<PAGE>
As filed with the Securities and Exchange Commission on February 3, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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CROSSWORLDS SOFTWARE, INC.
(Exact Name of Registrant as Specified in Its Charter)
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<TABLE>
<S> <C> <C>
Delaware 7372 94-3240149
(State or Other Jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
577 Airport Boulevard, Suite 800
Burlingame, CA 94010
(650) 685-9000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
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Mark R. Kent
Chief Financial Officer
577 Airport Boulevard, Suite 800
Burlingame, CA 94010
(650) 685-9000
(Name, Address Including Zip Code, and Telephone Number Including Area Code,
of Agent For Service)
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Copies to:
<TABLE>
<S> <C>
Jon E. Gavenman Neil Wolff
C. Howard Korrell John Y. Sasaki
Venture Law Group Jon P. Layman
A Professional Corporation Wilson Sonsini Goodrich & Rosati
2800 Sand Hill Road Professional Corporation
Menlo Park, CA 94025 650 Page Mill Road
(650) 854-4488 Palo Alto, CA 94304
(650) 493-9300
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed
Maximum
Aggregate Amount Of
Title Of Each Class Of Offering Registration
Securities To Be Registered Price(1) Fee
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<S> <C> <C>
Common Stock, par value $0.001........................ $50,000,000 $13,200
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities and we are +
+not soliciting offers to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 2000
PROSPECTUS
Shares
[LOGO OF CROSSWORLDS SOFTWARE, INC. APPEARS HERE]
Common Stock
CrossWorlds Software, Inc. is offering shares of its common
stock. This is our initial public offering. We anticipate that the initial
public offering price will be between $ and $ per share.
-----------
Prior to this offering, there has been no public market for our common stock.
We have applied to have our common stock approved for quotation on the Nasdaq
National Market under the symbol "CWLD."
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................ $ $
Underwriting discounts and commission........................ $ $
Proceeds, before expenses, to CrossWorlds.................... $ $
</TABLE>
CrossWorlds has granted the underwriters on option for a period of 30 days to
purchase up to additional shares of common stock.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 2000.
-----------
Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 8.
-----------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Chase H&Q
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Thomas Weisel Partners LLC
Prospectus dated , 2000
<PAGE>
[COLOR ARTWORK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 8
You Should Not Rely on Forward-Looking Statements Because They Are
Inherently Uncertain.................................................... 19
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 34
Management............................................................... 53
Certain Relationships and Related Transactions........................... 63
Principal Stockholders................................................... 66
Description of Capital Stock............................................. 68
Shares Eligible for Future Sale.......................................... 70
Underwriting............................................................. 72
Legal Matters............................................................ 74
Experts.................................................................. 74
Additional Information Available to You.................................. 74
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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CrossWorlds Software, Inc. was incorporated in Delaware in March 1996. As
used in this prospectus, references to "we," "our," "us" and "CrossWorlds"
refer to CrossWorlds Software, Inc., its predecessors and its consolidated
subsidiaries and not to the underwriters.
We maintain a World Wide Web site at www.crossworlds.com. Information
contained on our website does not constitute part of this prospectus.
We have applied for federal registration of the marks "CrossWorlds,"
"CrossWorlds Software," "United Applications Architecture," "UAA" and our
logo. Each logo, product name, tradename or service mark of any other company
appearing in this prospectus belongs to its holder.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information you
should consider before buying shares in the offering. You should read the
entire prospectus carefully. Unless otherwise indicated, this prospectus
assumes that the underwriters have not exercised their option to purchase
additional shares and all shares of preferred stock have been automatically
converted into shares of common stock.
CrossWorlds Software, Inc.
We are a leading provider of e-business infrastructure software that enables
the integration and automation of business processes within enterprises and
among trading partners using the Internet. Our products help traditional and
emerging businesses leverage the Internet as a platform to increase
productivity, improve responsiveness to customer demands and enhance overall
competitiveness.
In response to an increasingly competitive business environment, many large
companies are pursuing collaborative e-business strategies that require close
coordination across internal functions and among trading partners. Examples of
these strategies include the use of Internet-based marketplaces and trading
exchanges; collaborative supply and demand planning among trading partners;
outsourcing of customer service and manufacturing activities to third parties;
and inventory management across multiple company divisions and distribution
channels. The implementation of these strategies, however, has been hampered by
the challenges of integrating incompatible enterprise applications used by
multiple business functions and trading partners.
We believe that the market for e-business infrastructure software is
comprised of the market for e-business software and the related market for
enterprise application integration software. A variety of organizations--
including systems integrators, other information technology service providers,
information technology departments within companies, and software vendors--have
provided companies with integration solutions in support of e-business
initiatives. The market for e-business software, according to Forrester
Research, will grow from $121.0 million in 1997 to $3.8 billion in 2002.
According to the Yankee Group, the market for data integration tools and
enterprise application integration software will grow from $1.6 billion in 1998
to $5.0 billion in 2001. We believe that many of the software products offered
by participants in these markets lack key elements of a complete e-business
infrastructure solution. Examples of these missing elements include business
process support, architectural flexibility and the ability to support e-
business strategies.
Our products are based on an enterprise-class architecture that scales to
meet the requirements of global organizations and trading networks with large
volumes of mission critical transactions. We offer a set of tools that our
customers can use to customize and extend their integration solution to fulfill
their unique e-business requirements. We also provide pre-built connectivity
solutions to leading e-business and enterprise applications, as well as common
technology environments, and have developed pre-built components for automating
many of the common business processes within the enterprise and among trading
partners.
Our business strategy is to be the leading provider of e-business
infrastructure software to traditional and emerging companies. Our product
strategy focuses on expanding our support for e-business applications and
technologies, building connectivity for additional enterprise applications and
expanding our set of pre-built business process integration modules. Our sales
strategy is to focus on selling our products to customers in selected vertical
markets, including technology, industrial manufacturing, process manufacturing
and telecommunications.
To support these strategic efforts, we intend to leverage and expand our
strategic partnerships with IBM, SAP AG and global systems integrators through
technology sharing and cooperative marketing and
4
<PAGE>
sales efforts. In addition, we expect our systems integrator partners to
provide an increasing portion of the implementation services associated with
our products. Since late 1997, when we shipped our first product, we have
licensed our products to 47 customers in these markets, including Applied
Materials, Inc., Delphi Automotive Systems, E.I. DuPont de Nemours and Company,
Ingersoll-Rand Company, Nortel Networks Corporation, Siemens AG, Solar
Turbines, Inc., a wholly owned subsidiary of Caterpillar Inc., and U S WEST.
Our principal executive offices are located at 577 Airport Boulevard, Suite
800, Burlingame, California 94010, and our telephone number is (650) 685-9000.
5
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by
CrossWorlds Software, Inc.... shares
Common stock to be outstanding
after this offering.......... shares
Use of proceeds............... Working capital and general corporate purposes.
Proposed Nasdaq National
Market symbol................ CWLD
</TABLE>
The following information is based on 19,696,563 shares outstanding on
December 31, 1999. This number excludes 6,793,436 shares of common stock
issuable upon exercise of stock options outstanding on December 31, 1999 at a
weighted average exercise price of $5.78 per share and 1,064,087 shares of
common stock reserved for future issuance under our stock option plan and
executive stock plan. This number also excludes 343,431 shares of common stock
issuable upon exercise of warrants outstanding on December 31, 1999 at a
weighted average exercise price of $5.85 per share.
Our Board of Directors, subsequent to December 31, 1999, approved certain
changes to our stock option plan reserves. Effective on the date of completion
of this offering, the shares reserved for future issuance under our stock
option plans, will be as follows:
. 1997 Stock Plan: 3,000,000 shares.
. 2000 Employee Stock Purchase Plan: 750,000 shares.
. 2000 Directors' Stock Option Plan: 300,000 shares.
The above share reserves replace any stock option reserves existing immediately
prior to the date of completion of the offering, which reserves totalled
1,064,087 shares on December 31, 1999.
Additionally, subsequent to December 31, 1999, our Board approved the
issuance of warrants to purchase 199,996 shares of common stock at a weighted
average exercise price of $11.00 per share.
See "Management-- Stock Plans," "Certain Relationships and Related
Transactions" and "Note 5 to Consolidated Financial Statements."
6
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
(in thousands,
except per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue........................................ $ 1,108 $ 7,706 $ 19,094
Operating loss................................. (14,118) (41,853) (36,274)
Net loss....................................... (13,952) (41,374) (38,186)
Pro forma basic and diluted net loss per
share......................................... $ (1.70) $ (3.55) $ (2.38)
Weighted average shares used in pro forma per
share computation............................. 8,201 11,641 16,062
</TABLE>
Our software license revenue is generally recognized using the percentage-of-
completion method over the respective project implementation cycles, which
typically range from three to nine months. Consulting and service revenue is
recognized as the services are performed. Maintenance revenue from customer
support and product upgrades, including maintenance bundled with original
software licenses, are deferred and recognized ratably over the term of the
maintenance agreement.
Weighted average shares used in computing pro forma basic and diluted net
loss per share includes the shares used in computing basic and diluted net loss
per share adjusted for the conversion of preferred stock to common stock, as if
the conversion occurred at the date of original issuance.
<TABLE>
<CAPTION>
December 31, 1999
--------------------
Actual As Adjusted
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(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents............................... $12,506 $
Working capital (deficit)............................... (1,052)
Total assets............................................ 29,177
Deferred revenue........................................ 13,158
Long-term debt and capital lease obligations, less
current portion........................................ 3,513
Total stockholders' equity (deficit).................... (726)
</TABLE>
Deferred revenue consists primarily of the unrecognized portion of license
and maintenance sales contracts. Our deferred revenue balance or changes
therein may not be indicative of our total backlog or changes in the ordering
patterns of our customers.
The consolidated balance sheet data as of December 31, 1999 is set forth on
an actual basis and on an as adjusted basis to reflect the sale of shares
of common stock offered at an assumed initial public offering price of $ per
share after deducting the estimated underwriting discount and the estimated
offering expenses.
7
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. If any of the following risks actually
occur, our business, financial condition or operating results could be
materially harmed. This could cause the trading price of our common stock to
decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve known and
unknown risks and uncertainties. These statements relate to our plans,
objectives, expectations and intentions. Our actual results could differ
materially from those discussed in these statements. Factors that could
contribute to these differences include those discussed below and elsewhere in
this prospectus.
Our business is difficult to evaluate because our operating history is limited.
We were incorporated in March 1996 and shipped our first products in November
1997. Because our operating history is limited, the revenue and income
potential of our business and the market for our products are unproven. This
makes the value of an investment in us difficult to evaluate. In addition,
because of our limited operating history, we have limited insight into trends
that may emerge and affect our business. In the months ahead, we will encounter
many challenges and difficulties frequently encountered by companies in new and
rapidly evolving markets such as ours. In order to succeed in our market we
will need to:
. expand our customer base;
. increase our ability to attract and retain qualified personnel, including
engineering and sales personnel, which are vital to attracting and
retaining customers;
. compete effectively with internal information technology departments of
potential customers, systems integrators that develop customized
solutions and other software vendors that offer business integration
solutions;
. manage expanding operations--specifically our ability to install
management information and control systems in an efficient and timely
manner;
. continue to establish and maintain strategic relationships with key
systems integrators, enterprise application vendors and technology
partners; and
. retain our senior management team and other key personnel.
We may not be successful in addressing all or any of these challenges. Our
failure to meet these challenges would negatively affect our business and
operating results and the value of your investment.
We have a history of losses and our projected expenditures on research and
development and other activities are expected to cause us to incur future
losses.
We have experienced operating losses in each quarterly and annual period
since inception. Despite our history of losses, we believe that it is vital to
our future success that we significantly increase our research and development,
sales and marketing and general and administrative expenses. As a result of
these additional expenses, we will need to significantly increase our quarterly
revenue to achieve and maintain profitability. We incurred net losses of $15.5
million from inception through December 31, 1997 against revenue of $1.1
million, $41.4 million for the year ended December 31, 1998 against revenue of
$7.7 million and $38.2 million for the year ended December 31, 1999 against
revenue of $19.1 million. As of December 31, 1999, we had an accumulated
deficit of approximately $95.1 million. Though these historical results
indicate a trend of recent revenue growth, we may not be able to sustain these
growth rates in the future. As a result, we expect to incur significant losses
in the future. For a more detailed description of our operating results, see
"Selected Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
8
<PAGE>
Our revenue is subject to significant fluctuations and is unpredictable. If we
experience future revenue shortfalls, the value of your investment could be
adversely affected.
Our quarterly operating results have varied significantly in the past and
will likely vary significantly in the future due to a number of factors
inherent to our business. As a result, we believe that period-to-period
comparisons of our operating results are not meaningful and should not be
relied on as indicators of our future performance. These factors include, among
others:
. the small number, large size and diverse scope of the integration
projects in which we are engaged;
. the delay or deferral of product implementation schedules by us or by our
customers;
. the amount and timing of our customers' purchases of our products and
services;
. the length of the sales cycle and the implementation schedule for a
product or service;
. the degree of competitive pressures in the market for business
integration software which would affect our software licensing and
service fees;
. the timing of new products and product enhancements by us and our
competitors; and
. software defects and other product quality problems that our customers
may encounter which we may be required to solve.
Due to any or all of these factors, our results of operations may be below
the expectations of public market analysts and investors. Our failure to meet
these expectations may cause the market price of our common stock to fall.
Because we experience significant variability in our quarterly revenue due to
the nature of our sales and implementation cycles, we may not fulfill the
expectations of financial analysts which could negatively affect our stock
price.
Sales Cycle. Our e-business infrastructure solutions have a median selling
price of approximately $530,000, comprised of licensing fees for the software
products deployed and service fees for related consulting and maintenance
services. Because our median selling price is high, we often engage in a
lengthy sales effort. A customer's decision to purchase our products involves a
significant commitment of resources, requires executive-level approval and is
influenced by customer budget cycles. To successfully sell our products, we
generally must educate our potential customers regarding the uses and benefits
of our products, which can require significant time and resources. In addition,
some of our prospective customers evaluate our products on a trial basis before
entering a sales contract. Consequently, our sales cycle is often long, varying
typically from two to nine months, and subject to delays associated with the
lengthy budgetary, approval and competitive evaluation processes that often
accompany significant capital expenditures. This lengthy sales cycle makes it
difficult to predict the quarter in which expected orders will occur. During
such sales cycles, events beyond our control may affect the scope and timing of
our sales contracts with prospective customers. Delays in the execution of
orders could cause some or all of the licensing fee revenue from that order to
be shifted from the expected quarter to a subsequent quarter or quarters.
Implementation Cycle. Because we generally recognize revenue from orders on a
percentage-of- completion basis as the customer reaches certain milestones in
the implementation of the business integration solutions purchased, the timing
of our revenue depends on our customers' implementation cycles. The
implementation of our products often involves a significant commitment of
resources by customers over an extended period of time. The implementation
cycle may be delayed due to product defects or errors and factors over which we
have little or no control, including customers' budgetary constraints, internal
acceptance reviews, delays by third party systems integrators involved in the
implementation process, implementation schedules for related applications and
the complexity of our customers' business integration requirements. Our future
revenue, including both licensing fee revenue
9
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derived from sales contracts subject to percentage-of-completion accounting and
service fee revenue derived from all of our sales contracts, depends on
continued progress on the applicable product implementation schedules. Because
of the complexity of our products and because of each customer's particular
integration requirements and the variety of enterprise applications being
integrated, our product implementation schedules can take three to nine months
or more and span multiple quarterly periods. If we fail to achieve continued
progress on anticipated implementation schedules or our customers delay,
suspend or terminate their implementation efforts, expected licensing fee
revenue from our sales contracts subject to percentage-of-completion accounting
and service fee revenue from all of our sales contracts may not be recognized
until subsequent quarters, if at all. If any of these eventualities occur, the
value of your investment may be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" for a discussion of our revenue recognition policies.
Seasonal factors may affect the timing of our sales orders which could
negatively affect our results of operations.
Seasonal factors, including the quarterly and annual nature of budgetary,
purchasing, sales and implementation cycles, have historically affected the
timing of our sales orders. This seasonality may continue in the future. For
instance, we expect that our sales orders in the first quarter of each year
will typically be lower than sales orders in the fourth quarter of the
preceding year. We believe that this pattern is due, in part, to budgetary
decisions that are made by our customers before the end of the year and the
annual compensation incentives we provide to our direct sales force. Similarly,
the pace of new sales tends to be slower during the summer which, we believe,
is influenced by the difficulty many of our customers have in obtaining
required internal approvals during that time given customary vacation schedules
and planning cycles. When interpreted by financial analysts, the seasonality of
our sales orders may negatively affect our stock price. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
A substantial majority of our revenue has been derived from sales of our
software products and related services to a small number of selected
industries.
A large majority of our revenue to date has been derived from sales of our
software and related services to customers in the telecommunications industry
and the manufacturing industry, which is comprised of customers in the
technology, industrial and process manufacturing sectors. Of our customer base,
comprised as of December 31, 1999 of 47 customers, 23 customers are in the
manufacturing industry and 14 customers are in the telecommunications industry.
Sales of products to the manufacturing and telecommunications industries
accounted for approximately 72% of our revenue in 1997, approximately 96% of
our revenue in 1998 and approximately 90% of our revenue in 1999. We expect
that sales of our software and related services to these industries will
continue to account for substantially all of our revenue for the foreseeable
future. As a result, any significant decline in the demand for, and market
acceptance of, our software in the manufacturing and telecommunications
industries due to the pricing of our products and services, our failure to
compete effectively, respond to technological change, withstand an economic
downturn or other factors in these industries could adversely affect our
results of operations.
Because our revenue is derived from a small number of customers, our revenue
could suffer if we lose a major customer.
We have generated a substantial portion of our annual and quarterly revenue
from a limited number of customers and we expect that a small number of
customers will continue to account for a substantial portion of our revenue for
the foreseeable future. As of December 31, 1999, our customer base was
comprised of 47 customers, many of whom we believe will continue to provide a
substantial portion of our revenue through additional license, implementation
services and maintenance fees. In 1999, one customer accounted for more than
21% of our revenue and six customers collectively accounted for more than 50%
of our revenue. As a result, the loss of even one customer could have a
material adverse effect on our revenue, particularly if such customer accounts
for a significant portion of our revenue.
10
<PAGE>
Our gross margins could fail to improve if we are unable to increase software
license revenue as a portion of our overall revenue.
We intend to invest in further developing our relationships with systems
integrators with the goal of having them perform a greater share of the
consulting services associated with our products. If we are unable to further
develop these relationships, it will be significantly more difficult to migrate
to a business model that is more heavily weighted towards software license
revenue, thus limiting our ability to increase gross margins over time.
Our revenue will likely decline if we do not continue to develop and maintain
successful relationships with systems integrators and other strategic partners.
We engage in joint sales, marketing and/or implementation efforts with a
number of systems integrators, such as Cap Gemini Group, Computer Sciences
Corporation, Deloitte Consulting LLC, EDS, Ernst & Young LLP, and
PricewaterhouseCoopers LLP. In many cases, these parties have extensive
relationships with our existing and potential customers and influence the
decisions of these customers. We rely upon these firms to recommend our
products during the evaluation stage of the purchasing process, to refer
prospective customers and to provide access to their executive-level decision
makers. We expect to increasingly rely on these systems integrators to provide
our customers with product implementation and consulting services. In addition,
if these systems integrators are not appropriately trained to implement our
products, this could significantly harm our reputation with existing and
prospective customers. A number of our competitors may have or develop stronger
relationships with these systems integrators and, as a result, these systems
integrators may be more likely to recommend competitors' products and services.
Our failure to establish or maintain these relationships would significantly
harm our ability to license and successfully implement our e-business
infrastructure software products.
In addition to our relationship with systems integrators, we have begun and
intend to continue to develop relationships with other strategic partners who
can similarly enhance sales and marketing leverage. In particular, our
relationship with IBM announced in June 1999 provides for the joint marketing
and cooperative sale of a combined product offering. Our failure to maintain
this relationship with IBM or to develop additional strategic relationships
could significantly harm our ability to license and successfully implement our
products.
We could lose market share and be unable to maintain current pricing levels if
we do not keep up with the significant competition in the market for business
integration solutions.
The market for our products is intensely competitive, and is expected to
become increasingly competitive as current competitors enhance and expand their
product offerings and new competitors enter the market. Our current competitors
include a number of companies offering one or more solutions to the application
integration problem, some of which are directly competitive with our products.
To date, we have faced competition and some sales resistance from the
internal information technology departments of potential customers that have
developed or may develop in-house integration solutions that may substitute for
those offered by us. We expect that these internal development initiatives will
continue to be a principal source of competition for the foreseeable future.
The competitive factors in this area require that we produce a product that
conforms to the prospective customer's information technology standards, scales
to meet the needs of large enterprises and costs less than the internal
development efforts.
A second source of competition results from systems integrators and other
information technology service providers engaged to build customized
integration solutions across multiple customer applications. The competitive
factors in this area require that we demonstrate to our prospective customers,
systems integrators and other service providers the cost savings, risk
reduction, and other advantages of an integration solution based on
commercially supported software.
11
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Our competitors also include a large number of software vendors targeting one
or more segments of the business integration software market through various
technological solutions. Many of these competitors have longer operating
histories, significantly greater financial, technical, marketing and other
resources, significantly greater name recognition and a larger installed base
of customers than CrossWorlds. In addition, many competitors have well-
established relationships with current and potential customers. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than
CrossWorlds can.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Increased competition could
result in price reductions, reduced gross margins and loss of market share, any
one of which could significantly reduce our future revenues.
If the market for business integration slows, our revenue might be negatively
affected.
All of our revenue has come from sales of software and related business
integration consulting and maintenance services. We expect these sales to
account for substantially all of our revenue for the foreseeable future.
Although demand for business integration solutions has grown in recent years,
the market for these solutions is relatively new and rapidly evolving. We
cannot assure you that this market will continue to grow. If the market for
business integration solutions fails to grow, our business would be adversely
affected through reduced pricing and lower volume of sales.
If we lose our right to use technology licensed to us by third parties, our
revenue could be adversely affected.
We incorporate into our products certain software licensed to us by third
parties, including IBM, Inprise/Borland Corporation and BEA Systems, Inc.,
which provides important messaging and other functionality. Any interruption in
the supply of our licensed software or changes in the pricing or other terms of
these licenses could disrupt our operations, delay our sales and hinder our
ability to support our existing customers, unless and until we can replace the
functionality provided by this licensed software. Because our products
incorporate software developed and maintained by third parties, we depend on
these third parties to deliver and support reliable products, enhance their
current products, develop new products on a timely and cost-effective basis and
respond to emerging industry standards and other technological changes. In the
event that the licensed software becomes unavailable, obsolete or incompatible
with future versions of our products or is otherwise not adequately maintained
or updated, we may not be able to replace the functionality of the licensed
software on comparable terms or at all. Any significant delay in the
replacement of this functionality could harm our business.
If we fail to keep up with rapid technological change, we could lose market
share or our products could become obsolete.
The market for our products is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product life
cycles, changing customer requirements and evolving industry standards,
including Internet standards. The introduction of products embodying new
technologies and the emergence of new industry standards could quickly make our
existing products obsolete and unmarketable. Our future success will depend
upon our ability to continue to develop and introduce a variety of new products
and product enhancements to address the increasingly sophisticated needs of our
customers. We cannot assure you that our new products and product enhancements
will achieve market acceptance or that a new technology will not render our
products obsolete.
12
<PAGE>
If our products do not operate with the many hardware and software platforms
and applications used by our customers, we will not be successful.
We currently serve a customer base with a wide variety of constantly changing
hardware, enterprise applications and networking platforms. To increase market
acceptance, we believe that our products will have to operate within an
increasing number of technical environments. Our success will depend on the
following factors, among others:
. our ability to continue to integrate our products with multiple platforms
and applications and to modify our products as new versions of packaged
applications are introduced;
. access to the application programming interfaces of the packaged
applications with which our products need to integrate;
. the portability of our products across a number of hardware platforms,
operating systems and databases;
. our ability to anticipate and support new standards, especially Internet
standards; and
. the integration of additional software modules with existing products.
If we fail to achieve these objectives, our business and operating results
could be adversely affected.
If we are unable to maintain relationships with enterprise application vendors
whose products we integrate or plan to integrate, our results of operations
would be adversely affected.
We have strategic relationships with a number of enterprise application
vendors who provide access to their software and documentation to enable us to
effectively develop our product interfaces to be compatible with their packaged
enterprise applications. If any of our strategic relationships with these
vendors is terminated or access to their software and documentation is
otherwise restricted, or we are unsuccessful in establishing strategic
relationships with other vendors, our ability to develop product interfaces to
support new and existing versions of these vendors' packaged enterprise
applications would be adversely affected.
The loss of our senior management or other key personnel or our failure to
attract additional personnel could negatively affect our business and decrease
the value of your investment.
Our future success depends on the skills, experience and performance of our
senior management team and other key personnel and their ability to operate
effectively, both individually and as a group. In addition, the services and
expertise of our senior management team would be difficult to replace. We do
not maintain "key person" life insurance for any of our personnel. The intense
competition for qualified personnel in our industry and geographic region could
hinder our ability to replace any of these members of our senior management
team if we were to lose their services in the future. If we do not succeed in
attracting new personnel, or retaining and motivating existing personnel, our
business will be adversely affected. For a more detailed description of our
senior management team, see "Management."
If we fail to expand our direct sales, consulting and customer support
organizations, our business could suffer.
To date, we have sold our products primarily through our direct sales force
and have supported our customers through our consulting and customer support
staff. Although we intend to invest significant resources to recruit additional
direct sales, consulting and customer support personnel, competition for
qualified personnel is intense and many of our competitors have greater
recruiting resources than we do. We believe that the retention of qualified
direct sales personnel in our business is particularly difficult given that the
market for business integration solutions is still emerging, further market
acceptance of our products has not yet been achieved, and the sales cycles
associated with our products are lengthy. Our direct sales, consulting and
customer support organizations are vital to our success. If we fail to
sufficiently expand our
13
<PAGE>
direct sales force or our consulting and customer support staffs, we may not be
able to increase revenue or achieve increased market acceptance of our
products.
Our failure to retain skilled technical personnel in a tight labor market may
adversely affect our product development.
Qualified technical personnel are in great demand throughout the software
industry. The demand for qualified technical personnel is particularly acute in
the San Francisco Bay Area where our corporate headquarters are located. Our
success depends in large part upon our continued ability to attract and retain
highly skilled technical employees, particularly software architects and
engineers. Our failure to attract and retain the highly-trained technical
personnel that are integral to our product development and customer support
teams may limit the rate at which we can generate sales and develop new
products or product enhancements. This could have a material adverse effect on
our business, financial condition and operating results.
Our products may suffer from undetected errors and defects. We could face
litigation if one of these errors or defects causes our products to
malfunction, which might require considerable effort and expense to defend and
result in significant liability.
Our software products are complex and may contain undetected errors or
defects, especially when first introduced or when new versions are released.
Any errors or defects that are discovered after commercial release could result
in loss of revenue or delay in market acceptance, diversion of development
resources, damage to our customer relationships or reputation, increased
service and warranty cost or costly litigation defense. We have previously
discovered software errors in certain of the products that we have developed
and sold. These errors, when discovered by our customers, have impaired our
customer relationships to varying degrees. Despite testing, we cannot be
certain that errors will not be found in current versions, new versions or
enhancements of our products after commencement of commercial shipments to
customers. The license and support of software products generally involves the
risk of product liability claims. Any defects and errors found in our products
could cause customers to seek damages for loss of data, lost revenue, systems
costs or other adverse consequences they may suffer. Although our customer
license agreements typically contain provisions designed to limit our exposure
to these claims, it is possible that these limitation of liability provisions
may not be effective as a result of federal, state or local laws or ordinances
or unfavorable judicial decisions. Although we have not experienced any product
liability claims to date, a successful product liability claim brought against
us could adversely affect our business.
The cost and difficulties of implementing our products could significantly harm
our reputation with customers, which may diminish our ability to license
additional products to our customers.
Our products are often purchased as part of large business integration
projects undertaken by our customers. These projects are complex, time
consuming and expensive. Failure by customers to successfully deploy our
products, or the failure by us or third party consultants to ensure customer
satisfaction, could damage our reputation with existing and future customers
and reduce future revenue. In many cases, our customers must interact with,
modify or replace significant elements of their existing computer systems. The
costs of our products and services represent only a portion of the related
hardware, software, development, training and consulting costs. The significant
involvement of third parties, including system integrators, reduces the control
we have over the implementation of our product and the quality of customer
service provided to organizations which license our software. If our customers
are dissatisfied with any part of the implementation process, for any reason,
our ability to license further products to these customers would diminish.
14
<PAGE>
Because our products could interfere with the operations of our customers'
other software and hardware applications, we may be subject to potential
product liability and warranty claims by these customers, which may be costly
and may not be adequately covered by insurance.
Our e-business infrastructure products are integrated with our customers'
networks and software applications. The sale and support of our products may
entail the risk of product liability or warranty claims based on damage to, or
interference with, these networks or applications. Any of these claims, even if
not meritorious, could result in costly litigation or divert management's
attention and resources. Although we carry general liability insurance, our
current insurance coverage would likely be insufficient to protect us from all
liability that may be imposed under these types of claims.
We may be subject to claims related to year 2000 issues, and year 2000 problems
could adversely affect our revenue.
Many currently installed computer systems may not be capable of
distinguishing 21st century dates from 20th century dates. As a result,
beginning on January 1, 2000, computer systems and software used by many
companies and organizations in a wide variety of industries will produce
erroneous results or fail unless they have been modified or upgraded to process
date information correctly. In particular, although January 1, 2000 is past, it
is possible that problems have gone undetected, or that other dates in the year
2000, such as February 29, 2000, may further affect computer software and
systems. We are currently unable to assess completely whether our products, our
internal computer systems, the operation of our software or the software of
third parties contains errors or faults with respect to the year 2000. Known or
unknown errors or defects that affect the operation of our software and systems
or those of third parties could result in delay or loss of revenue,
interruption of services, cancellation of customer contracts, diversion of
development resources, damage to our reputation, increased service and warranty
costs and litigation costs, any of which could harm our business.
Managing growth may be difficult, time consuming and expensive. Our failure to
properly manage growth may hurt the value of your investment.
Our recent growth has strained, and we expect that any future growth will
continue to strain, our management systems and resources, which could hinder
our ability to grow in the future. In particular, we may not be able to install
management information and control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations. We have grown from 111 employees
as of December 31, 1997 to 202 employees as of December 31, 1999. As of
December 31, 1999, we have also opened 14 sales offices and established
subsidiaries in Australia, France, Germany, Ireland and the United Kingdom.
Additionally, several of our executive officers, including our President and
CEO and Senior VP Worldwide Sales, joined us within the last 6 months. In order
to effectively manage our growth, we will be required to integrate, train,
motivate and manage our work force, continue to improve our operational,
financial and management controls, reporting systems and procedures and
maintain close coordination among our executive engineering, accounting,
finance, marketing, sales and operations organizations. In addition, if our
currently planned expenditures related to the expansion of our operations are
not accompanied or shortly followed by significantly increased revenue, our
losses would be even greater than expected until we were able to delay or
reduce these expenditures. For example, during 1998 we increased our operating
expenses significantly, particularly sales and marketing expenses, based on our
expectations of revenue growth that did not materialize as quickly as
anticipated. These increased expense levels materially adversely affected our
operating results for that period. If we fail in any of these respects, our
business would be adversely affected.
If our international operations, which involve additional risks that do not
affect our domestic operations, do not perform as projected, our operating
results could be negatively affected.
As part of our strategy to address the global needs of our customers and
partners, we have committed significant resources to the opening of
international offices and the expansion of international sales and
15
<PAGE>
support channels in advance of revenue. Revenues from international sales
represented 20% of total 1997 revenue, 28% of total 1998 revenue and 22% of
total 1999 revenue. We have only limited experience in marketing, selling and
distributing our products and services internationally. If our international
expansion strategy does not generate sufficient revenue to offset our
expenditures to establish and maintain our international operations, our
business could be adversely affected. In December 1998, we implemented
strategic decisions to cease our Asian and Australian operations because our
capital expenditures in those markets were not producing sufficient returns. We
cannot assure you that this will not happen to other of our international
operations. We cannot be sure that we will be able to successfully localize,
market, sell and deliver our products in foreign markets, and our failure to do
so could adversely affect the value of your investment.
Risks of our international operations include:
. difficulties in collecting accounts receivable and longer collection
periods;
. difficulties in staffing and managing foreign operations;
. changing and conflicting regulatory requirements;
. increased operating expenses such as higher rents and costs of
employees--particularly in our European locations;
. potentially adverse tax consequences;
. tariffs and general export restrictions, including export controls
relating to encryption technology;
. political instability;
. fluctuations in currency exchange rates;
. seasonal reduction in business activity during the summer months in
Europe and certain other parts of the world; and
. the impact of local economic conditions and practices.
In addition, as we expand our international operations, we may allow payment in
foreign currencies and exposure to losses in foreign currency transactions may
increase. We may choose to limit such exposure through the purchase of forward
foreign exchange contracts or other hedging strategies, but there can be no
assurance that any currency hedging strategy would be successful in avoiding
exchange related losses. Any of the above factors could have a material and
adverse effect on our international sales and operations, which, in turn, could
adversely affect our overall business, operating results and financial
condition.
Our business could be hurt if we make acquisitions that are unsuccessful.
We may in the future pursue acquisitions of businesses, products and
technologies, or enter into joint venture arrangements, that could complement
our products, enhance our technical capabilities or expand our business. The
negotiation of potential acquisitions or joint ventures as well as the
integration of an acquired business, product or technology could cause the
diversion of management's time and resources. Future acquisitions could result
in potentially dilutive issuances of equity securities, the incurrence of debt
and contingent liabilities, amortization of goodwill and other intangibles,
research and development write-offs and other acquisitions-related expenses.
Further, we cannot assure you that any businesses, products or technologies we
may acquire will be successfully integrated with our current operations. If any
such acquisition were to occur, we cannot assure you that the intended benefits
of the acquisition will be realized. Future acquisitions, whether or not
consummated, could adversely affect our business.
If we are unable to adequately protect our proprietary rights, we may lose some
or all of our competitive advantage and our business could suffer.
We rely primarily on a combination of patents, copyrights, trademarks, trade
secret laws and contractual obligations with employees and third parties to
protect the proprietary aspects of our technology. The legal
16
<PAGE>
protection affords only limited protection. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. In addition, other
parties may breach confidentiality agreements or other protective contracts.
Furthermore, the laws of many foreign countries do not protect our intellectual
property rights to the same extent as the laws of the United States. Litigation
may be necessary to enforce our intellectual property rights and to protect our
trade secrets. Such litigation has an inherently uncertain outcome and could
result in substantial costs and diversion of management's attention and
resources.
We may be subject to liability for intellectual property infringement claims,
which could adversely affect our results of operations.
We may be subject to legal proceedings and claims for alleged infringement of
third party proprietary rights, such as patents, trademarks or copyrights,
particularly as the number of products and competitors in our industry grow and
functionalities of products overlap. This risk is higher in a new market in
which a larger number of patent applications have been filed but are not yet
publicly disclosed, such that we are less able to determine which patents our
products may infringe and take measures to avoid infringement. Any litigation
could result in substantial costs and diversion of management's attention and
resources. Further, parties making infringement claims against us may be able
to obtain injunctive or other equitable relief, which could prevent us from
selling our products or require us to enter into royalty or license agreements
which are not advantageous to us.
We expect that the market price for our common stock may be volatile.
Equity markets, particularly the market for high-technology companies, have
recently experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may adversely affect the market price of our common stock.
In addition, the market price of our common stock is likely to be highly
volatile. Factors such as fluctuations in our operating results, announcements
of technological innovations, new products or new services by us or by our
partners, competitors or customers or our competitors' developments with
respect to patents or proprietary rights, the announcement of litigation by or
against us, changes in stock market analyst recommendations regarding us or our
competitors, general market conditions and other factors may have a significant
effect on the market price of our common stock.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of their
securities. Such litigation could result in substantial costs and a diversion
of management's attention and resources.
Because our directors and officers will own approximately % of our
outstanding stock after this offering, you and other investors will have
minimal influence on stockholder decisions.
Upon completion of this offering, our executive officers and directors and
their affiliates will, in the aggregate, own approximately % of our
outstanding common stock. As a result, these stockholders will be able to
exercise control over all matters requiring stockholder approval, including the
election and removal of directors and approval of significant corporate
transactions. Such control could discourage others from initiating potential
merger, takeover or other change of control transactions, even if it would be
beneficial to other stockholders. See "Principal Stockholders."
Our charter document provisions could limit another party's ability to acquire
us.
Certain provisions of our Certificate of Incorporation and Bylaws, as well as
provisions of Delaware law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our stockholders. For
example our certificate of incorporation allows our board of directors to issue
up to 5,000,000 shares of preferred stock without a stockholder vote. Our
Bylaws provide that special meetings of
17
<PAGE>
stockholders can be called only by the Board of Directors or an authorized
committee of the Board. For information regarding these provisions, see
"Description of Capital Stock--Delaware Anti-Takeover Law and Certain Charter
and Bylaw Provisions."
Some of our shares will be eligible for future sale which may cause our stock
price to decline.
Sales of significant amounts of our common stock, including shares issued
upon the exercise of outstanding options, in the public market after this
offering could adversely affect the market price of our common stock. These
sales also might make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that we deem
appropriate. Upon completion of this offering, we will have outstanding
shares of common stock, based upon 19,696,563 shares outstanding as of December
31, 1999 as adjusted to reflect the conversion of all outstanding shares of
preferred stock into 16,542,628 shares of common stock and to include the
shares of common stock issued in connection with this offering. All of the
shares sold in this offering will be freely tradable without restriction unless
held by our affiliates. The remaining 19,696,563 shares of our common stock
outstanding after this offering will be restricted as a result of securities
laws or lock-up agreements signed by the holder and will be available for sale
in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date of Availability for Sale
---------------- -----------------------------
<S> <C>
0 At the date of this prospectus
0 90 days after the date of this prospectus
19,696,563 180 days after the date of this prospectus
</TABLE>
This table excludes 7,136,867 shares of our common stock issuable upon
exercise of outstanding options and warrants outstanding as of December 31,
1999, which shares will be tradable in the public market subject to vesting and
the expiration of lock-up agreements.
Chase Securities Inc. may, in its sole discretion and at any time without
prior notice, release all or any portion of the common stock subject to lock-up
agreements. See "Shares Eligible for Future Sale" and "Underwriting."
New investors will incur substantial and immediate dilution.
Purchasers of the common stock offered hereby will suffer an immediate and
substantial dilution of $ per share in the net tangible book value of our
common stock from the initial public offering price of $ per share. To the
extent outstanding options are exercised, there will be further dilution. See
"Dilution."
We may need more money, which may not be available to us on favorable terms or
at all.
Although we expect the net proceeds from this offering and borrowings under
our credit facility to be sufficient to meet our working capital and capital
expenditure needs for at least the next twelve months, such sources may be
inadequate. Consequently, we may require additional funds during or after such
period. Additional financing may not be available on favorable terms or at all.
This could seriously harm our business and operating results. Furthermore, if
we issue additional equity securities, stockholders may experience dilution and
the new equity securities could have rights senior to those of existing holders
of our common stock. If we cannot raise adequate funds to satisfy our capital
requirements, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements. For a more detailed discussion regarding our use of
proceeds from this offering or our working capital, see "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
18
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING
STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends" and similar expressions to identify forward-
looking statements. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
various markets. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described in
the preceding pages and elsewhere in this prospectus.
We are under no duty to update any of the forward-looking statements after
the date of this prospectus to conform these statements to actual results.
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
common stock that we are selling in this offering will be approximately $
million, or $ million if the underwriters' option to purchase additional
shares is exercised in full, assuming an offering price of $ per share and
after deducing the underwriting discount and estimated offering expenses.
We currently expect to use the net proceeds primarily for working capital,
for general corporate purposes, including increased sales and marketing
expenditures, increased research and development expenditures and capital
expenditures made in the ordinary course of business. We intend, if the
opportunity arises, to use an unspecified portion of the net proceeds to
acquire or invest in complementary businesses, products and technologies. From
time to time, in the ordinary course of business, we expect to evaluate
potential acquisitions of such businesses, products or technologies. See "Risk
Factors--Our business could be hurt if we make acquisitions that are
unsuccessful."
Pending such uses, we intend to invest the net proceeds from this offering in
short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Our credit facility with Silicon Valley
Bank prohibits us from paying dividends without the bank's prior approval.
19
<PAGE>
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
December 31, 1999:
. on an actual basis;
. on a pro forma as adjusted basis to reflect the conversion of all
outstanding shares of convertible preferred stock into 16,542,628 shares
of common stock upon the closing of this offering and to reflect our sale
and issuance of shares of common stock in this offering at an
assumed initial public offering price of $ per share and the
application of the net proceeds we receive.
This table should be read in conjunction with our consolidated financial
statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Pro Forma
Actual As Adjusted
-------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 12,506 $
======== ======
Long-term debt and capital lease obligations, less
current portion......................................... 3,513
--------
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value per share;
17,000,000 shares authorized, 16,126,003 shares issued
and outstanding, actual; 5,000,000 shares authorized,
none issued or outstanding, pro forma as adjusted .... 161
Common stock, $0.001 par value per share; 45,000,000
shares authorized, 3,153,935 shares issued and out-
standing, actual; 150,000,000 shares authorized,
shares issued and outstanding, pro
forma as adjusted .................................... 3
Additional paid-in capital............................. 96,757
Deferred stock-based compensation...................... (2,540)
Accumulated deficit.................................... (95,107)
-------- ------
Total stockholders' equity (deficit)................. (726)
-------- ------
Total capitalization............................... $ 2,787 $
======== ======
</TABLE>
The outstanding share information in the table above is as of December 31,
1999 and excludes:
. 6,793,436 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $5.78 per
share;
. 343,431 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $5.85 per share; and
. 423,612 shares reserved for future issuance under our 1997 stock option
plan and 640,475 shares reserved for future issuance under our 1999
executive stock plan.
Our Board of Directors, subsequent to December 31, 1999, approved certain
changes to our stock option plan reserves. Effective on the date of completion
of this offering, the shares reserved for future issuance under our stock
option plans, will be as follows:
. 1997 Stock Plan: 3,000,000 shares.
. 2000 Employee Stock Purchase Plan: 750,000 shares.
. 2000 Directors' Stock Option Plan: 300,000 shares.
The above share reserves replace any stock option reserves existing immediately
prior to the date of completion of the offering, which reserves totalled
1,064,087 shares on December 31, 1999.
Additionally, subsequent to December 31, 1999, our Board approved the
issuance of warrants to purchase 199,996 shares of common stock at a weighted
average exercise price of $11.00 per share.
20
<PAGE>
DILUTION
As of December 31, 1999, our pro forma net tangible book deficit was
approximately $(726,000) or $(0.23) per share of common stock. Pro forma net
tangible book deficit per share represents the amount of our total tangible
assets reduced by our total liabilities, divided by the number of shares of
common stock outstanding. After giving effect to the receipt of the estimated
net proceeds from our sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share, our pro
forma net tangible book value at December 31, 1999 would have been
approximately $ million or $ per share of common stock. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $
Pro forma net tangible book deficit per share as of December 31,
1999........................................................... $
Increase per share attributable to new investors................
----
Pro forma net tangible book value after the offering..............
----
Dilution per share to new investors............................... $
====
</TABLE>
The following table summarizes on a pro forma basis, as of December 31, 1999,
the differences between existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 19,696,563 % $88,145,000 % $4.48
New investors...............
---------- ----- ----------- -----
Totals.................... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The information presented above with respect to existing stockholders
includes 16,126,003 shares of preferred stock which will be automatically
converted into 16,542,628 shares of common stock upon the closing of this
offering. This information is as of December 31, 1999 and excludes:
. 6,793,436 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $5.78 per
share;
. 343,431 shares of common stock issuable upon the exercise of outstanding
warrants at a weighted average exercise price of $5.85 per share; and
. 423,612 shares reserved for future issuance under our 1997 stock option
plan and 640,475 shares reserved for future issuance under our 1999
executive stock plan.
Our Board of Directors, subsequent to December 31, 1999, approved certain
changes to our stock option plan reserves. Effective on the date of completion
of this offering, the shares reserved for future issuance under our stock
option plans, will be as follows:
. 1997 Stock Plan: 3,000,000 shares.
. 2000 Employee Stock Purchase Plan: 750,000 shares.
. 2000 Directors' Stock Option Plan: 300,000 shares.
The above share reserves replace any stock option reserves existing immediately
prior to the date of completion of the offering, which reserves totalled
1,064,087 shares on December 31, 1999.
21
<PAGE>
Additionally, subsequent to December 31, 1999, our Board approved the
issuance of warrants to purchase 199,996 shares of common stock at a weighted
average exercise price of $11.00 per share.
The issuance of common stock in connection with the exercise of outstanding
options and warrants or options and warrants issued in the future will result
in further dilution to new investors. See "Management--Stock Plans" and Note 5
to Consolidated Financial Statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," our consolidated financial statements and related
notes, and other financial information included elsewhere in this prospectus.
The consolidated statements of operations data for the years ended December 31,
1997, 1998 and 1999, and the selected consolidated balance sheet data at
December 31, 1998 and 1999 presented below are derived from consolidated
financial statements that have been audited by KPMG LLP, independent auditors,
which are included elsewhere in this prospectus. The selected historical
consolidated financial data set forth below for the period from March 8, 1996
(inception) to December 31, 1996 and as of December 31, 1996 and 1997 have been
derived from audited financial statements, which include, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of financial position and results
of operations for that period and as of that date. The historical results
presented below are not necessarily indicative of the results to be expected
for any future fiscal period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Period From
March 8, 1996
(Inception) Year Ended December 31,
to December ----------------------------
31, 1996 1997 1998 1999
------------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations:
Revenue:
Software license................ $ -- $ 748 $ 3,973 $ 8,194
Service, maintenance and other.. -- 360 3,733 10,900
------- -------- -------- --------
Total revenue................... -- 1,108 7,706 19,094
Cost of revenue:
Software license and royalties.. -- 36 438 1,599
Service, maintenance and other.. -- 1,860 5,392 10,127
------- -------- -------- --------
Total cost of revenue........... -- 1,896 5,830 11,726
------- -------- -------- --------
Gross profit (loss)........... -- (788) 1,876 7,368
------- -------- -------- --------
Operating expenses:
Research and development........ 757 4,080 11,748 14,243
Sales and marketing............. 375 6,954 23,141 21,792
General and administrative...... 503 2,296 4,066 6,145
Amortization of deferred stock-
based compensation............. -- -- 4,774 1,462
------- -------- -------- --------
Total operating expenses........ 1,635 13,330 43,729 43,642
------- -------- -------- --------
Operating loss................ (1,635) (14,118) (41,853) (36,274)
Other income (expense), net....... 41 166 479 (1,912)
------- -------- -------- --------
Net loss...................... $(1,594) $(13,952) $(41,374) $(38,186)
======= ======== ======== ========
Net loss per share:
Basic and diluted............... $ (2.83) $ (11.88) $ (19.99) $ (13.40)
======= ======== ======== ========
Weighted average shares used in
computation.................... 564 1,175 2,069 2,850
======= ======== ======== ========
Pro forma net loss per share(1):
Basic and diluted............... $ (0.31) $ (1.70) $ (3.55) $ (2.38)
======= ======== ======== ========
Weighted average shares used in
computation.................... 5,162 8,201 11,641 16,062
======= ======== ======== ========
</TABLE>
(1) Shares used in computing pro forma basic and diluted net loss per share
includes the shares used in computing basic and diluted net loss per share
adjusted for the conversion of preferred stock to common stock, as if the
conversion occurred at the date of original issuance.
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997 1998 1999
------ ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents................... $1,273 $24,741 $ 5,415 $12,506
Working capital (deficit)................... 1,074 21,938 (4,648) (1,052)
Total assets................................ 1,606 28,085 15,757 29,177
Long term debt and capital lease
obligations, less current portion.......... -- 986 6,254 3,513
Stockholders' equity (deficit).............. 1,391 22,947 (6,670) (726)
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our consolidated financial
statements and related notes included elsewhere in this prospectus. In addition
to historical information, the following discussion contains certain forward-
looking statements that involve known and unknown risks and uncertainties, such
as statements of our plans, objectives, expectations and intentions. You should
read the cautionary statements made in this prospectus as being applicable to
all related forward-looking statements wherever they appear in this prospectus.
Our actual results could differ materially from those discussed in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and in the section
entitled "Risk Factors," as well as those discussed elsewhere in this
prospectus.
Overview
We are a leading provider of e-business infrastructure software that enables
the integration and automation of business processes within enterprises and
among trading partners over the Internet. Our products help traditional and
emerging businesses to leverage the Internet as a platform to increase
productivity, improve responsiveness to customer demands and enhance overall
competitiveness.
Our products are based on a modular architecture that scales to meet the
requirements of large enterprises, and combines standard Internet technologies
with proprietary innovations. We offer a suite of tools that customers can use
to build comprehensive e-business integration solutions, as well as extend and
customize CrossWorlds' pre-built components. In order to accelerate time to
market and leverage industry best practices, our customers can utilize
CrossWorlds' pre-built connectivity to leading applications and pre-built
process automation components for common e-business and enterprise processes.
We were incorporated in March 1996 and released our first product in November
1997. Since inception, we have incurred substantial research and development
costs, invested heavily in our sales, marketing and professional services
organizations and have expanded our global operations and corporate
infrastructure to support our long-term growth strategy. We have also made
substantial investments in marketing and in building strategic partnerships.
Our full-time employees increased from 111 as of December 31, 1997 to 202 as of
December 31, 1999. Because our expenditures have been much higher than our
revenue, we have incurred net losses in each fiscal quarter since inception
and, as of December 31, 1999, we had an accumulated deficit of $95.1 million.
We anticipate that our operating expenses will continue to increase for the
foreseeable future, as we expand our product lines and sales and marketing
efforts. Accordingly, we expect to incur net losses at least through the end of
2001.
Revenues to date have been derived from the license of our e-business
infrastructure software and from maintenance and support, consulting and
training services. Customers who license our software generally purchase
maintenance contracts, typically covering a twelve month period. Additionally,
customers may purchase consulting services, which are customarily billed by us
at a fixed daily rate plus out-of-pocket expenses. We also offer training
services that are billed on a per student or per class session basis. The
initial total orders from end-user customers, including licenses and services,
have ranged from $250,000 to over $5.0 million.
Because our software arrangements typically involve significant customization
or implementation services, our software license revenue is generally
recognized using the percentage-of-completion method over the respective
project implementation cycles, which typically range from three to nine months.
In certain circumstances where we are unable to estimate the amount of effort
required to customize or implement the software, software license revenue is
recognized using the completed contract method. In the future we may recognize
upon shipment certain revenues associated with projects implemented by our
systems integrator partners when our services are not essential to the
functionality of the software. Consulting and service
24
<PAGE>
revenue is recognized as the services are performed. Maintenance revenue from
customer support and product upgrades, including maintenance bundled with
original software licenses, are deferred and recognized ratably over the term
of the maintenance agreement. Our revenue recognition policy complies with the
American Institute of Certified Public Accountants' (AICPA) Statement of
Position (SOP) 97-2, Software Revenue Recognition.
As a result of our revenue recognition policy, the current period revenue mix
between software license revenue and service and other revenue does not
necessarily reflect the mix in current period sales activities. For example,
revenues recognized during the quarter ended December 31, 1999 generally
resulted from sales made during the first two quarters of fiscal 1999. We
expect the future revenue mix to be more reflective of our current period sales
mix, which has been weighted more heavily towards software licenses than
previous quarters.
Our sales to date have been primarily generated by our direct sales force,
with a small percentage derived from indirect channels. In an effort to drive
additional sales by our direct sales force and provide additional skilled
implementation resources for use by our customers, we have established
relationships with third-party systems integrators including Cap Gemini, CSC,
Deloitte Consulting, EDS, Ernst & Young and PricewaterhouseCoopers. In June
1999, CrossWorlds and IBM announced a strategic relationship focused on joint
marketing and cooperative sales of a combined product offering.
We established an international presence in mid-1997 by opening a sales
office in Germany. We subsequently opened sales offices in the United Kingdom
and France in 1998. Revenues from international sales represented 20% of total
1997 revenue, 28% of total 1998 revenue and 22% of total 1999 revenue. The
percentage decrease during the year ended December 31, 1999 was due primarily
to significant revenue contribution from five U.S.-based customers,
collectively accounting for greater than 48% of total revenue during the
period.
Because of our revenue recognition policy, we calculate accounts receivable
days sales outstanding ("DSO") as the ratio of the quarter-end accounts
receivable to the sum of quarterly revenue and the net change in quarter-end
current deferred revenue, multiplied by 90. We believe this calculation is
appropriate because license fees are typically billable regardless of whether
revenue has been recognized or deferred. Under this method, DSO was 102 days as
of December 31, 1999. Since the terms of certain of our sales agreements spread
our billings over the applicable project implementation cycle and our sales
activity is concentrated at the end of each quarter, we anticipate that our DSO
will continue to be substantial in future periods.
At certain times throughout 1998 and to a lesser extent during 1999, we
issued stock options to employees at exercise prices that were subsequently
deemed to have been below fair value. We recognized the difference between the
exercise prices and the deemed fair values as deferred stock-based
compensation. We amortize deferred stock-based compensation over the vesting
period of the related award as a noncash expense in accordance with Financial
Accounting Standards Board Interpretation No. 28. As of December 31, 1999,
$2.5 million in deferred stock-based compensation remained on our balance sheet
which will be amortized to the Consolidated Statements of Operations through
the first quarter of 2002.
In view of the rapidly changing nature of our business and our limited
operating history, we believe that period-to-period comparisons of revenue and
operating results are not necessarily meaningful and should not be relied upon
as indications of future performance. Additionally, despite our revenue growth,
we do not believe that historical growth rates are necessarily sustainable or
indicative of future growth. See "Risk Factors-- Our business is difficult to
evaluate because our operating history is limited" and "Our revenue is subject
to significant fluctuations and is unpredictable. If we experience future
revenue shortfalls, the value of your investment could be adversely affected."
25
<PAGE>
Results of Operations
The following table sets forth certain operating data as a percentage of
total revenue.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- ------
<S> <C> <C> <C>
Revenue:
Software license............................... 67.5 % 51.6 % 42.9 %
Service, maintenance and other................. 32.5 48.4 57.1
-------- ------- ------
Total revenue.................................. 100.0 100.0 100.0
Cost of revenue:
Software license and royalties................. 3.2 5.7 8.4
Service, maintenance and other................. 167.8 70.0 53.0
-------- ------- ------
Total cost of revenue.......................... 171.0 75.7 61.4
-------- ------- ------
Gross margin................................. (71.0) 24.3 38.6
Operating expenses:
Research and development....................... 368.3 152.4 74.6
Sales and marketing............................ 627.6 300.3 114.1
General and administrative..................... 207.2 52.8 32.2
Amortization of deferred stock-based
compensation.................................. -- 62.0 7.7
-------- ------- ------
Total operating expenses....................... 1,203.1 567.5 228.6
-------- ------- ------
Operating loss............................... 1,274.1 (543.2) (190.0)
Other income (expense), net...................... 15.0 6.2 (10.0)
-------- ------- ------
Net loss..................................... (1,259.1)% (537.0)% (200.0)%
======== ======= ======
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Software License Revenue. Our total revenue increased from $1.1 million to
$7.7 million to $19.1 million in 1997, 1998 and 1999, representing growth of
595% and 148%. Our software license revenue increased from $748,000 to $4.0
million to $8.2 million in 1997, 1998 and 1999, representing growth of 431% and
106%. The increases were due to increased acceptance of our expanded product
offering in the marketplace resulting in a larger average transaction size and
a greater number of transactions.
As a result of our revenue recognition policy, the current period revenue mix
between software license revenue and service and other revenue does not
necessarily reflect the mix in current period sales activities. For example,
revenues recognized during the quarter ended December 31, 1999 generally
resulted from sales made during the first two quarters of fiscal 1999. We
expect the future revenue mix to be more reflective of our current period sales
mix which has been weighted more heavily towards software licenses than
previous quarters.
Service, Maintenance and Other Revenue. Service, maintenance and other
revenue increased from $360,000 to $3.7 million to $10.9 million in 1997, 1998
and 1999, representing growth of 937% and 192%. These increases were due to an
increase in consulting, training and maintenance fees associated with both the
increased number of licenses sold and the increased average transaction size,
along with a larger installed license base.
Cost of Software License Revenue and Royalties. Cost of software license
revenue and royalties revenue increased from $36,000 to $438,000 to
$1.6 million in 1997, 1998 and 1999, representing approximately 3%, 6% and 8%
of total revenue. The increase in absolute dollar amount was due to increases
in software license and royalties revenue which increased the related royalty
costs. The increase from 1997 to 1998 in cost of software license and royalties
revenue as a percentage of total revenue related to an increase in royalty fees
associated with certain technology licensed
26
<PAGE>
by CrossWorlds. The increase from 1998 to 1999 in cost of software license and
royalties revenue as a percentage of total revenue related to the amortization
of certain guaranteed minimum royalty payments associated with certain
technology licensed by CrossWorlds. We expect this percentage to decrease in
the future as a result of our replacing the licensed technology with our own
internally developed product during the fourth quarter of 1999.
Cost of Service, Maintenance and Other Revenue. Cost of service, maintenance
and other revenue increased from $1.9 million to $5.4 million to $10.1 million
in 1997, 1998 and 1999, representing 168%, 70% and 53% of total revenue. The
increase in cost of service, maintenance and other revenue in absolute dollars
was due to an increase in personnel costs. Cost of service, maintenance and
other revenue as a percentage of total revenue declined in 1998 and 1999 due
primarily to higher utilization of our consulting staff, most of whom were not
engaged in revenue generating activities in 1997.
Research and Development Expenses. Research and development expenses
increased from $4.1 million to $11.7 million to $14.2 million in 1997, 1998 and
1999. The increase in each of these periods was due to an increase in head
count dedicated to new product initiatives. Research and development expenses
represented 368%, 152% and 75% of total revenue in 1997, 1998 and 1999. The
decrease as a percentage of total revenue was due to growth in our total
revenue offset somewhat by an increase in our personnel costs.
Sales and Marketing Expenses. Sales and marketing expenses increased from
$7.0 million to $23.1 million from 1997 to 1998 and decreased to $21.8 million
in 1999. The increase from 1997 to 1998 reflects the hiring of additional sales
and marketing personnel in connection with the building of our direct sales
channel and higher sales commissions associated with increased sales volume
during the period. In 1998, we also made significant expenditures on
advertising and marketing programs and invested in foreign operations in
Australia and Asia. The decrease from 1998 to 1999 reflects the closure of
foreign operations in Australia and Asia and significant reductions in
expenditures on advertising. Sales and marketing expenses represented 628%,
300% and 114% of our total revenue in 1997, 1998 and 1999. The decrease as a
percentage of total revenue was due to the growth in total revenue during both
periods and the reduction of expenditures from 1998 to 1999.
General and Administrative Expenses. General and administrative expenses
increased from $2.3 million to $4.1 million to $6.1 million in 1997, 1998 and
1999, representing 207%, 53% and 32% of our total revenue in 1997, 1998 and
1999. Expenses increased in each period due primarily to increased staffing
necessary to manage and support our growth. The decrease as a percentage of our
total revenue was due primarily to the growth in our total revenue.
Other Income (Expense). Other income increased from $166,000 in 1997 to
$479,000 in 1998, despite the lower year end cash balance in 1998. This
increase was due primarily to our completion of a $23.0 million financing at
the end of 1997, resulting in a higher average cash balance in 1998 than in
1997. In 1999, other expense was $1.9 million. This increase in expense was due
primarily to interest payments on outstanding debt and the write-off of a
prepaid royalty asset (See Note 4 of Notes to Consolidated Financial
Statements).
Amortization of Deferred Stock-Based Compensation. During 1998 and 1999, we
recorded total deferred stock-based compensation of $8.6 million and $225,000,
respectively, in connection with stock option grants. We are amortizing these
amounts over the vesting periods of the applicable options, resulting in
amortization expense of $4.8 million and $1.5 million in 1998 and 1999.
Provision for Income Taxes. We incurred net operating losses in 1997 and 1998
and 1999 and consequently paid no federal, state and foreign income taxes in
each of those years.
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $85.1 million and $70.2 million. We also had
federal and state research and development tax credit carryforwards of
approximately $1.2 million and $852,000. Our federal net operating loss
carryforwards will expire at various dates beginning 2011 through 2019 if not
utilized and our state net operating loss carryforward expires beginning in the
year 2004.
27
<PAGE>
As of December 31, 1998 and 1999, we had deferred tax assets of approximately
$24.8 million and $39.2 million. Our net deferred tax assets have been fully
offset by a valuation allowance. Our net valuation allowance increased by $18.0
million and $14.4 million during 1998 and 1999. Deferred tax assets relate
primarily to net operating loss carryforwards, capitalized research and
development costs and deferred stock compensation. See Note 6 of Notes to
Consolidated Financial Statements.
Eight Quarters Ended December 31, 1999
The following tables set forth CrossWorlds' statement of operations data for
each of the eight quarters ended December 31, 1999, including such amounts
expressed as a percentage of total revenue. You should read the following table
in conjunction with our consolidated financial statements and related notes
included elsewhere in this prospectus. This unaudited quarterly information has
been prepared on the same basis as CrossWorlds' audited consolidated financial
statements and, in the opinion of management, reflects all adjustments
(consisting only of normal recurring entries) necessary for a fair presentation
of the information for the periods presented. The operating results for any
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue:
Software licenses..... $ 977 $ 1,155 $ 545 $ 1,296 $ 1,617 $ 1,811 $ 2,270 $ 2,496
Service, maintenance
and other............ 990 818 964 961 2,019 2,353 3,012 3,516
------- -------- -------- -------- ------- ------- ------- --------
Total revenue......... 1,967 1,973 1,509 2,257 3,636 4,164 5,282 6,012
Cost of revenue:
Software license and
royalties............ 70 24 73 271 128 311 562 598
Service, maintenance
and other............ 1,159 948 1,598 1,687 1,779 2,420 2,698 3,230
------- -------- -------- -------- ------- ------- ------- --------
Total cost of
revenue.............. 1,229 972 1,671 1,958 1,907 2,731 3,260 3,828
------- -------- -------- -------- ------- ------- ------- --------
Gross profit
(loss)............. 738 1,001 (162) 299 1,729 1,433 2,022 2,184
------- -------- -------- -------- ------- ------- ------- --------
Operating expenses:
Research and
development.......... 2,152 3,224 2,973 3,399 3,124 3,561 3,790 3,768
Sales and marketing... 3,545 6,234 6,173 7,189 4,647 5,103 5,439 6,603
General and
administrative....... 833 1,213 763 1,257 789 1,223 1,399 2,734
Amortization of
deferred stock-based
compensation......... 659 940 1,587 1,588 140 782 823 (283)
------- -------- -------- -------- ------- ------- ------- --------
Total operating
expenses............. 7,189 11,611 11,496 13,433 8,700 10,669 11,451 12,822
------- -------- -------- -------- ------- ------- ------- --------
Operating loss...... (6,451) (10,610) (11,658) (13,134) (6,971) (9,236) (9,429) (10,638)
Other income (expense),
net.................... 299 192 10 (22) (291) (197) (369) (1,055)
------- -------- -------- -------- ------- ------- ------- --------
Net loss............ $(6,152) $(10,418) $(11,648) $(13,156) $(7,262) $(9,433) $(9,798) $(11,693)
======= ======== ======== ======== ======= ======= ======= ========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
As a Percentage of
Revenue:
Revenue:
Software license...... 49.7 % 58.5 % 36.1 % 57.4 % 44.5 % 43.5 % 43.0 % 41.5 %
Service, maintenance
and other............ 50.3 41.5 63.9 42.6 55.5 56.5 57.0 58.5
------ ------ ------ ------ ------ ------ ------ ------
Total revenue......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Software license and
royalties............ 3.6 1.2 4.8 12.1 3.5 7.5 10.6 9.9
Service, maintenance
and other............ 58.9 48.0 105.9 74.7 48.9 58.1 51.1 53.7
------ ------ ------ ------ ------ ------ ------ ------
Total cost of reve-
nue.................. 62.5 49.2 110.7 86.8 52.4 65.6 61.7 63.6
------ ------ ------ ------ ------ ------ ------ ------
Gross margin......... 37.5 50.8 (10.7) 13.2 47.6 34.4 38.3 36.4
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and develop-
ment................. 109.4 163.4 197.0 150.6 85.9 85.5 71.7 62.7
Sales and marketing... 180.2 316.0 409.0 318.5 127.8 122.6 103.0 109.8
General and adminis-
trative.............. 42.3 61.5 50.6 55.7 21.7 29.4 26.5 45.5
Amortization of de-
ferred stock-based
compensation......... 33.5 47.6 105.2 70.4 3.9 18.8 15.6 (4.7)
------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses............... 365.4 588.5 761.8 595.2 239.3 256.3 216.8 213.3
------ ------ ------ ------ ------ ------ ------ ------
Operating loss....... (327.9) (537.7) (772.5) (582.0) (191.7) (221.9) (178.5) (176.9)
Other income (expense),
net.................... 15.2 9.7 0.7 (1.0) (8.0) (4.7) (7.0) (17.5)
------ ------ ------ ------ ------ ------ ------ ------
Net loss............. (312.7)% (528.0)% (771.8)% (583.0)% (199.7)% (226.6)% (185.5)% (194.4)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
The trends discussed in the annual comparisons of operating results from 1997
through 1999 generally apply to the comparison of results of operations for our
eight most recent quarters ended December 31, 1999. Our software license and
service revenue mix fluctuated significantly at various times during the last
eight quarters. As a result of our revenue recognition policy, the current
period revenue mix between software license revenue and service, maintenance
and other revenue does not necessarily reflect the mix in current period sales
activities. For example, revenues recognized during the quarter ended December
31, 1999 generally resulted from sales made during the first two quarters of
fiscal 1999. We expect the future revenue mix to be more reflective of our
current period sales mix which has been weighted more heavily towards software
licenses than previous quarters. Specifically, in the quarter ended September
30, 1998, software license revenue was lower as a percentage of total revenue
relative to the other seven quarters ended December 31, 1999 due to the
completion of several significant projects in the preceding quarter and a
reduction in the number of sales closed in the prior quarter. Additionally, we
initiated several service projects that were designed to allow customers to
evaluate our software on a trial basis but did not immediately include software
license sales, thus resulting in a decrease in software license revenue during
the period. Services, maintenance and other revenue increased significantly
from the quarter ended December 31, 1998 to the quarter ended March 31, 1999
due primarily to the implementation of two significant projects.
During the quarter ended December 31, 1998, cost of software license and
royalties revenue increased as a percentage of total revenue due to an increase
in royalty fees associated with certain technology licensed by CrossWorlds. The
increase for the two quarters ended December 31, 1999 in cost of software
license and royalties revenue as a percentage of total revenue related to the
amortization of certain guaranteed minimum royalty payments associated with
certain technology licensed by CrossWorlds. We expect this percentage to
decrease in the future as a result of our replacing the licensed technology
with our own internally developed product during the fourth quarter of 1999. In
addition, in anticipation of increased customer demand which did not
materialize until later periods, we expanded our professional services
organization during the quarter ended September 30, 1998, resulting in
significant services costs as a percentage of total revenue during that
quarter.
29
<PAGE>
Total operating expenses, in absolute dollar terms and as a percentage of
revenue, also fluctuated significantly during 1998. Total operating expenses in
absolute dollars increased in 1999 but decreased as a percentage of revenue.
Research and development expenses increased during the quarter ended June 30,
1998 due to increased staffing as we accelerated our efforts to expand our
product lines. Sales and marketing expenses increased during the quarter ended
June 30, 1998 due to increased advertising and expanded business development
efforts as we established our presence in the marketplace and built strategic
partnerships. Sales and marketing expenses decreased during the quarter ended
March 31, 1999 primarily due to our reorganization, and the reduction in the
size of our marketing organization, our election not to pursue advertising
campaigns similar to those we pursued in 1998, and our strategic decisions in
December 1998 to cease our Asian and Australian operations because our
expenditures in those markets were not producing sufficient returns. Sales and
marketing expenses increased during the quarter ended December 31, 1999 due to
increased commissions expense payable to sales and business development
personnel. Commission expense increases are generally not comparable to revenue
increases given that we typically recognize revenues on a percentage-of-
completion basis while commissions are earned and expensed in the quarter in
which the sale is made.
General and administrative expenses increased during the quarter ended
December 31, 1999 due to expenses associated with the employment of our Chief
Executive Officer. Total operating expenses increased during the quarter ended
June 30, 1999 from the prior quarter as we increased our investment in research
and development, expanded our direct sales force, and built our finance
infrastructure to support our growth. Total operating expenses increased during
the quarter ended December 31, 1999 from the prior quarter primarily as a
result of the increase in sales commission expense and expenses associated with
the employment of our Chief Executive Officer. Other expense increased during
the quarter ended December 31, 1999 due to the write-off of a prepaid royalty
asset (See Note 4 of Notes to Consolidated Financial Statements). Our quarterly
results have varied widely in the past, and we expect that they may continue to
fluctuate in the future as a result of a number of factors. See "Risk Factors--
Our quarterly financial results are subject to significant fluctuations that
could adversely affect our stock price."
We have experienced, and expect to continue to experience, seasonality with
respect to software and service orders. In recent years, there has been a
relatively greater demand for our products in the fourth quarter than in each
of the first three quarters of the year, particularly the first quarter. As a
result, we have historically experienced relatively higher sales in the fourth
quarter and relatively light sales in the first quarter. We believe that these
fluctuations are caused, in part, by customer buying patterns (often influenced
by year end budgetary pressures) and the efforts of our direct sales force to
meet or exceed year-end sales quotas. In addition, European sales may tend to
be relatively lower during the summer months than during other periods. We
expect that seasonal trends will continue for the foreseeable future. See "Risk
Factors--Seasonal factors may affect the timing of our business activity which
could negatively affect our stock price."
Software license revenue is generally recognized over the project
implementation cycle which is typically from three to nine months. As a result,
we expect that software license revenue will only be partially affected by
seasonal trends.
Liquidity and Capital Resources
We have funded our operations through December 31, 1999 primarily through
private sales of preferred equity securities, totaling $85.7 million and to a
lesser extent, commercial bank loans and equipment leases. As of December 31,
1999, we had $12.5 million in cash and cash equivalents.
Our operating activities resulted in net cash outflows of $11.4 million,
$32.0 million and $28.8 million in 1997, 1998 and 1999. The sources of cash
were primarily increases in accrued liabilities, increases in accrued
compensation and related expenses, and increases in deferred revenue in 1997,
1998 and 1999. Uses of cash in operating activities were primarily due to net
operating losses and increases in accounts receivable for 1997, 1998 and 1999.
Investing activities used cash of $1.8 million in 1997, $3.7 million in 1998
and $785,000 in 1999, due primarily to the purchase of capital equipment. In
April 1999, we began leasing equipment through a $1.5 million
30
<PAGE>
Master Lease Agreement with a lender. The Master Lease Agreement is accounted
for as a capital lease and therefore the $1.1 million purchased through the
Master Lease Agreement as of December 31, 1999 is reflected on our balance
sheet.
Financing activities provided cash of $36.7 million in 1997 and $16.3 million
in 1998, primarily through the issuance of preferred stock, proceeds from an
equipment loan in 1997 and 1998 and proceeds from the issuance of convertible
subordinated notes and proceeds from a revolving line of credit in 1998.
Financing activities provided cash totaling $36.6 million in 1999, due
primarily to the issuance of a subordinated loan and the issuance of preferred
stock.
As of December 31, 1999, our principal commitments consisted of obligations
under a revolving line of credit, equipment facility loans, an irrevocable
letter of credit, obligations under the Master Lease Agreement and a
subordinated loan and security agreement. As of December 31, 1999, we had
$6.5 million in outstanding borrowings which are payable through 2002. Our
revolving line of credit provides for borrowing of up to $10.0 million based on
60% of eligible accounts receivable. Borrowings under this line of credit
accrue interest, payable monthly, at 0.10% above prime rate. As of December 31,
1999, we had no borrowings against this line of credit. Borrowings are secured
by substantially all of our assets, and certain agreements also require us to
comply with certain financial covenants. See Notes 3 and 4 of Notes to
Consolidated Financial Statements.
Deferred revenue consists primarily of the unrecognized portion of license
and maintenance sales contracts. Our deferred revenue balance or changes
therein may not be indicative of our total backlog or changes in the ordering
patterns of our customers. Capital expenditures were primarily for computer
workstations used for product development, product demonstrations and customer
support.
Because of our revenue recognition policy, we calculate accounts receivable
days sales outstanding ("DSO") as the ratio of the quarter-end accounts
receivable to the sum of quarterly revenue and the net change in quarter-end
current deferred revenue, multiplied by 90. We believe this calculation is
appropriate because license fees are typically billable regardless of whether
revenue has been recognized or deferred. Under this method, DSO was 102 days as
of December 31, 1999. Since the terms of certain of our sales agreements spread
our billings over the applicable project implementation cycle and our sales
activity is concentrated at the end of each quarter, we anticipate that our DSO
will continue to be substantial in future periods. Although our DSO calculation
may not be comparable to other similarly titled information from other
companies, we believe that it is an additional meaningful measure of liquidity.
We believe that the net proceeds from this offering, together with our
current cash balances and the cash flows generated by operations and tax
refunds, if any, will be sufficient to satisfy our anticipated cash needs for
working capital and capital expenditures for at least the next twelve months.
Thereafter, we may require additional funds to support our working capital
requirements, or for other purposes, and may seek to raise such additional
funds through public or private equity financings or from other sources. We may
not be able to obtain adequate or favorable financing at that time. Any
financing we obtain may dilute your ownership interests.
A portion of our cash may be used to acquire or invest in complementary
businesses or products or to obtain the right to use complementary
technologies. From time to time, in the ordinary course of business, we may
evaluate potential acquisitions of such businesses, products or technologies.
We have no current plans, agreements or commitments, and are not currently
engaged in any negotiations with respect to any such transaction.
Year 2000 Readiness
The year 2000 issue refers generally to the problems that some software may
have in determining the correct century for the year. For example, software
with date-sensitive functions that is not year 2000
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compliant may not be able to distinguish whether "00" means 1900 or 2000, which
may result in failures or the creation of erroneous results. We have defined
year 2000 compliant with regard to our products as follows: our software
products, when used in accordance with their associated documentation, will be
capable upon installation of accurately processing, providing and/or receiving
date data from, into, and between the twentieth and twenty-first centuries,
including the years 1999 and 2000, and leap year calculations, provided that
all other products (e.g., hardware, software and firmware) used in combination
with our software products properly exchange date data with them. We believe
that our current product is year 2000 compliant when configured and used in
accordance with the related documentation, and provided that the underlying
operating system of the host machine and any other software (including third
party applications) used with or in the host machine or our product are year
2000 compliant. However, we have not exhaustively tested our product for year
2000 compliance. To date, we have not received any reports from our customers
of year 2000 compliance problems with our product. Although January 1, 2000 is
past, it is possible that problems have gone undetected, or that other dates in
the year 2000, such as February 29, 2000, may further affect computer software
and systems. We expect to continue to respond to customer questions about year
2000 compliance of our product. We have inquired of the vendors whose
technology is included within our products as to the year 2000 compliance of
their technology and have received various assurances. Despite testing by us
and current and potential customers, and assurances from developers of product
incorporated into our product, our product may contain undetected errors or
defects associated with year 2000 date functions. Known or unknown errors or
defects in our product could result in delay or loss of revenues, diversion of
development resources, damage to our reputation, increased service and warranty
costs, or liability from our customers, any of which could seriously harm our
business.
Some commentators have predicted significant litigation regarding year 2000
compliance issues, and we believe there may be lawsuits against other software
vendors. Because of the unprecedented nature of this litigation, it is
uncertain whether or to what extent we may be affected by it. Congress has
passed a law that is intended to limit liability for some failures to achieve
year 2000 compliance. There can be no assurance that this bill will provide us
with any protection.
We have completed an assessment of our material internal information and non-
information technology systems, all or substantially all of which are provided
by third party vendors. To the extent that we are not able to test the
technology provided by third party vendors, we have sought assurances from
these vendors that their systems are year 2000 compliant and have received
various responses. We are not currently aware of any material operational
issues or costs associated with conforming our internal information technology
and non-information technology systems for the year 2000. However, we may
experience material unanticipated problems and costs caused by undetected
errors or defects in the technology used in our internal information technology
and non-information technology systems. To date, there has been no material
adverse effect on our business due to potential year 2000 problems. We have
funded our year 2000 plan from operating cash flows and have not separately
accounted for these costs in the past. To date, these costs have not been
material. We may incur additional costs related to the year 2000 issues for
administrative personnel to manage these issues. In addition, we may experience
material problems and costs with year 2000 compliance that could seriously harm
our business, but as of the date of this prospectus, we have not experienced
any material problems or costs. We do not have a contingency plan to address
situations that may result if our critical operations are not year 2000 ready,
and we do not anticipate the need to do so. The cost of developing and
implementing the plan may itself be material. Finally, we are also subject to
external forces that might generally affect industry and commerce, including
utility or transportation company year 2000 compliance failure interruptions.
Year 2000 issues affecting our business, if not adequately addressed by us, our
third party vendors or suppliers or our customers, could have a number of
"worst case" consequences. These include: claims from our customers asserting
liability, including liability for breach of warranties related to the failure
of our product and services to function properly, and any resulting settlements
or judgments; and our inability to operate our business.
See "Risk Factors--We may be subject to claims related to year 2000 issues,
and year 2000 problems could adversely affect our revenue."
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Qualitative and Quantitative Disclosures about Market Risk
Given that we market our products both in the United States and in foreign
countries, our financial results could be affected by factors including changes
in foreign currency exchange rates or weak economic conditions in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we
believe that there is no material interest rate risk exposure. Therefore, no
quantitative tabular disclosures are required.
Recent Accounting Pronouncements
In December 1998, the Accounting Standards Executive Committee, the governing
body of the AICPA, issued SOP 98-9, Software Revenue Recognition, with Respect
to Certain Arrangements, which requires recognition of revenue using the
"residual method" in a multiple-element arrangement when fair value does not
exist for one or more of the undelivered elements in the arrangement. Under the
residual method, the total fair value of the undelivered elements is deferred
and subsequently, recognized in accordance with SOP 97-2. We adopted SOP 98-9
on January 1, 2000, and do not expect such adoption to have a material effect
on our consolidated financial position or results of operations.
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BUSINESS
Overview
We are a leading provider of e-business infrastructure software to enable the
integration and automation of business processes within enterprises and among
trading partners using the Internet. Our products help traditional and emerging
businesses to leverage the Internet as a platform to increase productivity,
improve responsiveness to customer demands and enhance overall competitiveness.
Our products are based on a modular architecture that scales to meet the
requirements of large enterprises, and combines standard Internet technologies
with proprietary innovations. We offer a suite of tools that customers can use
to build comprehensive e-business integration solutions, as well as extend and
customize CrossWorlds' pre-built components. In order to accelerate time to
market and leverage industry best practices, our customers can utilize
CrossWorlds' pre-built connectivity to leading applications and pre-built
process automation components for common e-business and enterprise processes.
We sell and market our products primarily through a direct sales force which
targets global companies in selected high-potential vertical markets such as
technology, industrial manufacturing, process manufacturing and
telecommunications. Additionally, we leverage our relationships with IBM, SAP,
global systems integrators and software providers to sell and implement our
products in these and other markets. Our customers include industry-leading
companies such as Applied Materials, Caterpillar/Solar Turbines, Delphi
Automotive, DuPont, Ingersoll-Rand, Nortel Networks, Siemens and U S WEST.
Industry Background
The Need for Collaborative Business Strategies
In recent years, many large companies have faced an increasingly competitive
business environment. This competitive environment has been exacerbated by such
factors as deregulation, mergers and acquisitions, and the increasing adoption
of e-business strategies. In response to this changing environment, many
companies have begun to fundamentally realign their operations to increase
efficiency and become more responsive to customer and market demands.
In pursuit of these goals, many companies are implementing collaborative e-
business strategies. Examples of these strategies include the use of Internet-
based marketplaces and trading exchanges; collaborative supply and demand
planning among trading partners; outsourcing of customer service and
manufacturing activities to third parties; and inventory management across
multiple company divisions and distribution channels.
Efforts to implement collaborative business strategies within and beyond
enterprises, however, have been constrained by various information technology
and business issues, including the following:
. Companies have traditionally been managed on a functional "silo" basis
with minimal coordination between functions such as procurement,
manufacturing, sales, logistics and administration;
. Companies have adopted disparate packaged and custom enterprise
applications to automate each business function, including enterprise
resource planning applications from vendors such as SAP and Oracle
Corporation, customer relationship management applications from vendors
such as Siebel Systems, Inc. and Clarify Inc., supply chain management
applications from vendors such as i2 Technologies, Manugistics Group,
Inc. and Numetrix, a J.D. Edwards Company, e-business applications from
vendors such as SAP, Ariba, Inc. and BroadVision, Inc., and industry-
specific applications from vendors such as Portal Software Inc. and
MetaSolv Software, Inc.;
. Business processes typically span multiple functions and applications,
requiring a significant level of integration within the enterprise;
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. Extending supply chain and outsourced business processes outside the
enterprise requires integration and coordination among trading partners
and their applications; and
. Technological incompatibilities and functional differences among
disparate applications make it difficult for many of these enterprise
systems to inter-operate in real time and to allow integration over the
Internet.
For example, a seemingly simple task such as receiving and fulfilling a
customer's order over the Internet may require interaction among the e-
business, order management, manufacturing, logistics and accounting systems
within one company and the customer service, manufacturing and accounting
systems of multiple trading partners, each of which utilizes its own enterprise
applications. The total dollar value of such business-to-business transactions
over the Internet is expected to grow to $1.3 trillion by 2003, according to
Forrester Research.
As a result, most large organizations face significant integration challenges
and need a flexible e-business infrastructure that automates cross-functional
and Internet-based business processes while leveraging investments made in
enterprise applications. The Yankee Group estimates that approximately 35% to
40% of total corporate information technology spending is now consumed by
system integration costs. This spending includes the cost of integration both
within the enterprise and among trading partners over the Internet.
Current Business Integration Market
Business integration solutions have traditionally been provided by numerous
parties, including systems integrators, other information technology service
providers, information technology departments within companies and software
vendors. The market for e-business software excluding related services,
according to Forrester Research, will grow from $121.0 million in 1997 to
$3.8 billion in 2002. According to International Data Corporation Research, the
worldwide systems integration services market will grow from $41.0 billion in
1996 to $90.0 billion by 2003. The related market for data integration tools
and enterprise application integration software, according to the Yankee Group,
will grow from $1.6 billion in 1998 to $5.0 billion in 2001. The Yankee Group
defines enterprise application integration software as software products that
integrate business applications both within an enterprise and, to a lesser
extent, among trading partners.
To date, the business integration software market has been comprised of three
segments:
. Messaging-Oriented Middleware is the underlying software that manages the
movement of simple messages between applications. In general, such
products have provided an infrastructure for application integration
projects but have offered limited functionality to support business
logic, the set of rules that support business processes by defining how,
when and in what form data is transmitted between applications. Companies
offering products in this segment include IBM, TIBCO Software, Inc. and
BEA, among others.
. Enterprise Application Integration Tools are designed to allow
information technology professionals to more rapidly build customized
links between pairs of applications, also known in the industry as point-
to-point integration. Development tools, in their simplest form, enable
users to convert data from one application into a format that is readable
by another application. The more sophisticated products enable the
developer to model and program more complex application connections that
utilize business logic. Companies offering products in this segment
include Active Software Inc., New Era of Networks Inc. and Mercator
Software (formerly TSI Software International), among others.
. Electronic Data Interchange is software that uses industry-specific
formats to enable point-to-point electronic links for the purpose of
transmitting business documents periodically. Companies offering products
in this segment include Sterling Commerce and Harbinger, among others.
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. Extensible Markup Language (XML) Tools enable companies to build
integration solutions based on the exchange of XML-formatted documents,
representing an alternative to EDI. These solutions typically do not
address the integration requirements of applications within the
enterprise--a capability we believe to be critical to the enablement of
e-business strategies. Companies offering products in this segment
include OnDisplay, Inc. and webMethods, Inc., among others.
Shortcomings of Common Business Integration Approaches
While the adoption of these products has driven substantial growth in the
business integration software market, we believe these products have fallen
short of providing a complete business integration solution in a number of
respects:
. Inability to Support e-Business. Many current business integration
products lack support for standard Internet data formats and
communication protocols. In addition, most solutions are not able to
support complex, Internet-based processes between trading partners.
. Lack of Sophisticated Business Process Support. Many tools-based or
electronic data interchange solutions support the transmission of data or
business documents rather than automating business processes between
applications and enterprises. In addition, many products do not provide
pre-built support for the most common business process integration
requirements to accelerate time-to-market.
. Lack of Pre-built Application Connectivity. Many business integration
solutions do not provide pre-built connectivity to the market's leading
packaged e-business and enterprise applications. With such incomplete
solutions, companies find it difficult to leverage their existing
information technology infrastructure as they pursue e-business
strategies.
. Architectural Inflexibility. Most custom connections provide simple
point-to-point interfaces that cannot be easily applied to similar
situations and require significant modifications or full-scale
reprogramming when adding additional trading partners or applications. In
addition, many business integration products are based on out-dated
technologies or do not provide a unified integration architecture.
New Approaches for Business Integration
We believe that a large opportunity exists for software vendors to address
these limitations by providing software solutions that:
. provide an e-business infrastructure for the integration and automation
of end-to-end business processes both within the enterprise and among
trading partners over the Internet;
. provide an open platform to support the scaleability and manageability
requirements of large enterprises;
. leverage the functionality of leading enterprise application packages;
and
. operate in a variety of technical environments including those comprised
of custom and legacy applications, leading packaged applications, various
operating systems and the Internet.
Such a comprehensive business integration solution would improve operating
efficiencies, enable organizations to adapt rapidly to changes in business and
information technology requirements and allow companies to more fully capture
the benefits of e-business.
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The CrossWorlds Solution
Our e-business infrastructure software enables the integration and automation
of business processes within enterprises and among trading partners over the
Internet. We offer a suite of integration products including development and
management tools, connectivity to leading e-business and enterprise application
packages and pre-built modules for the most common business integration
requirements.
Our products are characterized by the following five elements:
Flexible e-Business Infrastructure
We believe our products provide a strong foundation for e-business between
companies and their trading partners. We support a number of the leading
packaged e-business applications and development platforms. Our architecture
also supports standard e-business and Internet data formats and communication
protocols. When combined with our application integration and business process
automation products, customers are able to quickly deploy e-business solutions
that leverage their existing information technology infrastructures.
Real-time Business Process Automation
We believe our business process level integration solutions enable customers
to accelerate their e-business initiatives by integrating disparate enterprise
applications and automating their underlying business processes. While many
application integration and e-business solutions focus primarily on
transferring data between applications, our solution allows companies to
automate business processes that span applications thereby eliminating process
redundancies and data inconsistencies between applications. We offer both a
robust process modeling toolset for building custom business process
integration solutions as well as pre-built business process integration modules
that leverage our knowledge of industry best practices to automate the most
common integration requirements in our target markets.
Deep Packaged Application Integration
We offer pre-built connectivity products for many of the leading packaged e-
business and enterprise applications. These connectivity products leverage and
complement the standard interfaces provided by each application vendor. Where
required, we offer version specific connectivity products to accommodate
functional and technological changes in these standard interfaces. In some
cases, we have created additional tools to facilitate the use of standard
interfaces provided by various application vendors. This allows customers to
migrate between existing and new application releases with minimal changes to
their integration solution, thereby reducing their long term cost of
integration.
Extensive Custom and Legacy Application Integration
We offer a suite of tools that enable customers to extend their integration
solutions to include custom and legacy applications. Our tools automate common
integration development tasks such as data transformation, data cross-
referencing and communications between applications and the CrossWorlds
environment. To accelerate development efforts, we also provide pre-built
connectivity to many common technology environments.
Scalable Integration Architecture
Our Java-based, enterprise class architecture provides a modular application
integration environment that is both highly flexible and scalable. Our
architecture supports all relevant Internet and technology standards and can be
easily extended to support new standards as they emerge. This architecture has
been designed to allow customers to quickly adapt to changes in business and
information technology environments, including the addition of new applications
or trading partners. We have been granted a patent on key elements of our
technology and have additional patents pending on other portions of our
architecture.
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Strategy
Our objective is to establish and maintain a market leadership position in
the e-business infrastructure software market. To this end, our strategy
includes the following key elements:
Provide Comprehensive e-Business Solutions
As enterprises increasingly conduct business over the Internet, they will
face a growing number of integration challenges. To address these challenges,
we intend to enhance our current e-business product offering by developing
Internet-based business process integration modules and adding packaged
connectivity for additional leading e-business applications such as those used
for web-based procurement and web-based order management. In addition, we
intend to continue to enhance our architecture by providing additional security
and by supporting emerging Internet standards.
Expand Business Process Automation and Application Integration Solutions
We believe that the breadth and depth of our business process automation and
application integration solutions are a primary competitive differentiator in
our target markets. Within a unified architecture, our solution addresses a
broad range of integration requirements faced by global enterprises, thereby
allowing them to simplify their overall informational technology
infrastructure. We plan to add connectivity for additional packaged
applications and technology environments as well as to expand our set of pre-
built business process integration modules.
Maintain and Extend Technology Leadership
Our Java-based, open architecture leverages industry leading messaging
middleware and proprietary innovations, providing an extensible, high-
performance e-business infrastructure. We intend to continue to improve this
technology platform to ensure that our solutions scale to meet the demanding
requirements of large enterprises. We have been granted a patent on key
elements of our technology and have additional patents pending on other
portions of our architecture.
Penetrate High-Potential Vertical Markets
We believe that sales to global companies in selected vertical markets such
as technology, industrial manufacturing, process manufacturing and
telecommunications represent the greatest growth opportunities for us in the
near term. Many companies in these industries have made significant investments
in packaged and custom applications and are pursuing collaborative business
strategies that require the integration of these applications both internally
and with trading partners over the Internet. We have developed significant
functionality to address the integration and e-business requirements of these
industries and will continue to expand these offerings. We intend to target
additional vertical markets in the future where our solution can provide
significant strategic benefit.
Leverage Strategic Partnerships
We intend to continue to develop and extend our strategic partnerships to
promote adoption of our e-business infrastructure solutions. We believe that
these strategic partnerships are a competitive advantage. Our partnerships with
enterprise application and other technology vendors and systems integrators
provide sales and marketing leverage and access to required technology and
expertise. A number of our partners have also made equity investments in
CrossWorlds. Currently, our most significant strategic partners are:
IBM. CrossWorlds and IBM have a strategic relationship focused on joint
sales and marketing of a combined product offering. As part of the
agreement, CrossWorlds and IBM have also established a Joint Design Council
to identify areas of potential development cooperation such as joint
product development and technology transfer, and to accelerate the
development of IBM's MQSeries-based
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enterprise application integration solutions. In addition, CrossWorlds has
agreed to incorporate additional technology from IBM as part of
CrossWorlds' infrastructure. We plan to expand our relationship to include
a sales, marketing and implementation partnership with IBM Global Services,
IBM's systems integration organization.
SAP. SAP made equity investments in CrossWorlds in 1997 and 1999. SAP
and CrossWorlds have committed resources towards joint development,
marketing and sales. CrossWorlds supports SAP's Business Framework
architecture and is a certified partner in SAP's Complementary Software
Program. SAP has certified the CrossWorlds Connector for R/3 for the SAP
Business Application Programming Interface (BAPI). An executive from SAP
sits on CrossWorlds' technical advisory board. We have recently expanded
our partnership efforts to include cooperative sales efforts surrounding
SAP's B2B Procurement and mySAP.com product lines.
Global Systems Integrators. We have established relationships with
several other global systems integrators including Cap Gemini, CSC,
Deloitte Consulting, EDS, Ernst & Young and PricewaterhouseCoopers. These
partners provide implementation support and sales and marketing leverage
and, in some cases, leverage their industry expertise to build extensions
to the CrossWorlds product line. We intend to invest in further developing
our relationships with systems integrators. We believe this investment is a
crucial component of our overall strategy to migrate to a business model
that is more heavily weighted toward software licenses.
Products and Technology
CrossWorlds' e-business infrastructure products include business process
integration software and application connectivity components. These products
are supported by a robust architecture and toolset that can be used to develop
and deploy customized solutions. The table below provides a summary view of our
product offerings.
e-Business Infrastructure Products
<TABLE>
<CAPTION>
Product Description
-------------------------------------- --------------------------------------
<C> <S>
Business Process Integration Products Business process integration toolset
.CrossWorlds Process Designer
Pre-built business process integration
modules
.CrossWorlds eBusiness
.CrossWorlds Customer Interaction
.CrossWorlds Enterprise
Pre-built application connectivity
Application Integration Products solutions
.CrossWorlds Application Connectors
.CrossWorlds Technology Connectors
Custom and legacy application
integration toolset
.CrossWorlds Connector Development Kit
.CrossWorlds Map Designer
.CrossWorlds Relationship Designer
Infrastructure Products .CrossWorlds InterChange Server
.CrossWorlds System Manager
</TABLE>
Initial software license orders from end-user customers have ranged from
approximately $150,000 to $5 million. A typical installation would include one
or more InterChange Servers, and a set of pre-built
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business process integration modules and connectors that support a customer's
specific requirements. We also provide software maintenance and support,
training and associated implementation services. When these services are
included, initial total sales to end-user customers have ranged from $250,000
to over $5 million. In some cases, customers have licensed additional software
or purchased additional consulting services as their use of our products has
expanded.
Business Process Integration Products
Our business process integration solution is comprised of pre-built modules
and related tools that together enable business process integration both within
the enterprise and among trading partners over the Internet. Our solution
allows customers to:
. extend the functionality of individual applications, thereby enabling
additional e-business capabilities;
. reconcile differences and redundancies in the information managed by
disparate applications; and
. provide access to information not usually available to the user of a
single application.
The foundation for our business process integration solution is our Common
Object Model. All business processes within our system operate using a data
model that is designed to be independent of the way any specific application
represents its data. This Common Object Model is a superset of the models
employed by the most widely deployed packaged enterprise applications. We
believe that the use of a Common Object Model provides a significant advantage
over other integration approaches because it isolates the business process from
changes in the participating applications, thereby reducing the maintenance
effort typically associated with integration.
Business Process Integration Toolset
Business process integration modules are created and extended using the
CrossWorlds Process Designer suite of tools. The CrossWorlds Process Designer
is a standards-based tool for creating CrossWorlds Common Objects, designing
business process flows and automatically generating the underlying Java
programming code to operate on the CrossWorlds InterChange Server. Process
components are presented to the user visually, and are defined and configured
through the Process Designer's graphical user interface. This greatly
simplifies the development effort and provides the user with a flexible and
powerful customization environment.
Pre-Built Business Process Integration Modules
In addition to using the Process Designer to create their own business
process integration modules, customers can leverage a number of pre-built
components from CrossWorlds that integrate many of the common business
processes required for e-business and other enterprise business functions.
These pre-built components leverage our Common Object Model, allowing multiple
processes to be combined into solutions that address complex requirements.
CrossWorlds' pre-built process integration modules are grouped into three
product lines that are detailed in the following three tables.
CrossWorlds eBusiness. Our eBusiness product line includes business process
integration modules for integrating e-business applications and enabling
companies to collaborate with their trading partners over the Internet.
CrossWorlds eBusiness is designed to allow enterprises to rapidly implement e-
business solutions that leverage their existing information technology
investments. CrossWorlds eBusiness also partially leverages available process
integration modules from other product lines.
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CrossWorlds eBusiness
<TABLE>
<CAPTION>
Module Description
------------------------------- ---------------------------------------------
<C> <S>
CrossWorlds eSales Integrates the various applications involved
in the Internet-based sales and ordering
process, creating a seamless environment for
creating, processing, tracking and fulfilling
sales orders
CrossWorlds eProcurement Integrates self-service procurement
applications with back-office financial and
inventory systems
CrossWorlds eCustomer Service Provides self-service information to
customers and suppliers by integrating
Internet-based customer relationship
management applications and back-office
systems
CrossWorlds Demand Planning Integrates forecasting applications with
operational systems to enable effective
demand planning within the enterprise and to
support a forecasting process spanning
multiple trading partners
CrossWorlds Supply Planning Enables effective planning in batch and real-
time modes by integrating supply planning
applications with operational systems within
the enterprise and at trading partners
</TABLE>
CrossWorlds Customer Interaction. Our Customer Interaction product line
includes the business process integration modules that link customer
relationship management (sales force automation and customer service), order
management, billing and enterprise resource planning applications. These
products enable our customers to provide their sales and customer service
staffs with real time access to enterprise information thereby improving
customer service effectiveness and enhancing sales efficiency.
CrossWorlds Customer Interaction
<TABLE>
<CAPTION>
Module Description
------------------------------- ---------------------------------------------
<C> <S>
CrossWorlds Sales Processing Allows companies to seamlessly integrate
sales management applications with order
management and other back-end systems
CrossWorlds Service and Support Enables improved customer service by
integrating customer relationship management
applications with back-end systems to provide
customer service representatives with up-to-
date customer, billing, purchase, product and
pricing information
</TABLE>
CrossWorlds Enterprise. Our Enterprise product line includes business process
integration modules that synchronize information about key corporate assets
such as customers, products, inventory and employees. This enables companies to
maintain a single, consistent and up-to-date view of information that is often
duplicated across multiple systems, and simplifies the task of exchanging data
among trading partners.
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CrossWorlds Enterprise
<TABLE>
<CAPTION>
Module Description
------------------------------- --------------------------------------------
<C> <S>
CrossWorlds Human Resources Synchronizes relevant human resources
information such as employee master files,
departmental structures and payroll
information across multiple human resources
applications and with multiple enterprise
resource planning applications
CrossWorlds Procurement Enables an enterprise to synchronize product
and vendor databases and generate purchase
requisitions and orders among multiple
procurement and financial applications
CrossWorlds Inventory Synchronizes and tracks inventory movements
Management between inventory management and order
fulfillment applications, providing a
consistent view of distributed inventory
across multiple plants and disparate
applications
CrossWorlds Financial Integrates various functional applications
Transactions with financial applications by posting
accounts receivable, accounts payable and
general ledger transactions
</TABLE>
Application Integration Products
CrossWorlds' application integration products include pre-built connectivity
for many of the leading packaged applications and common technology platforms
as well as a toolkit for building connectivity to custom and legacy
applications.
Many of our connectors are targeted at specific versions of enterprise
applications and are maintained and upgraded by CrossWorlds to support new
functionality and interfaces as they are released by application vendors.
CrossWorlds also maintains a library of application and technology connectivity
solutions for less common environments, some of which are included in the
listings below. This connector library can be leveraged by CrossWorlds
implementation staff, customers and our systems integrator partners to more
rapidly build new connectors on site.
Pre-built Application Connectivity Solutions
CrossWorlds Application Connectors. Our Application Connectors are designed
to understand the means by which a packaged application communicates with its
external environment via published interfaces or other import/export methods.
Our Application Connectors have the ability to monitor the events occurring
within an application and make them available to the CrossWorlds environment in
real-time. Many of our Application Connectors also include pre-built components
that support the most common business integration scenarios, enabling our
customers to deploy e-business infrastructure solutions more rapidly. In most
cases we support multiple releases of the supported applications to allow our
customers to more easily upgrade their packaged applications and related
integration solutions.
CrossWorlds Application Connectors are available for a number of the leading
e-business and enterprise applications used by manufacturing and
telecommunications companies, including those offered by Baan Company N.V.,
BroadVision, Clarify, J.D. Edwards & Company, Kenan Systems, a subsidiary of
Lucent Technologies, Inc., Manugistics, MetaSolv, Numetrix, Oracle, PeopleSoft
Inc., Portal, SAP, including SAP R/3, and SAP B2B Procurement, Siebel, Trilogy
Software, Inc. and Vantive, a subsidiary of PeopleSoft. We intend to add
connectors for additional packaged applications focusing initially on emerging
e-business applications and applications utilized by the telecommunications
industry.
CrossWorlds Technology Connectors. We also provide Technology Connectors to
leading enterprise and e-business technology environments to allow integration
with legacy applications and applications which
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lack well-defined interfaces. This is accomplished by using widely adopted,
standard technologies such as ODBC, JDBC, HTML, CORBA, XML, EDI, CICS, IBM MQSI
and Oracle RDBMS.
Custom and Legacy Application Integration Toolset
Three tools are used to build connectivity solutions involving custom and
legacy applications.
CrossWorlds Connector Development Kit. The CrossWorlds Connector Development
Kit (CDK) can be used to build connectors to custom applications and extend the
connectivity provided by our pre-built connectors. The CDK provides a uniform
framework for connector development, allowing customers to reuse previously
built components. The combination of our Technology Connectors and the CDK
enables us to offer connectivity to the most common environments while
minimizing the amount of programming our customers need to perform.
CrossWorlds Map Designer. The CrossWorlds Map Designer is used to build and
extend transformation maps that convert data from application specific formats
into the CrossWorlds Common Object Model. The Map Designer is a visual tool and
is tightly integrated with the CrossWorlds environment to support high volumes
of transformations.
CrossWorlds Relationship Designer. The CrossWorlds Relationship Designer
maintains references between integrated data that resides in disparate
applications. Using a graphical user interface, the Relationship Designer
enables the definition of cross-reference relationships between applications
necessary for simultaneously synchronizing data across multiple applications.
Infrastructure Products
CrossWorlds process automation and application integration solutions are
deployed on the CrossWorlds InterChange Server, a Java-based, enterprise-class
software product that scales to meet the requirements of global organizations
and trading networks with large volumes of mission-critical transactions.
We believe that CrossWorlds' infrastructure products exhibit the key
characteristics of enterprise class software solutions:
Modern Technology Infrastructure. The CrossWorlds InterChange Server utilizes
a combination of proprietary technologies and industry-standard messaging
middleware from IBM. The InterChange Server is a modular, Java-based
infrastructure that allows us to leverage new technologies and industry
standards as they emerge. It supports the most widely-accepted operating system
standards, including Microsoft Windows NT and the Sun Solaris version of UNIX,
although the InterChange Server can interoperate with applications based on all
common operating systems. We have been granted a patent on key elements of our
architecture.
eBusiness Foundation. CrossWorlds' open platform supports a variety of
Internet standards including XML, RosettaNet, HTML, HTTP, ftp, and EDI. The
CrossWorlds InterChange Server provides interfaces for multiple data formats
and supports communications over multiple protocols, and is engineered to allow
us to rapidly add support for new and emerging e-business standards. Integrated
security ensures the integrity and confidentiality of exchanges between trading
partners.
Enterprise Scalability. Our e-business infrastructure is designed to scale to
meet the needs of organizations with multiple packaged and custom applications.
The CrossWorlds InterChange Server is multi-threaded and capable of executing
multiple business processes simultaneously in a distributed environment. Our
modular architecture gives customers flexibility in deploying our solution, and
allows them to improve performance of individual components to maximize
scalability in the overall solution.
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Manageability. We provide a distributed system management capability in the
form of the CrossWorlds System Manager. The CrossWorlds System Manager is
highly visual and tightly integrated with the CrossWorlds InterChange Server
enabling users to monitor and control the execution of our business process
integration modules and connectivity solutions from a centralized user
interface.
Adaptability. We provide an effective method of separating the functionality
of our process integration modules and connectors. This separation provides
multiple benefits to corporations implementing CrossWorlds' products. These
benefits include the ability to mix and match business process integration
modules and connectors, enabling greater adaptability to constantly changing
business requirements.
Customers and Markets
We have targeted and licensed our software to large global organizations in
four industries: technology, industrial manufacturing, process manufacturing
and telecommunications. In addition, customers in other vertical markets have
licensed our software to support specific functional integration projects. For
our four targeted industries, we have developed vertical market initiatives to
increase our market penetration, including:
. industry-specific product development;
. support for industry-specific applications;
. dedicated sales and pre-sales teams; and
. focused marketing initiatives.
A representative list of our customers includes:
Technology Telecommunications
- ------------------------------------- -------------------------------------
. Applied Materials . Avantel S.A./MCIWorldCom
. Nortel Networks . Axtel
. Royal Philips N.V. . Carrier Pro Services
. Siemens . Citykom Munster GmbH
. CodeNet
Industrial Manufacturing . EWE TEL AG
- ------------------------------------- . Excel Communications, Inc.
. Orange Plc.
. Andersen Corporation . Orbitel
. Caterpillar/Solar Turbines . U S WEST
. Delphi Automotive
. Ingersoll-Rand Other Industries
. 3M -------------------------------------
. Vorwerk AG
. Whirlpool Corporation . EnBW International GmbH
(Utilities)
Process Manufacturing . LodgeNet Entertainment Corporation
- ------------------------------------- (Entertainment)
. Neoforma.com, Inc. (Health Care)
. DuPont . Premier, Inc. (Health Care)
. Farmland Industries
. Hercules, Inc.
. Roche Group
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Customer Case Studies
Customer: Neoforma.com (healthcare e-business network provider)
Problem: Neoforma.com is building an online healthcare marketplace over the
Internet that will serve as a global network to bring together healthcare
providers and medical suppliers to exchange information and buy and sell
medical products, supplies and equipment. To accomplish this, Neoforma.com
is integrating mySAP.com Marketplace with its internal applications and
plans to integrate its online marketplace with the exchange participants'
order management and purchasing applications. The integration solution
should manage the diversity of packaged, custom and legacy applications
from each buyer and seller.
Solution: Neoforma.com is implementing CrossWorlds as the core integration
solution to provide healthcare providers and suppliers a conduit to connect
with the mySAP.com Marketplace. CrossWorlds eBusiness will be used to
automate the exchange by capturing order information from healthcare
providers and product information from medical suppliers and formatting it
for the mySAP.com Marketplace. CrossWorlds will standardize and maintain
the core business logic and master data definitions involved in the
transactions such as item, master customer, master vendor, master orders,
account status and inventory level. This standardization ensures
consistent, accurate exchange of information and facilitates the buying and
selling of medical products, supplies and equipment. Neoforma.com will also
use CrossWorlds to integrate mySAP.com and Neoforma.com's internal ERP
system.
Customer: Delphi Automotive (automotive technologies, systems and
components)
Problem: Delphi needed a standardized integration solution that could tie
together numerous packaged, legacy and custom applications and support the
company's complex business processes. These applications operate within
multiple business units, and Delphi wanted a solution that would improve
the efficiency of data sharing across the company. Delphi currently has a
large SAP ERP implementation along with a myriad of custom and legacy
applications that manage production, purchasing and fulfillment.
Solution: Delphi is implementing CrossWorlds to integrate the company's
complex application environment across the enterprise. From CrossWorlds,
Delphi purchased the SAP and multiple technical Connectors, the InterChange
Server, development toolset and multiple pre-built business process modules
to integrate key information and automate the processes across business
units.
Customer: U S WEST (telecommunications service provider)
Problem: U S WEST !NTERPRISE, U S WEST's data networking and new product
development division, needed to integrate the common business processes for
customer relationship management, order history and service contracts
across their three mission-critical customer service and back office
applications.
Solution: U S WEST implemented CrossWorlds Customer Interaction solution to
enable a bi-directional flow of information between these applications,
ensuring a consistent and accurate picture of its customers, products and
contracts. As a part of U S WEST's new systems architecture, CrossWorlds'
solution helped U S WEST achieve a five-fold increase in the number of
quotes for contracts and renewals processed within the first month of
implementation. U S WEST estimates they have achieved a 35% cost savings in
this first phase of the CrossWorlds implementation, simply because of the
ease of making changes to customer contracts.
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Partners
Strategic Partners
An important element of our overall strategy is to continue to enhance and
expand our strategic partnerships with key industry leaders in order to
increase market awareness and acceptance of our integration applications. These
relationships include a variety of joint development, cooperative sales and
marketing efforts that are significantly more in-depth than the relationships
we have with other partners. For more detailed information on these strategic
partners, see "--Strategy--Leverage Strategic Partnerships." Our strategic
partners include:
<TABLE>
<CAPTION>
Strategic Partner Description of Partner
------------------------------- -------------------------------------------
<C> <S>
IBM IBM is a provider of information technology
products and services.
SAP AG SAP is a provider of inter-enterprise
software solutions.
</TABLE>
Strategic Investors
In addition to SAP, we have received equity investments of at least $1
million from a variety of leading companies in the technology industry. Some of
these investors also provide marketing and sales leverage. Strategic investors
include:
<TABLE>
<CAPTION>
Strategic Investor Description of Investor
-------------------------------------- --------------------------------------
<C> <S>
Axon Solutions Axon is a United Kingdom-based systems
integrator.
Compaq Computer Corporation Compaq is a supplier of computer
equipment and related services.
Industri-Matematik International Corp. IMI is a provider of order management
(IMI) applications for manufacturers and
wholesale distributors.
Intel Corporation Intel is a manufacturer of computer,
networking and communications
products.
J.D. Edwards J.D. Edwards is a provider of
enterprise resource planning
applications.
Manugistics Manugistics is a provider of supply
chain planning and management
applications.
Omron Corporation Omron is a Japan-based supplier of
industrial automation, service
automation, healthcare automation and
information processing.
</TABLE>
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<PAGE>
Application Partners
We have established formal business relationship with a number of enterprise
application software providers. These relationships typically include one or
more of the following: technical cooperation, joint marketing, cooperative
development and/or joint sales. CrossWorlds has access to each company's
software and documentation. Our application partners include:
<TABLE>
<CAPTION>
Application Partner Description of Partner
-------------------------------------- --------------------------------------
<C> <S>
Baan Baan is a provider of enterprise
resource planning applications.
BroadVision BroadVision is a provider of
electronic commerce applications.
Clarify Clarify is a provider of customer
relationship management applications.
MetaSolv MetaSolv is a provider of operating
support system applications for the
telecommunications industry.
Oracle Oracle is a provider of enterprise
resource planning applications.
PeopleSoft/Vantive PeopleSoft is a provider of enterprise
resource planning and customer
relationship management applications.
Portal Portal is a supplier of customer
relationship management and billing
software for Internet service
providers.
Siebel Siebel is a provider of customer
relationship management applications.
</TABLE>
In addition, CrossWorlds provides connectivity solutions for products from
other vendors with whom we have no formal relationship including those provided
by Kenan, Mannesmann, Numetrix and Trilogy.
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<PAGE>
Systems Integrators/Consulting Firms
Systems integrators and consulting firms provide strategic sales, marketing
and product development leverage. Partnerships with key systems integrator and
consulting firms can help shorten the sales cycle for customer situations and
enable sales representatives to make calls to higher level executives at
potential prospects. In some instances, these partnerships also include joint
product development efforts. In addition to our strategic partnerships with SAP
and IBM listed above, our systems integrator and consulting firm partners
include:
<TABLE>
<CAPTION>
Systems Integrator Partner Description of Relationship
-------------------------------------- --------------------------------------
<C> <S>
Cap Gemini Cap Gemini and CrossWorlds have a
joint sales, implementation, marketing
and development partnership focused on
the telecommunications industry and
the United Kingdom market. CrossWorlds
and Cap Gemini have cooperatively
developed a connectivity solution for
the Portal application for this
market. Cap Gemini has installed
CrossWorlds' software in its solution
centers.
CSC CSC Consulting and CrossWorlds have a
joint sales and implementation
partnership focused on large
enterprises in the United States and
Europe.
Deloitte Consulting Deloitte Consulting and CrossWorlds
have a joint sales, implementation and
marketing partnership focused on the
telecommunications and enterprise
resource planning markets.
EDS EDS and CrossWorlds have a joint
sales, implementation and marketing
partnership focused on providing e-
business integration solutions to
selected vertical markets.
Ernst & Young Ernst & Young and CrossWorlds have a
joint sales, implementation, marketing
and development partnership focused on
selected vertical markets, including
manufacturing and telecommunications.
CrossWorlds and Ernst & Young have
cooperatively developed a connectivity
solution for the MetaSolv application
for the telecommunications industry.
An Ernst & Young executive is a member
of our technical advisory board.
PricewaterhouseCoopers PricewaterhouseCoopers and CrossWorlds
have a joint sales, implementation and
marketing partnership focused on
providing e-business integration
solutions for selected vertical
markets. CrossWorlds is being bundled
into selected PricewaterhouseCoopers'
solution sets which include software
and implementation services.
</TABLE>
In addition, CrossWorlds has worked cooperatively with other systems
integrators and consulting firms including Andersen Consulting and Cambridge
Technology Partners, although we have no formal partnerships with these
companies.
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Sales
We sell our software primarily through our direct sales organization. As of
December 31, 1999 our direct sales force consisted of 24 sales professionals
located in offices in North America and Europe. We have domestic offices
located in Burlingame, California; Los Angeles, California; Chicago, Illinois;
Bethesda, Maryland; Newton, Massachusetts; Edina, Minnesota; Princeton, New
Jersey; White Plains, New York; Charlotte, North Carolina; and Dallas, Texas.
Our European headquarters is based in Munich, Germany and we have also
established subsidiaries and local offices in France and the United Kingdom.
Technical sales support is provided by 15 pre-sales representatives co-located
in the corporate and field offices. The field sales force is complemented by
four telebusiness staff based in our Burlingame, California headquarters and
two telebusiness/marketing staff based in our Munich office.
We deploy sales teams consisting of both sales and technical sales support
professionals to create industry-specific proposals, presentations and
demonstrations that address the specific requirements of the customer. The
decision makers within CrossWorlds' prospective customers for the CrossWorlds
products are their executive teams, frequently consisting of the Chief
Information Officer, Chief Financial Officer and Chief Executive Officer. Our
typical customer profile includes Fortune 1000 companies in technology,
industrial manufacturing, process manufacturing and telecommunications, among
other industries. While the sales cycle varies significantly from customer to
customer for initial sales, the cycle has ranged to date from two to nine
months.
Marketing
Our marketing efforts are directed at establishing a market leadership
position for our software in the e-business infrastructure software market.
Targeted at information technology managers as well as Chief Information
Officers, Chief Financial Officers and other senior executives within global
Fortune 1000 companies, CrossWorlds' marketing programs are focused on creating
awareness and generating interest in the CrossWorlds solution in order to
increase sales. Our marketing plan includes the following critical elements:
Brand Awareness/Public Relations. Increasing brand awareness is a key
component of our marketing strategy. We believe that the building of the
CrossWorlds brand has improved our sales effectiveness by providing access to
higher level executives at target accounts and contributed to our ability to
attract leading partners. In order to build brand awareness we engage in a wide
range of public relations activities, including industry analyst relations,
press releases, media relations and media tours.
Lead Generation. We have developed lead-generation programs, including direct
mail campaigns, seminar series and audioseminars, targeted at specific
audiences and account profiles. In addition, we exhibit at selected trade shows
and partner user group events with the goal of identifying prospective
customers. These efforts are complemented by our own internal telebusiness
organization, which provides support for lead-generation activities.
Joint Marketing. We highly value our strategic partners and recognize how
critical those relationships are to our success. We leverage these
relationships by working jointly with application partners, technology partners
and systems integrators to establish joint marketing programs. We have worked
with our partners to execute a variety of marketing programs including trade
shows and user groups, joint speaking opportunities, seminar tours, public
relations and advertising campaigns. To date, we have executed joint marketing
activities with Cambridge Technology Partners, Clarify, Compaq, Deloitte
Consulting, Ernst & Young, IBM, MetaSolv, Oracle, PeopleSoft, Portal,
PricewaterhouseCoopers, SAP and Siebel.
Customer Support, Implementation and Training
Customer Support
We have implemented a customer support strategy designed to ensure successful
implementation and customer satisfaction. This multi-tiered approach includes
on-line support via the Internet, toll-free
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<PAGE>
telephone technical support and on-site support from our client services team
when required. Our Internet service programs provide links to selected
CrossWorlds systems, including product documentation, technical notes and a
frequently asked questions database. Customers can directly check the status of
their technical support requests over the Internet. Separately, a toll-free
phone number provides customers with access to technical service professionals
on a 24-hour a day, 7-day a week basis. Our staff also provides on-site support
to resolve more complex issues, typically on a fee-for-service basis.
We have an on-going initiative with a customer satisfaction research firm to
measure the satisfaction level of each customer and help us identify, analyze
and solve customer service problems.
Client Services
To install and configure our products, we maintain an internal client
services implementation team with expertise at installing and configuring our
products at client sites. While most implementations to date have been
performed by our internal staff, our long term implementation strategy is to
support the efforts of our third-party systems integrator partners with a small
number of CrossWorlds' client services resources on each client project. We
believe the presence of our client service staff has helped maintain the
consistency and quality of our product implementation.
Training
We offer a wide range of training courses in the installation, configuration,
customization and administration of CrossWorlds products. Typically, these
courses are attended by the relevant members of a customer's information
technology team. CrossWorlds also trains third-party implementation personnel
on the installation, customization and configuration of CrossWorlds products.
Training is available at CrossWorlds' training facility in Burlingame,
California and at various locations around the world through a third-party
training provider. In addition, customers and implementation partners can
arrange for dedicated classes to be provided at their own facilities.
Research and Development
Since inception, we have made substantial investments in research and
development. In addition, whenever practicable, we have also leveraged
technology from leading third-party providers and cooperative development with
systems integrator partners to reduce our own research and development
expenditures. Through December 31, 1999, we have invested approximately $30.8
million in research and development.
A high level of expenditure on research and development continues to be vital
to our success due to:
. the complexity of developing a comprehensive integration solution for e-
business and the enterprise;
. the need to support an increasing number of packaged enterprise
applications, particularly in the e-business and telecommunications
markets;
. the ongoing expansion of the functionality in each of our product lines;
and
. the increasing functional depth of our industry solutions for
manufacturing and telecommunications.
Our research and development efforts are focused on the development of
collaboration modules and connectivity solutions, the supporting infrastructure
and tools, quality assurance and technical publications that support all facets
of product usage. Our research and development staff are also engaged in the
development of advanced technologies and the evaluation of emerging third-party
products that can be leveraged in future releases of the product.
As of December 31, 1999, there were 75 employees in our research and
development organization, approximately half of which were dedicated to the
development of collaboration modules and connectivity
50
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solutions, with the balance focused on infrastructure development, quality
assurance, documentation and technical support.
We have assembled a Technical Advisory Board, made up of senior executives
from Compaq, McKinsey & Company, Ernst & Young and SAP, that provides feedback
on existing product plans and guidance for future research and development
activities.
Intellectual Property and Other Proprietary Rights
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property
rights. We have been granted one patent on certain aspects of our architecture
and four U.S. patent applications relating to the architecture of our products
pending. We cannot assure you that these applications will be approved, that
any issued patents will protect our intellectual property or that they will not
challenged by third parties. Furthermore, there can be no assurance that others
will not independently develop similar or competing technology or design around
any patents that may be issued to us. We also have five pending U.S. and
international trademark applications.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. In addition, we
provide our products to end-users primarily pursuant to non-exclusive license
agreements which impose restrictions on customers' ability to utilize the
software. Despite our efforts to protect our proprietary rights, existing laws
afford only limited protection. Attempts may be made to copy or reverse
engineer aspects of our product or to obtain and use information that we regard
as proprietary. Accordingly, there can be no assurance that we will be able to
protect our proprietary rights against unauthorized third-party copying or use.
Use by others of our proprietary rights could materially harm our business.
Monitoring unauthorized use of our products is difficult, and we cannot assure
you that the steps we have taken will prevent misappropriation of our
technology, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as in the United States.
The software industry is characterized by the existence of a large number of
patents and frequent litigation based on allegations of patent infringement and
the violation of other intellectual property rights. Although we attempt to
avoid infringing known proprietary rights of third parties in our product
development efforts, we expect that we may be subject to legal proceedings and
claims for alleged infringement by us or our licensees of third party
proprietary rights, such as patents, trademarks or copyrights, by us or our
licensees from time to time in the ordinary course of business. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources, or require us to enter into royalty or license agreements which
are not advantageous to us. In addition, parties making these claims may be
able to obtain an injunction, which could prevent us from selling our products
in the United States and abroad. Any of these results could harm our business.
We may increasingly be subject to infringement claims as the number of products
and competitors in our industry grow and functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
Competition
The market for our products is intensely competitive, and is expected to
become increasingly competitive as current competitors expand their product
offerings and new competitors enter the market. Our current competitors include
a number of companies offering one or more solutions to the application
integration problem, some of which are directly competitive with our products.
To date, we have faced competition and some sales resistance from the
internal information technology departments of potential customers that have
developed or may develop in-house integration solutions that
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<PAGE>
may substitute for those offered by us. We expect that these internal
development initiatives will continue to be a principal source of competition
for the foreseeable future. The competitive factors in this area require that
we produce a product that conforms to the prospective customer's information
technology standards, scales to meet the needs of large enterprises and costs
less than their internal development efforts.
A second source of competition results from systems integrators and other
information technology service providers engaged to build customized
integration solutions across multiple customer applications. The competitive
factors in this area require that we demonstrate to our prospective customers,
systems integrators and other service providers the cost savings, risk
reduction and other advantages of an integration solution based on
commercially-supported software.
Our competitors also include a large number of software vendors targeting one
or more segments of the business integration software market through various
technological solutions. Most of the competitors offer components of a complete
solution centered on such technologies as messaging and data transport,
including BEA, Microsoft Corporation, and TIBCO and e-business and integration
tools including Active Software, Extricity Software, Inc., Mercator Software,
New Era of Networks, OnDisplay, Software Technologies Corporation, Vitria
Technology Inc. and webMethods. Many of these competitors have longer operating
histories, significantly greater financial, technical, marketing, and other
resources, significantly greater name recognition and a larger installed base
of customers than CrossWorlds. In addition, many competitors have well-
established relationships with current and potential customers. As a result,
these competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than
CrossWorlds.
In addition, current and potential competitors have established or may
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address customer needs. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. Potential competition could
emerge from Hewlett-Packard, IBM, Microsoft and Oracle, among others. Increased
competition is likely to result in price reductions, reduced gross margins and
loss of market share.
Employees
As of December 31, 1999 CrossWorlds had a total of 202 employees, of which
178 were based in North America, including the United States and Canada, and 24
were based in Europe, principally in the United Kingdom and Germany. Of the
total, 65 were engaged in sales and marketing, 75 were in product development
and customer support, 40 were in implementation services and 22 were in
finance, administration and operations. None of our employees is represented by
a labor union. We have not experienced any work stoppages and consider our
relations with our employees to be good.
Facilities
Our principal administrative, sales, marketing, support and research and
development facilities are located in approximately 40,000 square feet in
Burlingame, California. The lease on this office space expires in April 2008.
We currently lease other domestic sales and support offices in Los Angeles,
California; Denver, Colorado; Westport, Connecticut; Chicago, Illinois;
Bethesda, Maryland; Newton, Massachusetts; Ann Arbor, Michigan; Princeton, New
Jersey; White Plains, New York; Charlotte, North Carolina; and Dallas, Texas.
We also maintain international offices in leased facilities located in the
United Kingdom, France and Germany. The German office also serves as our
European headquarters.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of CrossWorlds as of February 2, 2000
are as follows:
<TABLE>
<CAPTION>
Name Age Position(s)
- ---- --- -----------
<S> <C> <C>
Alfred J. Amoroso....... 49 Chief Executive Officer, President and Director
Katrina A. Garnett...... 38 Founder and Chairman of the Board of Directors
Barton S. Foster ....... 35 Senior Vice President, Marketing and Business Development
Prashant Gupta.......... 39 Chief Technical Officer and Senior Vice President
Mark R. Kent............ 40 Chief Financial Officer and Senior Vice President Finance
Arthur R. Matin......... 43 Senior Vice President, Worldwide Sales
James G. Rowley......... 34 Senior Vice President, Engineering
Terence J. Garnett...... 42 Director
Frederick W. Gluck(1)... 64 Director
Andrew K.
Ludwick(1)(2).......... 54 Director
Albert A."Rocky"
Pimentel(2)............ 44 Director
Colin F. Raymond(2)..... 29 Director
</TABLE>
- ---------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Alfred J. Amoroso has served as President, Chief Executive Officer and a
director of CrossWorlds since October 1999. Mr. Amoroso served as General
Manager of IBM Global Services Asia Pacific from May 1997 to October 1999. From
1993 to 1997, Mr. Amoroso held various other management positions at IBM,
including General Manager of the Worldwide Insurance Business Unit, General
Manager of the North American Insurance Business Unit and Vice President of the
Insurance Consulting Practice. Prior to IBM, Mr. Amoroso held various positions
at Price Waterhouse, now PricewaterhouseCoopers, from 1985 to 1993 including
Lead Technology Partner and partner in charge of the Worldwide Insurance
Consulting Practice. Prior to Price Waterhouse, Mr. Amoroso founded Computech
Corporation, an information technology consulting and development firm, in 1977
and served as Chief Executive Officer. Computech was purchased by Price
Waterhouse in 1985. Mr. Amoroso has a B.S. degree in Systems Engineering and a
M.S. in Operations Research from the Polytechnic Institute of Brooklyn.
Katrina A. Garnett founded CrossWorlds in April 1996, and has served as
Chairman of CrossWorlds since October 1999 and a director since inception. In
addition, Ms. Garnett served as President and Chief Executive Officer from
inception until October 1999. Prior to founding CrossWorlds, Ms. Garnett served
as Vice President and General Manager of the Distributed Objects and
Connectivity Division at Sybase, Inc., a database software company, from
October 1990 to April 1996. From 1986 to 1990, Ms. Garnett served in various
technical management positions in the areas of workflow and workgroup
applications at Oracle Corporation. Ms. Garnett has a B.S. degree in Industrial
Engineering from State University of New York and an M.B.A. from Webster/IMEDE.
Barton S. Foster has served as Senior Vice President, Marketing and Business
Development for CrossWorlds since November 1998, and served as Vice President,
Corporate Marketing from June 1998 to November 1998. Prior to CrossWorlds, Mr.
Foster held management positions at Connect, Inc., an electronic commerce
software company, where he served as Executive Vice President, Sales and
Marketing and Vice President, Marketing and Business Development, from March
1996 to June 1998. From November 1993 to March 1996, Mr. Foster held various
management positions at Oracle Corporation, including Vice President
Applications and Industry Marketing, and Senior Director Applications and
Industry Marketing. Mr. Foster holds a B.A. degree from Stanford University and
an M.B.A. degree from Harvard University Graduate School of Business
Administration.
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Prashant Gupta has served as Chief Technology Officer at CrossWorlds since
April 1996. Prior to joining CrossWorlds, Mr. Gupta served as Chief Architect
at Illustra/Informix from October 1995 until April 1996. From July 1992 to
October 1995, Mr. Gupta held a variety of positions at Sybase, Inc. where he
served as the chief technical architect for several key middleware and
connectivity programs. Mr. Gupta holds a B.S. degree with honors in electrical
and computer engineering from BITS, Pilani, in India. In addition, Mr. Gupta is
a director and consultant to several private companies.
Mark R. Kent has served as Senior Vice President Finance and Chief Financial
Officer for CrossWorlds since March 1999. Prior to CrossWorlds, Mr. Kent held
financial management positions at LSI Logic Corporation, a supplier of
semiconductors, where he served as Treasurer from November 1997 to March 1999,
and as Assistant Treasurer from December 1995 to November 1997. From April 1991
to December 1995, Mr. Kent was a proprietor in the financial management
consulting firm Feldmann, Kent and Associates. From November 1987 to April
1991, he served as a senior officer of the High Technology Group of Bank of the
West. Mr. Kent holds a B.S. degree in Business Administration from Colorado
State University.
Arthur R. Matin has served as Senior Vice President, Worldwide Sales and
Consulting for CrossWorlds since January 2000. Prior to CrossWorlds, Mr. Matin
served as Vice President of the Industrial Sector at IBM from January 1999 to
January 2000. From 1980 to 1999, Mr. Matin held various other management
positions at IBM, including General Manager, Industries, Asia Pacific, General
Manager, Product Management, Asia Pacific and Vice President of Sales,
Manufacturing Industry. Mr. Matin holds a B.A. in Biology from the University
of Rochester and a M.B.A. from the University of Chicago.
James G. Rowley has served as Senior Vice President of Engineering at
CrossWorlds since May 1999, and served as Vice President, Content Engineering
from November 1998 to May 1999 and Vice President Worldwide Sales Consulting
from January 1998 to November 1998. Prior to CrossWorlds, Mr. Rowley served as
Vice President, Worldwide Field Application Engineering at Scopus Corporation,
a software company, from January 1997 to January 1998. From January 1995 to
January 1997, Mr. Rowley established a worldwide sales consulting group at
Siebel Systems, a software company. From 1986 to January 1995, Mr. Rowley
served in several management positions at Oracle Corporation. Mr. Rowley holds
a B.A. degree and an M.B.A. from New York University.
Terence J. Garnett has served as a director of CrossWorlds since inception.
Mr. Garnett has been a managing director of Garnett Capital since January 2000.
Before starting Garnett Capital, Mr. Garnett was a Venture Partner with Venrock
Associates, a venture capital firm, from April 1995 to December 1999. From
October 1990 to August 1994, Mr. Garnett held a variety of management positions
with Oracle Corporation, where he served as Senior Vice President, Worldwide
Marketing and Business Development, Senior Vice President, New Media Group and
was a member of the Executive Committee. Mr. Garnett holds a B.S. degree from
the University of California Berkeley and an M.B.A. from the Stanford Graduate
School of Business. Mr. Garnett is also a director of Neoforma.com and Niku
Corporation and several other private companies.
Frederick W. Gluck has served as a director of CrossWorlds since January
1998. Mr. Gluck is presently serving as a consultant to McKinsey & Company,
Inc., an international management consulting firm. From 1995 to July 1998, Mr.
Gluck served as Vice-Chairman and Director of the Bechtel Group. Mr. Gluck
retired from Bechtel in July 1998. From 1967 to 1995, Mr. Gluck held various
positions with McKinsey including Managing Director of the firm from 1988 to
1994. Mr. Gluck serves as a director for AMGEN, ACT Networks, Columbia/HCA,
SCIENT and a several private companies.
Andrew K. Ludwick has served as a director of CrossWorlds since June 1997.
From 1995 to 1997, Mr. Ludwick served as CEO of Bay Networks, a networking
company. Mr. Ludwick co-founded SynOptics
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Communications, a networking company, in 1985 and served as CEO from 1985 to
1995. Mr. Ludwick also serves as a director of several private companies.
Albert A. "Rocky" Pimentel has been a director of CrossWorlds since March
1999. Mr. Pimentel has been Senior Vice President of WebTV Networks, Inc., a
provider of consumer Internet services and designer of Internet access
appliances and a subsidiary of Microsoft Corporation, since November 1996. From
June 1992 to October 1996, Mr. Pimentel served as Senior Vice President and
Chief Financial Officer of LSI Logic Corporation, a leading provider of
semiconductors. Mr. Pimentel serves as a director of ConXion Corporation,
everSearch.com and NetCell Corporation.
Colin F. Raymond has been a director of CrossWorlds since October 1999. Mr.
Raymond has been a partner with Soros Private Equity Partners, a private
investment management firm, since May 1999. From 1996 to 1999, Mr. Raymond was
with Morgan Stanley Capital Partners, most recently as Vice President. Prior to
that time, Mr. Raymond was employed by Wolfensohn & Co. and J.P. Morgan & Co.
working in corporate finance and mergers and acquisitions. Mr. Raymond serves
as a director of ARM Financial Group, Day International and a number of
privately-held companies.
Board Composition
CrossWorlds currently has authorized seven (7) directors. Each director is
elected for a period of one year at CrossWorlds' annual meeting of stockholders
and serves until the next annual meeting or until his successor is duly elected
and qualified. The executive officers serve at the discretion of the Board of
Directors. Katrina A. Garnett, CrossWorlds Founder and Chairman of the Board of
Directors, is married to Terence J. Garnett, a member of CrossWorlds' Board of
Directors.
Board Compensation
Except for reimbursement for reasonable travel expenses relating to
attendance at Board meetings and the grant of stock options, directors are not
compensated for their services as directors. As of the offering, directors who
are employees of CrossWorlds are eligible to participate in CrossWorlds' 1997
Stock Plan and directors who are not employees of CrossWorlds will be eligible
to participate in CrossWorlds' 2000 Director Stock Option Plan. See "Stock
Plans." Our outside directors have received option grants as follows:
<TABLE>
<CAPTION>
Exercise No. of
Name Date of Grant Price Shares
---- ------------- -------- ------
<S> <C> <C> <C>
Albert A. Pimentel February 1999 $3.00 53,333
Andrew K. Ludwick June 1997 $0.75 33,333
January 1999 $3.00 41,666
Frederick W. Gluck January 1998 $2.25 20,000
January 1999 $3.00 33,333
</TABLE>
All of the above options vest over three years from the date of grant.
Board Committees
In January 1999, the Board established the Audit Committee and Compensation
Committee. The Audit Committee reviews CrossWorlds' annual audit and meets with
CrossWorlds' independent auditors to review CrossWorlds' internal controls and
financial management practices. The Board's Audit Committee currently consists
of directors Ludwick, Pimentel and Raymond. The Compensation Committee
recommends compensation for certain of CrossWorlds' personnel to the Board and
administers CrossWorlds' Stock Plans. The Compensation Committee currently
consists of directors Gluck and Ludwick.
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<PAGE>
Executive Compensation
The following table provides certain summary information concerning the
compensation received for services rendered to CrossWorlds during the year
ended December 31, 1999 by (i) everyone who served as our Chief Executive
Officer during the year, (ii) each of the other four most highly compensated
executive officers whose total cash compensation exceeded $100,000 during the
year ended December 31, 1999 and (iii) one other person who was not an
executive officer at year end (collectively, the "Named Executive Officers").
The amounts in the column "All Other Compensation," with the exception of
$40,271 paid to Alfred J. Amoroso for moving expenses, are insurance premiums
paid by CrossWorlds.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------
Annual
Compensation
----------------- Securities
Salary Bonus Underlying All Other
Name and Principal Position ($) ($) Options (#) Compensation
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Alfred J. Amoroso(1)
President and Chief Executive
Officer........................... $115,530 $ -- 2,125,192 $40,346
Barton S. Foster
Senior Vice President, Marketing... 175,000 76,112 216,666 357
Prashant Gupta
Chief Technology Officer........... 175,000 106,112 333,332 2,304
Mark R. Kent(2)
Senior Vice President and Chief
Financial Officer................. 136,719 36,509 399,999 351
James G. Rowley
Senior Vice President,
Engineering....................... 164,583 84,798 204,999 319
Kevin Fitzgerald(3)
Former Senior Vice President,
Sales............................. 149,965 248,606 166,666 1,338
Katrina A. Garnett(4)
Chairman........................... 175,000 106,112 -- 360
</TABLE>
- --------
(1) Mr. Amoroso joined CrossWorlds in October 1999.
(2) Mr. Kent joined CrossWorlds in March 1999.
(3) Mr. Fitzgerald resigned as Senior Vice President, Sales in October 1999.
(4) Ms. Garnett resigned as Chief Executive Officer in October 1999.
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<PAGE>
Option Grants
The following table provides certain summary information regarding stock
options granted to the Named Executive Officers during the year ended December
31, 1999.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Percentage Annual Rates of
Number of of Total Stock Price
Shares Options Exercise Appreciation For
Underlying Granted to Price Option Term(2)
Options Employees per Expiration --------------------
Name Granted (1) Share Date 5% 10%
- ---- ---------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Alfred J. Amoroso....... 2,125,192 30.50% $6.60 10/11/09 $8,821,044 $22,354,258
Barton S. Foster........ 116,666 1.67% 3.00 2/18/09 220,112 557,807
100,000 1.43% 6.60 10/11/09 415,070 1,051,870
Prashant Gupta.......... 249,999 3.58% 5.25 3/11/09 825,421 2,091,779
83,333 1.19% 6.60 10/11/09 345,891 876,555
Mark R. Kent............ 249,999 3.58% 5.25 3/22/09 825,421 2,091,779
83,333 1.19% 6.60 8/12/09 345,891 876,555
66,667 0.96% 6.60 10/11/09 276,715 701,250
James G. Rowley......... 33,333 0.48% 5.25 3/11/09 110,055 278,902
71,666 1.03% 6.60 7/21/09 297,464 753,833
100,000 1.43% 6.60 10/11/09 415,070 1,051,870
Kevin Fitzgerald........ 83,333 1.19% 5.25 3/11/09 275,140 697,260
83,333 1.19% 6.60 7/21/09 345,891 876,555
Katrina A. Garnett...... -- -- -- -- -- --
</TABLE>
- --------
(1) Based on an aggregate of 6,968,975 subject to options granted by
CrossWorlds under the 1997 Stock Plan and the 1999 Executive Stock Plan
during the year ended December 31, 1999.
(2) Potential realizable values are net of exercise price, but before taxes
associated with exercise. The 5% and 10% assumed annual rates of compounded
stock price appreciation are mandated by the Securities and Exchange
Commission. There is no assurance provided to any executive officer or any
other holder of our securities that the actual stock price appreciation
over the 10-year term will be at the assumed 5% and 10% levels or at any
other defined level. Unless the market price of the common stock
appreciates over the long term, no value will be realized from the option
grants made to the executive officers.
Option Exercises and Holdings
The following table provides summary information concerning the shares of
common stock represented by outstanding stock options held by each of the Named
Executive Officers as of December 31, 1999.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year-End at Fiscal Year End(1)
----------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Alfred J. Amoroso.... 88,549 2,036,643 $212,518 $4,887,943
Barton S. Foster..... 50,696 215,969 274,177 965,813
Prashant Gupta....... 100,695 315,970 579,169 1,245,823
Mark R. Kent......... 69,793 330,206 230,785 1,066,710
James G. Rowley...... 79,886 158,446 232,665 504,330
Kevin Fitzgerald..... -- -- -- --
Katrina A. Garnett... -- -- -- --
</TABLE>
- --------
(1) These values are based on the fair market value of $9.00 per share as of
December 31, 1999, as determined by the board of directors, minus the
exercise price, multiplied by the number of shares underlying the option.
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<PAGE>
Stock Plans
1997 Stock Plan. Our 1997 Stock Plan was originally adopted by our board of
directors and approved by our stockholders in January 1997. As of December 31,
1999, an aggregate of 4,992,638 shares was reserved for issuance under the 1997
Plan. The 1997 Plan was amended by our board of directors on April 26, 1999 and
October 11, 1999 to increase the total number of shares reserved for issuance
by 666,667 shares and 666,667 shares, respectively, and to incorporate certain
other changes, after which a total of 4,992,638 shares was reserved for
issuance under the plan. In addition, the 1997 Plan was amended to provide for
a total of 3,000,000 shares to be available for grant at the effective time of
this offering, plus an automatic annual increase on the first day of each of
our fiscal years beginning in 2001 and ending in 2005 in an amount equal to the
lesser of 3,000,000 shares, 5% of our outstanding common stock on the last day
of the immediately preceding fiscal year, or such lesser number of shares as
our board determines. This amendment to the 1997 Plan will be submitted to our
stockholders for approval prior to the completion of this offering. If not
terminated earlier by our board of directors, the 1997 Plan will terminate in
2007.
As of December 31, 1999, options to purchase 753,425 shares of common stock
had been exercised, options to purchase a total of 3,845,091 shares at a
weighted average exercise price of $5.26 per share were outstanding and 423,612
shares remained available for future option grants.
The purposes of the 1997 Plan are to attract and retain the best available
personnel to CrossWorlds, to provide additional incentives to CrossWorlds'
employees and consultants and to promote the success of CrossWorlds' business.
The 1997 Plan provides for the granting to employees, including officers and
directors, of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, and for the granting to employees
and consultants, including nonemployee directors, of nonstatutory stock options
and stock purchase rights. To the extent an optionee would have the right in
any calendar year to exercise for the first time one or more incentive stock
options for shares having an aggregate fair market value (under all plans of
CrossWorlds and determined for each share as of the date the option to purchase
the shares was granted) in excess of $100,000, any such excess options shall be
treated as nonstatutory stock options.
The 1997 Plan may be administered by the Board of Directors or a committee of
the Board, each known as the administrator. The 1997 Plan is currently
administered by the Compensation Committee. The administrator determines the
terms of options and stock purchase rights granted under the 1997 Plan,
including the number of shares subject to the award, the exercise or purchase
price, the term and the vesting and/or exercisability of the award and any
other conditions to which the award is subject. In no event, however, may an
individual employee receive awards for more than 1,000,000 shares under the
1997 Plan in any fiscal year. The exercise price of all incentive stock options
granted under the 1997 Plan must be at least equal to the fair market value of
our common stock on the date of grant. The exercise price of any incentive
stock option granted to an optionee who owns stock representing more than 10%
of the total combined voting power of all classes of our outstanding capital
stock or the stock of any parent or subsidiary corporation of CrossWorlds must
equal at least 110% of the fair market value of the common stock on the date of
grant. Prior to this offering, the exercise price of all nonstatutory stock
options and stock purchase rights were required to have an exercise or purchase
price of at least 85% of the fair market value of the common stock on the date
of grant. After the date of this offering, the exercise price of nonstatutory
stock options and the purchase price of stock purchase rights will no longer be
subject to these limitations, although nonstatutory stock options and stock
purchase rights granted to our Chief Executive Officer and our four other most
highly compensated officers will be at least 100% of the fair market value of
the common stock on the date of grant if the award is intended to qualify as
performance based compensation under Section 162(m) of the Internal Revenue
Code. Payment of the exercise price may be made in cash or other consideration
as determined by the administrator.
The administrator determines the term of options, which may not exceed 10
years (or 5 years in the case of an incentive stock option granted to an
employee who owns stock representing more than 10% of the
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<PAGE>
total voting power of our stock or a parent or subsidiary's stock). Generally,
an option may not be transferred by the optionee other than by will or the laws
of descent or distribution and may be exercised during the lifetime of the
optionee only by such optionee. However, the administrator may in its
discretion provide for the limited transferability of nonstatutory stock
options granted under the 1997 Plan under certain circumstances. The
administrator determines when options become exercisable. Options granted under
the 1997 Plan generally become exercisable at the rate of 1/8th of the total
number of shares subject to the options six months after the date of grant, and
1/48th of the total number of shares subject to the options each month
thereafter. Stock purchased pursuant to stock purchase rights granted under the
1997 Plan is generally subject to a repurchase right at the purchaser's
original purchase price exercisable by CrossWorlds upon termination of the
Purchaser's employment or consulting relationship with us, for any reason,
including death or disability. This repurchase right will lapse in accordance
with the terms of the stock purchase right determined by the administrator at
the time of grant.
In the event of the sale of all or substantially all of the assets of
CrossWorlds, or the merger of CrossWorlds with another corporation, then each
option and stock purchase right may be assumed or an equivalent award
substituted by the successor corporation. If the successor corporation refuses
to assume or substitute for an outstanding award, each award shall become fully
vested and/or exercisable prior to the effective date of the transaction. In
addition, in the event that outstanding awards are assumed or new awards are
substituted for them, if an optionee's employment with CrossWorlds is
involuntarily terminated for reasons other than cause within one year following
a merger or sale of assets, subject to certain limitations described in the
1997 Plan, outstanding awards shall become immediately vested and/or
exercisable in an amount equal to 12 months of further vesting of each award at
the rate specified in the applicable stock option or stock purchase agreement.
Outstanding options will adjust in the event of a stock split, stock dividend
or other similar change in capital structure. The administrator has the
authority to amend or terminate the 1997 Plan as long as such action does not
adversely affect any outstanding option and provided that stockholder approval
shall be obtained as required by applicable law.
2000 Directors' Stock Option Plan. The 2000 Directors' Stock Option Plan was
adopted by the Board of Directors in January 2000 and will be submitted to our
stockholders for approval prior to completion of this offering. A total of
300,000 shares of common stock has been reserved for issuance under the
Directors' Plan. No shares have been issued under the Directors' Plan. The
Directors' Plan becomes effective on the date of this offering. The Directors'
Plan provides for the grant of nonstatutory stock options to nonemployee
directors of CrossWorlds. The Directors' Plan is designed to work automatically
without administration; however, to the extent administration is necessary, it
will be performed by the Board of Directors. To the extent conflicts of
interest arise, it is expected that they will be addressed by abstention of any
interested director from both deliberations and voting regarding matters in
which such director has a personal interest.
The Directors' Plan provides that each person who becomes a nonemployee
director of CrossWorlds after the effective date of this offering will be
granted a nonstatutory stock option to purchase 25,000 shares of common stock
on the date on which the optionee first becomes a nonemployee director of
CrossWorlds. On the date of CrossWorlds' Annual Stockholders Meeting each year,
each nonemployee director of CrossWorlds will be granted an option to purchase
5,000 shares of common stock if, on such date, he or she has served on
CrossWorlds' Board of Directors for at least six months.
The Directors' Plan sets neither a maximum nor a minimum number of shares for
which options may be granted to any one nonemployee director, but does specify
the number of shares that may be included in any grant and the method of making
a grant. No option granted under the Directors' Plan is transferable by the
optionee other than by will or the laws of descent or distribution or pursuant
to a qualified domestic relations order, and each option is exercisable, during
the lifetime of the optionee, only by such optionee. The Directors' Plan
provides that each option shall vest at the rate of 1/12 of the total number of
shares subject to such option per month. If a nonemployee Director ceases to
serve as a Director for any reason other than death or disability, he or she
may, but only within 90 days after the date he or she ceases to be a Director
of CrossWorlds, exercise options granted under the Directors' Plan. If he or
she does not exercise such option
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<PAGE>
(which he or she was entitled to exercise) within such 90 day period, such
option shall terminate. The exercise price of all stock options granted under
the Directors' Plan shall be equal to the fair market value of a share of
CrossWorlds' common stock on the date of grant of the option. Options granted
under the Directors' Plan have a term of ten years.
In the event we sell all or substantially all of our assets or in the event
of a merger or other similar transaction, options will be assumed by the
successor corporation or equivalent options substituted, unless the acquiror
does not agree to such assumption or substitution, in which case the options
will terminate upon consummation of the acquisition to the extent not
previously exercised. Outstanding options will adjust in the event of a stock
split, stock dividend or other similar change in capital structure. The Board
of Directors may amend or terminate the Directors' Plan; provided, however,
that no such action may adversely affect any outstanding option and we obtain
stockholder approval for any amendment to the extent required by applicable
law. If not terminated earlier, the Directors' Plan will have a term of ten
years.
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan was
adopted by the Board of Directors in January 2000 and will be submitted to our
stockholders for approval prior to completion of this offering. A total of
750,000 shares of common stock has been reserved for issuance under the
Purchase Plan, none of which have been issued as of the date of this offering.
The number of shares reserved for issuance under the Purchase Plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001 and ending in 2005 in an amount equal to the lesser of
500,000 shares, 2% of our outstanding common stock on the last day of the
immediately preceding fiscal year, or such lesser number of shares as the board
of directors determines. The Purchase Plan becomes effective on the date of
this offering. Unless terminated earlier by our board of directors, the
Purchase Plan will terminate in 2010.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be implemented by a series of overlapping offering periods of
approximately 24 months' duration, with new offering periods (other than the
first offering period) commencing on May 1 and November 1 of each year. Each
offering period will consist of four consecutive purchase periods of
approximately six months' duration. The initial offering period is expected to
commence on the date of this offering and end on April 30, 2002; the initial
purchase period is expected to end on October 31, 2000. The Purchase Plan will
be administered by the Board of Directors or by a committee appointed by the
Board. Employees (including officers and employee directors) of CrossWorlds, or
of any majority-owned subsidiary designated by the Board, are eligible to
participate in the Purchase Plan if they are employed by CrossWorlds or any
such subsidiary for at least 20 hours per week and more than five months per
year. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which may not exceed 15% of an employee's
compensation, at a price equal to the lower of 85% of the fair market value of
CrossWorlds' common stock at the beginning of each offering period or at the
end of each purchase period. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment with CrossWorlds. An employee cannot
be granted an option under the Purchase Plan if immediately after the grant the
employee would own stock and/or hold outstanding options to purchase stock
equaling 5% or more of the total voting power or value of all classes of our
stock or stock of our subsidiaries, or if the option would permit an employee's
rights to purchase stock under the Purchase Plan to accrue at a rate that
exceeds $25,000 of the fair market value of the stock for each year in which an
option is outstanding. In addition, no employee may purchase more than 1,500
shares of common stock under the Purchase Plan in any one purchase period.
The Purchase Plan provides that in the event of a merger of CrossWorlds with
or into another corporation or a sale of all or substantially all of
CrossWorlds' assets, each right to purchase stock under the Purchase Plan will
be assumed or an equivalent right substituted by the successor corporation.
However, our board of directors will shorten any ongoing offering period so
that employees' rights to purchase stock under the Purchase Plan are able to be
exercised prior to the transaction if the successor corporation refuses to
assume each purchase right or to substitute an equivalent right. Outstanding
options will adjust in the event of a stock split, stock dividend or other
similar change in capital structure. The board of directors has the
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<PAGE>
power to amend or terminate the Purchase Plan as long as such action does not
adversely affect any outstanding rights to purchase stock thereunder. However,
our board of directors may amend or terminate the Purchase Plan or an offering
period even if it would adversely affect outstanding options in order to avoid
our incurring adverse accounting charges.
1996 Stock Plan. Our 1996 Stock Plan was originally adopted by our Board of
Directors and approved by our stockholders in March 1996. It provides for the
grant of incentive stock options to employees and nonstatutory stock options to
employees and consultants. As of December 31, 1999, 980,555 shares were
reserved for issuance under the 1996 Plan, but the Board of Directors has
determined that no future grants will be made under the 1996 Plan.
The terms of the options under the 1996 Plan are generally the same as those
that may be issued under the 1997 Plan, except with respect to the following
features. Only options may be granted out of the 1996 Plan. Nonstatutory stock
options granted under the 1996 Plan are nontransferable in all cases and must
generally be granted with an exercise price equal to at least 85% of the fair
market value of our common stock on the date of grant.
In the event of a merger, reorganization or similar transaction involving the
Company, each outstanding option shall be assumed by the successor corporation
or an equivalent option substituted therefore, with appropriate adjustments
made to both the price and number of shares subject to each option. If the
successor corporation does not assume the options, then the outstanding options
will be fully vested and exercisable for a period of fifteen days following
notice provided to the optionee. Outstanding options will adjust in the event
of a stock split, stock dividend or other similar change in capital structure.
The term of options granted under the 1996 Plan is ten years from the date of
grant. Options granted under the 1996 Plan must be exercised within three
months after the end of the optionee's status as an employee of the Company, or
within twelve months after such optionee's termination by death or disability.
Options granted under the 1996 Plan will remain outstanding in accordance with
their terms.
1999 Executive Stock Plan. The 1999 Executive Stock Plan was adopted by our
board of directors and approved by our stockholders in October 1999. A total of
3,500,000 shares of common stock have been reserved for issuance under the 1999
Plan. As of December 31, 1999, 2,859,525 options were issued and outstanding or
committed for issuance and 640,475 shares remained available for future option
or stock purchase right grants. We do not intend to grant any additional
options or stock purchase rights under the 1999 Plan after the date of this
offering. Unless terminated earlier, the 1999 Plan will terminate in October
2009.
The terms of options and stock purchase rights under the 1999 Plan are
generally the same as those that may be issued under the 1997 Plan, except with
respect to the following features. The 1999 Plan does not impose a limitation
on the number of shares subject to options and stock purchase rights that may
be issued to any individual employee. Nonstatutory stock options and stock
purchase rights may not be granted to non-employee directors under the 1999
Plan after the date of this offering. Nonstatutory stock options and stock
purchase rights granted under the 1999 Plan are nontransferable in all cases
and must generally be granted with an exercise price or purchase price equal to
at least 85% of the fair market value of our common stock on the date of grant.
In the event we sell all or substantially all of our assets or merge with or
into another corporation, then each option and stock purchase right may be
assumed or an equivalent option or stock purchase right substituted by the
successor corporation. However, if the successor corporation does not agree to
this assumption or substitution, the option or stock purchase right shall
become fully vested and exercisable for a period of fifteen days from the date
optionee received notice and will terminate following such period. Upon the
closing of the transaction, outstanding repurchase rights will terminate unless
assigned to the successor corporation.
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The board of directors may amend, modify or terminate the 1999 Plan at any time
as long as any amendment, modification or termination does not impair vesting
rights of plan participants and provided that stockholder approval shall be
required for an amendment to the extent required by applicable law.
Limitation of Liability and Indemnification Matters
As permitted by the Delaware General Corporation Law, CrossWorlds has
included in its Amended and Restated Certificate of Incorporation a provision
to eliminate the personal liability of its officers and directors for monetary
damages for breach or alleged breach of their fiduciary duties as officers or
directors, respectively, subject to certain exceptions. In addition,
CrossWorlds' Bylaws provide that CrossWorlds is required to indemnify its
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and
CrossWorlds is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified. CrossWorlds has entered into indemnification agreements with its
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements require CrossWorlds, among
other things, to indemnify such officers and directors against certain
liabilities that may arise by reason of their status or service as officers and
directors (other than liabilities arising from willful misconduct of a culpable
nature), to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified, and to obtain directors'
and officers' insurance if available on reasonable terms. CrossWorlds has also
obtained directors' and officers' liability insurance.
At present, CrossWorlds is not aware of any pending or threatened litigation
or proceeding involving a director, officer, employee or agent of CrossWorlds
in which indemnification would be required or permitted. CrossWorlds is not
aware of any threatened litigation or proceeding that might result in a claim
for such indemnification. CrossWorlds believes that its charter provisions and
indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
62
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since January 1997, we have issued and sold shares of our capital stock as
follows: a total of 2,104,144 shares of Series C preferred stock at a price of
$6.00 per share in March and April, 1997, a total of 2,063,307 shares of
Series D preferred stock at a price of $15.00 per share in December 1997 and
March 1998, 2,883,326 shares of Series E preferred stock at a price of $6.00
per share in January, March and April, 1999, and 3,671,071 shares of Series F
preferred stock at a price of $6.81 per share in October, 1999. The following
table summarizes the shares of capital stock purchased by executive officers,
directors and five-percent stockholders and their affiliates in these
transactions:
<TABLE>
<CAPTION>
Series C Series D Series E Series F
Entities Affiliated with Preferred Preferred Preferred Preferred
Directors(1) Stock Stock Stock Stock
- ------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Katrina A. Garnett(2)............ 333,333 133,333 775,000(3) 734,224(4)
Andrew K. Ludwick................ 166,666 33,333 41,666(3) --
Frederick W. Gluck............... -- 16,666 16,666(3) 44,052
Albert A. Pimentel(5)............ -- 6,666 -- 3,670
Prashant Gupta................... 8,333 -- -- --
<CAPTION>
Other 5% Stockholders
- ---------------------
<S> <C> <C> <C> <C>
Entities affiliated with Soros Private Equity Partners(6)...... 1,468,429
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together for
the purposes of this chart. See "Principal Stockholders" for a chart of
beneficial owners.
(2) Includes shares held by Katrina A. Garnett and Terence J. Garnett in a
family trust.
(3) Shares were issued in exchange for convertible promissory notes issued by
the Company in December 1998.
(4) Includes 100,000 shares sold to Alfred J. Amoroso, CrossWorlds' President
and Chief Executive Officer.
(5) Includes shares held by trusts for the benefit of Mr. Pimentel's children.
Mr. Pimentel disclaims beneficial ownership of shares held by these
entities except to the extent of his pecuniary interest therein.
(6) Includes shares held by Quantum Industrial Partners LDC and SFM Domestic
Investments LLC.
On February 2, 2000, CrossWorlds issued warrants to purchase 199,996 shares
of its common stock at an exercise price of $11.00 per share to the following
persons in the following amounts. These warrants were issued in consideration
of their commitment to provide funding to CrossWorlds of up to $10,000,000, if
necessary, on mutually agreed terms and conditions, in the event that this
offering is not completed.
<TABLE>
<CAPTION>
Name Warrants
---- --------
<S> <C>
. Alfred J. Amoroso............................................. 16,528
. Frederick W. Gluck............................................ 8,264
. Andrew K. Ludwick............................................. 82,644
. Albert A. Pimentel............................................ 82,644
. Entities affiliates with Soros Private Equity Partners........ 9,916
</TABLE>
On January 27, 2000, CrossWorlds' board of directors approved a change of
control agreement with CrossWorlds' executive officers whereby twenty-five
percent (25%) of each officer's remaining unvested options or shares of
restricted stock shall become fully vested and exercisable upon a change of
control of CrossWorlds. In addition, to the extent options or restricted shares
are assumed by or assigned to a successor corporation, and the officer is
involuntarily terminated for reasons other than cause within one year of the
change of control, then, subject to certain restrictions described in the
change of control agreement or applicable stock option plan, outstanding awards
under the 1996 Stock Plan or the 1999 Executive Stock Plan shall become
immediately vested and exercisable in an amount equal to twelve (12) months of
further vesting of each award at the rate specified in the applicable stock
option or stock purchase agreement. The officer, if involuntarily terminated
for reasons other than cause or constructively terminated (as defined in the
agreement) within one year of the change of control, shall also be entitled to
six months of regular monthly salary plus target bonus, and six months of COBRA
payments.
63
<PAGE>
On January 1, 2000, CrossWorlds and Arthur R. Matin entered into an
employment agreement pursuant to which Mr. Matin became CrossWorlds' Senior
Vice President of Worldwide Sales. This employment agreement established Mr.
Matin's base salary at $20,833.33 per month and provides for the payment of a
sign-on bonus of $300,000 to be paid on or before March 1, 2000. In addition,
Mr. Matin will be eligible to earn a target bonus of up to $225,000. Mr. Matin
is to be granted options to purchase 400,000 shares of CrossWorlds' common
stock, 350,000 of which are subject to CrossWorlds' right of repurchase.
CrossWorlds' right of repurchase lapses in equal monthly installments over
forty-eight (48) months from the date of Mr. Matin's employment. If Mr. Matin's
employment is terminated by the CrossWorlds without cause or if he resigns with
good reason (as defined in the agreement), CrossWorlds' repurchase rights shall
lapse as to that number of shares that would have vested over the next twelve
(12) months. Mr. Matin is also entitled to severance payments of six months'
base salary plus one-half of his annual target bonus, together with six months
of COBRA payments for him and his eligible dependents, if he is terminated
without cause or if he resigns with good reason. In the event of a change in
control of CrossWorlds, then CrossWorlds' repurchase rights shall lapse as to
all of Mr. Matin's unvested shares. If Mr. Matin is terminated without cause or
if he resigns with good reason within one year after a change of control, then
he shall be entitled to nine months' base salary plus three quarters of his
annual target bonus, together with nine months of COBRA payments for him and
his eligible dependents.
On October 11, 1999, CrossWorlds amended its option agreement with Mark Kent,
CrossWorlds' Chief Financial Officer and Senior Vice President, Finance to
provide that all of Mr. Kent's options shall become fully vested and
exercisable upon a change of control of CrossWorlds.
On October 5, 1999 CrossWorlds and Alfred J. Amoroso entered into an
employment agreement pursuant to which Mr. Amoroso became CrossWorlds'
President and Chief Executive Officer. This employment agreement established
Mr. Amoroso's base salary at $41,666.66 per month and provides for a sign-on
bonus of $400,000 to be paid on or before March 1, 2000. In addition, Mr.
Amoroso became eligible for a pro rata target bonus of $250,000 based on the
number of weeks of actual employment in 1999 and a full annual target bonus of
$250,000 for the year 2000. Beginning in the year 2001 Mr. Amoroso will be
eligible to receive an annual bonus equal to at least 50% of his base salary.
CrossWorlds will also provide Mr. Amoroso with relocation expenses and
temporary living costs. The temporary living costs are currently anticipated to
total $200,000 to $300,000. CrossWorlds will provide Mr. Amoroso, at his
request, with a moving assistance loan of $1,500,000 pursuant to a secured non-
recourse promissory note, the principal and interest of which will be forgiven
in equal monthly installments from the date of employment over a period of
forty-eight (48) months, so long as Mr. Amoroso remains employed by
CrossWorlds. CrossWorlds will also make periodic bonus payments to Mr. Amoroso
which, following the deduction of all applicable taxes, will allow Mr. Amoroso
to make all tax payments on the loan, forgiven interest, relocation expenses
and temporary living costs. If Mr. Amoroso is terminated without cause or if he
resigns with good reason, CrossWorlds will forgive an additional twelve (12)
months of loan and accrued interest payments. Under the terms of the employment
agreement, Mr. Amoroso was granted an option to purchase 1,328,245 shares of
CrossWorlds' common stock which vest monthly in equal installments over forty-
eight (48) months. Mr. Amoroso was granted an additional option to purchase
796,947 shares of CrossWorlds' common stock which vest monthly in equal
installments over forty-eight (48) months; however, the vesting shall
accelerate and CrossWorlds' repurchase right will lapse immediately as to such
shares upon the effectiveness of this offering. If Mr. Amoroso's employment is
terminated without cause or if he resigns with good reason in the first year of
employment, then 50% of the shares will vest on the date of termination.
Following the first year of Mr. Amoroso's employment, if Mr. Amoroso's
employment is terminated without cause or if he resigns with good reason, Mr.
Amoroso shall vest in that number of shares that would have vested over the
next twelve (12) months from the date of termination. In the event Mr.
Amoroso's employment with CrossWorlds is terminated without cause or if he
resigns with good reason, then CrossWorlds shall pay Mr. Amoroso a lump sum
severance equal to the sum of (i) twelve months of his base salary plus (ii)
his annual target bonus, together with one year of COBRA payments for him and
his eligible dependents. CrossWorlds will also forgive Mr. Amoroso's repayment
of the moving assistance loan for twelve months. Finally, in the event of a
change of control during the period of Mr. Amoroso's employment, then each of
his outstanding options will become fully vested and CrossWorlds' repurchase
right will lapse immediately as to all shares subject to all options.
64
<PAGE>
In January 2000, CrossWorlds approved a loan of $100,000 to CrossWorlds'
Senior Vice President, Engineering, James G. Rowley, which CrossWorlds will
forgive at the rate of 1/24th per month over twenty-four (24) months based on
his continued employment with us.
In, November 1999, CrossWorlds loaned $150,000 to CrossWorlds' Senior Vice
President, Marketing and Business Development, Barton S. Foster, pursuant to
which CrossWorlds received a Secured Promissory Note, secured by real property.
In January 2000, CrossWorlds approved the forgiveness of Mr. Foster's loan at
the rate of 1/24th per month over twenty-four (24) months based on his
continued employment with us.
In connection with the termination of two of CrossWorlds' former executive
officers, CrossWorlds and such officers entered into severance agreements
pursuant to which each officer received $66,000 and four and one half months of
health insurance premiums.
In December 1998, CrossWorlds entered into a Convertible Note Purchase
Agreement with Katrina A. Garnett, Andrew K. Ludwick and Frederick W. Gluck. In
connection with this agreement we issued convertible promissory notes bearing
interest at 8% per annum, the principal amount of which was convertible into
shares of Series E preferred stock. In December 1998, Ms. Garnett loaned to
CrossWorlds $4,650,000; Mr. Ludwick loaned to CrossWorlds $250,000; and Mr.
Gluck loaned to CrossWorlds $100,000. In January 1999, the interest due under
the notes was paid in cash and the principal amount of the notes was converted
into shares of Series E preferred stock.
Since inception, from time to time we have issued and sold shares of our
common stock and granted options to purchase common stock to our employees,
directors and consultants.
65
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of common stock in this offering and the conversion of all
outstanding shares of preferred stock into shares of common stock, by (i) each
of our directors and Named Executive Officers, (ii) all directors and executive
officers of CrossWorlds as a group, and (iii) each person who is known by us to
own beneficially more than 5% of CrossWorlds' common stock. Except as otherwise
noted, the following executive officers, directors and stockholders can be
reached at the principal offices of CrossWorlds. This table assumes no exercise
of the Underwriters' over-allotment option. Except pursuant to applicable
community property laws or as indicated in the footnotes to this table, to
CrossWorlds' knowledge, each stockholder identified in the table possesses sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by such stockholder.
<TABLE>
<CAPTION>
Percent
Beneficially
Owned(1)
Shares -----------------
Beneficially Before After
Name and Address Owned Offering Offering
- ---------------- ------------ -------- --------
<S> <C> <C> <C>
Entitles affiliated with Soros Private Equity
Partners(2)................................... 1,478,345 7.50%
c/o Soros Fund Management LLC
ATTN: Michael C. Neus, Esq.
888 Seventh Avenue
New York, NY 10106
Alfred J. Amoroso(3)........................... 2,241,720 10.27
Barton S. Foster............................... 149,307 *
Prashant Gupta................................. 382,638 1.92
Mark R. Kent................................... 148,265 *
James G. Rowley................................ 232,331 1.17
Terence J. Garnett(4).......................... 6,069,478 30.82
Frederick W. Gluck(5).......................... 142,346 *
Andrew K. Ludwick(6)........................... 406,039 2.05
Albert A. Pimentel(7).......................... 147,657 *
Colin F. Raymond(8)............................ 1,478,345 7.50
Katrina A. Garnett(9).......................... 7,402,810 37.58
Kevin Fitzgerald............................... -- --
All directors and executive officers of
CrossWorlds as a group(13 persons)............ 12,781,458 55.83
</TABLE>
- --------
* Less than one percent of the outstanding shares of common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, based on factors including voting and
investment power with respect to shares. Shares of common stock subject to
options that are currently exercisable or exercisable within 60 days of
December 31, 1999 are deemed to be outstanding and to be beneficially owned
by the person holding such options for the purpose of computing the
percentage ownership of such person, but are not treated as outstanding for
the purpose of computing the percentage ownership of any other person.
(2) Includes shares held by Quantum Industrial Partners, LDC and SFM Domestic
Investments LLC. Also includes 9,916 shares issuable upon exercise of a
warrant issued to entities affiliated with Soros Private Equity Partners on
February 2, 2000.
(3) Includes 16,528 shares issuable upon exercise of a warrant issued to Mr.
Amoroso on February 2, 2000.
(4) Includes 6,069,478 shares of common stock held by the Garnett Family Trust
U/D/T April 2, 1997. Excludes 1,333,332 shares of common stock held
directly by Ms. Garnett. Excludes 333,332 shares of common stock held in
trust for the benefit of Mr. Garnett's children. Mr. Garnett does not
possess voting or dispositive power over such shares.
(5) Includes 8,264 shares issuable upon exercise of a warrant issued to Mr.
Gluck on February 2, 2000.
(6) Includes 82,644 shares issuable upon exercise of a warrant issued to Mr.
Ludwick on February 2, 2000.
(7) Includes 82,644 shares issuable upon exercise of a warrant issued to Mr.
Pimentel on February 2, 2000.
66
<PAGE>
(8) Represents 1,468,429 shares held by entities affiliated with Soros Private
Equity Partners. Also includes 9,916 shares issuable upon exercise of a
warrant issued to entities affiliated with Soros Private Equity Partners on
February 2, 2000. Mr. Raymond disclaims beneficial ownership of these
shares except to the extent of his pecuniary interest in Soros Private
Equity Partners and its affiliates.
(9) Includes 6,069,478 shares of common stock held by the Garnett Family Trust
U/D/T April 2, 1997 and 1,333,332 shares of common stock held directly by
Ms. Garnett. Excludes 333,332 shares of common stock held in trust for the
benefit of Ms. Garnett's children. Ms. Garnett does not possess voting or
dispositive power over such shares.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the completion of this offering, CrossWorlds will be authorized to issue
150,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of undesignated preferred stock, $0.01 par value per share. All
currently outstanding shares of preferred stock will be converted into common
stock upon the closing of this offering.
Common Stock
As of December 31, 1999, there were 19,696,563 shares of common stock
outstanding (as adjusted to reflect the conversion of all outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock, Series E Preferred Stock, and Series F Preferred
Stock, excluding the exercise of any outstanding options or warrants into
common stock), held of record by 332 stockholders. Options to purchase an
aggregate of 6,793,436 shares of common stock were also outstanding. There will
be shares of common stock outstanding (assuming no exercise of the
underwriters' overallotment option or exercise of outstanding options under
CrossWorlds' stock plans) after giving effect to the sale of the shares offered
hereby.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the Board of Directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of liquidation, dissolution or
winding up of CrossWorlds, the holders of common stock are entitled to share
ratably in all assets remaining after payment of liabilities, subject to the
prior distribution rights of any outstanding preferred stock. The common stock
has no preemptive or conversion rights or other subscription rights. The
outstanding shares of common stock are, and the shares of common stock to be
issued upon completion of this offering will be, fully paid and non-assessable.
Preferred Stock
Upon the closing of the offering, all outstanding shares of preferred stock
except for Series D Preferred Stock will be converted into one share of common
stock and automatically retired. Upon the closing of the offering each share of
Series D will be converted into approximately 1.2 shares of common stock and
automatically retired. Thereafter, the Board of Directors has the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
preferred stock, $0.01 par value, in one or more series. The Board of Directors
will also have the authority to designate the rights, preferences, privileges
and restrictions of each such series, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of CrossWorlds without further action by the
stockholders. The issuance of preferred stock with voting and conversion rights
may also adversely affect the voting power of the holders of common stock. In
certain circumstances, an issuance of preferred stock could have the effect of
decreasing the market price of the common stock. As of the closing of the
offering, no shares of preferred stock will be outstanding. CrossWorlds
currently has no plans to issue any shares of preferred stock.
Warrants
At December 31, 1999 there were warrants outstanding to purchase an aggregate
of 343,431 shares of common stock. Generally, each warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon the exercise of the warrant under certain circumstances,
including stock dividends, stock splits, reorganizations, reclassifications and
consolidations.
Additionally, subsequent to December 31, 1999, our Board approved the
issuance of warrants to purchase 199,996 shares of common stock at a weighted
average exercise price of $11.00 per share.
68
<PAGE>
Generally, each warrant contains provisions for the adjustment of the exercise
price and the aggregate number of shares issuable upon the exercise of the
warrant under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassifications and consolidations.
Registration Rights
The holders of 18,220,000 shares of common stock (assuming the conversion of
all outstanding preferred stock upon completion of this offering) and warrants
to purchase 337,097 shares of common stock (collectively, the "Registrable
Securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between CrossWorlds and the holders of
the Registrable Securities. Subject to certain limitations in the agreement,
(i) the holders of at least thirty percent (30%) of the Registrable Securities
then outstanding or (ii) Quantum Industrial Partners LDC or SFM Domestic
Investments LLC may require, on two occasions beginning six months after the
date of this prospectus, that CrossWorlds use its best efforts to register the
Registrable Securities for public resale if Form S-3 is not available. If
CrossWorlds registers any of its common stock either for its own account or for
the account of other security holders, the holders of Registrable Securities
are entitled to include their shares of common stock in such registration,
subject to the ability of the underwriters to limit the number of shares
included in the offering. Any holder of Registrable Securities then outstanding
may also require CrossWorlds (not more than twice in any twelve-month period)
to register all or a portion of their Registrable Securities on Form S-3 when
use of such form becomes available to CrossWorlds, provided, among other
limitations, that the proposed aggregate selling price (net of any
underwriters' discounts or commissions) is at least $1,000,000. CrossWorlds
will be responsible for paying all registration expenses, and the holders of
Registrable Securities selling their shares will be responsible for paying all
selling expenses.
Delaware Anti-Takeover Law and Certain Charter and Bylaw Provisions
Certain provisions of Delaware law and CrossWorlds' charter documents could
make the acquisition of CrossWorlds and the removal of incumbent officers and
directors more difficult. These provisions are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of CrossWorlds to negotiate with
it first. CrossWorlds believes that the benefits of increased protection of our
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure CrossWorlds outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
CrossWorlds is subject to the provisions of Section 203 of the Delaware law.
In general, the statute prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date that the person became an interested
stockholder unless (with certain exceptions) the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. Generally, a "business combination" includes a merger,
asset or stock sale, or other transaction resulting in a financial benefit to
the stockholder. Generally, an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock. These provisions may have
the effect of delaying, deferring or preventing a change in control of
CrossWorlds without further action by the stockholders.
Our certificate of incorporation allows our board of directors to issue up to
5,000,000 shares of preferred stock without a stockholder vote. Our Bylaws
provide that special meetings of stockholders can be called only by the Board
of Directors or an authorized committee of the Board. Moreover, the business
permitted to be conducted at any special meeting of stockholders is limited by
Delaware Law to the business set forth in the notice of the meeting. These
provisions would make it difficult for stockholders to call a special meeting
to take corporate action, and may have the effect of delaying deferring or
preventing a change in control of CrossWorlds.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is Boston Equiserve.
69
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for CrossWorlds common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect prevailing market prices. Furthermore, since only a
limited number of shares will be available for sale shortly after this offering
because of certain contractual and legal restrictions on resale (as described
below), sales of substantial amounts of CrossWorlds common stock in the public
market after the restrictions lapse could adversely affect the prevailing
market price and CrossWorlds' ability to raise equity capital in the future.
Upon completion of the offering, based upon shares outstanding as of
December 31, 1999, CrossWorlds will have outstanding shares of common
stock. Of these shares, the shares sold in the offering (plus any shares
issued upon exercise of the underwriters' overallotment option) will be freely
tradable without restriction under the Securities Act, unless purchased by
"affiliates" of CrossWorlds as that term is defined in Rule 144 under the
Securities Act (generally, officers, directors or 10% stockholders).
The remaining 19,696,563 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted securities
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted
Securities in the public market, or the availability of such shares for sale,
could adversely affect the market price of the common stock.
Stockholders of CrossWorlds holding an aggregate of 19,696,563 shares of
common stock are subject to lock-up agreements generally providing that they
will not offer, sell, contract to sell or grant any option to purchase or
otherwise dispose of CrossWorlds common stock or any securities exercisable for
or convertible into CrossWorlds common stock owned by them for a period of 180
days after the effective date of the registration statement filed pursuant to
this offering without the prior written consent of Chase Securities Inc. As a
result of these contractual restrictions, notwithstanding possible earlier
eligibility for sale under the provisions of Rules 144, 144(k) and 701, shares
subject to lock-up agreements will not be salable until such agreements expire
or are waived by the designated underwriters' representative. Taking into
account the lock-up agreements, and assuming Chase Securities Inc. does not
release stockholders from these agreements, the following shares will be
eligible for sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date, approximately 2,405,075
shares will be eligible for sale pursuant to Rule 701 and approximately
20,241,574 additional shares will be eligible for sale pursuant to Rule
144, of which all but 9,215,662 shares are held by affiliates.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements (180 days after the effective date) of a
person (or persons whose shares are aggregated) who has beneficially owned
restricted Securities for at least one year would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
(i) one percent of the number of shares of common stock then outstanding (which
will equal approximately shares immediately after the offering);
or (ii) the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain manner of sale provisions and notice requirements and to the
availability of current public information about CrossWorlds. Under Rule
144(k), a person who is not deemed to have been an affiliate of CrossWorlds at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
Pursuant to the lock-up agreements, all CrossWorlds employees holding common
stock or stock options may not sell shares acquired upon exercise until 180
days after the effective date. Beginning 180 days after
70
<PAGE>
the effective date, any employee, officer or director of or consultant to
CrossWorlds who purchased shares pursuant to a written compensatory plan or
contract may be entitled to rely on the resale provisions of Rule 701. Rule 701
permits affiliates to sell their Rule 701 shares under Rule 144 without
complying with the holding period requirements of Rule 144. Rule 701 further
provides that non-affiliates may sell such shares in reliance on Rule 144
without having to comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. In addition, CrossWorlds intends
to file registration statements under the Securities Act as promptly as
possible after the effective date to register shares to be issued pursuant to
CrossWorlds' employee benefit plans. As a result, any options exercised under
the 1997 Stock Plan or any other benefit plan after the effectiveness of such
registration statement will also be freely tradable in the public market,
except that shares held by affiliates will still be subject to the volume
limitation, manner of sale, notice and public information requirements of Rule
144 unless otherwise resalable under Rule 701. As of December 31, 1999, there
were outstanding options for the purchase of 6,793,436 shares, of which
3,310,545 options were exercisable. No shares have been issued to date under
our Purchase Plan or Directors Plan. See "Risk Factors--Some of our shares will
be eligible for future sale which may cause our stock price to decline,"
"Management--Stock Plans" and "Description of Capital Stock--Registration
Rights."
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, Chase Securities Inc., Dain Rauscher Wessels, a
division of Dain Rauscher Incorporated, and Thomas Weisel Partners LLC have
severally agreed to purchase from us the following numbers of shares of our
common stock:
<TABLE>
<CAPTION>
Number
of
Name Shares
---- ------
<S> <C>
Chase Securities Inc................................................
Dain Rauscher Wessels...............................................
Thomas Weisel Partners LLC..........................................
----
Total...............................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions precedent, including the absence of any material
adverse change in our business and the receipt of certificates, opinions and
letters from us, our counsel and independent auditors. The underwriters' are
committed to purchase all shares of common stock offered in this prospectus if
any shares are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After
the public offering of the shares, the underwriters may change offering price
and other selling terms.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to additional
shares of common stock at the public offering price, less the underwriting
discount set forth on the cover page of this prospectus. To the extent that the
underwriters exercise this option, each underwriter will have a firm commitment
to purchase approximately the same percentage that the number of shares of
common stock to be purchased by it shown in the above table bears to the total
number of shares of common stock offered in this offering. We will be obligated
to sell shares to the underwriters to the extent the option is exercised. The
underwriters may exercise such option only to cover over-allotments made in
connection with the sale of common stock offered in this prospectus.
The following table shows the per share and total underwriting discounts and
commissions we will pay to the underwriters in connection with this offering:
<TABLE>
<CAPTION>
Total
-------------------
Without With
Over- Over-
allotment allotment
--------- ---------
<S> <C> <C>
Per share.............................................. $ $
Total.................................................. $ $
</TABLE>
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
72
<PAGE>
Stockholders, including all executive officers and directors, who own in the
aggregate shares of common stock have agreed that they will not,
without the prior written consent of Chase Securities Inc., offer, sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities exchangeable for or convertible into
shares of common stock owned by them until 180 days following the date of this
prospectus. We have agreed that we will not, without the prior written consent
of Chase Securities Inc., offer, sell or otherwise dispose of any shares of
common stock, options or warrants to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock until
the date 180 days following the date of this prospectus, except that we may
issue shares upon the exercise of options granted prior to the date hereof, and
may grant additional options under our stock option plans, provided that,
without the prior written consent of Chase Securities Inc., such additional
options shall not be exercisable during such period.
Prior to this offering, there has been no public market for our common stock.
The initial public offering price for the common stock will be determined
through negotiation between us and the representatives of the underwriters.
Among the factors to be considered in such negotiation are prevailing market
conditions, our financial information, market valuations of other companies
that we and the representatives of the underwriters believe to be comparable to
us, estimates of our business potential, the present state of our development
and other factors deemed relevant.
Persons participating in this offering may over-allot or effect transactions
which stabilize, maintain or otherwise affect the market price of the common
stock at levels above those which might otherwise prevail in the open market,
including by entering stabilizing bids or effecting syndicate covering
transactions. A stabilizing bid means the placing of any bid or effecting of
any purchase for the purpose of pegging, fixing or maintaining the price of the
common stock. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with this offering. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market
or otherwise. Stabilizing, if commenced, may be discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market makers on the Nasdaq National Market
may engage in passive market making transactions in our common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934, as amended. During the business day prior to
the pricing of the offering before the commencement of offers or sales of our
common stock, passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid of such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since
December 1998, Thomas Weisel Partners has been named as a lead or co-manager on
110 filed public offerings of equity securities, of which 79 have been
completed, and has acted as a syndicate member in an additional 54 public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with
us pursuant to the underwriting agreement entered into in connection with this
offering.
We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $ .
73
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us by
Venture Law Group, A Professional Corporation, Menlo Park, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati. As of December 31, 1999, a
certain investment partnership and members of Wilson Sonsini Goodrich & Rosati,
Professional Corporation, beneficially owned an aggregate of 29,165 shares of
our Common Stock.
EXPERTS
The consolidated financial statements and schedule of CrossWorlds Software,
Inc. and subsidiaries as of December 31, 1998 and 1999, and for each of the
years in the three-year period ended December 31, 1999, have been included
herein and in the Registration Statement in reliance upon the report of KPMG
LLP, independent auditors, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the Securities and Exchange Commission a Registration
Statement (which terms shall include any amendments thereto) on Form S-1 under
the Securities Act with respect to the common stock offered hereby. This
prospectus, which constitutes a part of the Registration Statement does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. For further
information with respect to CrossWorlds and the common stock offered hereby,
reference is made to the Registration Statement, including the exhibits thereto
and the financial statements and not as filed as a part of the Registration
Statement. Statements made in this prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including the exhibits thereto
and the financial statements and not as filed as a part of the Registration
Statement, as well as such reports and other information filed with the
Commission may be inspected without charge at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, NY 10048, and the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any
part of the Registration Statement may be obtained from the SEC's offices upon
payment of certain fees prescribed by the Commission. Such reports and other
information may also be inspected without charge at a Web site maintained by
the Commission. The address of this Web site is http://www.sec.gov.
74
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............. F-3
Consolidated Statements of Operations for the three years ended December
31, 1999................................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the three
years ended December 31, 1999........................................... F-5
Consolidated Statements of Cash Flows for the three years ended December
31, 1999................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
CrossWorlds Software, Inc.:
We have audited the accompanying consolidated balance sheets of CrossWorlds
Software, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CrossWorlds
Software, Inc. and subsidiaries for each of the years in the three-year period
ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Mountain View, California
January 24, 2000
F-2
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 5,415,154 $ 12,506,119
Accounts receivable, net of allowance of $306,130
and $296,675 as of December 31, 1998 and 1999,
respectively.................................... 5,198,351 11,688,430
Prepaids and other current assets................ 820,115 1,019,036
------------ ------------
Total current assets............................. 11,433,620 25,213,585
Property and equipment, net........................ 4,156,515 3,846,379
Deposits and other assets.......................... 166,610 116,610
------------ ------------
Total assets..................................... $ 15,756,745 $ 29,176,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................. $ 862,408 $ 796,798
Accrued payroll and related expenses............. 1,166,372 2,597,501
Accrued commissions.............................. 1,966,503 2,741,629
Other accrued liabilities........................ 1,268,104 4,001,994
Current portion of capital lease obligations..... -- 347,216
Current portion of long-term debt................ 4,262,552 2,622,482
Deferred revenue................................. 6,555,892 13,157,747
------------ ------------
Total current liabilities........................ 16,081,831 26,265,367
Other long-term liabilities........................ 91,090 123,913
Capital lease obligations, less current portion.... -- 576,711
Long-term debt, less current portion............... 6,254,166 2,936,118
------------ ------------
Total liabilities................................ 22,427,087 29,902,109
------------ ------------
Commitments
Stockholders' equity (deficit):
Convertible preferred stock, $0.01 par value;
17,000,000 shares authorized; 9,571,606 and
16,126,003 shares issued and outstanding; and
aggregate liquidation preference of $88,859,405
as of December 31, 1999 ........................ 95,716 161,260
Common stock, $0.001 par value; 45,000,000 shares
authorized; 2,810,464 and 3,153,935 shares
issued and outstanding 2,810 3,154
Additional paid-in capital....................... 53,929,214 96,757,116
Deferred stock-based compensation................ (3,777,293) (2,540,474)
Accumulated deficit.............................. (56,920,789) (95,106,591)
------------ ------------
Total stockholders' equity (deficit)............. (6,670,342) (725,535)
------------ ------------
Total liabilities and stockholders' equity
(deficit)....................................... $ 15,756,745 $ 29,176,574
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Software license................... $ 748,336 $ 3,972,741 $ 8,193,907
Service, maintenance and other..... 360,019 3,733,694 10,899,886
------------ ------------ ------------
Total revenue...................... 1,108,355 7,706,435 19,093,793
------------ ------------ ------------
Cost of revenue:
Software license and royalties..... 36,503 437,813 1,599,047
Service, maintenance and other..... 1,859,536 5,392,589 10,127,418
------------ ------------ ------------
Total cost of revenue.............. 1,896,039 5,830,402 11,726,465
------------ ------------ ------------
Gross profit (loss).............. (787,684) 1,876,033 7,367,328
------------ ------------ ------------
Operating expenses:
Research and development........... 4,080,461 11,747,877 14,242,556
Sales and marketing................ 6,954,034 23,141,104 21,791,524
General and administrative......... 2,296,426 4,065,794 6,144,879
Amortization of deferred stock-
based compensation................ -- 4,773,927 1,461,652
------------ ------------ ------------
Total operating expenses........... 13,330,921 43,728,702 43,640,611
------------ ------------ ------------
Operating loss................... (14,118,605) (41,852,669) (36,273,283)
Other income (expense), net.......... 166,138 478,584 (1,912,519)
------------ ------------ ------------
Net loss......................... $(13,952,467) $(41,374,085) $(38,185,802)
============ ============ ============
Net loss per share:
Basic and diluted.................. $ (11.88) $ (19.99) $ (13.40)
============ ============ ============
Weighted average shares used in
computation (in thousands)........ 1,175 2,069 2,850
============ ============ ============
Pro forma net loss per share
(unaudited):
Basic and diluted.................. $ (1.70) $ (3.55) $ (2.38)
============ ============ ============
Weighted average shares used in
computation (in thousands)........ 8,201 11,641 16,062
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Convertible
preferred stock Common stock Additional Stockholder Deferred Total
------------------- ----------------- paid-in note stock-based Accumulated stockholders'
Shares Amount Shares Amount capital receivable compensation deficit equity (deficit)
---------- -------- --------- ------ ----------- ----------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31,
1996........... 5,404,155 $ 54,041 2,240,000 $2,240 $ 2,944,380 $(15,000) $ -- $ (1,594,237) $ 1,391,424
Issuance of
Series C
preferred
stock, net..... 2,104,144 21,041 -- -- 12,560,302 -- -- -- 12,581,343
Issuance of
Series D
preferred
stock, net..... 1,601,307 16,013 -- -- 22,805,259 -- -- -- 22,821,272
Exercise of
options and
restricted
stock purchase
agreements..... -- -- 406,250 406 104,282 937 -- -- 105,625
Repurchase of
restricted
stock.......... -- -- (93,750) (94) (13,969) 14,063 -- -- --
Net loss........ -- -- -- -- -- -- (13,952,467) (13,952,467)
---------- -------- --------- ------ ----------- -------- ----------- ------------- ------------
Balance as of
December 31,
1997........... 9,109,606 91,095 2,552,500 2,552 38,400,254 -- -- (15,546,704) 22,947,197
Issuance of
Series D
preferred
stock, net..... 462,000 4,621 -- -- 6,540,062 -- -- -- 6,544,683
Exercise of
options and
restricted
stock purchase
agreements..... -- -- 446,297 446 455,813 -- -- -- 456,259
Repurchase of
restricted
stock.......... -- -- (188,333) (188) (18,135) -- -- -- (18,323)
Deferred stock-
based
compensation
related to
option grants.. -- -- -- -- 8,551,220 -- (8,551,220) -- --
Amortization of
deferred stock-
based
compensation... -- -- -- -- -- -- 4,773,927 -- 4,773,927
Net loss........ -- -- -- -- -- -- -- (41,374,085) (41,374,085)
---------- -------- --------- ------ ----------- -------- ----------- ------------- ------------
Balance as of
December 31,
1998........... 9,571,606 95,716 2,810,464 2,810 53,929,214 -- (3,777,293) (56,920,789) (6,670,342)
Issuance of
Series E
preferred
stock, net..... 2,883,326 28,833 -- -- 17,221,535 -- -- -- 17,250,368
Issuance of
Series F
preferred
stock, net..... 3,671,071 36,711 -- -- 23,517,594 -- -- -- 23,554,305
Issuance of
preferred stock
warrants....... -- -- -- -- 1,256,449 -- -- -- 1,256,449
Exercise of
options........ -- -- 437,352 438 641,991 -- -- -- 642,429
Repurchase of
restricted
stock.......... -- -- (93,881) (94) (34,500) -- -- -- (34,594)
Deferred stock-
based
compensation
related to
option grants.. -- -- -- -- 224,833 -- (224,833) -- --
Amortization of
deferred stock-
based
compensation... -- -- -- -- -- -- 1,461,652 -- 1,461,652
Net loss........ -- -- -- -- -- -- -- (38,185,802) (38,185,802)
---------- -------- --------- ------ ----------- -------- ----------- ------------- ------------
Balance as of
December 31,
1999........... 16,126,003 $161,260 3,153,935 $3,154 $96,757,116 $ ---- $(2,540,474) $ (95,106,591) $ (725,535)
========== ======== ========= ====== =========== ======== =========== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(13,952,467) $(41,374,085) $(38,185,802)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 361,390 1,403,938 2,389,305
Amortization of deferred stock-based
compensation........................ -- 4,773,927 1,461,652
Issuance of warrants for services.... -- -- 756,449
Software licenses exchanged for
property and equipment and prepaid
assets.............................. (346,658) -- --
Changes in operating assets and
liabilities:
Accounts receivable................. (907,200) (4,291,151) (6,490,079)
Prepaids and other current assets... (334,548) (417,572) (198,921)
Accounts payable.................... 1,842,219 (1,045,161) (65,610)
Accrued payroll and related
expenses........................... 713,165 367,630 1,431,129
Accrued commissions................. -- 1,966,503 775,126
Other accrued liabilities........... 367,066 837,773 2,733,890
Deferred revenue.................... 788,413 5,767,479 6,601,855
Other long-term liabilities......... 39,439 51,651 32,823
------------ ------------ ------------
Net cash used in operating activities... (11,429,181) (31,959,068) (28,758,183)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.... (1,784,420) (3,572,632) (834,517)
Other assets........................... -- (120,000) 50,000
------------ ------------ ------------
Net cash used in investing activities... (1,784,420) (3,692,632) (784,517)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from convertible subordinated
notes payable to stockholder.......... -- 5,000,000 --
Proceeds from equipment facilities..... 1,173,720 1,147,113 --
Proceeds from subordinated debt........ -- -- 5,000,000
Proceeds from revolving working capital
facility.............................. -- 3,479,219 --
Repayments of equipment facilities..... -- -- (783,333)
Repayments of subordinated debt........ -- -- (516,291)
Repayments of working capital
facility.............................. -- (283,334) (3,479,219)
Proceeds from exercise of stock
options............................... 105,625 456,259 642,429
Proceeds from issuance of preferred
stock................................. 35,402,615 6,544,683 35,804,673
Repurchase of restricted stock......... -- (18,323) (34,594)
------------ ------------ ------------
Net cash provided by financing
activities............................. 36,681,960 16,325,617 36,633,665
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................ 23,468,359 (19,326,083) 7,090,965
Cash and cash equivalents at beginning
of year................................ 1,272,878 24,741,237 5,415,154
------------ ------------ ------------
Cash and cash equivalents at end of
year................................... $ 24,741,237 $ 5,415,154 $ 12,506,119
============ ============ ============
Supplemental disclosures of cash flow
information:
Cash paid during the period for
interest.............................. $ 55,372 $ 208,259 $ 995,393
============ ============ ============
Noncash investing and financial
activities:
Return of restricted stock in
satisfaction of note receivable....... $ 14,063 $ -- $ --
Issuance of preferred stock for
conversion convertible notes.......... -- -- 5,000,000
Issuance of preferred stock warrants in
connection with long-term debt........ -- -- 500,000
Issuance of preferred stock warrants in
connection with services.............. -- -- 756,449
Equipment acquired through equipment
lease facility........................ -- -- 1,077,985
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Significant Accounting Policies
(a) Description of Business
CrossWorlds Software, Inc. (the Company) develops, produces, markets and
implements e-business infrastructure software. The Company is headquartered in
Burlingame, California and operates foreign subsidiaries in Germany, the United
Kingdom and France. The majority of the Company's revenues are derived from
domestic sales which were 80%, 72% and 78% for 1997, 1998 and 1999 of total
revenues, respectively. Substantially all of the Company's sales are made in
U.S. dollars.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation.
(c) Foreign Currency
The Company considers the functional currency of its foreign subsidiaries to
be the U.S. dollar. Accordingly, the foreign subsidiaries' financial statements
are remeasured into U.S. dollars using the historical exchange rate for
nonmonetary items and the current exchange rate for monetary items.
Remeasurement gains and losses, as well as transaction gains and losses, are
included in the determination of net loss and have been immaterial to date.
(d) Cash and Cash Equivalents
The Company considers all highly liquid instruments with a remaining maturity
on the date of purchase of three months or less to be cash equivalents, which
consist primarily of money market funds and overnight deposits.
(e) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the respective assets, generally two to five years. Leasehold
improvements are amortized over the lesser of the asset's useful life or the
remaining lease term.
The Company evaluates long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If such assets are considered to be impaired, the impairment to
be recognized is measured as the difference between the carrying amount of the
property and equipment and its fair value. To date, the Company has made no
adjustments to the carrying values of its long-lived assets.
(f) Software Development Costs
Software development costs associated with new products and enhancements to
existing products are expensed as incurred until technological feasibility is
established upon completion of a working model. To date, the Company's software
development has been completed concurrent with the establishment of
technological feasibility, and, accordingly, no costs have been capitalized.
F-7
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Concentrations of Credit Risk and Major Customers
The Company's cash and cash equivalents are principally on deposit in a
short-term asset management account at a large bank. Accounts receivable
potentially subject the Company to concentrations of credit risk. The Company's
customer base is comprised primarily of large companies. The Company generally
does not require collateral for accounts receivable. When required, the Company
maintains allowances for credit losses, and to date such losses have been
within management's expectations. Information regarding sales to major
customers follows (items with an * indicate percentage was less than 10%):
<TABLE>
<CAPTION>
Percentage of
Percentage of Accounts
Total Revenue Receivable at
---------------- December 31,
Customer 1997 1998 1999 1999
- -------- ---- ---- ---- -------------
<S> <C> <C> <C> <C>
A.................................................. 22% * * *
B.................................................. 20% * * *
C.................................................. 25% * * *
D.................................................. 22% * * *
E.................................................. * 14% * *
F.................................................. * 13% * *
G.................................................. * 11% * *
H.................................................. * * 21% *
I.................................................. * * * 44%
</TABLE>
(h) Fair Value of Financial Instruments
The fair value of the Company's cash, accounts receivable, accounts payable,
and borrowings approximate their carrying values due to their short maturity or
variable-rate structure.
(i) Use of Estimates
The preparation of consolidated 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 liabilities at the date of the consolidated financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
(j) Revenue Recognition
The Company's software arrangements typically involve significant production,
customization, or modification of the software, or services that are essential
to the functionality of the software and, as a result, software license revenue
for the entire arrangement is recognized using the percentage-of-completion
method. In certain instances, the Company may recognize software license
revenue upon delivery and when persuasive evidence of an arrangement exists,
provided the fee is fixed and determinable, acceptance is certain, collection
is probable, and the arrangement does not involve significant production,
customization, or modification of the software or services that are essential
to the functionality of the software; however, software license revenue
recognized in this manner has been immaterial to date. In the event costs to
complete a contract are expected to exceed anticipated revenue, a loss is
accrued. Other consulting and service revenue is recognized as the services are
performed. Maintenance revenue from customer support and product upgrades,
including maintenance bundled with original software licenses, are deferred and
recognized ratably over the term of the maintenance agreement, typically 12
months. The Company recognizes revenue in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition.
F-8
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1998, the AcSEC issued SOP 98-9, Software Revenue Recognition,
with Respect to Certain Arrangements, which requires recognition of revenue
using the "residual method" in a multiple-element arrangement when fair value
does not exist for one or more of the undelivered elements in the arrangement.
Under the residual method, the total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The Company
adopted SOP 98-9 on January 1, 2000, and does not expect adoption to have a
material effect on its consolidated financial position or results of
operations.
(k) Stock-Based Compensation
The Company accounts for its stock-based compensation plans using the
intrinsic value method. Deferred stock-based compensation expense is recorded
if, on the date of grant, the current market value of the underlying stock
exceeds the exercise price. The Company amortizes deferred stock-based
compensation in accordance with Financial Accounting Standards Board (FASB)
Interpretation No. 28.
(l) Income Taxes
The Company accounts for income taxes using the asset and liability method.
Deferred income taxes are recognized by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. The measurement of deferred tax
assets is reduced, if necessary, by a valuation allowance for any tax benefits
for which future realization is uncertain.
(m) Comprehensive Loss
The Company does not have any components of comprehensive income,
consequently comprehensive loss consists entirely of net loss for all periods
presented.
(n) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock, excluding common stock subject to
repurchase. Diluted net loss per share is computed using the weighted-average
number of outstanding shares of common stock and, when dilutive, potential
common shares from options and warrants to purchase common stock and common
stock subject to repurchase using the treasury stock method, and from
convertible securities using the as-if converted basis. All potential common
shares have been excluded from the computation of diluted net loss per share
for all periods presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Stock options and warrants..................... 1,676,039 2,117,220 7,136,867
Common stock subject to repurchase............. 1,321,104 681,312 155,245
Convertible preferred stock.................... 9,109,606 9,571,606 16,538,664
---------- ---------- ----------
12,106,749 12,370,138 23,830,776
========== ========== ==========
</TABLE>
F-9
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(o) Segment Reporting
The Company is organized in a single operating segment for purposes of making
operating decisions and assessing performance. The chief operating decision
maker evaluates performance, makes operating decisions and allocates resources
based on financial data consistent with the presentation in the accompanying
consolidated financial statements.
(p) Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. For a derivative not
designated as a hedging instrument, changes in the fair value of the derivative
are recognized in earnings in the period of change. This statement will be
effective for all annual and interim periods beginning after January 1, 2001.
Management does not believe the adoption of SFAS No. 133 will have a material
effect on the Company's consolidated financial position or results of
operations.
(q) Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
approximately $394,000, $2,004,000 and $46,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
(r) Pro Forma Net Loss Per Share (unaudited)
Pro forma net loss per share for the years ended December 31, 1997, 1998 and
1999, is computed using the weighted average number of common shares
outstanding, including the pro forma effects of the automatic conversion of the
Company's convertible preferred stock into shares of the Company's common stock
effective upon the closing of the Company's initial public offering as if such
conversion occurred on January 1, 1997, or at the date of issuance, if later.
Pro forma common equivalent shares, comprised of incremental common shares
issuable upon the exercise of stock options and warrants as well as shares
subject to repurchase agreements are not included in pro forma diluted net loss
per share because they would be anti-dilutive.
(2) Property and Equipment
Property and equipment as of December 31, 1998 and 1999 consisted of the
following:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Computer equipment and software................. $ 4,672,705 $ 6,476,877
Furniture and fixtures.......................... 689,778 767,615
Leasehold improvements.......................... 569,118 599,611
----------- -----------
5,931,601 7,844,103
Accumulated depreciation........................ (1,775,086) (3,997,724)
----------- -----------
$ 4,156,515 $ 3,846,379
=========== ===========
</TABLE>
Equipment under the capital lease aggregated $1,132,726 as of December 31,
1999. Accumulated amortization on the assets under the capital lease aggregated
$179,565 as of December 31, 1999.
F-10
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Long Term Debt
On December 23, 1998 the Company entered into a Convertible Subordinated
Promissory Note Agreement (the Promissory Note Agreement) with certain
stockholders of the Company in the amount of $5,000,000. In accordance with the
terms of the Promissory Note Agreement, the entire amount plus accrued
interest, was converted into shares of convertible preferred stock in the
Company's Series E round of financing in January 1999.
During the year ended December 31, 1998 and 1999 the Company had available
two Equipment Facilities Agreements (the Equipment Facilities) which provided
for $350,000 and $2,000,000 and a $10,000,000 working capital facilities with a
bank. In January 1999, the Company had entered into a $5,000,000 credit
facility as a Subordinated Loan and Security Agreement (the Subordinated Loan
Agreement). The following amounts of debt are outstanding as of December 31,
1998 and 1999 (in order of subordination):
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
----------- ----------
<S> <C> <C>
$350,000 equipment facility with bank, payable in 36
equal monthly installments of principal plus interest
at the bank's prime rate plus 0.75% per annum (8.50%
and 9.25% as of December 31, 1998 and 1999
respectively).......................................... $ 204,166 $ 87,500
$2,000,000 equipment facility with bank, payable in 36
equal monthly installments of principal plus interest
at the bank's prime rate per annum (7.75% and 8.50% as
of December 31, 1998 and 1999 respectively)............ 1,833,333 1,166,667
$10,000,000 working capital facility with a bank
expiring in April 2000, payable in 36 equal monthly
installments of principal plus interest at the bank's
prime rate plus 0.10% per annum (7.85% as of December
31, 1998).............................................. 3,479,219 --
$5,000,000 Subordinated Loan and Security Agreement with
a lender. Note bearing interest at 12% per annum, with
interest payments beginning from April 1, 1999 through
September, 1999 followed by 30 equal monthly payments
of principal plus interest through March, 2002......... -- 4,304,433
$5,000,000 Promissory Note Agreement with stockholders,
bearing interest at 8% per annum, which was converted
into Series E convertible preferred stock in January
1999................................................... 5,000,000 --
----------- ----------
Total................................................... 10,516,718 5,558,600
Less, current portion................................... 4,262,552 2,622,482
----------- ----------
Long term debt.......................................... $ 6,254,166 $2,936,118
=========== ==========
</TABLE>
The aggregate future payments of long-term debt are as follows:
<TABLE>
<S> <C>
2000.............................................................. $2,622,482
2001.............................................................. 2,460,351
2002.............................................................. 475,767
----------
$5,558,600
==========
</TABLE>
Outstanding borrowings under the equipment facilities agreements are secured
by all of the Company's assets. The working capital facility agreement
contained affirmative and negative covenants requiring, among other things, the
Company to maintain minimum levels of liquid assets, limit the Company's
ability to incur additional debt, pay cash dividends, or to purchase certain
assets. These covenants require the Company to
F-11
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
restrict certain acquisitions, mergers, consolidations, or similar
transactions. In 1999, the Company issued 6,334 warrants to the bank in
exchange for waivers of noncompliance with these covenants. The fair value of
the warrants are not material to the Company's consolidated operating results.
As of December 31, 1999, all amounts drawn under the working capital facility
were repaid.
In connection with the Subordinated Loan Agreement, the Company issued
warrants to the lender to purchase up to 126,666 shares of Series E preferred
stock at an exercise price of $6.00 per share. The warrants are exercisable on
the earlier of seven years after the date of issuance or three years after the
Company's initial public offering. Accordingly, the Company has reserved
126,666 shares of Series E preferred stock for issuance upon the exercise of
the warrant. The warrants had a fair value of $500,000 on the date of grant,
computed using the Black-Scholes pricing model with the following assumptions:
60% volatility, zero dividends, a risk-free rate of 6.1% and a contractual life
of 7 years. The fair value of the warrants has been recorded in equity and as a
reduction of the carrying amount of the related debt and will be amortized into
interest expense over the debt term. Total amortization expense for the year
ended December 31, 1999 was $166,667.
(4) Commitments
(a) Lease Commitment
The Company leases its primary facility under a noncancelable operating lease
expiring in 2008. The Company also leases various facilities which serve as
sales offices in the United States, and subsidiary offices in France, Germany,
and the United Kingdom under noncancelable operating leases with expiration
dates ranging from February 1999 to February 2000. In addition, the Company
leases equipment under noncancelable operating leases expiring in December
2001. In conjunction with the facility lease, the Company issued a warrant for
the purchase of 33,333 shares of Series C preferred stock at an exercise price
equal to $6.00 per share. The warrant shall expire and no longer be exercisable
at the earlier of: (a) December 31, 2002; or (b) the merger or consolidation of
the Company with a third party or the sale of all or substantially all of the
Company's assets to a third party; or (c) the closing of an underwritten public
offering of shares of common stock of the Company. The fair value of the
warrant was not material to the Company's 1997 consolidated operating results.
Future minimum lease payments as of December 31, 1999, are as follows:
<TABLE>
<CAPTION>
Year ending Capital Operating
December 31, leases leases
------------ ---------- -----------
<S> <C> <C>
2000............................................. $ 399,846 $ 1,583,400
2001............................................. 399,846 1,418,392
2002............................................. 208,563 1,424,690
2003............................................. -- 1,468,236
2004............................................. -- 1,468,236
Thereafter....................................... -- 4,890,940
---------- -----------
Total minimum payments......................... 1,008,255 $12,253,894
===========
Less amounts representing imputed interest....... (84,328)
----------
Present value of minimum lease payments.......... 923,927
Less current portion........................... (347,216)
----------
Capital lease obligation, less current portion... $ 576,711
==========
</TABLE>
F-12
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $619,000, $1,536,000 and $2,000,000, respectively.
(b) Royalty Commitments
During 1999, the Company entered into royalty agreements with two third party
vendors for certain licensed technology. The agreements include minimum royalty
payments of approximately $2.8 million and $2.0 million, respectively due
through June 2001 and June 2000, respectively.
The Company expects to earn out its remaining minimum royalty obligations
associated with the technology with minimum royalty payments of approximately
$2.8 million due by June 2001 and has recognized the associated cost of license
commensurate with usage.
During the fourth quarter of 1999, the Company developed and began shipping
products which replaced the technology provided under the agreement associated
with the minimum royalty payments of $2.0 million due by June 2000. As a
result, the Company discontinued use of this licensed technology and recorded a
one-time charge to other expense for the remaining $1 million of unamortized
minimum royalties.
(c) Employment Agreements
In October 1999, the Company entered into an employment agreement with its
President and Chief Executive Officer. The agreement provided for a sign-on
bonus of $400,000 to be paid by March 1, 2000. The sign-on bonus was accrued
and charged to general expense in the fourth quarter of 1999. In addition, the
individual is eligible for a pro rata target bonus of $250,000 based on the
number of weeks of actual employment in 1999 and a full annual target bonus of
$250,000 for the year 2000. In addition, the Company will provide the
individual a moving assistance loan of $1.5 million pursuant to a secured
nonrecourse promissory note, which will be forgiven in equal monthly
installments over a period of 48 months as long as the individual remains
employed by the Company. No amounts have been borrowed through December 31,
1999.
In January 2000, the Company entered into an employment agreement with its
Senior Vice President of Worldwide Sales. The agreement provides for a sign-on
bonus of $300,000 to be paid by March 1, 2000.
(5) Stockholders' Equity
(a) Reverse Stock Split
On October 1, 1999, the Company's Board of Directors authorized a 1 for 3
reverse stock split. The accompanying consolidated financial statements and
related notes have been retroactively restated to give effect to the reverse
stock split.
(b) Convertible Preferred Stock
In January 1999, the Company sold 2,883,326 shares of Series E convertible
preferred stock at $6.00 per share for gross proceeds of $17,300,000. Included
in the issuance were 833,333 shares for the conversion of $5,000,000 in
convertible debt pursuant to the Convertible Subordinated Promissory Note
Purchase Agreement dated December 23, 1998.
F-13
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October, 1999 the Company sold 3,671,071 of Series F convertible preferred
stock at $6.81 per share for gross proceeds of $25,000,000.
Convertible preferred stock consisted of the following as of December 31,
1999:
<TABLE>
<CAPTION>
Shares
----------------------
Issued and
Series Designated outstanding
------ ---------- -----------
<S> <C> <C>
A.................................................. 3,333,333 3,333,333
B.................................................. 2,070,822 2,070,822
C.................................................. 2,137,500 2,104,144
D.................................................. 2,066,667 2,063,307
E.................................................. 3,333,333 2,883,326
F.................................................. 3,671,072 3,671,071
----------
16,126,003
==========
</TABLE>
The rights, preferences, and privileges of the holders of Series A, B, C, D,
E and F convertible preferred stock are as follows:
. Dividends are noncumulative and payable only upon declaration by the
Company's Board of Directors at a rate of $0.0075, $0.06, $0.30, $0.75,
$0.30 and $0.34 per share for Series A, B, C, D, E and F preferred stock,
respectively.
. Holders of Series A, B, C, D, E and F preferred stock have a liquidation
preference of $0.15, $1.20, $6.00, $15.00, $6.00 and $6.81 per share,
respectively, plus any declared but unpaid dividends.
. Each share of Series A, B, C, D, E and F preferred stock is convertible
at any time into one share of common stock at the option of the holder,
subject to certain antidilution provisions. Each share of preferred stock
automatically converts upon the earlier of the public offering of the
Company's common stock with gross proceeds in excess of $25,000,000 or
affirmative election of the holders of at least 66 2/3% of the
outstanding shares. The Company has fully reserved shares of common stock
for issuance upon the conversion of Series A, B, C, D, E and F preferred
stock.
. Each holder of preferred stock has voting rights equal to the number of
shares of common stock into which such shares could be converted. In
addition, the holders of Series A, B, C, D, E and F preferred stock vote
as a single class.
(c) Common Stock
The Company has issued 2,417,798 shares of common stock to founders and
employees under restricted stock purchase agreements. Pursuant to the
agreements, the Company has the right to repurchase the unvested common stock
at its original purchase price in the event of voluntary or involuntary
termination of the stockholder for any reason. The repurchase rights expire
through the year 2001. Shares subject to repurchase totaled approximately
1,321,104, 681,312 and 155,245 as of December 31, 1997, 1998 and 1999 ,
respectively.
(d) Common Stock Reserved
The Company has reserved 36,443,583 shares of common stock for issuance under
its stock option plan, for warrants, and upon the conversion of outstanding
convertible preferred stock.
F-14
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Stock Option Plan
The Company is authorized to issue up to 9,473,193 shares in connection with
its 1996, 1997 and 1999 stock option plans (the Plans) to directors, employees,
and consultants. The Plans provide for the issuance of stock purchase rights,
incentive stock options, or nonstatutory stock options.
Stock purchase rights are subject to a restricted stock purchase agreement
whereby the Company has the right to repurchase the stock at the original issue
price upon the voluntary or involuntary termination of the purchaser's
employment with the Company. The repurchase rights will lapse at a rate
determined by the stock plan administrator, but at a minimum rate of 20% per
year.
Under the 1997 plan, the exercise price for incentive stock options is at
least 100% of the stock's fair market value on the date of grant for employees
owning less than 10% of the voting power of all classes of stock, and at least
110% of the fair market value on the date of grant for employees owning more
than 10% of the voting power of all classes of stock. For nonstatutory stock
options, the exercise price is also at least 110% of the fair market value on
the date of grant for service providers owning more than 10% of the voting
power of all classes of stock and no less than 85% of the fair market value on
the date of grant for service providers owning less than 10% of the voting
power of all classes of stock.
Options generally expire in 10 years; however, they may be limited to 5 years
if the optionee owns stock representing more than 10% of the Company. Vesting
periods are determined by the stock plan administrator and generally provide
for shares to vest over a 4-year period, with 12.5% of the award vesting after
6 months from the date of grant and then ratably vesting each month thereafter.
The Company uses the intrinsic value method to account for its fixed option
plans. Deferred stock-based compensation cost has been recognized for its stock
option plan for grants to employees when the fair value of the underlying
common stock on the grant date exceeds the exercise price for each stock
option. Deferred stock-based compensation is amortized using the accelerated
method set forth in Financial Accounting Standards Board Interpretation No. 28.
Had compensation cost for the Company's stock-based compensation plan been
determined consistent with SFAS No. 123 for all of the Company's stock-based
compensation plans, net loss (in thousands) and basic and diluted net loss per
share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss:
As reported.................................... $(13,952) $(41,374) $(38,186)
Pro forma...................................... (13,973) (41,459) (39,873)
Basic and diluted net loss per share:
As reported.................................... (11.88) (19.99) (13.40)
Pro forma...................................... (11.89) (20.04) (13.99)
</TABLE>
The fair value of each option was estimated on the date of grant using the
minimum value method with the following weighted-average assumptions: no
dividend yield; risk-free interest rate of 6.2%, 5.0% and 4.7% for fiscal 1997,
1998 and 1999 respectively; and expected life of four years for all periods.
F-15
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of the status of the Company's options for the years ended December
31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------
Shares available Number Weighted-average
for grant of shares exercise price
---------------- ---------- ----------------
<S> <C> <C> <C>
Balances as of December 31,
1996........................... 525,008 581,661 $0.14
Authorized...................... 1,612,083 -- --
Granted......................... (1,386,624) 1,386,624 0.78
Exercised....................... -- (312,914) 0.15
Canceled........................ 12,665 (12,665) 0.99
---------- ----------
Balances as of December 31,
1997........................... 763,132 1,642,706 0.69
Authorized...................... 861,111 -- --
Granted......................... (1,381,005) 1,381,005 2.93
Exercised....................... -- (426,467) 0.96
Returned to Plans............... 6,875 -- 0.96
Canceled........................ 513,357 (513,357) 1.12
---------- ----------
Balances as of December 31,
1998........................... 763,470 2,083,887 2.00
Authorized...................... 5,386,665
Granted......................... (7,022,308) 7,022,308 6.08
Exercised....................... -- (436,394) 1.46
Returned to Plans............... 59,895 -- --
Canceled........................ 1,876,365 (1,876,365) 3.72
---------- ----------
Balances as of December 31,
1999........................... 1,064,087 6,793,436 $5.78
========== ==========
Options exercisable at:
December 31, 1997.............................. 773,148 $0.12
December 31, 1998.............................. 448,497 1.48
December 31, 1999.............................. 3,310,545 5.89
</TABLE>
The weighted-average fair value of options granted in fiscal 1997, 1998 and
1999 was $.15, $.51 and $1.03, respectively.
As of December 31, 1999, the range of exercise prices and weighted-average
remaining contractual life of outstanding options were as follows:
<TABLE>
<CAPTION>
Weighted-average
remaining
Number of contractual life Number of shares
Exercise prices options shares (years) exercisable
--------------- -------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.15 56,840 6.92 25,278
0.45 27,189 7.29 12,121
0.75 172,689 7.64 84,462
1.50 19,583 7.83 9,065
1.80 53,736 7.94 22,658
2.25 9,791 8.05 2,272
3.00 703,992 8.83 347,119
5.25 698,589 9.20 135,152
5.40 137,596 9.32 23,157
6.60 4,913,431 9.75 2,649,261
--------- ---------
6,793,436 3,310,545
========= =========
</TABLE>
F-16
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Warrants
In October 1999, the Company issued 177,098 warrants, at $6.60 a share, to an
executive search firm for the recruitment of its Chief Executive Officer. The
warrants are immediately exercisable up to seven years from the date of
issuance. The warrants had a fair value of $750,000 on the date of the grant
using the Black-Scholes pricing model with the following assumptions: 60%
volatility, zero dividends, a risk-free rate of 5.21% and a contractual life of
7 years. The amount was recorded as operating expense during 1999.
(6) Income Taxes
The Company has incurred significant losses since inception and has not
incurred any income tax expense to date. The 1999 income tax differed from the
amounts computed by applying the U.S. federal income tax rate of 34% to pretax
income as a result of the following:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Expected tax at U.S. Federal statutory
rate of 34% ......................... $(4,730,000) $(11,793,000) $(12,981,100)
Current year net operating losses and
temporary differences for which no
tax benefit is recognized............ 4,714,000 11,672,000 12,262,100
Other................................. 16,000 121,000 719,000
----------- ------------ ------------
Total............................... $ -- $ -- $ --
=========== ============ ============
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the Company's deferred tax assets and liabilities are presented below.
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward .................. $ 17,039,000 $ 28,919,000
Reserves and accrued expenses..................... 476,000 1,151,000
Deferred stock compensation....................... 2,044,000 --
Research credit carryforward...................... 1,228,000 2,099,000
State taxes and net operating loss carryforward... 3,842,000 6,209,000
Fixed assets and intangibles...................... 220,000 824,000
------------ ------------
Total gross deferred tax assets................. 24,849,000 39,202,000
Valuation allowance............................... (24,849,000) (39,202,000)
------------ ------------
Total deferred tax assets........................... $ -- $ --
============ ============
</TABLE>
The net change in the total valuation allowance for the period ended December
31, 1999 was a net increase of $14,353,000.
At December 31, 1999, the Company had net operating loss carryforwards for
federal and California income tax purposes of approximately $85,055,000 and
$70,233,000 respectively, available to reduce future income subject to income
taxes. The federal net operating loss carryforwards expire beginning 2011
through 2019. The California net operating loss carryforwards expire in 2004.
At December 31, 1999, the Company also had research credit carryforwards for
federal and California income tax return purposes of approximately $1,247,000
and $852,000 respectively, available to reduce future income subject to income
taxes. The federal research credit carryforward expires beginning in 2011
through 2014. The California research credit carries forward indefinitely.
F-17
<PAGE>
CROSSWORLDS SOFTWARE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Tax Reform Act of 1986 and the California Conformity Act of 1987 impose
restrictions on the utilization of net operating loss and credit carryforwards
in the event of an "ownership change" as defined by the Internal Revenue Code.
Should an ownership change occur in the future, the Company's ability to
utilize its net operating loss and tax credit carryforwards may be subject to
restriction pursuant to these provisions.
F-18
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO OF CROSSWORLDS SOFTWARE, INC. APPEARS HERE]
Common Stock
------------
PROSPECTUS
------------
Chase H&Q
Dain Rauscher Wessels
a division of Dain Rauscher Incorporated
Thomas Weisel Partners LLC
------------
, 2000
------------
You should rely only on information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering
and the distribution of this prospectus applicable to that jurisdiction.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by CrossWorlds in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<CAPTION>
Amount
to be Paid
----------
<S> <C>
SEC registration fee........................................... $ 13,200
NASD filing fee................................................ 5,500
Nasdaq National Market listing fee............................. *
Printing and engraving expenses................................ 200,000
Legal fees and expenses........................................ 400,000
Accounting fees and expenses................................... 200,000
Blue Sky qualification fees and expenses....................... 5,000
Transfer Agent and Registrar fees.............................. *
Miscellaneous fees and expenses................................ *
Total........................................................ *
</TABLE>
--------
* to be filed by amendment
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article X of CrossWorlds' Amended and Restated Certificate
of Incorporation (Exhibit 3.1 hereto) and Article VI of CrossWorlds' Bylaws
(Exhibit 3.2 hereto) provide for indemnification of CrossWorlds' directors,
officers, employees and other agents to the maximum extent permitted by the
Delaware General Corporation Law. In addition, CrossWorlds has entered into
Indemnification Agreements (Exhibit 10.1 hereto) with its officers and
directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-
indemnification among CrossWorlds and the Underwriters with respect to certain
matters, including matters arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities
Since January 1, 1997, CrossWorlds has sold and issued the following
securities:
1. On March 28, 1997, April 8, 1997 and April 15, 1997, CrossWorlds
issued a total of 2,104,144 shares of its Series C preferred stock to
private investors for an aggregate cash consideration of $12,625,000. At
various times between December 23, 1997 and April 6, 1998, CrossWorlds
issued 2,063,307 shares of its Series D preferred stock to private
investors for an aggregate cash consideration of $30,950,000. On January 7,
1999, March 26, 1999, and April 20, 1999, CrossWorlds issued a total of
2,883,326 shares of its Series E preferred stock to private investors for
an aggregate cash consideration of $17,300,000. On October 1, 1999,
CrossWorlds issued 3,671,071 shares of its Series F preferred stock to
private investors for an aggregate cash consideration of $25,000,000.
2. Since inception CrossWorlds has issued 6,793,436 options to purchase
common stock of CrossWorlds with a weighted average price of $5.78 to a
number of employees and directors of and consultants to CrossWorlds.
3. On June 26, 1998 CrossWorlds issued warrants to purchase 33,333 shares
of its Series C preferred stock with an exercise price of $1.20 per share
to Bay Park Plaza Associates LP for value received. On
II-1
<PAGE>
January 27, 1999 CrossWorlds issued warrants to purchase a total of 126,666
shares of its Series E preferred stock with an exercise price of $6.00 per
share to Comdisco, Inc. in consideration for a Subordinated Loan and
Security Agreement and Master Lease Agreement. On August 9, 1999,
CrossWorlds issued warrants to purchase 6,334 shares of its Common Stock
with an exercise price of $6.60 per share to Silicon Valley Bank for the
agreed upon value of $1.00 and for other good and valuable consideration.
On October 7, 1999 CrossWorlds issued warrants to purchase a total of
177,098 shares of its Common Stock with an exercise price of $6.60 per
share to Heidrick and Struggles for value received. On February 2, 2000,
CrossWorlds issued warrants to purchase 199,996 shares of its common stock
at an exercise price of $11.00 per share to private investors.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or
Regulation D, or other applicable exemption of such Securities Act as
transactions by an issuer not involving any public offering. In addition,
certain issuances described in Item 2 were deemed exempt from registration
under the Securities Act in reliance upon Rule 701 promulgated under the
Securities Act. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and warrants issued
in such transactions. All recipients had adequate access, through their
relationships with CrossWorlds, to information about CrossWorlds.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of CrossWorlds.
3.2* Bylaws of CrossWorlds.
4.1* Specimen Stock Certificate.
4.2* Warrant dated January 7, 1999 issued by CrossWorlds to Comdisco, Inc.
Warrant dated August 9, 1999 issued by CrossWorlds to Silicon Valley
4.3* Bank.
4.4* Warrant dated October 11, 1999 issued by CrossWorlds to Heidrick &
Struggles, Inc.
4.5* Form of Warrant dated February 2, 2000 issued by CrossWorlds to certain
private investors.
Opinion of Venture Law Group regarding the legality of the common stock
5.1* being registered.
10.1* Fifth Amended and Restated Investor Rights Agreement dated October 1,
1999 among CrossWorlds and certain investors.
Form of Indemnification Agreement between CrossWorlds and each of its
10.2 officers and directors.
10.3 1996 Stock Plan, as amended.
10.4 1997 Stock Plan, as amended.
10.5 1999 Executive Stock Plan.
10.6 2000 Employee Stock Purchase Plan.
10.7 2000 Directors' Stock Option Plan.
10.8* Employment Agreement dated October 5, 1999 with Alfred J. Amoroso.
10.9* Employment Agreement dated January 1, 2000 with Arthur R. Matin.
10.10* Promissory Note issued to CrossWorlds by James G. Rowley.
10.11* Secured Loan Agreement, Promissory Note and Security Agreement dated
November 15, 1999 between CrossWorlds and Barton S. Foster.
10.12* Form of Change of Control Agreement between CrossWorlds and each of its
executive officers.
10.13* IBM/OEM Program Agreement dated June 3, 1999.
10.14* Software License and Support Agreement with Delphi Automotive System
LLC dated December 21, 1999.
10.15* Lease Agreement, as amended, dated February 1, 1999 between CrossWorlds
and Bay Park Plaza Associates, L.P.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2* Consent of Venture Law Group (contained in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
II-3
<PAGE>
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Burlingame, State of
California on February 2, 2000.
CROSSWORLDS SOFTWARE, INC.
By: /s/ Alfred J. Amoroso
----------------------------------
Alfred J. Amoroso
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints, jointly and severally, Alfred J.
Amoroso and Mark R. Kent, and each of them, as his attorney-in-fact, with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule
462 under the Securities Act of 1933, as amended, in connection with or
related to the offering contemplated by this Registration Statement and its
amendments, if any, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming our signatures as they may be
signed by our said attorney to any and all amendments to said Registration
Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Alfred J. Amoroso President, Chief February 2, 2000
- ----------------------------------- Executive Officer and
Alfred J. Amoroso Director (Principal
Executive Officer)
/s/ Mark R. Kent Chief Financial Officer February 2, 2000
- ----------------------------------- (Principal Financial and
Mark R. Kent Accounting Officer)
/s/ Katrina A. Garnett Chairman of the February 2, 2000
- ----------------------------------- Board
Katrina A. Garnett
/s/ Terence J. Garnett Director February 2, 2000
- -----------------------------------
Terence J. Garnett
/s/ Frederick W. Gluck Director February 2, 2000
- -----------------------------------
Frederick W. Gluck
/s/ Andrew K. Ludwick Director February 2, 2000
- -----------------------------------
Andrew K. Ludwick
/s/ Albert A. Pimentel Director February 2, 2000
- -----------------------------------
Albert A. Pimentel
/s/ Colin F. Raymond Director February 2, 2000
- -----------------------------------
Colin F. Raymond
II-5
<PAGE>
SCHEDULE II
CROSSWORLDS SOFTWARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
Balance Charged Balance
at to Costs at End
Beginning and Deductions of
of Period Expenses Describe Period
--------- -------- ---------- --------
<S> <C> <C> <C> <C>
1999
Allowance for doubtful accounts....... $306,130 $15,886 $25,341(1) $296,675
1998
Allowance for doubtful accounts....... -- 333,250 27,120(1) 306,130
1997
Allowance for doubtful accounts....... -- -- -- --
</TABLE>
- --------
(1) Accounts written off.
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1* Amended and Restated Certificate of Incorporation of CrossWorlds.
3.2* Bylaws of CrossWorlds.
4.1* Specimen Stock Certificate.
4.2* Warrant dated January 7, 1999 issued by CrossWorlds to Comdisco, Inc.
Warrant dated August 9, 1999 issued by CrossWorlds to Silicon Valley
4.3* Bank
4.4* Warrant dated October 11, 1999 issued by CrossWorlds to Heidrick &
Struggles, Inc.
4.5* Form of Warrant dated February 2, 2000 issued by CrossWorlds to certain
investors.
Opinion of Venture Law Group regarding the legality of the common stock
5.1* being registered.
10.1* Fifth Amended and Restated Investor Rights Agreement dated October 1,
1999 among CrossWorlds and certain investors.
Form of Indemnification Agreement between CrossWorlds and each of its
10.2 officers and directors.
10.3 1996 Stock Plan.
10.4 1997 Stock Plan, as amended.
10.5 1999 Executive Stock Plan.
10.6 2000 Employee Stock Purchase Plan.
10.7 2000 Directors' Stock Option Plan.
10.8* Employment Agreement dated October 5, 1999 with Alfred J. Amoroso.
10.9* Employment Agreement dated January 1, 2000 with Arthur R. Matin
10.10* Promissory Note issued to CrossWorlds by James G. Rowley.
10.11* Secured Loan Agreement, Promissory Note and Security Agreement dated
November 15, 1999 between CrossWorlds and Barton S. Foster.
10.12* Form of Change of Control Agreement between CrossWorlds and each of its
executive officers.
10.13* IBM/OEM Program Agreement dated June 3, 1999.
10.14* Software License and Support Agreement with Delphi Automotive Systems
LLC dated December 21, 1999.
10.15* Lease Agreement, as amended dated February 1, 1999 between CrossWorlds
and By Park Plaza Associates, L.P.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2* Consent of Venture Law Group (contained in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
*To be supplied by amendment.
<PAGE>
CROSSWORLDS SOFTWARE, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is entered into as of
---------
the 12/th/ day of January, 1999 by and between CrossWorlds Software, Inc., a
Delaware corporation (the "Company"), and ____________ ("Indemnitee").
------- ----------
RECITALS
--------
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
agents and fiduciaries to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify
---------------------------
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any threatened, pending or
completed action, suit, proceeding or alternative dispute resolution mechanism,
or any hearing, inquiry or investigation that Indemnitee in good faith believes
might lead to the institution of any such action, suit, proceeding or
alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other (hereinafter a "Claim") by reason of (or
-----
arising in part out of) any event or occurrence related to the fact that
Indemnitee is or was a director, officer, employee, agent or fiduciary of the
Company, or any subsidiary of
<PAGE>
the Company, or is or was serving at the request of the Company as a director,
officer, employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action or inaction on
the part of Indemnitee while serving in such capacity (hereinafter an
"Indemnifiable Event") against any and all expenses (including attorneys fees
-------------------
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on Indemnitee as a result of the actual or
deemed receipt of any payments under this Agreement (collectively, hereinafter
"Expenses"), including all interest, assessments and other charges paid or
--------
payable in connection with or in respect of such Expenses. Such payment of
Expenses shall be made by the Company as soon as practicable but in any event no
later than five days after written demand by Indemnitee therefor is presented to
the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
---------------
obligations of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "Expense Advance") shall be subject to the condition that, if,
---------------
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any
Expense Advance shall be unsecured and no interest shall be charged thereon. If
there has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to
-2-
<PAGE>
appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
-----------------
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then, with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including "attorneys"
fees), claims, liabilities and damages arising out of or relating to this
Agreement or its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
-----------------------------
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (l)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
--------------------------------
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
---- ----------
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable
-3-
<PAGE>
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by the
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
applicable law, shall be a defense to Indemnitee's claim or create a presumption
that Indemnitee has not met any particular standard of conduct or did not have
any particular belief. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the Company
------------------
of a notice of a Claim pursuant to Section 2(b) hereof the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of Indemnitee, all amounts payable as a result of such action, suit, proceeding,
inquiry or investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall
have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's
expense and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the
-----
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its Board of Directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not
-4-
<PAGE>
otherwise required by such law, statute or rule to be applied to this Agreement,
shall have no effect on this Agreement or the parties rights and obligations
hereunder except as set forth in Section 8(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
Stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under this
--------------------------
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not be relieved of liability
under applicable law;
-5-
<PAGE>
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of
-6-
<PAGE>
the Company" shall include any service as a director, officer, employee, agent
or fiduciary of the Company which imposes duties on, or involves services by,
such director, officer, employee, agent or fiduciary with respect to an employee
benefit plan, its participants or its beneficiaries; and if Indemnitee acted in
good faith and in a manner Indemnitee reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan, Indemnitee
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if (i) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than
a trustee or other fiduciary holding securities under an employee benefit plan
of the Company or a corporation owned directly or indirectly by the Stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, (A) who is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of the
combined voting power of the Company's then outstanding Voting Securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than 20% of the total voting power represented by
the Company's then outstanding Voting Securities, (ii) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the Board of Directors of the Company and any new director whose election by the
Board of Directors or nomination for election by the Company's Stockholders was
approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof; or (iii) the Stockholders of the Company approve
a merger or consolidation of the Company with any other corporation other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the Stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
transactions) all or substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall
mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall not have otherwise performed
services for the Company or Indemnitee within the last three years (other than
with respect to matters concerning the rights of Indemnitee under this
Agreement, or of other indemnitees under similar indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to
-7-
<PAGE>
the particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director, officer, employee, agent or fiduciary of the Company or of any other
enterprise at the Company's request.
13. Attorneys Fees. In the event that any action is instituted by
--------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless, as a part of such action, a
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement of Expenses with respect
to such action, unless, as a part of such action, a court having jurisdiction
over such action determines that each of Indemnitee's material defenses to such
action was made in bad faith or was frivolous.
14. Notice. All notices and other communications required or permitted
------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service or other applicable postal service, if delivered by first class mail,
postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day
after the business day of deposit with Federal Express or similar overnight
courier, freight prep aid, or (d) one day after the business day of delivery by
facsimile transmission, if delivered by facsimile transmission with copy by
first class mail, postage prepaid, and shall be
-8-
<PAGE>
addressed if to the Indemnitee, at the Indemnitee's address as set forth beneath
his signature to this Agreement and if to the Company at the address of its
principal corporate offices (attention: Secretary) or at such other address as
such party may designate by ten days' advance written notice to the other party
hereto.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Superior
Court of the State of California in and for San Mateo County, which shall be the
exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement and all acts and transactions pursuant
-------------
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Delaware,
without giving effect to principles of conflicts of law.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CROSSWORLDS SOFTWARE, INC.,
a Delaware corporation
By: ______________________________
Title: ___________________________
Address:
577 Airport Boulevard, Suite 800
Burlingame, CA 94010-2024
AGREED TO AND ACCEPTED BY:
INDEMNITEE
_________________________________
Address:
_________________________________
_________________________________
-10-
<PAGE>
CROSSROADS SOFTWARE, INC.
1996 STOCK OPTION PLAN
(As Amended)
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of Directors
---------
in accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means Crossroads Software, Inc. a Delaware corporation.
-------
(g) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent, or
Subsidiary, is not interrupted or terminated. Continuous Status as an Employee
or Consultant shall not be considered interrupted in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
90 days, unless reemployment upon expiration of such leave is guaranteed by
statute or contract, including Company policies. If reemployment upon
expiration of a leave of absence approved by the
<PAGE>
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option. An
Optionee's change in status from Employee to Consultant, or vice versa, shall
not constitute cessation of the Optionee's Continuous Status as an Employee or
Consultant.
(i) "Employee" means any person, including Officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(k) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination, or;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(l) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(m) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option. In the event of an Optionee's change in
status from Employee to Consultant, the Optionee's Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the date three (3)
months and one day from the date of such change of status.
(n) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(o) "Option" means a stock option granted pursuant to the Plan.
------
(p) "Optioned Stock" means the Common Stock subject to an Option.
--------------
-2-
<PAGE>
(q) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(r) "Parent" means a "parent corporation", whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1995 Stock Option Plan.
----
(t) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(u) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 below.
(v) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 5,000,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program, the
unpurchased Shares which were subject thereto shall become available for future
grant or sale under the Plan (unless the Plan has terminated); provided,
--------
however, that Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan, except that if unvested Shares are repurchased by the Company at
their original purchase price, and the original purchaser of such Shares did not
receive any benefits of ownership of such Shares, such Shares shall become
available for future grant under the Plan. For purposes of the preceding
sentence, voting rights shall not be considered a benefit of Share ownership.
4. Administration of the Plan.
--------------------------
(a) Initial Plan Procedure. Prior to the date, if any, upon which the
----------------------
Company becomes subject to the Exchange Act, the Plan shall be administered by
the Board or a committee appointed by the Board.
(b) Plan Procedure after the Date, if any, upon Which the Company
-------------------------------------------------------------
becomes Subject to the Exchange Act.
- -----------------------------------
(i) Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options to Employees who are also Officers or directors of
the Company, the Plan shall be administered by (A) the Board if the Board may
administer the Plan in compliance with the rules under Rule 16b-3 promulgated
under the Exchange Act or any successor thereto ("Rule 16b-3") relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made, or
-3-
<PAGE>
(B) a Committee designated by the Board to administer the Plan, which Committee
shall be constituted to comply with the rules under Rule 16b-3 relating to the
disinterested administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be made.
Once appointed, such Committee shall continue to serve in its designated
capacity until otherwise directed by the Board. From time to time the Board may
increase the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in substitution
therefor, fill vacancies, however caused, and remove all members of the
Committee and thereafter directly administer the Plan, all to the extent
permitted by the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section 16(b) exempt
discretionary grants and awards of equity securities are to be made.
(ii) Multiple Administrative Bodies. If permitted by Rule 16b-
------------------------------
3, the Plan may be administered by different bodies with respect to directors,
non-director Officers and Employees who are neither directors nor Officers.
(iii) Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options to Employees or Consultants who are
- ---------
neither directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a committee designated by the Board, which committee shall
be constituted in such a manner as to satisfy the legal requirements relating to
the administration of incentive stock option plans, if any, of California
corporate and securities laws, of the Code, and of any applicable stock exchange
(the "Applicable Laws"). Once appointed, such Committee shall continue to serve
in its designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new members
in substitution therefor, fill vacancies, however caused, and remove all members
of the Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws.
(c) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the Common
Stock is listed, the Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom Options may
from time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
-4-
<PAGE>
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions of any award granted
hereunder;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted; and
(ix) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement
as either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in any way with his or her right or the
Company's right to terminate his or her employment or consulting relationship at
any time, with or without cause.
(d) Upon the Company or a successor corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act or upon the Plan being assumed by a corporation having a class of
common equity securities required to be registered under Section 12 of the
Exchange Act, the following limitations shall apply to grants of Options to
Employees:
-5-
<PAGE>
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial employment, an
Employee may be granted Options to purchase up to an additional 500,000 Shares
which shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 11.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 11), the cancelled Option will be counted against the limit
set forth in subsection (i) above. For this purpose, if the exercise price of an
Option is reduced, the transaction will be treated as a cancellation of the
Option and the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company, as described in Section 17 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 13 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.
-6-
<PAGE>
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of surrender and (y) have a Fair Market Value on the
date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan, but in no case at a rate of less than 20% per year over five (5)
years from the date the Option is granted.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
-7-
<PAGE>
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Status as an Employee or
Consultant with the Company, such Optionee may, but only within such period of
time as is determined by the Administrator, of at least thirty (30) days, with
such determination in the case of an Incentive Stock Option not exceeding three
(3) months after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that Optionee was entitled
to exercise it at the date of such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of such termination, or if
Optionee does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event of termination of an
----------------------
Optionee's consulting relationship or Continuous Status as an Employee as a
result of his or her disability, Optionee may, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the Option
Agreement), exercise the Option to the extent otherwise entitled to exercise it
at the date of such termination; provided, however, that if such disability is
not a "disability" as such term is defined in Section 22(e)(3) of the Code, in
the case of an Incentive Stock Option such Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the day three months and
one day following such termination. To the extent that Optionee is not entitled
to exercise the Option at the date of termination, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent that the Optionee was entitled to exercise the Option at the
date of death. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the Shares covered by the unexercisable
portion of the Option shall immediately revert to the Plan. If, after death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Rule 16b-3. Options granted to persons subject to Section 16(b)
----------
of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
-8-
<PAGE>
(f) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the
extent it has not been previously exercised, the Option will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the
event that the successor corporation refuses to assume or substitute for the
Option or Stock Purchase Right, the Optionee shall fully vest in and have the
right to exercise the Option or Stock Purchase Right as to all of the Optioned
Stock, including Shares as to which it would not otherwise be vested or
exercisable. If an Option or Stock Purchase Right becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully
exercisable for a period of fifteen (15) days from the date of such
-9-
<PAGE>
notice, and the Option or Stock Purchase Right shall terminate upon the
expiration of such period. For the purposes of this paragraph, the Option or
Stock Purchase Right shall be considered assumed if, following the merger or
sale of assets, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
all purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Board. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option is so granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain stockholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Administrator, which agreement must be in writing and signed by the Optionee
and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
-10-
<PAGE>
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
16. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
17. Stockholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable California and federal law
and the rules of any stock exchange upon which the Common Stock is listed.
18. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee, not less frequently than annually, copies of annual financial
statements. The Company shall also provide such statements to each individual
who acquires Shares pursuant to the Plan while such individual owns such Shares.
The Company shall not be required to provide such statements to key employees
whose duties in connection with the Company assure their access to equivalent
information.
-11-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
1997 STOCK PLAN
(As Amended January 2000)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
of stock option plans under U.S. state corporate laws, U.S. federal and state
securities laws, the Code, any stock exchange or quotation system on which the
Common Stock is listed or quoted and the applicable laws of any foreign country
or jurisdiction where Options or Stock Purchase Rights are granted under the
Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or a merger, consolidation or other capital reorganization
of the Company with or into another corporation, or any other transaction or
series of related transactions in which the Company's stockholders immediately
prior thereto own less than 50% of the voting stock of the Company (or its
successor or parent) immediately thereafter.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means a committee of Directors appointed by the
---------
Board in accordance with Section 4 hereof.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means CrossWorlds Software, Inc., a Delaware
-------
corporation.
(i) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services to such
entity, including a Director of the Company.
(j) "Director" means any member of the Board of Directors of the
--------
Company.
<PAGE>
(k) "Employee" means any person, (including, if appropriate,
--------
Officers, Directors and Named Executives, employed by the Company or any Parent
or Subsidiary of the Company, with the status of employment determined based
upon such minimum number of hours or periods worked as shall be determined by
the Administrator, subject to any requirements of the Code. A Service Provider
shall not cease to be an Employee in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company or
between the Company, its Parent, any Subsidiary, or any successor. For purposes
of Incentive Stock Options, no such leave may exceed ninety days, unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
If reemployment upon expiration of a leave of absence approved by the Company is
not so guaranteed, on the 181st day of such leave any Incentive Stock Option
held by the Optionee shall cease to be treated as an Incentive Stock Option and
shall be treated for tax purposes as a Nonstatutory Stock Option. Neither
service as a Director nor payment of a director's fee by the Company shall be
sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the date of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the date of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code.
(o) "Listed Security" means any security of the Company that is
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(p) "Named Executive" means any individual who, on the last day of
---------------
the Company's fiscal year, is the chief executive officer of the Company (or is
acting in such capacity) or among the four most highly compensated officers of
the Company (other than the
-2-
<PAGE>
chief executive officer). Such officer status shall be determined pursuant to
the executive compensation disclosure rules under the Exchange Act.
(q) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(r) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
------
(t) "Option Agreement" means a written or electronic agreement
----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(u) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(w) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(x) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(y) "Plan" means this 1997 Stock Plan.
----
(z) "Reporting Person" means an Officer, Director, or greater than
----------------
10% stockholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(aa) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 12 below.
(bb) "Section 16(b)" means Section 16(b) of the Securities Exchange
-------------
Act of 1934, as amended.
(cc) "Service Provider" means an Employee, Director or Consultant.
----------------
(dd) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 below.
(ee) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 12 below.
-3-
<PAGE>
(ff) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
(gg) "Ten Percent Holder" means a person who owns stock representing
------------------
more than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 3,000,000, plus an automatic increase on the first
day of each fiscal year of the Company beginning in 2001 and ending in 2005
equal to the lesser of (i) 3,000,000 Shares, (ii) five percent (5%) of the
Shares outstanding on the last day of the immediately preceding fiscal year or,
(iii) such lesser number of Shares determined by the Board. The Shares may be
authorized but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant as Stock Purchase Rights or Nonstatutory Stock Options under the Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
-------
Committee, or a combination thereof, as determined by the Board. The Plan may be
administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers (who may (but need not) be Officers) to grant
Options or Stock Purchase Rights to Employees and Consultants.
(b) Administration With Respect to Reporting Persons. With respect
------------------------------------------------
to Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed
---------------------
pursuant to this Section 4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) and remove all members of
a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee administering
the Plan pursuant to Section 4(b) above, to the extent permitted or required by
Rule 16b-3 and Section 162(m) of the Code.
-4-
<PAGE>
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 10(f) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
-5-
<PAGE>
(d) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 15 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, is a Ten Percent Holder,
the term of the Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
8. Limitation on Grants to Employees. Subject to adjustment as provided
---------------------------------
in Section 13 below, after the date, if any, on which the Common Stock becomes a
Listed Security, the maximum number of Shares which may be subject to Options
and Stock Purchase Rights granted to any one Employee under this Plan for any
fiscal year of the Company shall be 1,000,000 Shares.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
-6-
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, is a Ten Percent Holder, the exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted prior to the date, if any, on which the
Common Stock becomes a Listed Security to a Service Provider who, at the time of
grant of such Option is a Ten Percent Holder, the exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of the grant.
(B) granted, prior to the date, if any, on which the
Common Stock becomes a Listed Security to any other Service Provider, the per
Share exercise price shall be no less than 85% of the Fair Market Value per
Share on the date of grant if required by the Applicable Laws and, if not so
required, shall be such price as is determined by the Administrator.
(C) granted on or after the date, if any, on which the
Common Stock becomes a Listed Security to any Service Provider, the per share
Exercise Price shall be such price as determined by the Administrator; provided,
however, that if such Service Provider is, at the time of the grant of such
Option, a Named Executive of the Company, the per share Exercise Price shall be
no less than 100% of the Fair Market Value on the date of grant if such Option
is intended to qualify as performance-based compensation under Section 162(m) of
the Code.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
-7-
<PAGE>
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement, which may include vesting requirements and/or
performance criteria with respect to the Company and/or the Optionee; provided,
however, that if required by the Applicable Laws, any Option granted prior to
the date, if any, upon which the Common Stock becomes a Listed Security shall
become exercisable at the rate of at least 20% per year over five years from the
date the Option is granted. In the event that any of the Shares issued upon
exercise of an Option (which exercise occurs prior to the date, if any, upon
which the Common Stock becomes a Listed Security) should be subject to a right
of repurchase in the Company's favor, such repurchase right shall, if required
by the Applicable Laws, lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer (including but not limited to Officers),
Director or Consultant of the Company or any Parent or Subsidiary of the
Company, the Option may become fully exercisable, and a repurchase right, if
any, in favor of the Company shall lapse, at any time or during any period
established by the Administrator. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
-------------------------------------------------
Optionee ceases to be a Service Provider, such Optionee may exercise his or her
Option within such period of time as is specified in the Option Agreement (of at
least thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option
-8-
<PAGE>
Agreement, the Option shall remain exercisable for three (3) months following
the Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified by the
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If such disability is not a "disability" as such term is defined in
Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically cease to be treated as an Incentive
Stock Option and shall be treated for tax purposes as a Nonstatutory Stock
Option on the day three months and one day following such termination. If, on
the date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall revert to
the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or administrator
of the Optionee's estate or, if none, by the person(s) entitled to exercise the
Option under the Optionee's will or the laws of descent or distribution. If the
Option is not so exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Service Provider
relationship with the Company from the periods set forth in Sections 10(b),
10(c) and 10(d) above or in the Option Agreement to such greater time as the
Board shall deem appropriate, provided that in no event shall such Option be
exercisable later than the date of expiration of the term of such Option as set
forth in the Option Agreement.
-9-
<PAGE>
(f) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
(g) Rule 16b-3. Options granted to Reporting Persons shall comply
----------
with Rule 16b-3 and shall contain such additional conditions or restrictions as
may be required thereunder to qualify for the maximum exemption for Plan
transactions.
11. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution provided that, after the date, if any, upon which the
Common Stock becomes a Listed Security, the Administrator may in its discretion
grant transferable Nonstatutory Stock Options pursuant to Option Agreements
specifying (i) the manner in which such Nonstatutory Stock Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an Optionee will not constitute a
transfer. An Option or Stock Purchase Right may be exercised, during the
lifetime of the holder of Option or Stock Purchase Right, only by such holder or
a transferee permitted by this Section 11.
12. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. In the case of a Stock Purchase Right granted
prior to the date, if any, on which the Common Stock becomes a Listed Security
and if required by the Applicable Laws at such time, the terms of the offer
shall comply in all respects with Section 260.140.42 of Title 10 of the
California Code of Regulations. The offer shall be accepted by execution of a
Restricted Stock purchase agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine, provided, however, that with respect to a Stock
Purchase Right granted prior to the date, if any, on which the Common Stock
becomes a Listed Security to a purchaser who is not an officer (including an
Officer), Director or Consultant of the Company or of any Parent or Subsidiary
of the Company, it shall lapse at a minimum rate of 20% per year if required by
the Applicable Laws.
-10-
<PAGE>
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
13. Adjustments Upon Changes in Capitalization, Change of Control.
-------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to which no
Options or Stock Purchase Rights have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, the number of Shares set forth in Sections 3(a)(i) and 8 above,
as well as the price per share of Common Stock covered by each such outstanding
Option or Stock Purchase Right, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until fifteen (15) days prior to
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
-11-
<PAGE>
(c) Change of Control. In the event of a Change of Control, each
-----------------
outstanding Option and Stock Purchase Right shall be assumed or an equivalent
option or right substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the Option or Stock Purchase
Right, the Optionee shall fully vest in and have the right to exercise the
Option or Stock Purchase Right as to all of the Optioned Stock, including Shares
as to which it would not otherwise be vested or exercisable. If an Option or
Stock Purchase Right becomes fully vested and exercisable in lieu of assumption
or substitution in the event of a merger or sale of assets, the Administrator
shall notify the Optionee in writing or electronically that the Option or Stock
Purchase Right shall be fully exercisable for a period of fifteen (15) days from
the date of such notice, and the Option or Stock Purchase Right shall terminate
upon the expiration of such period. For the purposes of this paragraph, the
Option or Stock Purchase Right shall be considered assumed if, following the
Change of Control, the option or right confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option or Stock Purchase Right
immediately prior to the Change of Control, the consideration (whether stock,
cash, or other securities or property) received in the Change of Control by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the Change of Control
is not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the Change of Control.
(d) Termination Following A Change of Control. If the holder of an
-----------------------------------------
Option or Stock Purchase Right is an employee of the Company and such holder's
employment terminates as a result of an Involuntary Termination other than for
Cause (as such terms are defined below) at any time within (1) one year
following a Change of Control, then, subject to subsection (e) below, (i) in the
case of an Option, the unvested shares under such Option shall automatically be
accelerated and become exercisable as of the effective date of the Involuntary
Termination in an amount equal to twelve (12) months of further vesting in
accordance with the vesting schedule specified in the employee's option
agreement and (ii) in the case of a Stock Purchase Right, any rights of
repurchase with respect to such Stock Purchase Right shall automatically
terminate as of the effective date of the Involuntary Termination with respect
to an amount of shares equal to twelve (12) months of further vesting in
accordance with the vesting schedule set forth in the employee's restricted
stock purchase agreement.
(e) Limitation on Payments. In the event that the vesting
----------------------
acceleration provided for in subsection (d) above (i) constitutes "parachute
payments" within the meaning of Section 280G of the Internal Revenue Code of
1986, as amended (the "Code"), and (ii) but for
-12-
<PAGE>
this subsection (e), would be subject to the excise tax imposed by Section 4999
of the Code (or any corresponding provisions of state income tax law), then the
vesting acceleration pursuant to subsection (d) above shall be either
(i) delivered in full, or
(ii) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the holder of an Option or Stock
Purchase Right on an after-tax-basis, of the greater amount of severance
benefits, notwithstanding that all or some portion of such severance benefits
may be taxable under Section 4999 of the Code. Any determination required under
this subsection (e) shall be made in writing by the Company's independent
accountants, whose determination shall be conclusive and binding on the Company
and all holders of Options and Stock Purchase Rights for all purposes. In the
event that subdivision (i) above applies, then the holder of the Option or Stock
Purchase Rights shall be responsible for any excise taxes imposed with respect
to such severance and other benefits. In the event that subdivision (ii) above
applies, then each benefit provided hereunder shall be proportionately reduced
to the extent necessary to avoid imposition of such excise taxes.
(f) Definition of Terms. The following terms used in subsections (d)
-------------------
through (e) shall have the following meanings:
(i) Cause. "Cause" shall mean (i) gross negligence or willful
-----
misconduct in the performance of an employee's duties to the Company; (ii)
repeated unexplained or unjustified absence from the Company; (iii) a material
and willful violation of any federal or state law; (iv) refusal or failure to
act in accordance with any specific direction or order of, or contractual
obligation with, the Company; (v) commission of any act of fraud with respect to
the Company; or (vi) conviction of or plea of no contest to a felony or a crime
involving moral turpitude causing material harm to the standing and reputation
of the Company, in each case as determined by the Board of Directors of the
Company.
(ii) Involuntary Termination. "Involuntary Termination" shall
-----------------------
mean (A) any termination by the Company without Cause and (B) a voluntary
resignation by an employee within 60 days following the occurrence of one of the
following events without the employee's express written consent: (i) the
significant reduction of such employee's duties, authority or responsibilities,
relative to the employee's duties, authority or responsibilities as in effect
immediately prior to such reduction, or the assignment to the employee of such
reduced duties, authority or responsibilities, provided, however, that the
assignment of the employee to a position with the same title as the employee
then holds, or substantially similar title, in a business unit, division or
subsidiary of the Company following a Change of Control or a company into which
the Company is merged in a Change of Control or otherwise acquiring assets or
voting shares of the Company in connection with a Change of Control, or a parent
of such a company, shall not constitute a significant reduction of duties,
authority or responsibilities; (ii) a material reduction by the Company in the
base salary of the employee as in effect immediately prior to
-13-
<PAGE>
such reduction; (iii) a material reduction by the Company in the kind or level
of employee benefits, including bonuses, to which the employee was entitled
immediately prior to such reduction with the result that the employee's overall
benefits package is significantly reduced; or (iv) the relocation of the
employee to a facility or a location more than fifty (50) miles from the
employee's then present location.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator. Notice
of the determination shall be given to each Employee or Consultant to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with the Applicable Laws and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
-14-
<PAGE>
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company
within twelve (12) months after the date the Plan, or an amendment to the Plan,
is adopted. Such stockholder approval shall be obtained in the degree and manner
required under the Applicable Laws.
20. Information to Optionees and Purchasers. Prior to the date, if any,
---------------------------------------
on which the Common Stock becomes a Listed Security and if required by the
Applicable Laws, the Company shall provide to each Optionee and to each
individual who acquires Shares pursuant to the Plan, not less frequently than
annually during the period such Optionee or purchaser has one or more Options or
Stock Purchase Rights outstanding, and, in the case of an individual who
acquires Shares pursuant to the Plan, during the period such individual owns
such Shares, copies of annual financial statements. The Company shall not be
required to provide such statements to key employees whose duties in connection
with the Company assure their access to equivalent information.
-15-
<PAGE>
CrossWorlds Software, Inc.
1999 EXECUTIVE STOCK PLAN
1. Purposes of the Plan. The purposes of this 1999 Executive Stock Plan
--------------------
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to Employees and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be Incentive Stock
Options (as defined under Section 422 of the Code) or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant of an Option
and subject to the applicable provisions of Section 422 of the Code, as amended,
and the regulations promulgated thereunder. Stock Purchase Rights may also be
granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or its Committee appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Affiliate" means an entity other than a Subsidiary in which the
---------
Company owns an equity interest or which, together with the Company, is under
common control of a third person or entity.
(c) "Applicable Laws" means the legal requirements relating to the
---------------
administration of stock option plans under applicable U.S. state corporate laws,
U.S. federal and applicable state securities laws, the Code, any Stock Exchange
rules or regulations and the applicable laws of any other country or
jurisdiction where Options or Stock Purchase Rights are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time.
(d) "Board" means the Board of Directors of the Company.
-----
(e) "Code" means the Internal Revenue Code of 1986, as amended.
----
(f) "Committee" means one or more committees or subcommittees of the
---------
Board appointed by the Board to administer the Plan in accordance with Section 4
below.
(g) "Common Stock" means the Common Stock of the Company.
------------
(h) "Company" means CrossWorlds Software, Inc., a Delaware
-------
corporation.
(i) "Consultant" means any person, including an advisor, who renders
----------
services to the Company, or any Parent, Subsidiary or Affiliate, and is
compensated for such services, and any director of the Company whether
compensated for such services or not; provided, however, that if and in the
event the Company registers any class of equity security
<PAGE>
pursuant to the Exchange Act, the term Consultant shall thereafter not include
directors who are not compensated for their services or are paid only a
director's fee by the Company.
(j) "Continuous Service Status" means the absence of any interruption
-------------------------
or termination of service as an Employee or Consultant to the Company or a
Parent, Subsidiary or Affiliate. Continuous Service Status shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than 90 days, unless reemployment upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to Company policy adopted from time to time; or (iv)
in the case of transfers between locations of the Company or between the
Company, its Parents, Subsidiaries or Affiliates or their respective successors.
Unless otherwise determined by the Administrator, a change in status from an
Employee to a Consultant or from a Consultant to an Employee will not constitute
an interruption of Continuous Service Status.
(k) "Corporate Transaction" means a sale of all or substantially all
---------------------
of the Company's assets, or a merger, consolidation or other capital
reorganization of the Company with or into another corporation.
(l) "Director" means a member of the Board.
--------
(m) "Employee" means any person, including officers and Directors,
--------
employed by the Company or any Parent, Subsidiary or Affiliate of the Company.
The payment by the Company of a director's fee to a Director shall not be
sufficient to constitute "employment" of such Director by the Company.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(o) "Fair Market Value" means, as of any date, the fair market value
-----------------
of Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system including without limitation the National
Market of the National Association of Securities Dealers, Inc. Automated
Quotation ("Nasdaq") System, its Fair Market Value shall be the closing sales
------
price for such stock (or the closing bid, if no sales were reported), as quoted
on such system or exchange on the date of determination, or if no trading
occurred on the date of determination, on the last market trading day prior to
the time of determination, as reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System (but not
on the National Market thereof) or regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean between the high bid and low asked prices for the Common Stock for the last
market trading day prior to the time of determination, as reported in The Wall
Street Journal or such other source as the Administrator deems reliable; or
-2-
<PAGE>
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(p) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable Option Agreement.
(q) "Listed Security" means any security of the Company that is
---------------
listed or approved for listing on a national securities exchange or designated
or approved for designation as a national market system security on an
interdealer quotation system by the National Association of Securities Dealers,
Inc.
(r) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option, as designated in the applicable Option
Agreement.
(s) "Option" means a stock option granted pursuant to the Plan.
------
(t) "Option Agreement" means a written document, the form(s) of which
----------------
shall be approved from time to time by the Administrator, reflecting the terms
of an Option granted under the Plan and includes any documents attached to or
incorporated into such Option Agreement, including, but not limited to, a notice
of stock option grant and a form of exercise notice.
(u) "Option Exchange Program" means a program approved by the
-----------------------
Administrator whereby outstanding Options are exchanged for Options with a lower
exercise price.
(v) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(w) "Optionee" means an Employee or Consultant who receives an
--------
Option.
(x) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code, or any successor provision.
(y) "Participant" means any holder of one or more Options or Stock
-----------
Purchase Rights, or of the Shares issuable or issued upon exercise of such
awards, under the Plan.
(z) "Plan" means this 1999 Executive Stock Plan.
----
(aa) "Reporting Person" means an officer, Director, or greater than
----------------
10% shareholder of the Company within the meaning of Rule 16a-2 under the
Exchange Act, who is required to file reports pursuant to Rule 16a-3 under the
Exchange Act.
(bb) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 10 below.
-3-
<PAGE>
(cc) "Restricted Stock Purchase Agreement" means a written document,
-----------------------------------
the form(s) of which shall be approved from time to time by the Administrator,
reflecting the terms of a Stock Purchase Right granted under the Plan and
includes any documents attached to such agreement.
(dd) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act,
----------
as the same may be amended from time to time, or any successor provision.
(ee) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 of the Plan.
(ff) "Stock Exchange" means any stock exchange or consolidated stock
--------------
price reporting system on which prices for the Common Stock are quoted at any
given time.
(gg) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 10 below.
(hh) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code, or any successor
provision.
(ii) "Ten Percent Holder" means a person who owns stock representing
------------------
more than 10% of the voting power of all classes of stock of the Company or any
Parent or Subsidiary.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be sold under the Plan
is 4,000,000 Shares of Common Stock. The Shares may be authorized, but
unissued, or reacquired Common Stock. If an Option expires or becomes
unexercisable for any reason without having been exercised in full, or is
surrendered pursuant to an Option Exchange Program, the unpurchased Shares
that were subject thereto shall, unless the Plan shall have been terminated,
become available for future grant under the Plan. In addition, any Shares of
Common Stock that are retained by the Company upon exercise of an Option or
Stock Purchase Right in order to satisfy the exercise or purchase price for
such Option or Stock Purchase Right or any withholding taxes due with respect
to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares issued under the Plan and later repurchased
by the Company pursuant to any repurchase right that the Company may have
shall not be available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) General. The Plan shall be administered by the Board or a
--------
Committee, or a combination thereof, as determined by the Board. The Plan may
be administered by different administrative bodies with respect to different
classes of Optionees and, if permitted by the Applicable Laws, the Board may
authorize one or more officers to grant Options or Stock Purchase Rights under
the Plan.
-4-
<PAGE>
(b) Administration with Respect to Reporting Persons. With respect
-------------------------------------------------
to Options granted to Reporting Persons and Named Executives, the Plan may (but
need not) be administered so as to permit such Options to qualify for the
exemption set forth in Rule 16b-3 and to qualify as performance-based
compensation under Section 162(m) of the Code.
(c) Committee Composition. If a Committee has been appointed
----------------------
pursuant to this Section 4, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to time the
Board may increase the size of any Committee and appoint additional members
thereof, remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies (however caused) and remove all members of
a Committee and thereafter directly administer the Plan, all to the extent
permitted by the Applicable Laws and, in the case of a Committee administering
the Plan pursuant to Section 4(b) above, to the extent permitted or required by
Rule 16b-3 and Section 162(m) of the Code.
(d) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any Stock Exchange, the Administrator
shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(o) of the Plan;
(ii) to select the Consultants and Employees to whom Options
and Stock Purchase Rights or any combination thereof may from time to time be
granted;
(iii) to determine whether and to what extent Options and Stock
Purchase Rights or any combination thereof are granted;
(iv) to determine the number of Shares of Common Stock to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder, which terms and
conditions include but are not limited to the exercise or purchase price, the
time or times when Options or Stock Purchase Rights may be exercised (which may
be based on performance criteria), any vesting acceleration or waiver of
forfeiture restrictions, and any restriction or limitation regarding any Option,
Optioned Stock, Stock Purchase Right or Restricted Stock, based in each case on
such factors as the Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an
Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have
-5-
<PAGE>
declined since the date the Option was granted and to make any other amendments
or adjustments to any Option that the Administrator determines, in its
discretion and under the authority granted to it under the Plan, to be necessary
or advisable, provided however that no amendment or adjustment to an Option that
would materially and adversely affect the rights of any Optionee shall be made
without the prior written consent of the Optionee;
(ix) to determine the terms and restrictions applicable to
Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights;
(x) to initiate an Option Exchange Program;
(xi) to construe and interpret the terms of the Plan and awards
granted under the Plan; and
(xii) in order to fulfill the purposes of the Plan and without
amending the Plan, to modify grants of Options or Stock Purchase Rights to
Participants who are foreign nationals or employed outside of the United States
in order to recognize differences in local law, tax policies or customs.
(e) Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be final and
binding on all Participants.
5. Eligibility.
-----------
(a) Recipients of Grants. Nonstatutory Stock Options and Stock
--------------------
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees; provided however that Employees of
Affiliates shall not be eligible to receive Incentive Stock Options. An
Employee or Consultant who has been granted an Option or Stock Purchase Right
may, if he or she is otherwise eligible, be granted additional Options or Stock
Purchase Rights.
(b) Type of Option. Each Option shall be designated in the Option
--------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designations, to the extent that the aggregate
Fair Market Value of Shares with respect to which Options designated as
Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of grant of such Option.
(c) At-Will Relationship. The Plan shall not confer upon any
--------------------
Participant any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with such
holder's right or the Company's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
-6-
<PAGE>
6. Term of Plan. The Plan shall become effective upon its adoption by
------------
the Board. It shall continue in effect for a term of ten years unless sooner
terminated under Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
--------------
the Option Agreement; provided, however, that the term shall be no more than ten
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement. However, in the case of an Incentive Stock Option granted
to an Optionee who, at the time the Option is granted, is a Ten Percent Holder,
the term of such Option shall be five years from the date of grant thereof or
such shorter term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per Share exercise price for the Shares to be issued pursuant
to exercise of an Option shall be such price as is determined by the
Administrator and set forth in the Option Agreement, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who at the time of grant is a
Ten Percent Holder, the per Share exercise price shall be no less than 110% of
the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to a person who at the time of grant is a Ten
Percent Holder, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of the grant if required by the
Applicable Laws and, if not so required, shall be such price as is determined by
the Administrator.
(B) granted to a person who, at the time of the grant of
such Option, is a Named Executive, the per share Exercise Price shall be no less
than 100% of the Fair Market Value on the date of grant if such Option is
intended to qualify as performance-based compensation under Section 162(m) of
the Code.
(C) granted prior to the date, if any, on which the Common
Stock becomes a Listed Security to any other eligible person, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant if required by the Applicable Laws and, if not so required,
shall be such price as is determined by the Administrator.
-7-
<PAGE>
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash; (2)
check; (3) delivery of Optionee's promissory note with such recourse, interest,
security and redemption provisions as the Administrator determines to be
appropriate; (4) cancellation of indebtedness; (5) other Shares that (x) in the
case of Shares acquired upon exercise of an Option, either have been owned by
the Optionee for more than six months on the date of surrender or such other
period as may be required to avoid a charge to the Company's earnings or were
not acquired, directly or indirectly, from the Company, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which such Option shall be exercised; (6) authorization for the
Company to retain from the total number of Shares as to which the Option is
exercised that number of Shares having a Fair Market Value on the date of
exercise equal to the exercise price for the total number of Shares as to which
the Option is exercised; (7) delivery of a properly executed exercise notice
together with such other documentation as the Administrator and the broker, if
applicable, shall require to effect exercise of the Option and prompt delivery
to the Company of the sale or loan proceeds required to pay the exercise price
and any applicable withholding taxes; (8) any combination of the foregoing
methods of payment; or (9) such other consideration and method of payment for
the issuance of Shares to the extent permitted under the Applicable Laws. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company, and the Administrator may refuse to
accept a particular form of consideration at the time of any Option exercise if,
in its sole discretion, acceptance of such form of consideration is not in the
best interests of the Company at such time.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, consistent with the term of the Plan and
reflected in the Option Agreement, including vesting requirements and/or
performance criteria with respect to the Company and/or the Optionee; provided
however, that, if required by the Applicable Laws, any Option granted prior to
the date, if any, upon which the Common Stock becomes a Listed Security shall
become exercisable at the rate of at least 20% per year over five years from the
date the Option is granted. In the event that any of the Shares issued upon
exercise of an Option (which exercise occurs prior to the date, if any, upon
which the Common Stock becomes a Listed Security) should be subject to a right
of repurchase in the Company's favor, such repurchase right shall, if required
by the Applicable Laws, lapse at the rate of at least 20% per year over five
years from the date the Option is granted. Notwithstanding the above, in the
case of an Option granted to an officer, Director or Consultant of the Company
or any Parent, Subsidiary or Affiliate of the Company, the Option may become
fully exercisable, or a repurchase right, if any, in favor of the Company
-8-
<PAGE>
shall lapse, at any time or during any period established by the Administrator.
The Administrator shall have the discretion to determine whether and to what
extent the vesting of Options shall be tolled during any leave of absence.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when written notice of such exercise
has been given to the Company in accordance with the terms of the Option by the
person entitled to exercise the Option and the Company has received full payment
for the Shares with respect to which the Option is exercised. Full payment may,
as authorized by the Administrator, consist of any consideration and method of
payment allowable under Section 8(b) of the Plan. Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, not withstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
stock certificate promptly upon exercise of the Option. No adjustment will be
made for a dividend or other right for which the record date is prior to the
date the stock certificate is issued, except as provided in Section 12 of the
Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares that thereafter may be available, both for purposes of the Plan
and for sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Employment or Consulting Relationship. In the
----------------------------------------------------
event of termination of an Optionee's Continuous Service Status with the
Company, such Optionee may, but only within three months (or such other period
of time, not less than 30 days, as is determined by the Administrator, with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option) after the date of such termination (but in no event later
than the expiration date of the term of such Option as set forth in the Option
Agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise the Option to the extent so
entitled within the time specified above, the Option shall terminate and the
Optioned Stock underlying the unexercised portion of the Option shall revert to
the Plan. Unless otherwise determined by the Administrator, no termination
shall be deemed to occur and this Section 9(b) shall not apply if (i) the
Optionee is a Consultant who becomes an Employee, or (ii) the Optionee is an
Employee who becomes a Consultant.
(c) Disability of Optionee.
----------------------
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Service Status as a result of his or her
total and permanent disability (within the meaning of Section 22(e)(3) of the
Code), such Optionee may, but only within twelve months (or such other period of
time as is determined by the Administrator, with such determination in the case
of an Incentive Stock Option made at the time of grant of the Option) from the
date of such termination (but in no event later than the expiration date of the
term of
-9-
<PAGE>
such Option as set forth in the Option Agreement), exercise the Option
to the extent otherwise entitled to exercise it at the date of such termination.
To the extent that the Optionee was not entitled to exercise the Option at the
date of termination, or if the Optionee does not exercise such Option to the
extent so entitled within the time specified above, the Option shall terminate
and the Optioned Stock underlying the unexercised portion of the Option shall
revert to the Plan.
(ii) In the event of termination of an Optionee's Continuous
Service Status as a result of a disability which does not fall within the
meaning of total and permanent disability (as set forth in Section 22(e)(3) of
the Code), such Optionee may, but only within six months (or such other period
of time as is determined by the Administrator, with such determination in the
case of an Incentive Stock Option made at the time of grant of the Option) from
the date of such termination (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option that is an Incentive Stock Option (within the meaning of Section 422 of
the Code) within three months of the date of such termination, the Option will
not qualify for Incentive Stock Option treatment under the Code. To the extent
that the Optionee was not entitled to exercise the Option at the date of
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time period specified above, the Option shall terminate and
the Optioned Stock underlying the unexercised portion of the Option shall revert
to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee
-----------------
during the period of Continuous Service Status since the date of grant of the
Option, or within 30 days following termination of the Optionee's Continuous
Service Status, the Option may be exercised, at any time within twelve months
following the date of death (but in no event later than the expiration date of
the term of such Option as set forth in the Option Agreement), by such
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of death or, if earlier, the date of termination of the
Optionee's Continuous Service Status. To the extent that the Optionee was not
entitled to exercise the Option at the date of death or termination, as the case
may be, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified above, the Option shall terminate and the
Optioned Stock underlying the unexercised portion of the Option shall revert to
the Plan.
(e) Extension of Exercise Period. The Administrator shall have full
----------------------------
power and authority to extend the period of time for which an Option is to
remain exercisable following termination of an Optionee's Continuous Status as
an Employee or Consultant from the periods set forth in Sections 9(b), 9(c) and
9(d) above or in the Option Agreement to such greater time as the Board shall
deem appropriate, provided, that in no event shall such Option be exercisable
later than the date of expiration of the term of such Option as set forth in the
Option Agreement.
(f) Buy-Out Provisions. The Administrator may at any time offer to
-------------------
buy out for a payment in cash or Shares an Option previously granted under the
Plan based on such terms
-10-
<PAGE>
and conditions as the Administrator shall establish and communicate to the
Optionee at the time such offer is made.
10. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing of the terms, conditions and restrictions related to the
offer, including the number of Shares that such person shall be entitled to
purchase, the price to be paid, and the time within which such person must
accept such offer, which shall in no event exceed 30 days from the date upon
which the Administrator made the determination to grant the Stock Purchase
Right. If required by the Applicable Laws, the purchase price of Shares subject
to Stock Purchase Rights shall not be less than 85% of the Fair Market Value of
the Shares as of the date of the offer, or, in the case of a person owning stock
representing more than 10% of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary, the price shall not be less
than 100% of the Fair Market Value of the Shares as of the date of the offer.
If the Applicable Laws do not impose restrictions on the purchase price, the
purchase price of Shares subject to Stock Purchase Rights shall be as determined
by the Administrator. The offer to purchase Shares subject to Stock Purchase
Rights shall be accepted by execution of a Restricted Stock Purchase Agreement
in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine; provided, however, that with respect to a purchaser
who is not an officer, Director or Consultant of the Company or of any Parent or
Subsidiary of the Company, it shall lapse at a minimum rate of 20% per year if
required by the Applicable Laws.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock Purchase Agreements need not be the
same with respect to each purchaser.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 12
of the Plan.
-11-
<PAGE>
11. Taxes.
-----
(a) As a condition of the exercise of an Option or Stock Purchase
Right granted under the Plan, the Participant (or in the case of the
Participant's death, the person exercising the Option) shall make such
arrangements as the Administrator may require for the satisfaction of any
applicable federal, state, local or foreign withholding tax obligations that may
arise in connection with the exercise of an Option or Stock Purchase Right and
the issuance of Shares. The Company shall not be required to issue any Shares
under the Plan until such obligations are satisfied.
(b) In the case of an Employee and in the absence of any other
arrangement, the Employee shall be deemed to have directed the Company to
withhold or collect from his or her compensation an amount sufficient to satisfy
such tax obligations from the next payroll payment otherwise payable after the
date of an exercise of the Option.
(c) This Section 11(c) shall apply only after the date, if any, upon
which the Common Stock becomes a Listed Security. In the case of a Participant
other than an Employee (or in the case of an Employee where the next payroll
payment is not sufficient to satisfy such tax obligations, with respect to any
remaining tax obligations), in the absence of any other arrangement and to the
extent permitted under the Applicable Laws, the Participant shall be deemed to
have elected to have the Company withhold from the Shares to be issued upon
exercise of the Option or Stock Purchase Right that number of Shares having a
Fair Market Value determined as of the applicable Tax Date (as defined below)
equal to the amount required to be withheld. For purposes of this Section 11,
the Fair Market Value of the Shares to be withheld shall be determined on the
date that the amount of tax to be withheld is to be determined under the
Applicable Laws (the "Tax Date").
--------
(d) If permitted by the Administrator, in its discretion, a
Participant may satisfy his or her tax withholding obligations upon exercise of
an Option or Stock Purchase Right by surrendering to the Company Shares that (i)
in the case of Shares previously acquired from the Company, have been owned by
the Participant for more than six months on the date of surrender, and (ii) have
a Fair Market Value determined as of the applicable Tax Date equal to the amount
required to be withheld.
(e) Any election or deemed election by a Participant to have Shares
withheld to satisfy tax withholding obligations under Section 11(c) or (d) above
shall be irrevocable as to the particular Shares as to which the election is
made and shall be subject to the consent or disapproval of the Administrator.
Any election by a Participant under Section 11(d) above must be made on or prior
to the applicable Tax Date.
(f) In the event an election to have Shares withheld is made by a
Participant and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Participant shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Participant shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
-12-
<PAGE>
12. Non-Transferability of Options and Stock Purchase Rights. Options and
--------------------------------------------------------
Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution; provided however that, after the date, if any, upon
which the Common Stock becomes a Listed Security, the Administrator may in its
discretion grant transferable Nonstatutory Stock Options pursuant to Option
Agreements specifying (i) the manner in which such Nonstatutory Stock Options
are transferable and (ii) that any such transfer shall be subject to the
Applicable Laws. The designation of a beneficiary by an Optionee will not
constitute a transfer. An Option or Stock Purchase Right may be exercised,
during the lifetime of the holder of the Option or Stock Purchase Right, only by
such holder or a transferee permitted by this Section 12.
13. Adjustments Upon Changes in Capitalization, Corporate Transactions and
----------------------------------------------------------------------
Certain Other Transactions.
- --------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per Share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued Shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock (including
any change in the number of Shares of Common Stock effected in connection with a
change of domicile of the Company), or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the
Administrator, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares of Common Stock subject to an Option
or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the dissolution or
--------------------------
liquidation of the Company, each outstanding Option or Stock Purchase Right
shall terminate immediately prior to the consummation of such action, unless
otherwise provided by the Administrator.
(c) Corporate Transactions. In the event of a Corporate Transaction,
----------------------
each outstanding Option and Stock Purchase Right shall be assumed or an
equivalent option or right shall be substituted by the successor corporation or
a Parent or Subsidiary of such successor corporation, unless such successor
corporation does not agree to assume the outstanding Options or Stock Purchase
Rights or to substitute equivalent options or rights, in which case such Options
or Stock Purchase Rights shall terminate upon the consummation of the
transaction.
-13-
<PAGE>
For purposes of this Section 13(c), an Option or a Stock Purchase
Right shall be considered assumed, without limitation, if, at the time of
issuance of the stock or other consideration upon a Corporate Transaction, each
holder of an Option or Stock Purchase Right would be entitled to receive upon
exercise of the Option or Stock Purchase Right the same number and kind of
shares of stock or the same amount of property, cash or securities as such
holder would have been entitled to receive upon the occurrence of the
transaction if the holder had been, immediately prior to such transaction, the
holder of the number of Shares of Common Stock covered by the Option or the
Stock Purchase Right at such time (after giving effect to any adjustments in the
number of Shares covered by the Option or Stock Purchase Right as provided for
in this Section 13); provided however that if such consideration received in the
transaction is not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the Option or
Stock Purchase Right to be solely common stock of the successor corporation or
its Parent equal to the Fair Market Value of the per Share consideration
received by holders of Common Stock in the transaction.
(d) Certain Distributions. In the event of any distribution to the
---------------------
Company's shareholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator;
provided, however, that in the case of any Incentive Stock Option, the grant
date shall be the later of the date on which the Administrator makes the
determination granting such Incentive Stock Option or the date of commencement
of the Optionee's employment relationship with the Company. Notice of the
determination shall be given to each Employee or Consultant to whom an Option or
Stock Purchase Right is so granted within a reasonable time after the date of
such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Authority to Amend or Terminate. The Board may at any time amend,
-------------------------------
alter, suspend, discontinue or terminate the Plan, but no amendment, alteration,
suspension, discontinuation or termination (other than an adjustment made
pursuant to Section 13 above) shall be made that would materially and adversely
affect the rights of any Optionee or holder of Stock Purchase Rights under any
outstanding grant, without his or her consent. In addition, to the extent
necessary and desirable to comply with the Applicable Laws, the Company shall
obtain shareholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) Effect of Amendment or Termination. No amendment or termination
----------------------------------
of the Plan shall materially and adversely affect Options already granted,
unless mutually agreed
-14-
<PAGE>
otherwise between the Optionee and the Administrator, which agreement must be in
writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for,
failure to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the Applicable Laws, with such compliance determined
by the Company in consultation with its legal counsel.
As a condition to the exercise of an Option or Stock Purchase Right, the
Company may require the person exercising such Option or Stock Purchase Right to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
----------
Option Agreements and Restricted Stock Purchase Agreements, respectively, in
such form(s) as the Administrator shall from time to time approve.
19. Shareholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the shareholders of the Company
within twelve months before or after the date the Plan is adopted. Such
shareholder approval shall be obtained in the degree and manner required under
the Applicable Laws.
20. Information and Documents to Optionees and Purchasers. Prior to the
-----------------------------------------------------
date, if any, upon which the Common Stock becomes a Listed Security and if
required by the Applicable Laws, the Company shall provide financial statements
at least annually to each Optionee and to each individual who acquired Shares
pursuant to the Plan, during the period such Optionee or purchaser has one or
more Options or Stock Purchase Rights outstanding, and in the case of an
individual who acquired Shares pursuant to the Plan, during the period such
individual owns such Shares. The Company shall not be required to provide such
information if the issuance of Options or Stock Purchase Rights under the Plan
is limited to key employees whose duties in connection with the Company assure
their access to equivalent information. In addition, at the time of issuance of
any securities under the Plan, the Company shall provide to the Optionee or the
purchaser a copy of the Plan and any agreement(s) pursuant to which securities
granted under the Plan are issued.
-15-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
---------------------------------
The following constitute the provisions of the 2000 Employee Stock Purchase
Plan of CrossWorlds Software, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company. It is the intention of the Company to have the Plan
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The
provisions of the Plan shall, accordingly, be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the Common Stock of the Company.
------------
(d) "Company" means CrossWorlds Software, Inc., a Delaware
-------
corporation.
(e) "Compensation" means all regular straight time gross earnings,
------------
commissions and bonuses and shall not include payments for overtime, shift
premium, other incentive payments or other compensation.
(f) "Continuous Status as an Employee" means the absence of any
--------------------------------
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of (i) sick leave; (ii)
military leave; (iii) any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company and its Designated Subsidiaries.
(g) "Contributions" means all amounts credited to the account of a
-------------
participant pursuant to the Plan.
(h) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or a merger, consolidation or other capital reorganization
of the Company with or into another corporation, or any other transaction or
series of related transactions in which the Company's stockholders immediately
prior thereto own less than 50% of the voting stock of the Company (or its
successor or parent) immediately thereafter.
<PAGE>
(i) "Designated Subsidiaries" means the Subsidiaries which have been
-----------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan; provided however that the Board shall only have the
discretion to designate Subsidiaries if the issuance of options to such
Subsidiary's Employees pursuant to the Plan would not cause the Company to incur
adverse accounting charges.
(j) "Employee" means any person, including an Officer, who is an
--------
employee for tax purposes and who is customarily employed for at least twenty
(20) hours per week and more than five (5) months in a calendar year by the
Company or one of its Designated Subsidiaries.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "IPO Date" means the effective date of the Registration Statement
--------
on Form S-1 for the initial public offering of the Company's Common Stock.
(m) "Offering Date" means the first business day of each Offering
-------------
Period of the Plan.
(n) "Offering Period" means a period of twenty-four (24) months
---------------
commencing on May 1 and November 1 of each year, except for the first Offering
Period as set forth in Section 4(a).
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Plan" means this Employee Stock Purchase Plan.
----
(q) "Purchase Date" means the last day of each Purchase Period of the
-------------
Plan.
(r) "Purchase Period" means a period of six (6) months within an
---------------
Offering Period, except for the Purchase Periods in the first Offering Period as
set forth in Section 4(b).
(s) "Purchase Price" means with respect to a Purchase Period an amount
--------------
equal to 85% of the Fair Market Value (as defined in Section 7(b) below) of a
Share of Common Stock on the Offering Date or on the Purchase Date, whichever is
lower; provided, however, that in the event (i) of any increase in the number of
Shares available for issuance under the Plan as a result of a stockholder-
approved amendment to the Plan, and (ii) all or a portion of such additional
Shares are to be issued with respect to one or more Offering Periods that are
underway at the time of such increase ("Additional Shares"), and (iii) the Fair
-----------------
Market Value of a Share of Common Stock on the date of such increase (the
"Approval Date Fair Market Value") is higher than the Fair Market Value on the
- --------------------------------
Offering Date for any such Offering Period, then in such instance the Purchase
Price with respect to Additional Shares shall be 85% of the Approval Date Fair
Market Value or the Fair Market Value of a Share of Common Stock on the Purchase
Date, whichever is lower.
-2-
<PAGE>
(t) "Share" means a share of Common Stock, as adjusted in accordance
-----
with Section 19 of the Plan.
(u) "Subsidiary" means a corporation, domestic or foreign, of which
----------
not less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or acquired
by the Company or a Subsidiary.
3. Eligibility.
-----------
(a) Any person who is an Employee as of the Offering Date of a given
Offering Period shall be eligible to participate in such Offering Period under
the Plan, subject to the requirements of Section 5(a) and the limitations
imposed by Section 423(b) of the Code; provided however that eligible Employees
may not participate in more than one Offering Period at a time.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase stock possessing five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or of any subsidiary of the Company, or (ii) if such
option would permit his or her rights to purchase stock under all employee stock
purchase plans (described in Section 423 of the Code) of the Company and its
Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars
($25,000) of the Fair Market Value (as defined in Section 7(b) below) of such
stock (determined at the time such option is granted) for each calendar year in
which such option is outstanding at any time.
4. Offering Periods and Purchase Periods.
-------------------------------------
(a) Offering Periods. The Plan shall generally be implemented by a
----------------
series of Offering Periods of twenty-four (24) months' duration, with new
Offering Periods (other than the first Offering Period) commencing on or about
May 1 and November 1 of each year (or at such other time or times as may be
determined by the Board of Directors). The first Offering Period shall commence
on the IPO Date and continue until April 30, 2002. The Plan shall continue
until terminated in accordance with Section 19 hereof. The Board of Directors
of the Company shall have the power to change the duration and/or the frequency
of Offering Periods with respect to future offerings without stockholder
approval if such change is announced at least five (5) days prior to the
scheduled beginning of the first Offering Period to be affected.
(b) Purchase Periods. Each Offering Period shall generally consist of
----------------
four (4) consecutive purchase periods of six (6) months' duration. The last day
of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A
-------------
Purchase Period commencing on May 1 shall end on the next October 31. A Purchase
Period commencing on November 1 shall end on the next April 30. The first
Purchase Period of the first Offering Period shall commence on the IPO Date and
shall end on October 31, 2000. The Board of Directors of the Company shall have
the power to change the duration and/or frequency of Purchase Periods with
respect to
-3-
<PAGE>
future purchases without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Purchase
Period to be affected.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement on the form provided by the Company and
filing it with the Company's payroll office or the stock brokerage or other
financial services firm designated by the Company (the "Designated Broker")
prior to the applicable Offering Date, unless a later time for filing the
subscription agreement is set by the Board for all eligible Employees with
respect to a given Offering Period. The subscription agreement shall set forth
the percentage of the participant's Compensation (subject to Section 6(a) below)
to be paid as Contributions pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
Purchase Period of the Offering Period to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in Section
10.
6. Method of Payment of Contributions.
----------------------------------
(a) A participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not less than one percent (1%)
and not more than fifteen percent (15%) (or such other percentage as the Board
may establish from time to time before an Offering Date) of such participant's
Compensation on each payday during the Offering Period. All payroll deductions
made by a participant shall be credited to his or her account under the Plan. A
participant may not make any additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan
as provided in Section 10, or, may increase or decrease the rate of his or her
Contributions by completing and filing with the Company or its Designated Broker
a new subscription agreement authorizing a change in the payroll deduction rate.
The Board may, in its discretion, limit the number of rate changes during any
Offering Period. The change in rate shall be effective with the first full
payroll following five (5) business days after the Company's receipt of the new
subscription agreement, unless the Company elects to process a given rate change
more quickly. A participant's subscription agreement shall remain in effect for
successive Offering Periods unless terminated as provided in Section 10.
(c) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's
payroll deductions may be decreased by the Company to 0% at any time during a
Purchase Period. Payroll deductions shall re-commence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10. In addition, a
participant's payroll deductions may be decreased by the Company to 0% at any
time during a Purchase Period in order to avoid unnecessary payroll
contributions as a result of application of the maximum share limit set forth in
Section 7(a), in which case payroll deductions shall re-commence at the rate
-4-
<PAGE>
provided in such participant's subscription agreement at the beginning of the
next Purchase Period, unless terminated by the participant as provided in
Section 10.
7. Grant of Option.
---------------
(a) On the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted an option to
purchase on each Purchase Date a number of Shares of the Company's Common Stock
determined by dividing such Employee's Contributions accumulated prior to such
Purchase Date and retained in the participant's account as of the Purchase Date
by the applicable Purchase Price; provided however that the maximum number of
Shares an Employee may purchase during each Purchase Period shall be 1,500
Shares (subject to any adjustment pursuant to Section 19 below), and provided
further that such purchase shall be subject to the limitations set forth in
Sections 3(b) and 13.
(b) The fair market value of the Company's Common Stock on a given
date (the "Fair Market Value") shall be determined by the Board in its
-----------------
discretion based on the closing sales price of the Common Stock for such date
(or, in the event that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported by the National Association of
Securities Dealers Automated Quotation (Nasdaq) National Market or, if such
price is not reported, the mean of the bid and asked prices per share of the
Common Stock as reported by Nasdaq or, in the event the Common Stock is listed
on a stock exchange, the Fair Market Value per share shall be the closing sales
price on such exchange on such date (or, in the event that the Common Stock is
not traded on such date, on the immediately preceding trading date), as reported
in The Wall Street Journal. For purposes of the Offering Date under the first
-----------------------
Offering Period under the Plan, the Fair Market Value of a share of the Common
Stock of the Company shall be the Price to Public as set forth in the final
prospectus filed with the Securities and Exchange Commission pursuant to Rule
424 under the Securities Act of 1933, as amended.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10, his or her option for the purchase of Shares will be
exercised automatically on each Purchase Date of an Offering Period, and the
maximum number of full Shares subject to the option will be purchased at the
applicable Purchase Price with the accumulated Contributions in his or her
account. No fractional Shares shall be issued; any payroll deductions
accumulated in a participant's account that are not sufficient to purchase a
full Share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 below. Any other amounts left over in a
participant's account after a Purchase Date shall be returned to the
participant. The Shares purchased upon exercise of an option hereunder shall be
deemed to be transferred to the participant on the Purchase Date. During his or
her lifetime, a participant's option to purchase Shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Purchase Date of each
--------
Offering Period, the number of Shares purchased by each participant upon
exercise of his or her option shall be deposited into an account established in
the participant's name with the Designated Broker.
-5-
<PAGE>
10. Voluntary Withdrawal; Termination of Employment.
-----------------------------------------------
(a) A participant may withdraw all but not less than all the
Contributions credited to his or her account under the Plan at any time prior to
each Purchase Date by giving written notice to the Company or the Designated
Broker, as directed by the Company. All of the participant's Contributions
credited to his or her account will be paid to him or her promptly after receipt
of his or her notice of withdrawal and his or her option for the current period
will be automatically terminated, and no further Contributions for the purchase
of Shares will be made during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an
Employee prior to the Purchase Date of an Offering Period for any reason,
including retirement or death, the Contributions credited to his or her account
will be returned to him or her or, in the case of his or her death, to the
person or persons entitled thereto under Section 14, and his or her option will
be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as
an Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be deemed
to have elected to withdraw from the Plan and the Contributions credited to his
or her account will be returned to him or her and his or her option terminated.
(d) A participant's withdrawal from an offering will not have any
effect upon his or her eligibility to participate in a succeeding offering or in
any similar plan which may hereafter be adopted by the Company.
11. Automatic Withdrawal. If the Fair Market Value of the Shares on any
--------------------
Purchase Date of an Offering Period is less than the Fair Market Value of the
Shares on the Offering Date for such Offering Period, then every participant
shall automatically (i) be withdrawn from such Offering Period at the close of
such Purchase Date and after the acquisition of Shares for such Purchase Period,
and (ii) be enrolled in the Offering Period commencing on the first business day
subsequent to such Purchase Period. Participants shall automatically be
withdrawn as of April 30, 2000 from the Offering Period beginning on the IPO
Date and re-enrolled in the Offering Period beginning on May 1, 2000 if the Fair
Market Value of the Shares on the IPO Date is greater than the Fair Market Value
of the Shares on April 30, 2000, unless a participant notifies the Administrator
prior to April 30, 2000 that he or she does not wish to be withdrawn and re-
enrolled.
12. Interest. No interest shall accrue on the Contributions of a
--------
participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment as provided in Section 19, the maximum
number of Shares which shall be made available for sale under the Plan shall be
750,000 Shares, plus an automatic annual increase on the first day of each
fiscal year of the Company beginning in 2001
-6-
<PAGE>
and ending in 2005, in an amount equal to the lesser of (i) 500,000 Shares, (ii)
two percent (2%) of the Shares outstanding on the last day of the immediately
preceding fiscal year, or (iii) such lesser number of Shares as determined by
the Board. If the Board determines that, on a given Purchase Date, the number
of shares with respect to which options are to be exercised may exceed (i) the
number of shares of Common Stock that were available for sale under the Plan on
the Offering Date of the applicable Offering Period, or (ii) the number of
shares available for sale under the Plan on such Purchase Date, the Board may in
its sole discretion provide (x) that the Company shall make a pro rata
allocation of the Shares of Common Stock available for purchase on such Offering
Date or Purchase Date, as applicable, in as uniform a manner as shall be
practicable and as it shall determine in its sole discretion to be equitable
among all participants exercising options to purchase Common Stock on such
Purchase Date, and continue all Offering Periods then in effect, or (y) that the
Company shall make a pro rata allocation of the shares available for purchase on
such Offering Date or Purchase Date, as applicable, in as uniform a manner as
shall be practicable and as it shall determine in its sole discretion to be
equitable among all participants exercising options to purchase Common Stock on
such Purchase Date, and terminate any or all Offering Periods then in effect
pursuant to Section 20 below. The Company may make pro rata allocation of the
Shares available on the Offering Date of any applicable Offering Period pursuant
to the preceding sentence, notwithstanding any authorization of additional
Shares for issuance under the Plan by the Company's stockholders subsequent to
such Offering Date.
(b) The participant shall have no interest or voting right in Shares
covered by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Board, or a committee named by the Board, shall
--------------
supervise and administer the Plan and shall have full power to adopt, amend and
rescind any rules deemed desirable and appropriate for the administration of the
Plan and not inconsistent with the Plan, to construe and interpret the Plan, and
to make all other determinations necessary or advisable for the administration
of the Plan.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any Shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of a
Purchase Period but prior to delivery to him or her of such Shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death prior to the Purchase Date of an Offering Period.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
(and his or her spouse, if any) at any time by written notice. In the event of
the death of a participant
-7-
<PAGE>
and in the absence of a beneficiary validly designated under the Plan who is
living at the time of such participant's death, the Company shall deliver such
Shares and/or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been appointed (to the
knowledge of the Company), the Company, in its discretion, may deliver such
Shares and/or cash to the spouse or to any one or more dependents or relatives
of the participant, or if no spouse, dependent or relative is known to the
Company, then to such other person as the Company may designate.
16. Transferability. Neither Contributions credited to a participant's
---------------
account nor any rights with regard to the exercise of an option or to receive
Shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in Section 15) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds in accordance with Section 10.
17. Use of Funds. All Contributions received or held by the Company under
------------
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
18. Reports. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of Contributions,
the per Share Purchase Price, the number of Shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of Shares covered by each option under the Plan which
has not yet been exercised and the number of Shares which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the maximum number of shares of
--------
Common Stock which may be purchased by a participant in a Purchase Period, the
number of shares of Common Stock set forth in Section 13(a)(i) above, and the
price per Share of Common Stock covered by each option under the Plan which has
not yet been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Common Stock
(including any such change in the number of Shares of Common Stock effected in
connection with a change in domicile of the Company), or any other increase or
decrease in the number of Shares effected without receipt of consideration by
the Company; provided however that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issue by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an option.
-8-
<PAGE>
(b) Change of Control. In the event of a dissolution or liquidation
-----------------
of the Company, any Purchase Period and Offering Period then in progress will
terminate immediately prior to the consummation of such action, unless otherwise
provided by the Board. In the event of a Change of Control, each option
outstanding under the Plan shall be assumed or an equivalent option shall be
substituted by the successor corporation or a parent or Subsidiary of such
successor corporation. In the event that the successor corporation refuses to
assume or substitute for outstanding options, each Purchase Period and Offering
Period then in progress shall be shortened and a new Purchase Date shall be set
(the "New Purchase Date"), as of which date any Purchase Period and Offering
-----------------
Period then in progress will terminate. The New Purchase Date shall be on or
before the date of consummation of the transaction and the Board shall notify
each participant in writing, at least ten (10) days prior to the New Purchase
Date, that the Purchase Date for his or her option has been changed to the New
Purchase Date and that his or her option will be exercised automatically on the
New Purchase Date, unless prior to such date he or she has withdrawn from the
Offering Period as provided in Section 10. For purposes of this Section 19, an
option granted under the Plan shall be deemed to be assumed, without limitation,
if, at the time of issuance of the stock or other consideration upon a Corporate
Transaction, each holder of an option under the Plan would be entitled to
receive upon exercise of the option the same number and kind of shares of stock
or the same amount of property, cash or securities as such holder would have
been entitled to receive upon the occurrence of the transaction if the holder
had been, immediately prior to the transaction, the holder of the number of
Shares of Common Stock covered by the option at such time (after giving effect
to any adjustments in the number of Shares covered by the option as provided for
in this Section 19); provided however that if the consideration received in the
transaction is not solely common stock of the successor corporation or its
parent (as defined in Section 424(e) of the Code), the Board may, with the
consent of the successor corporation, provide for the consideration to be
received upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in Fair Market Value to the per Share
consideration received by holders of Common Stock in the transaction.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per Share
of Common Stock covered by each outstanding option, in the event that the
Company effects one or more reorganizations, recapitalizations, rights offerings
or other increases or reductions of Shares of its outstanding Common Stock, and
in the event of the Company's being consolidated with or merged into any other
corporation.
20. Amendment or Termination.
------------------------
(a) The Board may at any time and for any reason terminate or amend
the Plan. Except as provided in Section 19, no such termination of the Plan may
affect options previously granted, provided that the Plan or an Offering Period
may be terminated by the Board on a Purchase Date or by the Board's setting a
new Purchase Date with respect to an Offering Period and Purchase Period then in
progress if the Board determines that termination of the Plan and/or the
Offering Period is in the best interests of the Company and the stockholders or
if continuation of the Plan and/or the Offering Period would cause the Company
to incur adverse accounting charges as a result of a change after the effective
date of the Plan in the generally
-9-
<PAGE>
accepted accounting rules applicable to the Plan. Except as provided in Section
19 and in this Section 20, no amendment to the Plan shall make any change in any
option previously granted which adversely affects the rights of any participant.
In addition, to the extent necessary to comply with Rule 16b-3 under the
Exchange Act, or under Section 423 of the Code (or any successor rule or
provision or any applicable law or regulation), the Company shall obtain
stockholder approval in such a manner and to such a degree as so required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been adversely affected, the Board
(or its committee) shall be entitled to change the Offering Periods and Purchase
Periods, limit the frequency and/or number of changes in the amount withheld
during an Offering Period, establish the exchange ratio applicable to amounts
withheld in a currency other than U.S. dollars, permit payroll withholding in
excess of the amount designated by a participant in order to adjust for delays
or mistakes in the Company's processing of properly completed withholding
elections, establish reasonable waiting and adjustment periods and/or accounting
and crediting procedures to ensure that amounts applied toward the purchase of
Common Stock for each participant properly correspond with amounts withheld from
the participant's Compensation, and establish such other limitations or
procedures as the Board (or its committee) determines in its sole discretion
advisable which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such Shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, applicable state securities laws and the requirements of
any stock exchange upon which the Shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan; Effective Date. The Plan shall become effective upon
----------------------------
the IPO Date. It shall continue in effect for a term of ten (10) years unless
sooner terminated under Section 20.
24. Additional Restrictions of Rule 16b-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of Shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be
-10-
<PAGE>
deemed to contain, and such options shall contain, and the Shares issued upon
exercise thereof shall be subject to, such additional conditions and
restrictions as may be required by Rule 16b-3 to qualify for the maximum
exemption from Section 16 of the Exchange Act with respect to Plan transactions.
-11-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
----------------------
New Election ______
Change of Election ______
1. I, ________________________, hereby elect to participate in the
CrossWorlds Software, Inc. 2000 Employee Stock Purchase Plan (the "Plan") for
----
the Offering Period ______________, ____ to _______________, ____, and subscribe
to purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of ____% of my
Compensation, as those terms are defined in the Plan, applied to this purchase.
I understand that this amount must not be less than 1% and not more than 15% of
my Compensation during the Offering Period. (Please note that no fractional
percentages are permitted).
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into such
account. I understand that all payments made by me shall be accumulated for the
purchase of shares of Common Stock at the applicable purchase price determined
in accordance with the Plan. I further understand that, except as otherwise set
forth in the Plan, shares will be purchased for me automatically on the Purchase
Date of each Offering Period unless I otherwise withdraw from the Plan by giving
written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Purchase
Date my participation in the Plan as provided in Section 10 of the Plan. I also
understand that I can increase or decrease the rate of my Contributions on one
occasion only with respect to each rate change during any Purchase Period by
completing and filing a new Subscription Agreement with such increase or
decrease taking effect as of the beginning of the calendar month following the
date of filing of the new Subscription Agreement, if filed at least ten (10)
business days prior to the beginning of such month. Further, I may change the
rate of deductions for future Offering Periods by filing a new Subscription
Agreement, and any such change will be effective as of the beginning of the next
Offering Period. In addition, I acknowledge that, unless I discontinue my
participation in the Plan as provided in Section 10 of the Plan, my election
will continue to be effective for each successive Offering Period.
<PAGE>
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "CrossWorlds Software, Inc. 2000 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. In connection with the initial public offering of the Company's
securities and upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, I agree not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company, however or whenever acquired, without the
prior written consent of the Company or such underwriters, as the case may be,
for such period of time (not to exceed 180 days) from the effective date of such
registration as may be requested by the Company or such managing underwriters
and to execute an agreement reflecting the foregoing as may be requested by the
underwriters at the time of the public offering; provided however, that I need
-------- -------
not so agree unless a majority of the Company's officers and directors and a
majority of the holders of at least 5% of the Company's outstanding securities
also agree to be similarly bound.
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print) _____________________________________
(First) (Middle) (Last)
_____________________ _____________________________________
(Relationship) (Address)
_____________________________________
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the Purchase
Date, I will be treated for federal income tax purposes as having received
ordinary compensation income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares on the Purchase Date over
the price which I paid for the shares, regardless of whether I disposed of the
shares at a price less than their fair market value at the Purchase Date. The
remainder of the gain or loss, if any, recognized on such disposition will be
treated as capital gain or loss.
I hereby agree to notify the Company in writing within 30 days after the
------------------------------------------------------------------------
date of any such disposition, and I will make adequate provision for federal,
- -----------------------------------------------------------------------------
state or other tax withholding obligations, if any, which arise upon the
- ------------------------------------------------------------------------
disposition of the Common Stock. The Company may, but will not be obligated to,
- -------------------------------
withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available to
the Company any tax deductions or benefits attributable to the sale or early
disposition of Common Stock by me.
-2-
<PAGE>
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares under the option, or (2) 15% of the fair market value of the shares
on the Offering Date. The remainder of the gain or loss, if any, recognized on
such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
----------------------------------------------------------------------
change. I further understand that I should consult a tax advisor concerning the
- ------
tax implications of the purchase and sale of stock under the Plan.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:________________________
SOCIAL SECURITY #:________________
DATE:_____________________________
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
__________________________________
(Signature)
__________________________________
(Print name)
-3-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
--------------------
I, __________________________, hereby elect to withdraw my participation in
the CrossWorlds Software, Inc. 2000 Employee Stock Purchase Plan (the "Plan")
----
for the Offering Period that began on _________ ___, _____. This withdrawal
covers all Contributions credited to my account and is effective on the date
designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to the
Company a new Subscription Agreement.
Dated:___________________ ____________________________________
Signature of Employee
____________________________________
Social Security Number
<PAGE>
CROSSWORLDS SOFTWARE, INC.
2000 DIRECTORS' STOCK OPTION PLAN
---------------------------------
1. Purposes of the Plan. The purposes of this Directors' Stock Option
--------------------
Plan are to attract and retain the best available personnel for service as
Directors of the Company, to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Board" means the Board of Directors of the Company.
-----
(b) "Change of Control" means a sale of all or substantially all of
-----------------
the Company's assets, or a merger, consolidation or other capital reorganization
of the Company with or into another corporation, or any other transaction or
series of related transactions in which the Company's stockholders immediately
prior thereto own less than 50% of the voting stock of the Company (or its
successor or parent) immediately thereafter.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Common Stock" means the Common Stock of the Company.
------------
(e) "Company" means CrossWorlds Software, Inc., a Delaware corporation.
-------
(f) "Continuous Status as a Director" means the absence of any
-------------------------------
interruption or termination of service as a Director.
(g) "Director" means a member of the Board.
--------
(h) "Employee" means any person, including any officer or Director,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(j) "Option" means a stock option granted pursuant to the Plan. All
------
options shall be nonstatutory stock options (i.e., options that are not intended
to qualify as incentive stock options under Section 422 of the Code).
(k) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(l) "Optionee" means an Outside Director who receives an Option.
--------
<PAGE>
(m) "Outside Director" means a Director who is not an Employee.
----------------
(n) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 2000 Directors' Stock Option Plan.
----
(p) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 11 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 300,000 Shares of Common Stock (the "Pool"). The Shares may
----
be authorized, but unissued, or reacquired Common Stock.
If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan has been terminated, become available for future grant
under the Plan. In addition, any Shares of Common Stock that are retained by
the Company upon exercise of an Option in order to satisfy the exercise price
for such Option, or any withholding taxes due with respect to such exercise,
shall be treated as not issued and shall continue to be available under the
Plan. If Shares that were acquired upon exercise of an Option are subsequently
repurchased by the Company, such Shares shall not in any event be returned to
the Plan and shall not become available for future grant under the Plan.
4. Administration of and Grants of Options under the Plan.
------------------------------------------------------
(a) Administrator. Except as otherwise required herein, the Plan
-------------
shall be administered by the Board.
(b) Procedure for Grants. All grants of Options hereunder shall be
--------------------
automatic and nondiscretionary and shall be made strictly in accordance with the
following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
(ii) Each Outside Director shall be automatically granted an
Option to purchase 25,000 Shares, (the "First Option") on the date on which
such person first becomes an Outside Director after the effective date of this
Plan, whether through election by the shareholders of the Company or appointment
by the Board of Directors to fill a vacancy.
-2-
<PAGE>
(iii) Each Outside Director, including an Outside Director who
did not receive a First Option grant, shall be automatically granted an Option
to purchase 5,000 Shares (the "Annual Option") on the date of each Annual
Meeting of the Company's shareholders immediately following which such Outside
Director is serving on the Board, provided that, on such date, he or she shall
have served on the Board for at least six (6) months prior to the date of such
Annual Meeting.
(iv) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, in the event that a grant would cause the number of Shares subject
to outstanding Options plus the number of Shares previously purchased upon
exercise of Options to exceed the Pool, then each such automatic grant shall be
for that number of Shares determined by dividing the total number of Shares
remaining available for grant by the number of Outside Directors receiving an
Option on the automatic grant date. Any further grants shall then be deferred
until such time, if any, as additional Shares become available for grant under
the Plan through action of the stockholders to increase the number of Shares
which may be issued under the Plan or through cancellation or expiration of
Options previously granted hereunder.
(v) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any grant of an Option made before the Company has obtained
stockholder approval of the Plan in accordance with Section 17 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 17 hereof.
(vi) The terms of each Option granted hereunder shall be as
follows:
(1) each Option shall be exercisable only while the
Outside Director remains a Director of the Company, except as set forth in
Section 9 below;
(2) the exercise price per Share shall be 100% of the
fair market value per Share on the date of grant of each Option, determined in
accordance with Section 8 hereof;
(3) each Option shall vest and become exercisable ratably
over a period of twelve (12) months following the date of grant.
(c) Powers of the Board. Subject to the provisions and restrictions
-------------------
of the Plan, the Board shall have the authority, in its discretion: (i) to
determine, upon review of relevant information and in accordance with Section
8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine
the exercise price per Share of Options to be granted, which exercise price
shall be determined in accordance with Section 8 of the Plan; (iii) to interpret
the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to
the Plan; (v) to authorize any person to execute on behalf of the Company any
instrument required to effectuate the grant of an Option previously granted
hereunder; and (vi) to make all other determinations deemed necessary or
advisable for the administration of the Plan.
-3-
<PAGE>
(d) Effect of Board's Decision. All decisions, determinations and
--------------------------
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan.
(e) Suspension or Termination of Option. If the Chief Executive
-----------------------------------
Officer or his or her designee reasonably believes that an Optionee has
committed an act of misconduct, such officer may suspend the Optionee's right to
exercise any option pending a determination by the Board (excluding the Outside
Director accused of such misconduct). If the Board (excluding the Outside
Director accused of such misconduct) determines an Optionee has committed an act
of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the
Company, breach of fiduciary duty or deliberate disregard of the Company rules
resulting in loss, damage or injury to the Company, or if an Optionee makes an
unauthorized disclosure of any Company trade secret or confidential information,
engages in any conduct constituting unfair competition, induces any Company
customer to breach a contract with the Company or induces any principal for whom
the Company acts as agent to terminate such agency relationship, neither the
Optionee nor his or her estate shall be entitled to exercise any Option
whatsoever. In making such determination, the Board of Directors (excluding the
Outside Director accused of such misconduct) shall act fairly and shall give the
Optionee an opportunity to appear and present evidence on Optionee's behalf at a
hearing before the Board or a committee of the Board.
5. Eligibility. Options may be granted only to Outside Directors. All
-----------
Options shall be automatically granted in accordance with the terms set forth in
Section 4(b) above. An Outside Director who has been granted an Option may, if
he or she is otherwise eligible, be granted an additional Option or Options in
accordance with such provisions.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate his or her directorship at any time.
6. Term of Plan; Effective Date. The Plan shall become effective on the
----------------------------
effectiveness of the registration statement under the Securities Act of 1933, as
amended, relating to the Company's initial public offering of securities. It
shall continue in effect for a term of ten (10) years unless sooner terminated
under Section 13 of the Plan.
7. Term of Options. The term of each Option shall be ten (10) years from
---------------
the date of grant thereof unless an Option terminates sooner pursuant to Section
9 below.
8. Exercise Price and Consideration.
--------------------------------
(a) Exercise Price. The per Share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be 100% of the fair market
value per Share on the date of grant of the Option.
(b) Fair Market Value. The fair market value shall be determined by
-----------------
the Board; provided however that in the event the Common Stock is traded on the
Nasdaq National
-4-
<PAGE>
Market or listed on a stock exchange, the fair market value per Share shall be
the closing sales price on such system or exchange on the date of grant of the
Option (or, in the event that the Common Stock is not traded on such date, on
the immediately preceding trading date), as reported in The Wall Street Journal,
-----------------------
or if there is a public market for the Common Stock but the Common Stock is not
traded on the Nasdaq National Market or listed on a stock exchange, the fair
market value per Share shall be the mean of the bid and asked prices of the
Common Stock in the over-the-counter market on the date of grant, as reported in
The Wall Street Journal (or, if not so reported, as otherwise reported by the
- -----------------------
National Association of Securities Dealers Automated Quotation ("Nasdaq")
System).
(c) Form of Consideration. The consideration to be paid for the
---------------------
Shares to be issued upon exercise of an Option shall consist entirely of cash,
check, other Shares of Common Stock having a fair market value on the date of
surrender equal to the aggregate exercise price of the Shares as to which the
Option shall be exercised (which, if acquired from the Company, shall have been
held for at least six months), or any combination of such methods of payment
and/or any other consideration or method of payment as shall be permitted under
applicable corporate law.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable at such times as are set forth in Section
4(b) above; provided however that no Options shall be exercisable prior to
stockholder approval of the Plan in accordance with Section 17 below has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by
the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the stock certificate evidencing such Shares,
no right to vote or receive dividends or any other rights as a stockholder shall
exist with respect to the Optioned Stock, notwithstanding the exercise of the
Option. A share certificate for the number of Shares so acquired shall be issued
to the Optionee as soon as practicable after exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. If an Outside
----------------------------------------------
Director ceases to serve as a Director, he or she may, but only within ninety
(90) days after the date he or
-5-
<PAGE>
she ceases to be a Director of the Company, exercise his or her Option to the
extent that he or she was entitled to exercise it at the date of such
termination. Notwithstanding the foregoing, in no event may the Option be
exercised after its term set forth in Section 7 has expired. To the extent that
such Outside Director was not entitled to exercise an Option at the date of such
termination, or does not exercise such Option (to the extent he or she was
entitled to exercise) within the time specified above, the Option shall
terminate and the Shares underlying the unexercised portion of the Option shall
revert to the Plan.
(c) Disability of Optionee. Notwithstanding Section 9(b) above, in
----------------------
the event a Director is unable to continue his or her service as a Director with
the Company as a result of his or her total and permanent disability (as defined
in Section 22(e)(3) of the Code), he or she may, but only within twelve (12)
months from the date of such termination, exercise his or her Option to the
extent he or she was entitled to exercise it at the date of such termination.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that he or she was not
entitled to exercise the Option at the date of termination, or if he or she does
not exercise such Option (to the extent he or she was entitled to exercise)
within the time specified above, the Option shall terminate and the Shares
underlying the unexercised portion of the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee: (A)
-----------------
during the term of the Option who is, at the time of his or her death, a
Director of the Company and who shall have been in Continuous Status as a
Director since the date of grant of the Option, or (B) three (3) months after
the termination of Continuous Status as a Director, the Option may be exercised,
at any time within twelve (12) months following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise that
had accrued at the date of death or the date of termination, as applicable.
Notwithstanding the foregoing, in no event may the Option be exercised after its
term set forth in Section 7 has expired. To the extent that an Optionee was not
entitled to exercise the Option at the date of death or termination or if he or
she does not exercise such Option (to the extent he or she was entitled to
exercise) within the time specified above, the Option shall terminate and the
Shares underlying the unexercised portion of the Option shall revert to the
Plan.
10. Nontransferability of Options. The Option may not be sold, pledged,
-----------------------------
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution or pursuant to a qualified
domestic relations order (as defined by the Code or the rules thereunder). The
designation of a beneficiary by an Optionee does not constitute a transfer. An
Option may be exercised during the lifetime of an Optionee only by the Optionee
or a transferee permitted by this Section.
11. Adjustments Upon Changes in Capitalization; Corporate Transactions.
------------------------------------------------------------------
(a) Adjustment. Subject to any required action by the stockholders of
----------
the Company, the number of shares of Common Stock covered by each outstanding
Option, the number of Shares of Common Stock set forth in Sections 4(b)(ii),
(iii) and (iv) above, and the
-6-
<PAGE>
number of Shares of Common Stock which have been authorized for issuance under
the Plan but as to which no Options have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option, as well as
the price per Share of Common Stock covered by each such outstanding Option,
shall be proportionately adjusted for any increase or decrease in the number of
issued Shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock (including
any such change in the number of Shares of Common Stock effected in connection
with a change in domicile of the Company) or any other increase or decrease in
the number of issued Shares of Common Stock effected without receipt of
consideration by the Company; provided however that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Change of Control. In the event of any transaction that qualifies
-----------------
as a Change of Control and notwithstanding whether or not outstanding Options
are assumed, substituted for or terminated in connection with the transaction,
the vesting of each outstanding Option shall accelerate in full such that each
Optionee shall have the right to exercise his or her Option as to all of the
Optioned Stock, including Shares as to which the Option would not otherwise be
exercisable, immediately prior to consummation of the transaction.
For purposes of this Section 11(b), an Option shall be considered
assumed, without limitation, if, at the time of issuance of the stock or other
consideration upon such Change of Control, each Optionee would be entitled to
receive upon exercise of an Option the same number and kind of shares of stock
or the same amount of property, cash or securities as the Optionee would have
been entitled to receive upon the occurrence of such transaction if the Optionee
had been, immediately prior to such transaction, the holder of the number of
Shares of Common Stock covered by the Option at such time (after giving effect
to any adjustments in the number of Shares covered by the Option as provided for
in this Section 11); provided however that if such consideration received in the
transaction was not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon exercise of the Option to be
solely common stock of the successor corporation or its Parent equal to the Fair
Market Value of the per Share consideration received by holders of Common Stock
in the transaction.
(c) Certain Distributions. In the event of any distribution to the
---------------------
Company's stockholders of securities of any other entity or other assets (other
than dividends payable in cash or stock of the Company) without receipt of
consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per Share of Common Stock covered by each
outstanding Option to reflect the effect of such distribution.
12. Time of Granting Options. The date of grant of an Option shall, for
------------------------
reported by the all purposes, be the date determined in accordance with Section
4(b) hereof. Notice of the
-7-
<PAGE>
determination shall be given to each Outside Director to whom an Option is so
granted within a reasonable time after the date of such grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may amend or terminate the
-------------------------
Plan from time to time in such respects as the Board may deem advisable;
provided that, to the extent necessary and desirable to comply with Rule 16b-3
under the Exchange Act (or any other applicable law or regulation), the Company
shall obtain approval of the stockholders of the Company to Plan amendments to
the extent and in the manner required by such law or regulation.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan that would impair the rights of any Optionee shall not
affect Options already granted to such Optionee and such Options shall remain in
full force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Notwithstanding any other
----------------------------------
provision of the Plan or any agreement entered into by the Company pursuant to
the Plan, the Company shall not be obligated, and shall have no liability for
failure, to issue or deliver any Shares under the Plan unless such issuance or
delivery would comply with the legal requirements relating to the administration
of stock option plans under applicable U.S. state corporate laws, U.S. federal
and applicable state securities laws, the Code, any stock exchange or Nasdaq
rules or regulations to which the Company may be subject and the applicable laws
of any other country or jurisdiction where Options are granted under the Plan,
as such laws, rules, regulations and requirements shall be in place from time to
time (the "Applicable Laws"). Such compliance shall be determined by the
---------------
Company in consultation with its legal counsel.
As a condition to the exercise of an Option, the Company may require
the person exercising such Option to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by law.
15. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
16. Option Agreement. Options shall be evidenced by written option
----------------
agreements in such form as the Board shall approve.
17. Stockholder Approval. If required by the Applicable Laws, continuance
--------------------
of the Plan shall be subject to approval by the stockholders of the Company.
Such stockholder approval shall be obtained in the manner and to the degree
required under the Applicable Laws.
-8-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
2000 DIRECTORS' STOCK OPTION PLAN
NOTICE OF STOCK OPTION GRANT
----------------------------
(Optionee)
(OptioneeAddress1)
(OptioneeAddress2)
You have been granted an option to purchase Common Stock of CrossWorlds
Software, Inc. (the "Company") as follows:
-------
Date of Grant (GrantDate)
Vesting Commencement Date (VestingStartDate)
Exercise Price per Share (ExercisePrice)
Total Number of Shares Granted (SharesGranted)
Total Exercise Price (TotalExercisePrice)
Expiration Date (ExpirDate)
Vesting Schedule: This Option may be exercised, in whole
----------------
or in part, in accordance with the
following schedule: 1/12/th/ of the
Option Shares shall vest and be
exercisable on each monthly anniversary
of the Vesting Commencement Date.
Termination Period: This Option may be exercised for 90
------------------
days after termination of Optionee's
Continuous Status as a Director, or such
longer period as may be applicable upon
death or Disability of Optionee as
provided in the Plan, but in no event
later than the Expiration Date as
provided above.
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this option is granted under and governed by the
terms and conditions of the 2000 Directors' Stock Option Plan and the
Nonstatutory Stock Option Agreement, all of which are attached and made a part
of this document.
OPTIONEE: CROSSWORLDS SOFTWARE, INC.
____________________________ By:_______________________________
Signature
Title:____________________________
____________________________
Print Name
-2-
<PAGE>
CROSSWORLDS SOFTWARE, INC.
NONSTATUTORY STOCK OPTION AGREEMENT
-----------------------------------
1. Grant of Option. The Board of Directors of the Company hereby grants
---------------
to the Optionee named in the Notice of Stock Option Grant attached as Part I of
this Agreement (the "Optionee"), an option (the "Option") to purchase a number
-------- ------
of Shares, as set forth in the Notice of Stock Option Grant, at the exercise
price per share set forth in the Notice of Stock Option Grant (the "Exercise
--------
Price"'), subject to the terms and conditions of the 2000 Directors' Stock
- -----
Option Plan (the "Plan"), which is incorporated herein by reference.
----
(Capitalized terms not defined herein shall have the meanings ascribed to such
terms in the Plan.) In the event of a conflict between the terms and conditions
of the Plan and the terms and conditions of this Nonstatutory Stock Option
Agreement, the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
------------------
(a) Right to Exercise. This Option is exercisable during its term in
-----------------
accordance with the Vesting Schedule set out in the Notice of Stock Option Grant
and the applicable provisions of the Plan and this Nonstatutory Stock Option
Agreement. In the event of Optionee's death, disability or other termination of
Optionee's employment or consulting relationship, the exercisability of the
Option is governed by the applicable provisions of the Plan and this
Nonstatutory Stock Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery of an
------------------
exercise notice, in the form attached as Exhibit A (the "Exercise Notice"),
--------- ---------------
which shall state the election to exercise the Option, the number of Shares in
respect of which the Option is being exercised (the "Exercised Shares"), and
----------------
such other representations and agreements as may be required by the Company
pursuant to the provisions of the Plan. The Exercise Notice shall be signed by
the Optionee and shall be delivered in person or by certified mail to the
Secretary of the Company. The Exercise Notice shall be accompanied by payment
of the aggregate Exercise Price as to all Exercised Shares. This Option shall
be deemed to be exercised upon receipt by the Company of such fully executed
Exercise Notice accompanied by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with all relevant provisions of law
and the requirements of any stock exchange or quotation service upon which the
Shares are then listed. Assuming such compliance, for income tax purposes the
Exercised Shares shall be considered transferred to the Optionee on the date the
Option is exercised with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
<PAGE>
(b) check;
(c) delivery of a properly executed exercise notice together with such
other documentation as the Administrator and the broker, if applicable, shall
require to effect an exercise of the Option and delivery to the Company of the
sale or loan proceeds required to pay the exercise price; or
(d) surrender of other Shares which (i) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than six
(6) months on the date of surrender, and (ii) have a Fair Market Value on the
date of surrender equal to the aggregate Exercise Price of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution or
pursuant to a domestic relations order (as defined by the Code or the rules
thereunder) and may be exercised during the lifetime of Optionee only by the
Optionee or a transferee permitted by Section 10 of the Plan. The terms of the
Plan and this Nonstatutory Stock Option Agreement shall be binding upon the
executors, administrators, heirs, successors and assigns of the Optionee.
5. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Stock Option Grant, and may be exercised during such term
only in accordance with the Plan and the terms of this Nonstatutory Stock Option
Agreement.
6. Tax Consequences. Set forth below is a brief summary of certain
----------------
federal tax consequences relating to this Option under the law in effect as of
the date of grant. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND
REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT HIS OR HER OWN TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. Since this Option does not qualify as an
---------------------
incentive stock option under Section 422 of the Code, the Optionee may incur
regular federal income tax liability upon exercise. The Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Exercised
Shares on the date of exercise over their aggregate Exercise Price.
(b) Disposition of Shares. If the Optionee holds the Option Shares
---------------------
for more than one year, gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. The long-
term capital gain will be taxed for federal income tax purposes at a maximum
rate of 20 percent.
-2-
<PAGE>
By your signature and the signature of the Company's representative below,
you and the Company agree that this Option is granted under and governed by the
terms and conditions of the Plan and this Nonstatutory Stock Option Agreement.
Optionee has reviewed the Plan and this Nonstatutory Stock Option Agreement in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Nonstatutory Stock Option Agreement and fully understands all
provisions of the Plan and Nonstatutory Stock Option Agreement. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions relating to the Plan and
Nonstatutory Stock Option Agreement.
CROSSWORLDS SOFTWARE, INC.
_____________________________ By:_________________________________
(Optionee)
Title:______________________________
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Nonstatutory Stock Option Agreement. In
consideration of the Company's granting his or her spouse the right to purchase
Shares as set forth in the Plan and this Nonstatutory Stock Option Agreement,
the undersigned hereby agrees to be irrevocably bound by the terms and
conditions of the Plan and this Nonstatutory Stock Option Agreement and further
agrees that any community property interest shall be similarly bound. The
undersigned hereby appoints the undersigned's spouse as attorney-in-fact for the
undersigned with respect to any amendment or exercise of rights under the Plan
or this Nonstatutory Stock Option Agreement.
______________________________
Spouse of Optionee
-3-
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
To: CrossWorlds Software, Inc.
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
--------
exercise Optionee's option to purchase __________ shares of CrossWorlds
Software, Inc. Common Stock, under and pursuant to the Company's 2000 Directors'
Stock Option Plan and the Nonstatutory Stock Option Agreement dated
_______________, as follows:
Grant Number: ______________________________
Date of Purchase: ______________________________
Number of Shares: ______________________________
Purchase Price: ______________________________
Method of Payment of
Purchase Price: ______________________________
Social Security No.: ______________________________
The shares should be issued as follows:
Name: ______________________________
Address: ______________________________
______________________________
______________________________
Signed: ______________________________
Date: ______________________________
-4-
<PAGE>
INDEPENDENT AUDITORS' REPORT
ON SCHEDULE AND CONSENT
The Board of Directors
Crossworld Software, Inc. and Subsidiaries
The audits referred to in our report dated January 24, 2000, included the
related financial statement schedule as of December 31, 1999, and for each of
the years in the three-year period ended December 31, 1999 included in the
registration statement. This financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG LLP
Mountain View, California
February 2, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 5,415 12,506
<SECURITIES> 0 0
<RECEIVABLES> 5,504 11,985
<ALLOWANCES> (306) (297)
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,434 25,214
<PP&E> 5,932 7,844
<DEPRECIATION> (1,775) (3,998)
<TOTAL-ASSETS> 15,757 29,177
<CURRENT-LIABILITIES> 16,082 26,265
<BONDS> 10,517<F1> 6,482<F1>
0 0
96 161
<COMMON> 3 3
<OTHER-SE> (6,769) (890)
<TOTAL-LIABILITY-AND-EQUITY> 15,757 29,177
<SALES> 3,973 8,194
<TOTAL-REVENUES> 7,706 19,094
<CGS> 438 1,599
<TOTAL-COSTS> 5,830 11,726
<OTHER-EXPENSES> 10 1,220
<LOSS-PROVISION> 333 16
<INTEREST-EXPENSE> 208 1,069
<INCOME-PRETAX> (41,374) (38,186)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (41,374) (38,186)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (41,374) (38,186)
<EPS-BASIC> (19.99) (13.40)
<EPS-DILUTED> (19.99) (13.40)
<FN>
<F1>Includes all outstanding debts.
</FN>
</TABLE>
