<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 1999
REGISTRATION NO. 333 -
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
CROSSROADS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 74-2846643
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
CROSSROADS SYSTEMS, INC.
9390 RESEARCH BOULEVARD
SUITE II-300
AUSTIN, TEXAS 78759
TELEPHONE: (512) 349-0300
FACSIMILE: (512) 349-0304
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
---------------------
BRIAN R. SMITH
CHIEF EXECUTIVE OFFICER
9390 RESEARCH BOULEVARD
SUITE II-300
AUSTIN, TX 78759
TELEPHONE: (512) 349-0300
FACSIMILE: (512) 349-0304
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
<TABLE>
<S> <C>
S. MICHAEL DUNN, P.C. PAUL E. HURDLOW, P.C.
J. MATTHEW LYONS P. STEVEN HACKER
TED A. GILMAN ALBERT J. LI
BROBECK, PHLEGER & HARRISON LLP GRAY CARY WARE & FREIDENRICH LLP
301 CONGRESS AVENUE, SUITE 1200 100 CONGRESS AVENUE, SUITE 1440
AUSTIN, TEXAS 78701 AUSTIN, TEXAS 78701
TELEPHONE: (512) 477-5495 TELEPHONE: (512) 457-7000
FACSIMILE: (512) 477-5813 FACSIMILE: (512) 457-7070
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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, as amended, 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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $0.001 par value.............................. $46,000,000 $12,788
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
---------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS 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 IS EFFECTIVE. THIS 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 AUGUST 18, 1999
PROSPECTUS
SHARES
[CROSSROADS LOGO]
COMMON STOCK
This is an initial public offering of shares of common stock of Crossroads
Systems, Inc. Crossroads expects that the public offering price will be between
$ and $ per share.
We have applied to have our common stock listed for trading and quotation
on the Nasdaq National Market under the symbol "CRDS."
OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE .
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
---------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price.................................... $ $
Underwriting discounts and commissions................... $ $
Proceeds, before expenses, to Crossroads................. $ $
</TABLE>
The underwriters may also purchase from us and certain selling stockholders
up to an additional shares of common stock at the public offering
price, less the underwriting discounts and commissions, to cover
over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
---------------------------
SG COWEN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
, 1999
<PAGE> 3
[INSIDE FRONT COVER AND GATEFOLD GRAPHICS]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
Prospectus Summary....................... 5
Risk Factors............................. 9
Note Regarding Forward-Looking
Statements............................. 20
Use of Proceeds.......................... 21
Dividend Policy.......................... 21
Capitalization........................... 22
Dilution................................. 23
Selected Consolidated Financial Data..... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 25
Business................................. 34
PAGE
---
<S> <C>
Management............................... 48
Certain Transactions..................... 58
Principal and Selling Stockholders....... 60
Description of Capital Stock............. 62
Shares Eligible for Future Sale.......... 65
Underwriting............................. 67
Legal Matters............................ 69
Experts.................................. 69
Where You Can Find Additional Information
About Crossroads....................... 69
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. 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.
---------------------
UNTIL , 1999, 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 DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
We have registered the trademark "CROSSROADS" in the United States. The
trademark "CROSSROADS SYSTEMS" has been allowed in the United States. We have
filed a trademark registration application for "ACTIVE FABRIC" in the United
States. All other trademarks, service marks or trade names referred to in this
prospectus are the property of their respective owners.
All references in this prospectus to "we," "us," "ours," "Crossroads" and
"Crossroads Systems" are intended to include Crossroads Systems, Inc., our
wholly-owned subsidiary Crossroads Systems (Texas), Inc., and our predecessor
Infinity Commstor, LLC.
<PAGE> 5
[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]
<PAGE> 6
PROSPECTUS SUMMARY
The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including the consolidated
financial statements and related notes. Our business involves significant risks.
You should carefully consider the information under the heading "Risk Factors."
CROSSROADS SYSTEMS, INC.
We are the leading provider of storage routers for storage area networks,
or SANs. Our storage routers interconnect servers and storage systems in a Fibre
Channel SAN to more effectively and efficiently store, manage and ensure the
integrity and availability of data. The SAN is a high speed network that
facilitates communication among servers and storage systems using a high
performance data transmission protocol known as Fibre Channel. By deploying our
storage routers in a SAN, organizations gain improved information management
capability. Specifically, our storage routers decrease network congestion,
reduce time required for data backup, improve utilization of storage resources
and preserve and enhance existing server and storage system investments. Our
products provide these benefits by enabling rapid, seamless communication
between devices utilizing diverse input/output, or I/O, data transmission
protocols. We sell our products primarily through leading server and storage
system original equipment manufacturers, or OEMs, including ADIC, ATL Products,
Compaq, Dell, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, INRANGE,
McDATA and StorageTek. To date, we have sold approximately 5,000 of our storage
routers to OEM customers. We have also recently begun to sell our products
through distributors, resellers and system integrators, including Andataco, Bell
Microproducts, Cranel, Datalink and Pinacor.
Information management has become a strategic imperative for many
organizations today. The challenges of information management have intensified
in recent years due to increasing amounts of business critical data, growth in
the number of users accessing that data and demand for data 24 hours a day,
seven days a week. These challenges are exacerbated by the failure of data
transfer rates between storage systems and server microprocessors to keep pace
with dramatically improved data storage capacity and microprocessor speeds. The
result is an interconnect bottleneck which impedes data access, diminishes
application performance and consumes network bandwidth. The limitations of
today's most widely deployed I/O protocol -- small computer system interface, or
SCSI -- and today's most commonly used storage architecture -- the
point-to-point architecture -- contribute to this interconnect bottleneck.
Fibre Channel, established as a standard data transmission protocol in
1994, has emerged as a means to address many of the current limitations of
information management. Fibre Channel is a higher performance, more scalable and
more flexible protocol than SCSI and has enabled the evolution of the SAN. The
principal interconnect components of a SAN are the storage hub, the storage
switch and the storage router. The storage router allows SCSI and Fibre Channel
protocols to coexist in a SAN today and, therefore, is critical to the rapid
deployment and widespread adoption of SANs. As new protocols are introduced in
the future, storage routers will be increasingly essential to enable rapid,
seamless communication among servers, storage systems and SAN devices that
utilize diverse protocols.
Our storage routers offer organizations a number of important benefits
today by:
- Facilitating Efficient Backup and Recovery. Our storage routers enable
organizations to accomplish backup processes over the SAN, rather than
the local area network, reducing network downtime and increasing network
availability and efficiency. In addition, our products support creation
of redundant data sites at distances of up to 10 kilometers to restore
data when a dedicated storage system fails or is damaged.
- Providing Broad, Verified Interoperability. Our storage routers are
designed to interoperate with all commercially available Fibre Channel
storage hubs and storage switches, as well as other SAN components. We
have tested and verified this interoperability in over 2,500 SAN
configurations.
5
<PAGE> 7
- Increasing Scalability and Implementation Flexibility. Our storage
routers are designed to operate in any computing environment and are
scalable to address the needs of organizations for greater throughput,
broader connectivity and greater interconnect distance.
- Enhancing Manageability. Our storage routers serve as a platform for
advanced storage management functions, including remote diagnostics,
remote management and real-time application monitoring.
- Leveraging Existing Server and Storage System Investments. Our storage
routers minimize the need for costly distributed storage centers by
allowing consolidation of storage resources in a centralized facility,
and facilitate more efficient use of existing storage capacity by
permitting multiple servers to connect to multiple storage systems.
We intend to capitalize on our market leadership in storage routing
solutions by expanding and enhancing our relationships with existing and new OEM
customers and by extending the interoperability of our products with other
components of the SAN. We also plan to leverage our significant technology
expertise to remain at the forefront of the SAN market and develop solutions for
emerging routing market opportunities. For example, we are currently developing
I/O routing products that incorporate emerging protocols, including Next
Generation of Input/Output, or NGIO, and Future Input/Output, or Future I/O.
Furthermore, we intend to continue building relationships with leading storage
management software vendors such as BMC Software, Computer Associates, Legato
Systems, Tivoli Systems and Veritas Software to ensure the integration of their
solutions with our storage routers for improved SAN management. We believe our
storage routers represent a critical component of the SAN today and will serve
an important role in the ongoing evolution of the SAN.
Our principal executive offices are located at 9390 Research Boulevard,
Suite II-300, Austin, Texas 78759. Our telephone number is (512) 349-0300.
6
<PAGE> 8
THE OFFERING
Common stock we are offering............. shares
Common stock to be outstanding after this
offering................................. shares
Use of proceeds.......................... We intend to use the net proceeds
for working capital and other
general corporate purposes,
including research and development,
sales and marketing and potential
acquisitions.
Proposed Nasdaq National Market symbol... CRDS
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of July 31, 1999, and assumes
the conversion of all of our preferred stock. This number excludes 1,553,343
shares of common stock issuable upon exercise of options outstanding as of July
31, 1999 with a weighted average exercise price of $0.50 per share and 1,016,079
additional shares of common stock reserved under our option plan as of July 31,
1999, and assumes no exercise of the underwriters' over-allotment option.
---------------------
ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS
This offering is for shares. The underwriters have a 30-day
option to purchase up to additional shares from us and the selling
stockholders to cover over-allotments. Some of the disclosures in this
prospectus would be different if the underwriters exercise the over-allotment
option. Unless we tell you otherwise, the information in this prospectus assumes
that the underwriters will not exercise the over-allotment option.
Except where we state otherwise, the information we present in this
prospectus:
- reflects a 3-for-2 split of our common stock effected as of August 12,
1999;
- reflects our sale of 801,667 shares of our Series E preferred stock on
August 6, 1999 for an aggregate purchase price of approximately $12.0
million; and
- reflects the conversion of all outstanding shares of preferred stock into
13,599,848 shares of common stock upon the closing of this offering.
Our fiscal year ends on October 31. Therefore, a reference to "fiscal
1998," for example, is to our fiscal year ended October 31, 1998.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables summarize our consolidated financial data. For a more
detailed explanation of our financial condition and operating results, you
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and the notes to
those statements included in this prospectus. Unaudited pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding preferred stock into common stock as if the shares had converted
immediately upon their issuance.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.............................. $ 160 $ 821 $ 2,930 $ 1,721 $11,728
Other revenue................................ 332 188 279 276 65
------ ------- ------- ------- -------
Total revenue........................ 492 1,009 3,209 1,997 11,793
Gross profit................................... 322 544 1,348 994 4,828
Loss from operations........................... (204) (2,749) (5,436) (3,917) (3,735)
Net loss....................................... (212) (2,693) (5,354) (3,812) (3,645)
Basic and diluted net loss per share........... $(0.04) $ (0.45) $ (0.87) $ (0.62) $ (0.52)
Shares used in computing basic and diluted net
loss per share............................... 6,000 6,000 6,146 6,120 7,005
Pro forma basic and diluted net loss per
share........................................ $ (0.31) $ (0.18)
Shares used in computing pro forma basic and
diluted net loss per share................... 17,088 20,605
</TABLE>
The following table contains a summary of our consolidated balance sheet:
- on an actual basis at July 31, 1999 (giving effect to our 3-for-2 stock
split);
- on a pro forma basis to reflect (a) the issuance of 801,667 shares of
Series E preferred stock on August 6, 1999 as if such issuance had
occurred on July 31, 1999; and (b) the conversion of all outstanding
shares of preferred stock into 13,599,848 shares of common stock; and
- on a pro forma as adjusted basis at July 31, 1999 to additionally reflect
net proceeds from the sale of shares of common stock offered
hereby at an assumed initial public offering price per share of $ .
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,492 $18,467 $
Working capital............................................. 6,220 18,195
Total assets................................................ 14,140 26,115
Long-term debt, net of current portion...................... 936 936
Redeemable convertible preferred stock...................... 18,441 --
Total stockholders' equity (deficit)........................ (11,102) 19,314
</TABLE>
8
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties described below are those that we currently believe may
materially affect our company. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that affect our company.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
WE HAVE INCURRED SIGNIFICANT LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER
BECOME PROFITABLE.
We have incurred significant losses in every fiscal quarter since the end
of fiscal 1996 and expect to continue to incur losses in the future. As of July
31, 1999, we had an accumulated deficit of $11.8 million. Although our revenue
has grown in recent quarters, we cannot be certain that we will be able to
sustain these growth rates or that we will realize sufficient revenue to achieve
profitability. We also expect to incur significant product development, sales
and marketing and administrative expenses and, as a result, we expect to
continue to incur losses. We will need to generate significant revenue to
achieve profitability. Moreover, even if we do achieve profitability, we may not
be able to sustain or increase profitability.
DUE TO OUR LIMITED OPERATING HISTORY AND THE UNCERTAIN DEVELOPMENT OF THE
STORAGE AREA NETWORK MARKET, WE MAY HAVE DIFFICULTY ACCURATELY PREDICTING
REVENUE FOR FUTURE PERIODS AND APPROPRIATELY BUDGETING FOR EXPENSES.
We have generated product revenue for approximately two years and, thus, we
have only a short history from which to predict future revenue. This limited
operating experience, combined with the rapidly evolving nature of the storage
area network market in which we sell our products and other factors which are
beyond our control, reduces our ability to accurately forecast our quarterly and
annual revenue. Furthermore, we plan our operating expenses based primarily on
these revenue projections. Because most of our expenses are fixed in the short
term or incurred in advance of anticipated revenue, we may not be able to
decrease our expenses in a timely manner to offset any shortfall of revenue. We
are currently expanding our staffing and increasing our expense levels in
anticipation of future revenue growth. If our revenue does not increase as
anticipated, significant losses could result due to our higher expense levels.
In addition, our customers frequently change their order requirements with
little or no prior notice to us, which further compounds the difficulties we
face in predicting future revenue and budgeting for expenses.
WE HAVE EXPERIENCED AND EXPECT TO CONTINUE TO EXPERIENCE SIGNIFICANT
PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUE AND OPERATING RESULTS, WHICH MAY
RESULT IN VOLATILITY IN OUR STOCK PRICE.
We have experienced and expect to continue to experience significant
period-to-period fluctuations in our revenue and operating results due to a
number of factors, and any such variations and factors may cause our stock price
to fluctuate. Accordingly, you should not rely on the results of any past
quarterly or annual periods as an indication of our future performance. It is
likely that in some future period our operating result will be below the
expectations of public market analysts or investors. If this occurs, our stock
price may drop, perhaps significantly.
Among the primary factors that may affect us are:
- fluctuations in demand for our products;
- the timing of orders from, and product integration by, our customers,
particularly our original equipment manufacturer, or OEM, customers;
- the mix of products that are sold, as well as the mix in sales to OEM
customers and distributors, resellers and system integrators;
9
<PAGE> 11
- our ability to develop, introduce, ship and support new products and
product enhancements;
- the rate of adoption of storage area networks as an alternative to
existing data storage and management systems;
- the ongoing need for storage routing products in storage area network
architectures;
- announcements and new product introductions by our competitors;
- decreases in the prices at which we can sell our products;
- our ability to obtain sufficient supplies of sole or limited source
components necessary to build our products;
- unexpected increases or insufficient decreases in the prices of the
components we purchase;
- our ability to attain and maintain production volumes and quality levels
for our products from both our contract manufacturer and our in-house
manufacturing facility;
- potential for inventory obsolescence;
- greater than anticipated levels of warranty claims resulting in increases
in our warranty costs;
- product transitions and the time required for OEM qualification of new
products;
- deferrals of customer orders in anticipation of new products, services or
product enhancements from us or our competitors or from other providers
of storage area network products;
- the rate at which new markets emerge for products we are currently
developing; and
- the effective entry of new competitors into our market or mergers and
consolidations.
In addition, potential and existing OEM customers often place initial
orders for our products for purposes of qualification and testing. As a result,
we may report an increase in sales or a commencement of sales of a product in a
quarter that will not be followed by similar sales in subsequent quarters as
OEMs conduct qualification and testing. This order pattern has in the past and
could in the future lead to fluctuations in quarterly revenue and gross margins.
OUR BUSINESS IS DEPENDENT ON THE STORAGE AREA NETWORK MARKET WHICH IS NEW AND
UNPREDICTABLE, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE,
OUR BUSINESS WILL SUFFER.
Fibre Channel-based storage area networks, or SANs, were first deployed in
1997. As a result, the market for SANs and related storage router products has
only recently begun to develop and is rapidly evolving. Because this market is
new, it is difficult to predict its potential size or future growth rate. Our
products are used exclusively in SANs and, therefore, our business is dependent
on the SAN market. Accordingly, widespread adoption of SANs in enterprise
computing environments is critical to our future success. Most of our potential
end-user customers are organizations that have invested substantial resources in
their existing data storage and management systems and, as a result, may be
reluctant or slow to adopt a new approach like SANs. SANs are often implemented
in connection with the deployment of new storage systems and servers. Therefore,
our future success is also substantially dependent on the market for new storage
systems and servers. Furthermore, widespread interoperability among the various
components of the SAN has not yet been achieved. Until greater interoperability
is achieved, customers may be reluctant to deploy SANs. Our success in
generating revenue in the emerging SAN market will depend on, among other
things, our ability to:
- educate potential OEM customers, distributors, resellers, system
integrators and end-user organizations about the benefits of SANs and
storage router technology, including, in particular, the ability to use
storage routers with SANs to improve system backup and recovery
processes;
- maintain and enhance our relationships with OEM customers, distributors,
resellers, system integrators and end-user organizations;
10
<PAGE> 12
- predict and base our products on standards which ultimately become
industry standards; and
- achieve interoperability between our products and other SAN components
from diverse vendors.
WE HAVE LIMITED PRODUCT OFFERINGS AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
DEVELOP IN A TIMELY MANNER NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.
We currently have only three principal products within our storage router
product family that we sell in commercial quantities. In particular, sales of
our 4100 product have accounted for the vast majority of our product revenue to
date. In fiscal 1998 and in the nine months ended July 31, 1999, sales of our
4100 product accounted for 52% and 71% of our product revenue. To reduce our
dependence on the 4100 product, we must successfully develop and introduce to
market new products and product enhancements in a timely manner. Even if we are
able to develop and commercially introduce new products and enhancements, we
cannot assure you that these new products or enhancements will achieve market
acceptance. Any failure of our future products to achieve market acceptance
could harm our business and financial results.
Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:
- growth of, and changing requirements of customers within, the SAN and
storage router markets;
- performance, quality, price and total cost of ownership of our products;
- availability, performance, quality and price of competing products and
technologies;
- our customer service and support capabilities and responsiveness;
- changes in technology, industry standards or end-user preferences; and
- successful development of our relationships with existing and potential
OEM, distributor, reseller and system integrator customers.
WE DEPEND ON A LIMITED NUMBER OF OEM CUSTOMERS FOR THE VAST MAJORITY OF OUR
REVENUE, AND THE LOSS OF OR SIGNIFICANT REDUCTION IN ORDERS FROM ANY KEY OEM
CUSTOMER WOULD SIGNIFICANTLY REDUCE OUR REVENUE.
Approximately 90% of our revenue in each of fiscal 1998 and the nine months
ended July 31, 1999 was derived from six OEM customers. Furthermore, during
fiscal 1998, our four largest customers -- ADIC, Compaq, Hewlett-Packard and
StorageTek -- accounted for 25%, 20%, 16% and 14% of our total revenue,
respectively. In the nine months ended July 31, 1999, revenue from Compaq and
StorageTek represented 44% and 30% of our total revenue. Our operating results
in the foreseeable future will continue to depend on sales to a relatively small
number of OEM customers. Therefore, the loss of any of our key OEM customers, or
a significant reduction in sales to any one of them, would significantly reduce
our revenue and adversely affect our business.
OUR OEM CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS WHICH DOES NOT ASSURE PRODUCT SALES.
Prior to offering our products for sale, our OEM customers require that
each of our products undergo an extensive qualification process, which involves
interoperability testing of our product in the OEM's system as well as rigorous
reliability testing. This qualification process may continue for a year or
longer. However, qualification of a product by an OEM does not assure any sales
of the product to the OEM. Despite this uncertainty, we devote substantial
resources, including sales, marketing and management efforts, toward qualifying
our products with OEMs in anticipation of sales to them. If we are unsuccessful
or delayed in qualifying any products with an OEM, such failure or delay would
preclude or delay sales of that product to the OEM, which may impede our growth
and cause our business to suffer.
11
<PAGE> 13
DEMAND FOR OUR PRODUCTS DEPENDS SIGNIFICANTLY UPON THE NEED TO INTERCONNECT
SCSI-BASED TAPE STORAGE SYSTEMS WITH FIBRE CHANNEL SANS, AND WE EXPECT TO FACE
COMPETITION FROM MANUFACTURERS OF FIBRE CHANNEL-BASED TAPE STORAGE SYSTEMS.
Currently, we derive the majority of our revenue from sales of storage
routers that are used to connect SCSI-based tape storage systems, and tape
libraries in particular, with Fibre Channel SANs to effect data backup and
restore processes without using significant amounts of the available bandwidth
of local area networks. This application is commonly referred to as "LAN-free
backup". The introduction of tape storage systems with embedded Fibre Channel
interfaces could significantly reduce demand for our storage routers which
connect these tape storage systems to the SAN. Certain storage system OEMs,
including several of our current customers, likely will introduce tape storage
systems with embedded Fibre Channel interfaces in the near future. If these or
other OEMs are successful in introducing such Fibre Channel-based tape storage
systems and these systems achieve market acceptance, demand for our storage
router products would be materially reduced and our business would be seriously
harmed. Furthermore, we may be unable to develop and successfully introduce in a
timely manner new products that are able to generate revenue sufficient to
offset any lost revenue.
OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON UTILIZING EMERGING
TECHNOLOGIES AND STANDARDS, AND ANY DELAY OR ABANDONMENT OF EFFORTS TO DEVELOP
THESE TECHNOLOGIES OR STANDARDS BY INDUSTRY PARTICIPANTS, OR FAILURE OF THESE
TECHNOLOGIES OR STANDARDS TO ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR
COMPETITIVE POSITION.
Our products are intended to complement other SAN products to improve the
performance of computer networks by addressing the input/output bottleneck that
has emerged between the storage systems and servers. As a result, we have
devoted and expect to continue to devote significant resources to developing
products based on emerging technologies and standards that reduce input/output
bottlenecks. A number of large companies in the computer hardware and software
industries are actively involved in the development of new technologies and
standards that are expected to be incorporated in our new products. Should any
of these companies delay or abandon their efforts to develop commercially
available products based on these new technologies and standards, our research
and development efforts with respect to such technologies and standards likely
would have no appreciable value. In addition, if we do not correctly anticipate
new technologies and standards, or if our products based on these new
technologies and standards fail to achieve market acceptance, our competitors
may be better able to address market demand than would we. Furthermore, if
markets for these new technologies and standards develop later than we
anticipate, or do not develop at all, our future results of operations would be
materially harmed.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE MANUFACTURE
PRODUCTS IN ADVANCE OF BINDING PURCHASER COMMITMENTS FOR CERTAIN OEM CUSTOMERS
BASED ON FORECASTS THEY PROVIDE.
In order to assure availability of our products for some of our largest OEM
customers, we manufacture products in advance of purchase orders based on
forecasts provided by these OEM customers. However, these forecasts do not
represent binding purchase commitments and we do not recognize revenue for such
products until the product is shipped to the OEM. As a result, we incur
inventory and manufacturing costs in advance of anticipated revenue. Because
demand for our products may not materialize, this product delivery method
subjects us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH.
The future growth of our business will depend in part on our ability to
expand our existing relationships with distributors, resellers and system
integrators, develop additional channels for the distribution and sale of our
products and manage these relationships. As part of our growth strategy, we
intend to expand our relationships with distributors, resellers and system
integrators. The inability to successfully execute this strategy could impede
our future growth.
12
<PAGE> 14
THE LOSS OF OUR CONTRACT MANUFACTURER, OR THE FAILURE TO FORECAST DEMAND
ACCURATELY FOR OUR PRODUCTS OR TO MANAGE OUR RELATIONSHIP WITH OUR CONTRACT
MANUFACTURER SUCCESSFULLY, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS.
We rely on a third-party manufacturer to manufacture all of our products on
a purchase order basis. We do not have a long-term supply contract with this
manufacturer and, therefore, it is not obligated to supply products to us for
any specific period, or in any specific quantity, except as may be provided in a
particular purchase order. We generally place orders for products with our
contract manufacturer approximately four months prior to the anticipated
delivery date, with order volumes based on forecasts of demand from our
customers. Accordingly, if we inaccurately forecast demand for our products, we
may be unable to obtain adequate manufacturing capacity from our contract
manufacturer to meet our customers' delivery requirements, or we may accumulate
excess inventories. We have on occasion in the past been unable to adequately
respond to unexpected increases in customer purchase orders, and therefore were
unable to benefit from this incremental demand. Our contract manufacturer has
not provided assurances to us that adequate capacity will be available to us
within the time required to meet additional demand for our products.
We plan to introduce new products and product enhancements, which will
require that we coordinate our efforts with those of our component suppliers and
our contract manufacturer to rapidly achieve volume production. If we should
fail to effectively manage our relationships with our component suppliers and
our contract manufacturer, or if any of our suppliers or our manufacturer
experiences delays, disruptions, capacity constraints or quality control
problems in its manufacturing operations, our ability to ship products to our
customers could be delayed, and our competitive position and reputation could be
harmed. Qualifying a new contract manufacturer and commencing volume production
can be expensive and time consuming. If we are required to change or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.
WE ARE TRANSITIONING THE FINAL ASSEMBLY AND TEST PORTION OF OUR MANUFACTURING
PROCESS TO AN IN-HOUSE FACILITY, WHICH WILL INCREASE OUR FIXED COSTS AND EXPOSE
US TO INCREASED INVENTORY RISKS.
Commencing in September 1999, we intend to perform our final assembly and
product test operations in-house. Our contract manufacturer currently performs
these activities for us. Although we have personnel with prior experience in
managing assembly and test operations, we have not previously assembled our
products, and we may encounter difficulties and delays in establishing,
maintaining or expanding our internal assembly and test capabilities. Our
assembly and test operations also will require us to increase the number of our
full-time and part-time employees, purchase additional equipment and maintain
larger facilities, all of which will increase our fixed costs. Furthermore,
during the transition period which could continue through the end of fiscal
1999, we anticipate that our manufacturing costs will increase, and gross margin
will decrease, as we incur costs of final assembly and test performed both by us
and our contract manufacturer. If demand for our products does not support the
effective utilization of these employees and additional facilities and
equipment, we may not realize any benefit from replacing our contract
manufacturer with internal final assembly and testing. Furthermore, internal
assembly and test operations will require us to manage and maintain the
components used in our products at our facilities. A significant portion of this
inventory will be useful only in the final assembly of our products. Any
decrease in demand for our products could result in a substantial part of this
inventory becoming excess, obsolete or otherwise unusable. If we are unable to
successfully integrate our assembly and test operations with our current
operations or if our internal assembly and test operations are underused or
mismanaged, we may incur significant costs that could adversely affect our
operating results and financial condition.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, OUR
DELAYED ABILITY TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS MAY RESULT IN REDUCED
REVENUE AND LOST SALES.
We currently purchase Fibre Channel application specific integrated
circuits and other key components for our products from sole or limited sources.
To date, most of our component purchases have
13
<PAGE> 15
been made in relatively small volumes. As a result, if our suppliers receive
excess demand for their products, we likely will receive a low priority for
order fulfillment as large volume customers will use our suppliers' available
capacity. If we are delayed in acquiring components for our products, the
manufacture and shipment of our products will also be delayed, which will reduce
our revenues and may result in lost sales. We generally use a rolling six-month
forecast of our future product sales to determine our component requirements.
Lead times for ordering materials and components vary significantly and depend
on factors such as specific supplier requirements, contract terms and current
market demand for such components. If we overestimate our component
requirements, we may have excess inventory which would increase our costs. If we
underestimate our component requirements, we may have inadequate inventory which
would delay our manufacturing and render us unable to deliver products to
customers on a scheduled delivery date. We also may experience shortages of
certain components from time to time, which also could delay our manufacturing.
Manufacturing delays could negatively impact our ability to sell our products
and damage our customer relationships, thereby harming our business and
reputation.
OUR PRODUCTS DEPEND ON TECHNOLOGY LICENSED FROM THIRD PARTIES, WHICH, IF
UNAVAILABLE TO US, COULD SUBSTANTIALLY DELAY OUR PRODUCT SHIPMENTS AND
MATERIALLY HARM OUR OPERATING RESULTS.
We rely upon certain software that we license from third parties, including
an operating system "kernel" that is integrated with our internally developed
software and used in our products to perform key functions. Our inability to
maintain any such software licenses could result in shipment delays or
reductions until equivalent software could be developed or licensed and
integrated into our products, which could materially and adversely affect our
results of operations.
COMPETITION WITHIN OUR MARKETS MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE OUR
MARKET SHARE.
The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ATTO, Chaparral, Pathlight and, to some extent,
Computer Network Technologies. In addition, our OEM customers could develop
products or technologies internally that would replace their need for our
products and would become a source of competition. Furthermore, we have licensed
our 4200 storage router technology to one of our OEM customers. While to date
this OEM has not introduced competitive products based on this licensed
technology, this OEM could potentially do so in the future. We expect to face
competition in the future from storage system industry suppliers, including
manufacturers and vendors of other SAN products or entire SAN systems, as well
as innovative start-up companies. For example, manufacturers of Fibre Channel
hubs or switches could seek to include router functionality within their SAN
products which would obviate the need for our storage routers. As the market for
SAN products grows, we also may face competition from traditional networking
companies and other manufacturers of networking products. These networking
companies may enter the storage router market by introducing their own products
or by entering into strategic relationships with or acquiring other existing SAN
product providers.
Some of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger installed base of customers than we have. As a result, these competitors
may have greater credibility with our existing and potential customers. They
also may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than us to new or
emerging technologies or changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with decision makers at our current or potential
customers. These competitors may be able to leverage their existing
relationships to discourage these customers from purchasing products from us or
to persuade them to replace our products with their products. Increased
competition could decrease our prices, reduce our sales, lower our margins, or
decrease our market share. These and other competitive pressures may prevent us
from competing successfully against current or future competitors, and may
materially harm our business.
14
<PAGE> 16
WE EXPECT UNIT PRICES OF OUR PRODUCTS TO DECREASE OVER TIME, AND IF WE CANNOT
INCREASE OUR SALES VOLUMES OR REDUCE OUR COSTS, OUR OPERATING RESULTS WILL
SUFFER.
Many of our agreements with OEM customers provide for decreases in the
price of our products over time. In addition, we anticipate that, as products in
the SAN market become standardized and more widely available, we may need to
reduce the average unit selling price of our products in the future to respond
to competitive pricing pressures or new product introductions by our
competitors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our revenue will decline. In
addition, in order to maintain gross margin, we must continue to reduce the
manufacturing cost of our products. If we cannot maintain our gross margins, our
stock price could suffer and our business could be seriously harmed.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUE.
Networking products such as ours frequently contain undetected software or
hardware errors when first introduced or as new versions are released. Our
products are complex and errors have been found in the past and may be found
from time to time in the future. In addition, our products include components
from a number of third-party vendors and are deployed in SANs with products of
other vendors. We rely on the quality testing of these vendors to ensure the
adequate operation of their products. Because our products are manufactured with
a number of components supplied by various third-party sources, should problems
occur in the operation or performance of our products, it may be difficult to
identify the source. In addition, as our products are deployed with SAN products
from a variety of vendors, the occurrence of hardware and software errors,
whether caused by our or another vendor's SAN products could adversely affect
sales of our products. Furthermore, defects may not be discovered until our
products are already deployed in the SAN. These errors also could cause us to
incur significant warranty, diagnostic and repair costs, divert the attention of
our engineering personnel from our product development efforts and cause
significant customer relations and business reputation problems. We are
currently aware of a defect in a module purchased from a component supplier that
was incorporated into some of our installed products. While we no longer include
this module in new products, the existence of this defective module in our
installed product base could result in product returns and future loss of
business.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
Our success depends to a significant degree upon the continued
contributions of our key management, engineering and sales and marketing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Brian R. Smith, our co-founder
and Chief Executive Officer. We do not have employment contracts with any of our
key personnel.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering and sales
and marketing personnel. Competition for these personnel is intense. We have
experienced difficulty in hiring engineers with appropriate qualifications in
networking, routing and storage technologies and we may not be successful in
attracting and retaining sufficient levels of such engineers to support our
anticipated growth. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of, and negatively impact our ability to
sell, our products.
TO MANAGE OUR GROWTH AND EXPANSION, WE PLAN TO RELOCATE TO NEW FACILITIES AND
UPGRADE AND IMPLEMENT OUR ENTERPRISE RESOURCE PLANNING SYSTEM, WHICH MAY DISRUPT
OUR BUSINESS.
Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management and operational resources,
including our physical facilities and enterprise
15
<PAGE> 17
resource planning system. We plan to continue to aggressively expand our
operations following this offering to pursue existing and potential market
opportunities. We plan to relocate our headquarters facility to a larger
facility in the near future. In addition, we also are planning to replace our
current enterprise resource planning system commencing in 2000, which will
integrate manufacturing, resource planning and financial accounting. We expect
these changes to be disruptive, time-consuming and expensive processes. If we
are unsuccessful or experience delays in effecting these changes, our business
may be adversely affected and our ability to grow our business may be impaired.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS.
To date, a significant portion of our products that are purchased by OEMs
are shipped to end-user organizations in international markets. We intend to
open sales offices in international markets to focus on expanding our
international sales activities in Europe and the Pacific Rim region. Our planned
international sales growth will be limited if we are unable to expand our
international sales channel relationships, hire additional personnel and develop
relationships with international distributors, resellers, system integrators and
service providers. We may not be able to maintain or increase international
market demand for our products. Our international sales activities are subject
to a number of risks, including:
- increased complexity and costs of managing international operations;
- protectionist laws and business practices that favor local competition in
some countries;
- multiple, conflicting and changing laws, regulations and tax schemes;
- longer sales cycles;
- greater difficulty in accounts receivable collection and longer
collection periods; and
- political and economic instability.
To date, all of our sales to international customers have been denominated
in U.S. dollars. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive for our
customers to purchase, thus rendering them less competitive.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE.
Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is and will continue to be important to the success
of our business. We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements with
our employees, consultants and business partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite these efforts, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where applicable laws may not protect our proprietary rights as fully
as in the United States.
OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY CAUSE US TO BECOME INVOLVED
IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. Although we have not
been involved in intellectual property litigation, we may become involved in
litigation in the future to protect our intellectual property or defend
allegations of infringement asserted by others. Legal proceedings could subject
us to significant liability for damages or
16
<PAGE> 18
invalidate our proprietary rights. Any litigation, regardless of its outcome,
would likely be time consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
also could force us to take specific actions, including:
- cease selling our products that use the challenged intellectual property;
- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not be
available on reasonable terms, or at all; or
- redesign those products that use infringing intellectual property.
ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.
As part of our growth strategy, we intend to review opportunities to
acquire other businesses or technologies that would complement our current
products, expand the breadth of our markets or enhance our technical
capabilities. Although we are currently not subject to any agreement or letter
of intent with respect to potential acquisitions, we have from time to time
engaged in acquisition discussions with other parties. In the event of a future
acquisition, we could:
- issue stock that may dilute our current stockholders' percentage
ownership of our company;
- incur debt and assume other liabilities;
- incur significant expenses related to goodwill and other intangible
assets that can only be amortized over lengthy periods of time; or
- immediately write off the value of certain acquired assets or take other
charges.
In addition, acquisitions entail a number of risks that could materially
and adversely affect our business and operating results, including:
- problems integrating the acquired operations, technologies or products
with our existing business and products;
- diversion of management's time and attention from our core business;
- difficulties in retaining business relationships with suppliers and
customers of the acquired company;
- risks associated with entering markets in which we lack prior experience;
and
- potential loss of key employees of the acquired company.
INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS AFFECTING OUR BUSINESS EVOLVE
RAPIDLY, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS AND REGULATIONS, OUR BUSINESS WILL SUFFER.
Our products comprise only a part of a SAN. All components of a SAN must
uniformly comply with the same industry standards in order to operate
efficiently together. We depend on companies that provide other components of
the SAN to support prevailing industry standards. Many of these companies are
significantly larger and more influential in effecting industry standards than
we are. Some industry standards may not be widely adopted or implemented
uniformly, and competing standards may emerge that may be preferred by OEM
customers or end users. If larger companies do not support the same industry
standards that we do, or if competing standards emerge, our products may not
achieve market acceptance which would adversely affect our business.
Our products must comply with industry standards and governmental
regulations. For example, in the United States, our products must comply with
various regulations and standards defined by the American National Standards
Institute, the Federal Communications Commission and the Underwriters
Laboratories. Our products also must comply with standards established in
foreign jurisdictions where our products are sold. Any new products and product
enhancements that we introduce in the future must also
17
<PAGE> 19
meet industry standards at the time they are introduced. Failure to comply with
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.
WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.
The Year 2000 computer issue creates risks for us. If our suppliers,
distributors and complementary solution providers fail to correct their Year
2000 problems, these failures could result in an interruption in, or a failure
of, our normal business activities or operations. If a Year 2000 problem occurs,
it may be difficult to determine which vendor's products have caused the
problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
Year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any Year 2000 failures
will harm our business and financial condition. In addition, Year 2000
compliance issues or concerns of our customers or their end users could delay or
reduce their demand for our products. Such delays or reductions in sales could
materially and adversely affect our business.
Our internal Year 2000 compliance review is focused on an audit of our
internal computer information and security systems to assess Year 2000
compliance, and developing and implementing remedial programs to resolve Year
2000 issues in a timely manner. We have contacted most of our third-party
suppliers and have received or anticipate receiving written assurances from them
that the products they have supplied to us are Year 2000 compliant. To date, our
Year 2000 compliance costs have been immaterial.
OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT OUR
STOCKHOLDERS MAY NOT AGREE WITH AND IN WAYS THAT DO NOT IMPROVE OUR EFFORTS TO
ACHIEVE PROFITABILITY OR INCREASE OUR STOCK PRICE.
Our management will have considerable discretion in the application of the
net proceeds received by us from this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. You must rely on the judgment of our management
regarding the application of the proceeds of this offering. The net proceeds may
be used for corporate purposes that do not improve our efforts to achieve
profitability or increase our stock price. Pending application of the net
proceeds from this offering, they may be placed in investments that do not
produce income or that lose value. Please see "Use of Proceeds" for a more
complete description of how we plan to use the proceeds of this offering.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.
Upon completion of this offering, our executive officers and directors, and
their respective affiliates, will beneficially own, in the aggregate,
approximately % of our outstanding common stock. As a result, these
stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of voting power could
delay or prevent an acquisition of our company on terms which other stockholders
may desire.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of Delaware which may discourage, delay or prevent someone from acquiring
or merging with us, which may adversely affect the market price of our common
stock. Please see "Description of Capital Stock -- Anti-Takeover Effects" for
more information concerning anti-takeover provisions.
18
<PAGE> 20
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to numerous
factors, some of which are beyond our control, including the following:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts or our failure to
perform in line with such estimates;
- changes in market valuations of other technology companies, particularly
those that sell products used in SANs;
- announcements by us or our competitors of significant technical
innovations, acquisitions, strategic partnerships, joint ventures or
capital commitments;
- introduction of technologies or product enhancements that reduce the need
for storage routers;
- the loss of one or more key OEM customers;
- departures of key personnel;
- sales of common stock in the future; and
- general economic conditions, including the potential for increased
interest rates in the future.
The stock market has experienced extreme volatility that often has been
unrelated to the performance of particular companies. These market fluctuations
may cause our stock price to fall regardless of our performance.
THERE MAY BE SALES OF A SUBSTANTIAL AMOUNT OF OUR COMMON STOCK AFTER THIS
OFFERING THAT COULD CAUSE OUR STOCK PRICE TO FALL.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. All of the
shares sold in this offering will be freely tradeable, with the
21,882,926 remaining shares outstanding (based on the number of shares
outstanding as of July 31, 1999 and assuming the conversion of all of our
preferred stock), being "restricted securities" as defined in Rule 144 of the
Securities Act of 1933. 18,211,574 of these restricted shares will be freely
tradeable beginning 180 days after the effective date of this offering upon the
termination of the holders' market stand-off agreements with the underwriters.
The underwriters may terminate these agreements at their discretion, which could
result in these shares becoming available for sale prior to the expiration of
such 180-day period subject, in some cases, to volume limitations. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF YOUR SHARES.
The initial public offering price is expected to be substantially higher
than the net tangible book value per share of our outstanding common stock
immediately after this offering. Accordingly, if you purchase common stock in
this offering, you will incur immediate dilution of approximately $ in
the net tangible book value per share of our common stock from the price you pay
for our common stock. Please see "Dilution" for information regarding the
dilution you will experience.
19
<PAGE> 21
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate" and "continue". You should read statements that contain
these words carefully because they discuss our future expectations, make
projections of our future results of operations or of our financial condition or
state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections captioned "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as any cautionary language in this prospectus, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Before you
invest in our common stock, you should be aware that the occurrence of the
events described in the "Risk Factors" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections and elsewhere in this
prospectus could have a material adverse effect on our business, operating
results and financial condition.
20
<PAGE> 22
USE OF PROCEEDS
Assuming an initial public offering price of $ per share, we will
receive approximately $ million from our sale of shares of common
stock, net of estimated offering expenses and estimated underwriting discounts
and commissions payable by us. If the underwriters exercise their over-
allotment option in full, we will receive an additional $ million in net
proceeds and selling stockholders will receive an aggregate of $ million in
net proceeds. We will not receive any portion of the net proceeds received by
the selling stockholders from the sale of their shares upon exercise of the
underwriters' over-allotment option. See "Principal and Selling Stockholders."
The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock, facilitate future access by us to
public equity markets and provide us with increased visibility in our markets.
We intend to use the net proceeds of this offering for general corporate
purposes, including capital expenditures, working capital, and expansion of our
research and development and sales and marketing activities. In addition, we may
use a portion of the net proceeds to acquire businesses, products or
technologies that are complementary to our current or future business and
product lines. Although we are currently not subject to any agreement or letter
of intent with respect to potential acquisitions, we have from time to time
engaged in acquisition discussions with other parties. Our management will have
significant flexibility in applying the net proceeds of this offering. Pending
such uses, we will invest the net proceeds of this offering in short-term,
investment grade, interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
preferred stock, and we do not intend to pay cash dividends on our common stock
in the foreseeable future. We currently expect to retain any future earnings to
fund the operation and expansion of our business, and we do not anticipate
paying any cash dividends in the foreseeable future. In addition, the terms of
our credit agreements prohibit the payment of cash dividends.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization at July 31, 1999:
- on an actual basis (giving effect to our 3-for-2 stock split);
- on a pro forma basis to reflect (a) the issuance of 801,667 shares of
Series E preferred stock on August 6, 1999 as if such issuance had
occurred on July 31, 1999; and (b) the conversion of all outstanding
shares of preferred stock into 13,599,848 shares of our common stock; and
- on a pro forma as adjusted basis at July 31, 1999 to additionally reflect
net proceeds from the sale of shares of common stock offered
hereby at an assumed initial public offering price per share of $ .
You should read the following table in conjunction with our consolidated
financial statements and the notes to those statements at the end of this
prospectus.
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion...................... $ 936 $ 936 $
Redeemable convertible preferred stock, $.001 par value,
11,000,000 shares authorized, 8,614,898 and 9,481,565
shares designated actual and pro forma, 8,264,898 shares
issued and outstanding, actual; no shares issued or
outstanding, pro forma and pro forma as adjusted.......... 18,441 --
Stockholders' equity (deficit):
Common stock, $.001 par value, 49,000,000 shares
authorized, 8,283,078 shares issued and outstanding,
actual; 49,000,000 shares authorized, 21,882,926 shares
issued and outstanding, pro forma; 49,000,000 shares
authorized, shares issued and outstanding,
pro forma as adjusted.................................. 8 22
Additional paid-in capital.................................. 5,562 35,964
Deferred stock-based compensation........................... (4,389) (4,389)
Notes receivable from stockholders.......................... (447) (447)
Accumulated deficit......................................... (11,834) (11,834)
Treasury stock.............................................. (2) (2)
-------- -------- --------
Total stockholders' equity (deficit)................. (11,102) 19,314
-------- -------- --------
Total capitalization.............................. $ 8,275 $ 20,250 $
======== ======== ========
</TABLE>
The share information set forth above excludes:
- 1,553,343 shares subject to outstanding options under our stock option
plan with a weighted average exercise price of $0.50 per share; and
- 1,016,079 shares of common stock reserved for issuance under our stock
option plan.
22
<PAGE> 24
DILUTION
Our pro forma net tangible book value at July 31, 1999 was $19.3 million,
or $0.88 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities, divided by the pro forma number of shares of common stock
outstanding as of July 31, 1999, after giving effect to:
- our sale of 801,667 shares of Series E preferred stock for approximately
$12.0 million on August 6, 1999 as if such sale had occurred on July 31,
1999; and
- the conversion of all outstanding shares of our preferred stock into
13,599,848 shares of common stock.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to our sale of shares of common stock in this offering at an
assumed initial public offering price of $ per share and after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us, our adjusted pro forma net tangible book value at July 31, 1999
would have been $ million, or $ per share. This amount represents an
immediate increase in pro forma net tangible book value to our existing
stockholders of $ per share and an immediate dilution to new investors of
$ per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share at July 31,
1999...................................................... $ 0.88
Increase in pro forma net tangible book value per share
attributable to new investors.............................
--------
Pro forma net tangible book value per share after this
offering..................................................
--------
Dilution per share to new investors......................... $
========
</TABLE>
If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at July 31, 1999 would have been
$ million, or $ per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $ per share
and an immediate dilution to new investors of $ per share.
The following table summarizes, on a pro forma basis, at July 31, 1999,
after giving effect to the pro forma adjustments described above, the
differences between the number of shares of common stock purchased from us, the
aggregate cash consideration paid to us and the average price per share paid by
our existing stockholders and by new investors purchasing shares of common stock
in this offering. The calculation below is based on an assumed initial public
offering price of $ per share, before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders...................... 21,882,926 % $30,590,426 % $1.40
New investors..............................
--------- ----- ----------- -----
Total............................ 100.0% 100.0%
========= ===== =========== =====
</TABLE>
This discussion and table assume no exercise of any stock options
outstanding at July 31, 1999. At July 31, 1999, there were options outstanding
under our stock option plan to purchase a total of 1,553,343 shares of common
stock with a weighted average exercise price of $0.50 per share. To the extent
that any of these options are exercised, there will be further dilution to new
investors.
23
<PAGE> 25
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes to those
statements included in this prospectus. The consolidated balance sheet data at
October 31, 1997 and 1998 and the consolidated statement of operations data for
the years ended October 31, 1996, 1997 and 1998 have been derived from audited
consolidated financial statements included in this prospectus. The consolidated
statement of operations data for the period from May 1, 1995 (inception) to
October 31, 1995 has been derived from unaudited consolidated financial
statements not included in this prospectus. The consolidated balance sheet data
at July 31, 1999 and the consolidated statement of operations data for the nine
months ended July 31, 1998 and 1999 are derived from unaudited consolidated
financial statements included in this prospectus. In the opinion of management,
the unaudited interim financial data have been prepared on the same basis as the
audited consolidated financial statements appearing in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, we
believe to be necessary for a fair presentation of the data. Operating results
for the nine months ended July 31, 1999 are not necessarily indicative of the
results that may be expected for the full fiscal year or any future period.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 NINE MONTHS ENDED
(INCEPTION) TO FISCAL YEAR ENDED OCTOBER 31, JULY 31,
OCTOBER 31, ------------------------------------------------ -------------------------------
1995 1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Product revenue........... $ 15 $ 160 $ 821 $ 2,930 $ 1,721 $11,728
Other revenue............. 270 332 188 279 276 65
------- ------- ------- ------- ------- -------
Total revenue....... 285 492 1,009 3,209 1,997 11,793
Cost of revenue............. 160 170 465 1,861 1,003 6,965
------- ------- ------- ------- ------- -------
Gross profit................ 125 322 544 1,348 994 4,828
------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing....... -- -- 641 2,461 1,886 2,791
Research and
development............. -- 291 1,329 2,386 1,600 3,539
General and
administrative.......... 52 235 1,323 1,896 1,411 1,699
Amortization of
stock-based
compensation............ -- -- -- 41 14 534
------- ------- ------- ------- ------- -------
Total operating
expenses.......... 52 526 3,293 6,784 4,911 8,563
------- ------- ------- ------- ------- -------
Income (loss) from
operations................ 73 (204) (2,749) (5,436) (3,917) (3,735)
Other income (expense),
net....................... (3) (8) 56 82 105 90
------- ------- ------- ------- ------- -------
Net income (loss)........... $ 70 $ (212) $(2,693) $(5,354) $(3,812) $(3,645)
======= ======= ======= ======= ======= =======
Basic and diluted net loss
per share................. $ (0.04) $ (0.45) $ (0.87) $ (0.62) $ (0.52)
======= ======= ======= ======= =======
Shares used in computing
basic and diluted net loss
per share................. 6,000 6,000 6,146 6,120 7,005
======= ======= ======= ======= =======
Pro forma basic and diluted
net loss per share........ $ (0.31) $ (0.18)
======= =======
Shares used in computing pro
forma basic and diluted
net loss per share........ 17,088 20,605
======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------
1997 1998 JULY 31, 1999
-------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments.............................. $ 6,063 $ 3,934 $ 6,492
Working capital................................................................ 5,757 4,461 6,220
Total assets................................................................... 7,615 7,187 14,140
Long-term debt, net of current portion......................................... 301 591 936
Redeemable convertible preferred stock......................................... 9,219 13,184 18,441
Total stockholders' deficit.................................................... (2,817) (8,093) (11,102)
</TABLE>
24
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those discussed below and elsewhere in this
prospectus, particularly under the heading "Risk Factors."
OVERVIEW
We are the leading provider of storage routers for storage area networks,
or SANs. Our storage routers interconnect servers and storage systems in a Fibre
Channel SAN to more effectively and efficiently store, manage and ensure the
integrity and availability of data. The SAN is a high speed network that
facilitates communication among servers and storage systems using a high
performance data transmission protocol known as Fibre Channel. By deploying our
storage routers in a SAN, organizations gain improved information management
capability.
Our company was originally formed in 1995 as Infinity Commstor, LLC, a
Texas limited liability company. In 1996, Infinity Commstor was merged into a
newly formed Delaware corporation, which became Crossroads Systems, Inc., with
operations conducted through a wholly owned Texas corporation subsidiary. Since
mid-1996, our operating activities have related primarily to increasing our
research and development capabilities, designing, developing and marketing our
storage routers, staffing our administrative, marketing and sales organizations
and establishing relationships with OEMs and distributors, resellers and system
integrators. We began shipping our first product, the Crossroads 4100 storage
router, to OEMs for their evaluation in July 1997. Prior to that time, our
revenue was derived principally from consulting services related to the
implementation of Fibre Channel components and from the sale of a software
developer's kit used to deploy Fibre Channel systems. Since the introduction of
our 4100 product, we have expanded our storage router product line and sold
approximately 5,000 storage routers.
To date, we have derived substantially all of our product revenue from
sales of storage routers to server and storage system OEMs. To a lesser extent,
we have sold products to distributors, resellers and system integrators. Our OEM
customers are ADIC, ATL Products, Compaq, Dell, Exabyte, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, INRANGE, McDATA and StorageTek. A few OEM
customers historically have accounted for a substantial portion of our revenue.
During fiscal 1998, our four largest customers -- ADIC, Compaq, Hewlett-Packard
and StorageTek -- accounted for 25%, 20%, 16% and 14% of our total revenue,
respectively. During the nine month period ended July 31, 1999, sales to Compaq
and StorageTek accounted for 44% and 30% of our total revenue. No other customer
accounted for more than 10% of our total revenue in these periods. We do not
have a contract with one of our key customers, and none of our customers are
obligated to purchase minimum quantities of our products. A key element of our
growth strategy is to expand our sales channels. To this end, we have
established relationships with a number of distributors, resellers and system
integrators, including Andataco, Bell Microproducts, Cranel, Datalink and
Pinacor. Although we anticipate that revenue derived from sales to distributors,
resellers and system integrators will increase as a percentage of our total
revenue in future periods, we expect to continue to experience significant
customer concentration in sales to key OEM accounts for the foreseeable future.
Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our first
generation product -- the 4100 -- has accounted for 52% and 71% of our product
revenue in fiscal 1998 and in the nine month period ended July 31, 1999,
respectively. Moreover, many of our current agreements with our OEM customers
include provisions requiring reductions in the sales price for our storage
routers over time. As a result, we expect to experience declines in the average
unit selling prices for our products in the future. Such declines may be
25
<PAGE> 27
more pronounced should we encounter significant pricing pressures from increased
competition within the storage router market.
With respect to sales of our products to OEMs, we recognize product revenue
when products are shipped to the OEM. Product sales to distributors, resellers
and system integrators who do not have return rights are recognized at the time
of shipment. To the extent that we sell products to distributors, resellers and
system integrators that have rights of return, we defer revenue and cost of
revenue associated with such sales and recognize these amounts when that
customer sells our products to its customers. At July 31, 1999, our deferred
revenue totaled $220,000. We provide a repair or replace warranty of between 15
and 39 months following the sale of our products, and we provide a reserve for
warranty costs when the related product revenue is recognized.
We currently outsource all of our manufacturing requirements to a contract
manufacturer and a significant portion of our cost of revenue historically has
consisted of payments to that manufacturer. We currently are transitioning the
final assembly and test portion of our manufacturing process from our contract
manufacturer to an in-house facility. In connection with this transition, we
have hired additional personnel, purchased the necessary equipment, planned
customer qualification efforts and leased additional facilities. We expect the
total cost of this transition to be less than $1.0 million. We believe that
bringing final assembly and test operations in-house will allow us to reduce our
total manufacturing costs on a per unit basis and provide us with greater
flexibility to respond to changes in customer demand. As the needs of our
customers continue to evolve, we plan to reassess our manufacturing requirements
on a periodic basis and effect appropriate changes to our manufacturing
processes. Please see "Risk Factors -- We are transitioning the final assembly
and test portion of our manufacturing process to an in-house facility, which
will increase our fixed costs and expose us to increased inventory risks" for a
discussion of risks associated with the in-house performance of final assembly
and testing for our products.
In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998 and the nine
months ended July 31, 1999 aggregating approximately $5.0 million. Deferred
compensation represents, for accounting purposes, the difference between the
deemed fair value of the common stock underlying these options and their
exercise price at the date of grant. The difference has been recorded as
deferred stock-based compensation and is being amortized over the vesting period
of the applicable options, generally four years. Of the total deferred
compensation amount, $575,000 has been amortized as of July 31, 1999. The
amortization of deferred compensation is recorded as an operating expense. We
currently expect to amortize the remaining amounts of deferred compensation as
of July 31, 1999 in the periods indicated:
<TABLE>
<S> <C>
August 1, 1999 to October 31, 1999.............. $ 700,000
November 1, 1999 to October 31, 2000............ 2,234,000
November 1, 2000 to October 31, 2001............ 950,000
November 1, 2001 to October 31, 2002............ 425,000
November 1, 2002 to July 31, 2003............... 80,000
----------
$4,389,000
==========
</TABLE>
We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $11.8
million at July 31, 1999. Moreover, we anticipate that we will continue to incur
net losses on both a quarterly and annual basis for the foreseeable future, in
part due to our plans to devote substantial resources to expand our sales and
marketing and research and development activities.
As of July 31, 1999, we had approximately $10.6 million of federal net
operating loss carryforwards. These net operating loss carryforwards begin to
expire in 2011. We have not recognized any benefit from the future use of loss
carryforwards for these periods or for any other periods since inception due to
uncertainties regarding the realization of deferred tax assets based on the
Company's taxable earnings history.
26
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth our consolidated financial data for the
periods indicated expressed as a percentage of our total revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue........................... 32.5% 81.4% 91.3% 86.2% 99.4%
Other revenue............................. 67.5 18.6 8.7 13.8 0.6
------ ------ ------ ------ ------
Total revenue..................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................. 34.6 46.1 58.0 50.2 59.1
------ ------ ------ ------ ------
Gross margin................................ 65.4 53.9 42.0 49.8 40.9
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing....................... -- 63.5 76.7 94.4 23.7
Research and development.................. 59.1 131.7 74.3 80.1 30.0
General and administrative................ 47.8 131.2 59.1 70.6 14.4
Amortization of stock-based
compensation........................... -- -- 1.3 0.7 4.5
------ ------ ------ ------ ------
Total operating expenses.......... 106.9 326.4 211.4 245.8 72.6
------ ------ ------ ------ ------
Loss from operations........................ (41.5) (272.5) (169.4) (196.0) (31.7)
Other income (expense)...................... (1.6) 5.6 2.6 5.2 0.8
------ ------ ------ ------ ------
Net loss.................................... (43.1)% (266.9)% (166.8)% (190.8)% (30.9)%
====== ====== ====== ====== ======
</TABLE>
COMPARISON OF NINE MONTHS ENDED JULY 31, 1998 TO NINE MONTHS ENDED JULY 31, 1999
Revenue. Total revenue increased 491% from $2.0 million in the nine months
ended July 31, 1998 to $11.8 million in the comparable 1999 period.
Product revenue. Product revenue increased 581% from $1.7 million in the
nine months ended July 31, 1998 to $11.7 million in the comparable 1999 period.
The increase in product revenue was primarily due to the increase in product
sales to significant OEM customers, incremental sales to new OEM customers and
the introduction of our 4200 storage router product in June 1998. As a
percentage of total revenue, product revenue increased from 86% in the nine
months ended July 31, 1998 to 99% in the comparable 1999 period.
Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue decreased 76% from $276,000 in the nine
months ended July 31, 1998 to $65,000 in the comparable 1999 period. Other
revenue was higher in the 1998 period principally due to the nonrecurring
license of a product design for $150,000 in that period. As a percentage of
total revenue, other revenue decreased from 14% in the nine months ended July
31, 1998 to 0.6% in the comparable 1999 period. We do not anticipate significant
other revenue in the future.
Cost of revenue and gross margin. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead and
warranty costs. Cost of revenue increased 594% from $1.0 million in the nine
months ended July 31, 1998 to $7.0 million in the comparable 1999 period. This
increase was primarily due to the increased unit sales volume in the 1999 period
and a corresponding increase in costs related to manufacturing. Gross profit
increased 386% from $994,000 in the nine months ended July 31, 1998 to $4.8
million in the comparable 1999 period. The increase was primarily due to
increased product revenue. Gross profit as a percentage of total revenue,
referred to as gross margin, decreased from 50% in the nine months ended July
31, 1998 to 41% in the comparable 1999 period. Gross margin in the nine month
period ended July 31, 1998 was favorably impacted by nonrecurring license
revenue. Gross margin in the comparable 1999 period was negatively impacted by
the absence of material
27
<PAGE> 29
license revenue, a decline in weighted average unit selling prices pursuant to
contractually agreed price reductions with certain OEM customers, costs incurred
in anticipation of establishing in-house final assembly and test operations,
and, to a lesser extent, changes in our customer and product mix.
Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs and other promotional activities. Sales and marketing
expenses increased 48% from $1.9 million in the nine months ended July 31, 1998
to $2.8 million in the comparable 1999 period. The increase in sales and
marketing expenses was primarily due to the hiring of additional sales and
marketing personnel and increased commissions commensurate with greater sales.
As a percentage of total revenue, sales and marketing expenses decreased from
94% in the nine months ended July 31, 1998 to 24% in the comparable 1999 period,
primarily as a result of substantially higher revenue in the 1999 period. We
anticipate that sales and marketing expenses will continue to increase in
absolute dollars and may fluctuate as a percentage of total revenue, due to the
planned expansion of our sales and marketing efforts and increased marketing
activity that is intended to broaden awareness of the benefits of our products.
Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development and
prototyping expenses. Research and development expenses increased 121% from $1.6
million in the nine months ended July 31, 1998 to $3.5 million in the comparable
1999 period. The increase in research and development expenses was primarily due
to the hiring of additional research and development personnel and increased
prototyping costs related to the development of our 4200 product. As a
percentage of total revenue, research and development expenses decreased from
80% in the nine months ended July 31, 1998 to 30% in the comparable 1999 period,
primarily as a result of substantially higher revenue in the 1999 period.
Research and development personnel totaled 21 at July 31, 1998 and 42 at July
31, 1999. We expect that research and development expenses will continue to
increase in absolute dollars, and may fluctuate, due to the importance of
research and development in developing our technologies and expanding our
product offerings.
General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses and insurance costs. General and
administrative expenses increased 20% from $1.4 million in the nine months ended
July 31, 1998 to $1.7 million in the comparable 1999 period. The increase in
general and administrative expenses was primarily due to increased staffing and
associated expenses necessary to manage and support the growth of our business.
As a percentage of total revenue, general and administrative expenses decreased
from 71% in the nine months ended July 31, 1998 to 14% in the comparable 1999
period, primarily as a result of substantially higher revenue in the 1999
period. We anticipate that general and administrative expenses will continue to
increase in absolute dollars for the foreseeable future as we accommodate
growth, add related infrastructure and incur expenses related to being a public
company. However, if our revenue continues to increase, general and
administrative expenses should decrease as a percentage of total revenue.
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
Revenue. Our total revenue increased 105% from $492,000 in fiscal 1996 to
$1.0 million in fiscal 1997, and increased 218% to $3.2 million in fiscal 1998.
Product revenue. Product revenue increased 413% from $160,000 in fiscal
1996 to $821,000 in fiscal 1997, and increased 257% to $2.9 million in fiscal
1998. As a percentage of total revenue, product revenue increased from 33% in
fiscal 1996, to 81% in fiscal 1997 and to 91% in fiscal 1998. The increases in
product revenue resulted from increased product sales to significant OEM
customers, in fiscal 1997, the introduction of our 4100 product, and, in fiscal
1998, the introduction of our 4200 product.
Other revenue. Other revenue decreased 43% from $332,000 in fiscal 1996 to
$188,000 in fiscal 1997 and increased 48% to $279,000 in fiscal 1998. The
increase in fiscal 1998 was principally due to the license of a product design
for $150,000 in that period.
28
<PAGE> 30
Cost of revenue and gross margin. Cost of revenue increased 174% from
$170,000 in fiscal 1996 to $465,000 in fiscal 1997, and increased 300% to $1.9
million in fiscal 1998. These increases were primarily due to increases in unit
sales volume and a corresponding increase in costs related to manufacturing.
Gross profit increased 69% from $322,000 in fiscal 1996 to $544,000 in fiscal
1997 and 148% to $1.3 million in fiscal 1998. The increase was primarily due to
higher sales in each period. Gross margin decreased from 65% in fiscal 1996 to
54% in fiscal 1997, and to 42% in fiscal 1998. The decreases in gross margin
resulted from decreases in the percentage of total revenue attributable to
higher margin license revenue.
Sales and marketing. Sales and marketing expenses increased from $0 in
fiscal 1996 to $641,000 in fiscal 1997, and increased 284% to $2.5 million in
fiscal 1998. The significant increase in sales and marketing expenses in fiscal
1998 was primarily due to the hiring of additional sales and marketing personnel
and increased sales and marketing activities. As a percentage of total revenue,
sales and marketing expenses increased from 64% in fiscal 1997 to 77% in fiscal
1998.
Research and development. Research and development expenses increased 357%
from $291,000 in fiscal 1996 to $1.3 million in fiscal 1997, and increased 80%
to $2.4 million in fiscal 1998. The increases were primarily due to the hiring
of additional research and development personnel during fiscal 1997 and 1998 and
product development and prototyping costs related to the development of our 4100
product in fiscal 1997 and 4200 product in fiscal 1998. As a percentage of total
revenue, research and development expenses increased from 59% in fiscal 1996 to
132% in fiscal 1997, and decreased to 74% in fiscal 1998. The decrease in fiscal
1998 was primarily due to substantially higher revenue in that year.
General and administrative. General and administrative expenses increased
463% from $235,000 in fiscal 1996 to $1.3 million in fiscal 1997 and increased
43% to $1.9 million in fiscal 1998. The significant increase in general and
administrative expenses in fiscal 1997 was primarily due to increased staffing
and associated expenses necessary to manage and support the growth in our
business. As a percentage of total revenue, general and administrative expenses
increased from 48% in fiscal 1996 to 131% in fiscal 1997 and decreased to 59% in
fiscal 1998. The decrease in fiscal 1998 as a percentage of total revenue was
primarily due to substantially higher revenue in that year.
29
<PAGE> 31
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following tables set forth our unaudited consolidated statement of
operations data for the seven fiscal quarters ended July 31, 1999, as well as
such data expressed as a percentage of our total revenue for the quarters
presented. This unaudited quarterly information has been prepared on the same
basis as our audited consolidated financial statements and, in the opinion of
our management, reflects all normal recurring adjustments that we consider
necessary for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue............................. $ 523 $ 427 $ 771 $ 1,209 $ 3,160 $ 3,503 $ 5,065
Other revenue............................... 19 158 98 4 60 3 2
------- ------- ------- ------- ------- ------- -------
Total revenue......................... 542 585 869 1,213 3,220 3,506 5,067
Cost of revenue............................... 199 321 483 858 1,807 2,029 3,129
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 343 264 386 355 1,413 1,477 1,938
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 543 589 753 576 770 853 1,168
Research and development.................... 505 506 589 786 838 990 1,711
General and administrative.................. 418 501 492 485 436 476 787
Amortization of stock-based compensation.... -- 1 13 27 49 98 387
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 1,466 1,597 1,847 1,874 2,093 2,417 4,053
------- ------- ------- ------- ------- ------- -------
Loss from operations.......................... (1,123) (1,333) (1,461) (1,519) (680) (940) (2,115)
Other income (expense)........................ 56 34 15 (23) 33 9 48
------- ------- ------- ------- ------- ------- -------
Net loss.............................. $(1,067) $(1,299) $(1,446) $(1,542) $ (647) $ (931) $(2,067)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue............................. 96.5% 73.0% 88.7% 99.7% 98.1% 99.9% 100.0%
Other revenue............................... 3.5 27.0 11.3 0.3 1.9 0.1 --
------- ------- ------- ------- ------- ------- -------
Total revenue......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................... 36.7 54.9 55.6 70.7 56.1 57.9 61.8
------- ------- ------- ------- ------- ------- -------
Gross margin.................................. 63.3 45.1 44.4 29.3 43.9 42.1 38.2
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 100.2 100.7 86.7 47.5 23.9 24.3 23.0
Research and development.................... 93.2 86.5 67.8 64.8 26.0 28.2 33.8
General and administrative.................. 77.1 85.6 56.6 40.0 13.6 13.6 15.5
Amortization of stock-based compensation.... -- 0.2 1.5 2.2 1.5 2.8 7.6
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 270.5 273.0 212.6 154.5 65.0 68.9 79.9
------- ------- ------- ------- ------- ------- -------
Loss from operations.......................... (207.2) (227.9) (168.2) (125.2) (21.1) (26.8) (41.7)
Other income (expense)........................ 10.3 5.8 1.7 (1.9) 1.0 0.2 0.9
------- ------- ------- ------- ------- ------- -------
Net loss.............................. (196.9)% (222.1)% (166.5)% (127.1)% (20.1)% (26.6)% (40.8)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
Our quarterly results of operations have fluctuated in the past and we
expect them to fluctuate in future periods due to a variety of reasons,
including those specifically discussed in the section captioned "Risk Factors."
For example, our product revenue was higher in the quarter ended January 31,
1998 than the quarter ended April 30, 1998 due to the purchase of units for
qualification testing by a key OEM customer and a large order by another OEM
customer in the January 31, 1998 quarter. In the quarters ended April 30 and
July 31, 1998 and January 31, 1999, we received significant other revenue from
the license of a product design. We do not expect significant other revenue on a
recurring basis.
Furthermore, we have experienced significant fluctuations in our gross
margin, due to a number of factors, including declines in average selling
prices. In the quarters ended April 30, 1998 and July 31, 1998, our gross margin
was adversely affected by higher royalties for licensed technology.
30
<PAGE> 32
In addition, in the quarter ended October 31, 1998 we recorded a charge for
excess and obsolete inventory related to certain components for one of our
products. In addition, our gross margins declined in the quarter ended July 31,
1999 due to an increase in our manufacturing costs related to additional
staffing and facilities costs incurred to transition the final assembly and test
portion of our manufacturing operations to an in-house facility.
We also have also experienced significant fluctuations in our operating
expenses. For example, our sales and marketing expenses increased in the quarter
ended July 31, 1998 because of costs incurred in closing a sales office that
quarter. Research and development expenses increased substantially in the
quarter ended July 31, 1999 due to increased prototyping costs and payment of a
non-recurring license fee. General and administrative expenses increased in the
quarter ended July 31, 1999 due to increased staffing in our administrative and
information technology departments.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity at July 31, 1999 consisted of $6.5
million in cash and cash equivalents and our bank credit facility. The credit
facility includes a revolving line of credit providing borrowings up to the
lesser of (a) $2.5 million or (b) 80% of eligible accounts receivable plus 25%
of eligible inventories; and an equipment loan agreement providing for financing
up to $1.0 million. Borrowings under the revolving line of credit bear interest
at the bank's prime rate, which was 8.0% at July 31, 1999, and are secured by
our accounts receivable and inventories. Term loan financing available to us
under the equipment loan agreement bears interest at the bank's prime rate plus
0.5%, is secured by the related capital equipment and is payable through June
30, 2003. The line of credit and the equipment loan agreement expire in December
1999. The line of credit and equipment loan agreement contain provisions that
prohibit the payment of cash dividends and require the maintenance of specified
levels of tangible net worth and certain financial performance covenants
measured on a monthly basis. We entered into a modification letter with our bank
in July 1999 to revise an operating covenant in our loan agreements to bring us
into compliance with the terms of our loan agreements. Prior to such
modification, we were in default of a provision of our loan agreements. As of
July 31, 1999, there were no borrowings outstanding under the revolving line of
credit and $1.7 million of term loans outstanding. We are currently in
negotiations with our lender to extend the revolving portion of our credit
facility to August 2000, to increase the availability under the equipment loan
agreement.
We have funded our operations to date primarily through sales of preferred
stock, resulting in aggregate gross proceeds to us of $30.6 million (which
amount includes the $12.0 million of proceeds received from the private
placement of our Series E preferred stock in August 1999), product sales and, to
a lesser extent, bank debt. During fiscal 1996, cash utilized by operating
activities was $15,000, compared to $2.6 million in fiscal 1997, $5.8 million in
fiscal 1998 and $2.1 million in the nine months ended July 31, 1999. The
increases in net cash utilized reflected the increased losses from operations,
working capital required to fund expanding operations and increases in
inventories and accounts receivable. Capital expenditures were $123,000 in
fiscal 1996, $719,000 in fiscal 1997, $956,000 in fiscal 1998 and $1.5 million
in the nine months ended July 31, 1999. These expenditures reflect our
investments in computer equipment, test equipment, software development tools
and leasehold improvements, all of which were required to support our business
expansion. We anticipate capital expenditures through the remainder of fiscal
1999 and fiscal 2000 of at least $5.0 million to fund our purchase of a new
enterprise resource planning system; leasehold improvements; costs associated
with the transition to an in-house facility of the final assembly and test
portions of our manufacturing process, including modification to our facilities
and test and other manufacturing equipment; and equipment and software to
support our projected growth in personnel.
We believe the net proceeds of this offering, together with our existing
cash balances, the net proceeds from the sale of our Series E preferred stock
and credit facilities, will be sufficient to meet our capital requirements
through at least the next 12 months. However, we could be required, or could
elect, to seek additional funding prior to that time. Our future capital
requirements will depend on many factors, including the rate of revenue growth,
the timing and extent of spending to support product development
31
<PAGE> 33
efforts and expansion of sales and marketing activities, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. Although we are currently not a party to any
agreement or letter of intent with respect to a potential acquisition or
strategic arrangement, we may enter into acquisitions or strategic arrangements
in the future which also could require us to seek additional equity or debt
financing. We cannot assure you that additional equity or debt financing, if
required, will be available to us on acceptable terms, or at all.
YEAR 2000 COMPLIANCE
Impact of the Year 2000 computer problem. The Year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have time-
sensitive software may recognize a date represented as "00" as the year 1900
rather than 2000. This could result in system failures or miscalculations that
disrupt our operations.
To date, we have not experienced any Year 2000 issues with any of our
internal systems or our products, and we currently do not expect to experience
any such issues in the future.
Our Year 2000 compliance program. Our Year 2000 compliance program is based
on the program adopted by the U.S. Government Accounting Office. The program is
divided into six phases: awareness, assessment, renovation, validation,
implementation and monitoring. The program covers our information technology
systems, non-information technology systems and embedded technology. We have
completed the awareness phase, substantially completed the assessment phase and
are starting the renovation phase. We expect to be completed with the
implementation phase by the end of October 1999.
State of readiness of our products. We have been testing our existing
products for use in the year 2000 and beyond, and believe that using our
products as documented should not cause any Year 2000 related issues. While we
believe our products are Year 2000 compliant, it is impractical for us to test
all of our products in every computer environment or with all available
combinations of our products with products and components of our customers and
third-party suppliers of SAN products. As a result, there may be situations
where our products, when implemented in an organization's computing system with
products and components supplied by third parties, could result in Year 2000
issues for that organization.
State of readiness of our internal systems. Our business may be affected by
Year 2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We are requesting written assurances from our third-party
vendors for all of our material systems that such systems are Year 2000
compliant. To date, we have identified one internal system that will require an
upgrade to be Year 2000 compliant and one of our enterprise systems that
utilizes a database system that will require an upgrade to be Year 2000
compliant. Software necessary to effect these upgrades is currently available.
In addition, several of our administrative and engineering systems rely on an
operating system that will require an upgrade to be Year 2000 compliant, which
is currently available. Most of our productivity systems and personal computers
utilize Microsoft Windows 95/98 operating systems and Microsoft NT 4.0. While
the Microsoft Windows 95/98 environments have Year 2000 upgrades available, to
date Microsoft has not provided what we consider a usable Year 2000 upgrade for
the NT 4.0 environment. We believe that Microsoft will provide this upgrade in a
timely manner to avoid any Year 2000 problems. We believe we will be able to
implement all available upgrades by the end of September 1999. We have not
deferred any of our internal projects due to the Year 2000 issue.
State of readiness of our facilities. The operation of our facilities also
depends upon the computer-controlled systems of third parties such as suppliers
and service providers. We believe that absent a systemic failure outside our
control, such as a prolonged loss of electrical or telephone service, Year 2000
problems of these third parties will not have a material impact on our
operations. Our facilities use limited embedded technology and the failure of
that technology is not expected to have a material impact on our operations.
32
<PAGE> 34
State of readiness of key third parties. We believe that our third-party
suppliers are sensitive to the need to be Year 2000 compliant. As part of the
assessment phase of our Year 2000 program, we are requesting written assurances
from our third-party suppliers that they are Year 2000 compliant. Some of our
third-party suppliers have indicated that they are Year 2000 compliant. However,
others have indicated to us that they are in a Year 2000 compliance review
process. Therefore, at this time they are not in a position to provide us with
Year 2000 compliance assurance. If we identify a material Year 2000 compliance
issue with a third-party supplier, we will work with that supplier to resolve
the issue or source the parts or services from a supplier that is Year 2000
compliant.
Use of independent verification. We have retained Sprint/Paranet, an
independent information technology consulting firm, to assess our Year 2000
readiness and identify areas where we may face Year 2000 compliance issues. We
anticipate that a preliminary report will be provided to us by the end of August
1999 and a full report completed by the end of September 1999.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediation of our internal systems will exceed $250,000.
Worst case Year 2000 scenario. While it is impossible to evaluate every
aspect of Year 2000 compliance, we believe the worst case scenario related to
Year 2000 compliance issues would be the failure of a sole or limited source
component supplier to be Year 2000 compliant. The failure of one of these
suppliers to be Year 2000 compliant could seriously interrupt the flow of
materials into the manufacturing process and therefore delay the manufacture and
sale of our products and further entail a recall of installed products from
end-user organizations to replace the malfunctioning product. However, due to
the general uncertainty inherent in the Year 2000 computer problem resulting
from the uncertainty of the Year 2000 readiness of third-party component
suppliers, we are unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on our business.
Additional risks. Any failure by us to make our products Year 2000
compliant could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems. Failures of our internal systems could temporarily
prevent us from processing orders, issuing invoices, and developing products,
and could require us to devote significant resources to correcting such
problems.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. We do not currently engage or plan to engage in derivative
instruments or hedging activities.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
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 have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
33
<PAGE> 35
BUSINESS
OVERVIEW
We are the leading provider of storage routers for storage area networks,
or SANs. Our storage routers interconnect servers and storage systems in a Fibre
Channel SAN to more effectively and efficiently store, manage and ensure the
integrity and availability of data. The SAN is a high speed network that
facilitates communication among servers and storage systems using a high
performance data transmission protocol known as Fibre Channel. By deploying our
storage routers in a SAN, organizations gain improved information management
capability. Specifically, our storage routers decrease network congestion,
reduce time required for data backup, improve utilization of storage resources
and preserve and enhance existing server and storage system investments. Our
products provide these benefits by enabling rapid, seamless communication
between devices utilizing diverse input/output, or I/O, data transmission
protocols. We sell our products primarily through leading server and storage
system original equipment manufacturers, or OEMs, including ADIC, ATL Products,
Compaq, Dell, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, INRANGE,
McDATA and StorageTek. To date, we have sold approximately 5,000 of our storage
routers to OEM customers. We have also recently begun to sell our products
through distributors, resellers and system integrators, including Andataco, Bell
Microproducts, Cranel, Datalink and Pinacor.
INDUSTRY BACKGROUND
Increasing Importance of Information Management
Information management has become a strategic imperative for many
organizations today. The broad deployment of distributed computer networks
combined with the widespread use of the Internet, intranets and electronic
commerce have enabled organizations to empower employees, customers and
suppliers with access to business-critical data. The voluminous amount of data
generated, stored, protected and accessed has created increasingly serious
information management challenges. Moreover, the greater number and more diverse
types of users accessing data, as well as the proliferation of applications
across heterogeneous operating systems and interconnect protocols, have
exacerbated these challenges. Organizations must therefore implement processes
and systems that effectively and efficiently store, manage and ensure the
integrity and availability of data 24 hours-a-day, seven days-a-week, 365
days-a-year.
The Interconnect Bottleneck
While data storage capacity and microprocessor speeds have increased
dramatically, the speed at which information is transmitted from storage systems
to microprocessors has not increased nearly as rapidly. This imbalance has
resulted in an interconnect bottleneck, commonly referred to as the I/O
bottleneck. This bottleneck causes significant latency in the flow of data
within a network, impeding data access by clients and servers, diminishing
application performance and consuming network bandwidth. The I/O bottleneck
persists due, in large part, to the limitations of traditional interconnect
protocols used to transport data and the point-to-point storage system
architectures that are used in the vast majority of enterprise computing systems
today.
I/O bottlenecks generally occur across two data paths within a computing
system. The first is the data path between the microprocessor and the I/O
interface. Today, this data path is a bus which shares data transmission across
multiple devices using the peripheral component interface, or PCI, protocol. The
second data path is between a server's I/O interface and storage systems, which
is typically interconnected by the small computer system interface, or SCSI.
Both PCI and SCSI have inherent limitations in throughput, interconnect
distances, scalability, manageability and data accessibility. For example, a
single SCSI bus enables data throughput of only 40 or 80 megabytes per second,
can transmit data over a maximum of 25 meters and can support a maximum of 15
devices. Despite these limitations, SCSI currently is the most prevalent
interconnect approach and is expected to remain an important protocol for
storage systems in the future.
34
<PAGE> 36
The storage architecture most prevalent today relies on a dedicated
point-to-point connection between each server and each storage system. Because
users can access information residing on a storage system only via the dedicated
server, data throughput is limited, the risk of data loss is increased and
information is more difficult to access and manage. Furthermore, as the number
of data requests received by the server and the number of applications running
on the server grow, I/O congestion within the server increases and server
performance decreases. As a result, many organizations are changing their
storage system architectures to address I/O bottlenecks and their overall
information management challenges.
Addressing the I/O Bottleneck with Fibre Channel Storage Area Networks
Fibre Channel has received broad recognition as a means to address many of
the current limitations and difficulties of information management. Fibre
Channel is an industry standard interconnect protocol developed in the early
1990s and approved by the American National Standards Institute in 1994. Fibre
Channel enables data throughput of more than 100 megabytes per second, can
transmit data over distances of up to 10 kilometers and can interconnect
hundreds of heterogeneous servers and storage systems. As a result of these
capabilities, Fibre Channel has enabled the evolution of a new architecture, the
storage area network, or SAN.
A SAN is a high-speed network dedicated to storage. While SANs have only
recently emerged in open systems environments for UNIX and Windows NT, SANs have
been in place for many years in mainframe systems using protocols such as IBM's
ESCON. Similar to local and wide area networks, SAN architectures apply the
distributed computing model to servers and storage systems and take advantage of
the inherent benefits of networking. Through various network-like topologies, a
SAN enables connectivity of any server with any storage system, and of storage
systems with each other. The following describes the key interconnect components
of the SAN:
- The Storage Hub is a Fibre Channel device which interconnects Fibre
Channel servers and storage systems via a shared communication path.
Accordingly, when a server and storage system are communicating, no other
communication can take place. This architecture is known as an arbitrated
loop. Leading suppliers of storage hubs include Gadzoox Networks and
Vixel.
- The Storage Switch is a Fibre Channel device which interconnects Fibre
Channel servers and storage systems via multiple communication paths.
Accordingly, multiple servers can communicate with multiple storage
systems simultaneously. This architecture is commonly known as a switched
fabric. Leading suppliers of storage switches include Ancor
Communications, Brocade Communications and McDATA.
- The Storage Router is a multi-protocol device which interconnects
servers, storage systems, hubs and switches across heterogeneous I/O
protocols, including both SCSI and Fibre Channel today. By enabling data
transport across multiple protocols, storage routers facilitate seamless
communication among the components of the SAN. Storage routers enable
point-to-point connections as well as arbitrated loop (through hubs) and
switched fabric (through switches) connections. Storage routers enable
both server-to-storage and storage-to-storage communication. We are the
leading supplier of storage routers.
35
<PAGE> 37
The following provides a graphical depiction of a SAN:
[DESCRIPTION OF GRAPHIC:
The graphic depicts a schematic diagram of a storage area network, or SAN.
From the top of the diagram, three "Storage Systems" are shown, "Tape Storage,"
"Disk Storage" and "Optical Storage." Each of these storage systems are
connected through a "SCSI" connection to three "Storage Routers." These storage
routers are each connected to a "Fibre Channel SAN with hubs/switches" in the
center of the diagram. The Fibre Channel SAN with hubs/switches is connected to
(i) three different "servers" running UNIX, Windows NT and Netware,
respectively, (ii) "Fibre Channel Storage Systems," and (iii) via a "Storage
Router" to a "SCSI Server." Each of the servers is in turn connected to a "Local
Area Network", to which various "Client" computers are attached.
GRAPH
New Applications Enabled by Fibre Channel SANs
Key applications enabled by Fibre Channel SANs include the following:
- LAN-free Backup. Information backup and recovery processes are major
contributors to I/O bottlenecks and can account for a significant portion
of the data traffic over local area networks, or LANs. As computing
systems are increasingly used on an around-the-clock basis, the available
time during which data backup can be performed has decreased, while the
time required to perform backup has increased. Unlike LAN-based backup
involving multiple servers, LAN-free backup moves individual server data
directly to backup storage systems across the SAN. By moving the data
backup function from the LAN to the SAN, LAN-free backup substantially
reduces the I/O bottleneck in today's networked systems.
- Server-free Backup. The development of server-free backup, also known as
third-party copy, will further extend the benefits of LAN-free backup by
virtually removing the server from the backup process. This application
will enable automated data movement between storage systems directly
across the SAN, allowing data backup while utilizing a very small
percentage of the server's capacity and internal I/O bandwidth. As a
result, organizations will no longer need to identify lengthy "backup
windows" for taking servers off-line to perform backup. Instead, servers
can remain online during backup, with application performance optimized
for processor speed and not encumbered by I/O limitations.
- Shared Storage. Today, a significant portion of storage resources are
underutilized because they are dedicated to a particular server which may
not efficiently use the resource. With SANs, multiple servers can share
the same storage systems, enabling more stored data to be available to
more users, and reducing the need to add more servers or storage devices
to support greater storage requirements.
36
<PAGE> 38
- Enhanced Data Integrity. SANs enhance data integrity by facilitating data
replication, or mirroring, and enhanced disaster tolerance and recovery.
In mirroring, two copies of all transaction data are created and
maintained on separate storage systems. Because SANs enable very high
data
36.1
<PAGE> 39
transmission rates and support transmission distances of up to 10
kilometers per Fibre Channel link, SANs enable mirroring across storage
systems that may be many kilometers apart from each other. These
capabilities also facilitate the creation and maintenance of offsite data
centers that support business recovery in the event data is lost at a
primary storage site due to a natural disaster or other disabling event.
The Need for Storage Routers to Facilitate the Adoption of SANs and Emerging
I/O Protocols
In order for organizations to effectively and efficiently deploy SANs in
today's computing environment, SANs must accommodate multiple, diverse I/O
protocols. Many organizations will be reluctant to replace their existing
information technology investments on a wholesale basis or to stop purchasing
SCSI-compatible products in order to deploy SANs. As a consequence,
organizations will require their Fibre Channel-based SANs to communicate with
SCSI-based peripherals. This suggests that organizations are more likely to seek
solutions that will allow them to attain the benefits of Fibre Channel
technology today, while maximizing investments in their installed base and
future purchases of SCSI systems.
In addition, several current and emerging I/O protocols are expected to be
incorporated into commercial SAN products. These protocols include asynchronous
transfer mode, which would support the high-speed transmission of data between
multiple SANs via wide area networks. In addition, several other current and
future I/O protocols under development, including Next Generation I/O (NGIO) and
Future I/O, are intended to address I/O bottlenecks. As new protocols achieve
commercial acceptance, storage routers will be increasingly essential to enable
seamless communication among servers, storage systems and SAN devices that
utilize diverse protocols.
THE CROSSROADS SOLUTION
We are the leading provider of storage routing solutions for SANs. Our
storage routers interconnect Fibre Channel SANs with SCSI servers and SCSI
storage systems and are fully interoperable with commercially available Fibre
Channel storage hubs and storage switches. Our products incorporate proprietary
routing software that "intelligently" examines data packet traffic to prioritize
transmission and minimize congestion in the flow of I/O transactions between
servers and storage systems. Our software provides critical interoperability
between diverse I/O protocols, supports rapid field deployment of new
configurations and features, enables sharing of storage resources by multiple
servers and can be adapted to new I/O protocols as they emerge. This proprietary
software is combined with software management tools and embedded in our system
hardware to form our storage routing solutions. Our system hardware consists of
industry-standard microprocessors, industry standard application specific
integrated circuits and our proprietary programmable logic. Our solutions enable
organizations to deploy SANs within their existing computing environments,
regardless of the operating systems and other protocols used in those
environments. Our solutions offer organizations the benefits of Fibre Channel
technology today, such as decreased network congestion and improved storage
scalability and manageability, while preserving existing server and storage
system investments. As a result, we believe our solutions help organizations
reduce their total cost of information management.
Our storage routers offer organizations a number of important benefits
today by:
Facilitating Efficient Backup and Recovery
Currently, our storage routers are used primarily to connect SCSI tape
storage systems to Fibre Channel SANs for LAN-free backup applications. By
allowing backup processes to be accomplished across the SAN, rather than across
the LAN, our storage routers enable the LAN to more effectively serve the client
network. LAN-free backup provides flexibility to conduct backup at any time of
day. This capability is increasingly important as users demand network
availability around the clock and from geographically diverse locations. In
addition, we have software in beta development which is designed to enable
server-free backup. Server-free backup will extend the benefits of our LAN-free
backup capability
37
<PAGE> 40
to offer further significant reductions in server utilization. Finally, our
storage routers support the distance capabilities of Fibre Channel SANs,
enabling long distance mirroring and the creation of redundant data sites to
restore data when a dedicated storage system fails or is damaged by a natural
disaster, debilitating computer virus or similar catastrophic event.
Providing Broad, Verified Interoperability
Our storage routers are designed to interoperate with all commercially
available Fibre Channel storage hubs and storage switches, as well as other SAN
components, including storage systems, host bus adapters, operating systems and
storage management software. Our storage routers function in all Fibre Channel
topologies, providing organizations with flexibility in selecting their storage
architectures and in addressing their priorities, such as reducing cost, data
latency and bandwidth congestion. Furthermore, our products support concurrent
transmissions of data utilizing multiple protocols, including SCSI and TCP/IP.
Our products can be deployed across heterogeneous operating systems, including
NetWare, UNIX and Windows NT. Our solutions have been tested and verified in
over 2,500 configurations through our Crossroads Verified-Storage Area Network
(CV-SAN) program.
Increasing Scalability and Implementation Flexibility
Our storage routers are designed to operate in any computing environment
and are scalable to address the increasing needs of organizations for greater
throughput, broader connectivity and greater interconnect distance. Our products
also are designed to work in all Fibre Channel topologies so organizations can
initially deploy point-to-point or arbitrated loop solutions then move to
switched fabric solutions without changing their storage routers. Organizations
can incrementally add storage routers as backup demands grow or as new storage
devices are brought on-line. Our newest line of storage routers are configurable
to support transmission over copper or fiber optic lines, depending on the
distance requirements of the application.
Enhancing Manageability
Our storage routers serve as a platform for advanced storage management
functions. Our products support remote diagnostics and remote management as well
as real-time application monitoring. In addition, our software enhances
management of storage systems that are attached to the storage router by
translating network management protocols to storage management protocols. To
this end, we work closely with leading independent software vendors, such as BMC
Software, Computer Associates, Hewlett-Packard and Tivoli Systems, to ensure
that our storage routers can be managed through their network management
software products.
Leveraging Existing Server and Storage System Investments
Organizations have made large investments in SCSI servers and storage
systems used in traditional point-to-point architectures. In addition to
enabling organizations to preserve these existing investments, our storage
routers improve the functionality of those systems when operated in conjunction
with a SAN. For example, by connecting SCSI-only servers to Fibre Channel SANs,
which is referred to as server migration, our storage routers enable
organizations to deploy SAN applications, such as LAN-free backup and shared
storage systems, using those servers. By allowing consolidation of storage
resources in a centralized facility, our solutions also minimize the need for
costly distributed storage centers and enable more efficient use of existing
storage capacity.
38
<PAGE> 41
OUR STRATEGY
Our objective is to maintain our position as the leading provider of
storage routers and to leverage this position to become the leading provider of
I/O routing solutions. The key elements of our strategy include the following:
Leverage and Extend Market Leadership
We are the leading provider of storage routers, based on our market share,
and believe that we were the first company to ship storage routers. We intend to
capitalize on our market leadership position by expanding the depth and breadth
of our relationships with OEM, distributor, reseller and system integrator
customers. To achieve this objective, we are committing additional resources to
extend the interoperability of our products to new and emerging platforms. In
order to accelerate the interoperability of our products, we developed the
Crossroads Verified-Storage Area Network program. We believe that CV-SAN
differentiates our company by proactively ensuring the interoperability of our
products with other SAN components. Through our CV-SAN initiative, we have
tested and verified the interoperability of over 2,500 different SAN
configurations using our storage routers. We intend to continue leveraging our
technology expertise to expand and improve our storage routing solutions and
gain additional market share.
Leverage and Expand Our Relationships with Leading OEM Customers
We believe that working with leading OEMs enables us to effectively
distribute our products, anticipate the needs of enterprises, introduce new
products to meet those needs and target new markets. Since OEMs must expend
substantial resources to qualify SAN solutions and ensure interoperability, they
tend to qualify only a few vendors for a particular product. As a result, we
believe that our success depends heavily on maintaining and augmenting our OEM
relationships. To date, we have cultivated customer relationships with leading
server and storage system OEMs, including ADIC, ATL Products, Compaq, Dell,
Groupe Bull, Hewlett-Packard, Hitachi Data Systems, INRANGE, McDATA and
StorageTek. We intend to continue targeting major server and storage system OEMs
to further strengthen our market position.
Capitalize on Emerging I/O Market Opportunities
We intend to leverage our significant expertise in embedded systems,
routing algorithms, and existing and emerging I/O protocols to remain at the
forefront of the SAN market. We believe this expertise has enabled us to
establish our market leadership in our core market of storage routing. We intend
to extend our technological capabilities to emerging I/O routing market
opportunities. We are currently developing:
- a SAN-to-WAN router which enables multiple SANs to be connected over wide
area networks;
- our Active Fabric storage router software, which we expect will provide
enhanced features for SANs, including server-free backup; and
- new I/O router products which incorporate emerging I/O technology.
We actively participate in the working groups that define and shape
emerging I/O standards, including both the NGIO Forum (whose members include
Dell, Hitachi Data Systems, Intel, NEC, Siemens and Sun Microsystems) and the
Future I/O Alliance (whose members include Adaptec, Cisco, Compaq,
Hewlett-Packard, IBM and 3Com). In addition to the NGIO and Future I/O forums,
we participate in the Storage Networking Industry Association and Computer
Associates' Storage Area Network Integrated Technology Initiative. We believe
that our participation in these working groups helps us define optimal ways of
building intelligent I/O interconnections, influence relevant standards,
implement and deliver products to OEMs and other customers and remain a
technological leader.
39
<PAGE> 42
Broaden Relationships with Leading Software Vendors
We believe that establishing relationships with leading enterprise and
storage management software companies is essential to facilitating the efficient
and reliable integration of their capabilities with our I/O routing solutions.
To this end, we have developed relationships with leading software vendors,
including BMC Software, Computer Associates, Legato Systems, Tivoli Systems and
VERITAS Software. The focus of our strategic initiatives with these companies
has been to ensure the integration of our storage router with leading software
solutions to optimize SAN management. We intend to continue expanding our
relationships with leading software vendors to ensure the compatibility of our
products with their software.
Expand Distribution Channels
In addition to building upon our established OEM sales channel, we believe
that we can achieve additional growth by selling through distributors, resellers
and system integrators. To date, we have developed relationships with Andataco,
Bdata, Bell Microproducts, Cranel, Datalink, EIE Data Media Products-Japan,
Pinacor and Tricom. We intend to enter into additional agreements with
distributors, resellers and system integrators, both in the United States and
abroad, to increase our geographic coverage and address additional
opportunities. We regularly conduct sales training for prospective distributor,
reseller and system integrator customers to educate them in the sale of our
products. In addition, we have initiated an out-bound marketing program directed
at end-user organizations to build greater awareness of the benefits of our
products. This is intended to generate demand for distributors, resellers and
system integrators selling our products.
40
<PAGE> 43
PRODUCTS
We have developed a line of storage routers which enable bi-directional,
seamless communications between Fibre Channel devices in the SAN and SCSI
devices. Each storage router supports point-to-point, arbitrated loop and
switched fabric networks, provides management capability through an Ethernet
port, and supports full Simple Network Management Protocol, or SNMP, and remote
Web-based management.
Storage Router Products
The following table summarizes the key features and benefits of our
products:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST
PRODUCT SHIPMENT DEVICE
STORAGE ROUTER NAME TO OEM CONFIGURATION BENEFITS
<C> <C> <C> <S> <C>
- ------------------------------------------------------------------------------------------------------------------------
MID-RANGE 4100 July 1997 - 1 Fibre Channel port - Enables LAN-free backup and recovery
- 1 SCSI bus - Supports shared storage (disk, tape and optical)
- 1 Ethernet management - Connects up to 15 SCSI devices
port - Transmits data over distances up to 10 km
- Enables server migration to SANs
- ------------------------------------------------------------------------------------------------------------------------
ENTERPRISE 4400 Dec. 1997 - 2 Fibre Channel ports - Allows RAID (Redundant Array of Independent Disks)
- 4 SCSI buses migration
- Enables LAN-free backup and recovery
- Supports shared storage (disk and tape)
- Connects up to 60 SCSI devices
- ------------------------------------------------------------------------------------------------------------------------
HIGH END 4200 June 1998 - 1 Fibre Channel port - Enables LAN-free backup and recovery
- 2 SCSI buses - Supports shared storage (disk, tape and optical)
- 1 Ethernet management - Connects up to 30 SCSI devices
port - Transmits data over distances up to 10 km
- Enables server migration to SANs
- ------------------------------------------------------------------------------------------------------------------------
THIRD 4x50* May 1999* - 1 Fibre Channel port Will provide the same benefits as 4200 router, plus:
GENERATION - 1 to 4 SCSI buses - Enable server-free backup
- 1 Ethernet management - Double the SCSI throughput via low voltage
port differential technology
- Provide enhanced software for storage management
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* The first product we are offering in our 4x50 family is the 4250 storage
router. The 4250 is currently in evaluation with OEMs.
Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our 4100 product
has accounted for 52% and 71% of our product revenue in fiscal 1998 and in the
nine month period ended July 31, 1999, respectively.
Internal Product Testing and Verification through CV-SAN Program
Each of our storage routers undergoes an extensive testing and verification
process in our interoperability lab to assess its interoperability with the
various other components of the SAN, including storage systems, storage hubs,
storage switches, host bus adapters, operating systems and storage management
software from a wide variety of vendors. Through our Crossroads
Verified -- Storage Area Network program, we have tested and verified the
interoperability of approximately 2,500 different SAN configurations utilizing
our storage router solutions. We have designed our Web-based Configurator to
enable our customers to access this interoperability data and dynamically
configure interoperable SANs. Our Configurator serves as a tool for our current
and potential customers to assist them in designing a SAN by determining which
SAN components are interoperable with other SAN components.
41
<PAGE> 44
OUR CUSTOMERS
To date, we have sold approximately 5,000 of our storage routers to OEM
customers. Our storage routers are currently sold to end-user organizations
primarily through OEMs under their brands, and to a lesser extent, through
distributors, resellers and system integrators under the Crossroads brand.
OEM Customers
Our primary customers are OEMs, including server and storage system
manufacturers. We believe that LAN-free backup is the primary end-user
application for which our storage routers are being used today. The following is
a list of our OEM customers and their branded Crossroads products:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CROSSROADS
OEM OEM-BRANDED PRODUCT PRODUCT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADIC FCR100 Fibre Channel Router 4100
FCR200 Fibre Channel Router 4200
FCR400 Fibre Channel Router 4400
- ------------------------------------------------------------------------------
ATL Products Crossroads 4200 4200
- ------------------------------------------------------------------------------
Compaq StorageWorks Fibre Channel Tape Controller 4100
- ------------------------------------------------------------------------------
Dell PowerVault 35F Multi-port Bridge 4200
- ------------------------------------------------------------------------------
Exabyte FC-11 Storage Router 4100
FC-12 Storage Router 4200
- ------------------------------------------------------------------------------
Groupe Bull SAN 4100 4100
SAN 4200 4200
- ------------------------------------------------------------------------------
Hewlett-Packard SureStore 2100 4200
- ------------------------------------------------------------------------------
Hitachi Data Systems Crossroads 4200 4200
- ------------------------------------------------------------------------------
INRANGE Fibre Channel SCSI eXchange: 9066/9067 FSX *
- ------------------------------------------------------------------------------
McDATA EB-1200 FabricGate 4200
- ------------------------------------------------------------------------------
StorageTek 3100 Fibre Channel/SCSI Bridge 4100
3200 Fibre Channel/SCSI Bridge 4200
- ---------------------------------------------------------------------------------------
</TABLE>
* This customer currently purchases a SCSI distance extender product that can be
upgraded to a 4100.
During fiscal 1998, our four largest customers -- ADIC, Compaq,
Hewlett-Packard and StorageTek -- accounted for 25%, 20%, 16% and 14% of our
total revenue, respectively. In the nine month period ended July 31, 1999,
revenue from Compaq and StorageTek represented 44% and 30% of our total revenue,
respectively. No other customer accounted for more than 10% of our revenue in
these periods.
Distributors, Resellers and System Integrators
We expect to sell our products through additional channels as SANs mature
and broader interoperability of SAN components is demonstrated. As such, we are
investing significant resources in developing distributor, reseller and system
integrator relationships. As of July 31, 1999 we had relationships with the
following distributors, resellers and system integrators:
<TABLE>
<CAPTION>
DISTRIBUTORS RESELLERS/SYSTEM INTEGRATORS
------------ ----------------------------
<S> <C>
Bell Microproducts Andataco
Cranel Bdata
Forefront Graphics Datalink
Pinacor EIE Data Media Products-Japan
Tricom
</TABLE>
42
<PAGE> 45
SALES AND MARKETING
We base our sales and marketing strategy on an indirect sales model
executed through OEMs and distributors, resellers and system integrators. For
the past two years, our sales activity has focused principally on OEM adoption
through extensive OEM testing and product qualification. As the market for SAN
products matures, we believe that open market branded sales through
distributors, resellers and system integrators will represent an increasing
percentage of our total revenues. While we sell most of our products today
through OEMs, with an expanded sales channel, we will gain broader brand
awareness and a greater presence in the departmental and mid-sized business
markets where distributors, resellers and system integrators generally have a
strong presence and can influence product adoption choices.
We also anticipate expanding our international sales activities in the near
future. Currently, sales to international end users are handled through our OEM
customers. In the future, we plan to establish an office in Europe to support
and manage our customer relationships.
Our marketing organization primarily focuses on coordinating strategic
planning activities which help us to determine market segments to pursue,
understand size and growth characteristics of these market segments, analyze
competition within the market segments, define product features to successfully
penetrate market segments and construct business analyses to measure expected
return on investments. Additionally, our marketing efforts are geared toward
developing key relationships with OEMs, distributors, resellers and system
integrators, participating in tradeshows to promote and launch our products, and
coordinating our involvement in various industry standards organizations. In
order to raise potential customer awareness of the benefits of our storage
routers, we also intend to increase our advertising in trade publications.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization provides comprehensive
training programs and telephone, e-mail and Web-based direct support to our
customers. These programs allow us to minimize the need for a large end-user
support organization by enabling our OEMs to provide installation, service and
primary technical support to their customers while we focus on high-level
secondary support. In addition, we replicate field issues to help our customers
solve end-user problems and will test the interoperability of various SAN
configurations upon customer request. All newly verified SAN configurations are
entered into our online Configurator and published in our CV-SAN guide.
TECHNOLOGY
Our storage router products are based on an architecture that combines
embedded, proprietary software and hardware designs using industry standard
components and our proprietary programmable logic. Our proprietary routing
software intelligently examines data packet traffic to prioritize transmission
and minimize network congestion in the flow of I/O transactions between servers
and storage systems. This software also manages data latency that results from
variances in I/O speeds and provides accurate communication of transmission
status to connected devices. Our software provides critical interoperability
between diverse I/O protocols, supports rapid field deployment of new
configurations and features, enables sharing of storage resources by multiple
servers and can be adapted to new I/O protocols as they emerge. Additionally,
our software is easily configurable and upgradable and can be quickly adapted to
varying customer requirements and computing environments. While our software
architecture serves as the foundation for our current products, it is also
scalable to accommodate several planned generations of new designs. Our hardware
is the "engine" that provides basic performance and functionality such as
operating speed, data movement, external device connectivity, network management
interfaces and the ability to operate in extreme environmental conditions of
temperature and humidity.
We possess a high level of multi-disciplinary expertise encompassing I/O
technologies, software design, operating systems, hardware and application
specific integrated circuit design, and LAN/WAN technologies, which we utilize
to design, develop, manufacture and deliver our products. We believe that our
combined expertise in each of these technologies provides us with a competitive
advantage in time-to-
43
<PAGE> 46
market, interoperability, product feature capability and integration of
additional I/O interfaces and functions.
I/O Technologies
We believe that our I/O routing expertise is a critical factor in our
ability to maintain our leadership position in storage routing. There are three
key I/O technologies in use today for open systems and mainframe systems: SCSI,
Fibre Channel and ESCON. We employ a large number of engineers and technologists
who have significant involvement in the evolution of these I/O technologies.
Based on their expertise and our overall capabilities, we believe that we
possess insight and understanding into the capabilities and limits of each new
technology and the requirements for I/O routing. We initially chose to build our
routers to interconnect SCSI and Fibre Channel technology, and we plan to evolve
this interconnectivity into additional interfaces over time. As new I/O
standards are developed, we expect to contribute to these developments and
leverage our software and technical expertise in developing additional I/O
routers. Such additional areas of focus include ATM, Gigabit Ethernet, TCP/IP,
NGIO and Future I/O.
Embedded Software Design
We design, develop and test all of our own embedded software. As of July
31, 1999, our engineering staff included 28 software engineers with expertise in
embedded software, management tools, software applications and graphical user
interface development. We have considerable expertise in I/O protocol standards,
error detection and recovery and support. The flexibility to modify our software
to varying system configurations has enhanced our ability to rapidly achieve
verified interoperability.
I/O Standards
The Fibre Channel standards were drafted and are controlled by the ANSI
X3T11 Technical Committee of the National Committee for Information Technology
Standards (NCITS). The Fibre Channel protocol, which allows storage transport
via SCSI operations on the Fibre Channel transport, falls under the X3T10
Technical Committee. Our personnel have been and remain active members of these
committees, and we have initiated and contributed significant efforts in both,
including the FC-Tape proposal in X3T11 and the Extended Copy Command in the
X3T10 committee. We also are a member of the NGIO Forum and the Future I/O
Alliance. These standards efforts are directed at moving network capabilities
into I/O architecture, which will further extend the complementary benefits and
capabilities of I/O routers.
MANUFACTURING
Presently, our manufacturing process is outsourced to a contract
manufacturer who invoices us based on agreed prices and payment terms that are
set forth in purchase orders issued by us. The pricing takes into account
component costs, manufacturing costs and margin requirements. Our contract
manufacturer purchases the components to our products based upon our
specifications. In this process, we determine the components that are
incorporated into our products and select the appropriate suppliers of the
components.
We plan to transition the final assembly and test portion of our product
manufacturing process to our internal facilities in September 1999. In
connection with this transition, we have hired additional employees, purchased
the necessary equipment, initiated customer qualification efforts and leased
additional facilities. We believe that bringing our final assembly and test
operations in-house will allow us to reduce our total per unit manufacturing
costs and provide us with greater flexibility to respond to changes in customer
demand. As the needs of our customers continue to evolve, we plan to reassess
our manufacturing requirements on a periodic basis and address changes as we
deem necessary.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single-source
components include application specific integrated circuits, power supplies,
licensed software and chassis. Please see "Risk Factors -- We depend on sole
source and limited source
44
<PAGE> 47
suppliers for certain key components, and if we are unable to buy these
components on a timely basis, our delayed ability to deliver our products to our
customers may result in reduced revenue and lost sales" for a discussion of the
risks associated with our procurement of components.
RESEARCH AND DEVELOPMENT
We believe that our research and development efforts are essential to our
ability to successfully deliver innovative products that address the needs of
our customers as the I/O routing market evolves. We work closely with our
marketing and sales team and OEMs to define product features and performance.
Development activities are conducted with extensive validation testing at both
our company and at our major customers.
Research and development programs that are currently underway focus on our
I/O routing initiatives:
- SCSI-to-Fibre Channel storage routing: Increased connectivity and port
density, improved manageability, broader interoperability and higher
performance products;
- Active Fabric software: Modular software focused on the development of
enhanced SAN features, including server-free backup, also known as third
party copy, "intelligent" data management and data movement;
- SAN-to-WAN I/O routing: Fibre Channel-to-asynchronous transfer mode
router products to enable connectivity of multiple SANs over a wide area
network; and
- Server I/O routing: Technology development focused on multi-protocol I/O
routing products for NGIO or Future I/O connecting to SCSI, Fibre Channel
and asynchronous transfer mode.
In developing our products, we recognize the importance of product
compatibility with existing and emerging I/O standards. In particular, Intel is
providing technical and consulting support to help us develop NGIO-enabled
versions of our storage routers. Four of our senior engineers are actively
engaged in development of industry standards which allows us to focus our
product strategies in areas that are aligned with those standards. Additionally,
members of our development team have experience in developing and protecting
intellectual property. We believe we have developed a strong intellectual
property base in I/O routing and have filed patents in that regard.
Our research and development expenses were $2.4 million in fiscal 1998 and
$3.5 million the nine months ended July 31, 1999. At July 31, 1999, we employed
28 software engineers and 14 hardware engineers.
Our product development efforts may not result in commercially viable
products, and our products may be made obsolete by changing technology or new
product announcements by other companies. Please see "Risk Factors -- We have
limited product offerings and our success depends on our ability to develop in a
timely manner new and enhanced products that achieve market acceptance" and
"-- Demand for our products depends significantly upon the need to interconnect
SCSI-based tape storage systems with Fibre Channel SANs, and we expect to face
competition from manufacturers of Fibre Channel-based tape storage systems" for
a discussion of risks associated with our research and development efforts.
OUR COMPETITION
The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ATTO, Chaparral, Pathlight and, to a lesser
extent, Computer Network Technologies. In addition, we expect to face
competition in the future from one or more of the following sources:
- OEMs, including our customers and potential customers;
- LAN router manufacturers;
45
<PAGE> 48
- storage system industry suppliers, including manufacturers and vendors of
other SAN products or entire SAN systems; and
- innovative start-up companies.
As the market for SAN products grows, we also may face competition from
traditional networking companies and other manufacturers of networking products.
These networking companies may enter the storage router market by introducing
their own products or by entering into strategic relationships with or acquiring
other existing SAN product providers. It is also possible that OEM customers
could develop and introduce products competitive with our product offerings.
Furthermore, we have licensed our 4200 storage router technology to one of our
OEM customers. While to date this OEM has not introduced competitive products
based on this technology, the OEM could potentially do so in the future.
We believe the competitive factors in the storage router market include the
following:
- OEM endorsement;
- product reliability and verified interoperability;
- customer service and technical support;
- product performance and features;
- brand awareness and credibility;
- ability to meet delivery schedules;
- strength of distribution channel; and
- price.
Some of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger installed base of customers than we have. As a result, these competitors
may have greater credibility with our existing and potential customers. They
also may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than us to new or
emerging technologies or changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with the decision makers at our current or potential
customers. These competitors may be able to leverage their existing
relationships to discourage these customers from purchasing products from us or
persuade them to replace our products with their products. Increased competition
could result in pricing pressures, reduce sales, lower margins, or reduce our
market share or cause us not have the financial resources, technical expertise
or marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. Additionally, we may not be able to compete
successfully against current or future competitors, and competitive pressures
may materially harm our business.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trademarks and trade secrets, as well
as confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. Despite
these precautions, the measures we undertake may not be adequate to protect our
proprietary technology and may not preclude competitors from independently
developing products with functionality or features similar to our products. We
currently have one patent application that has been allowed and 10 patent
applications pending in the United States with respect to our technology. We
also have two patents pending under the Patent Cooperation Treaty with the
intent of filing in additional countries. One of our patent applications pending
under the Patent Cooperation Treaty has a number of claims for which a favorable
opinion of allowability has been provided by the International Preliminary
Examining Authority. However, none of our patents, including patents that may be
issued in the future, our patent
46
<PAGE> 49
applications may adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to protect our intellectual property could materially harm our business.
In addition, our competitors may independently develop similar or superior
technology.
It is possible that litigation may be necessary in the future to enforce
our intellectual property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. Litigation could
result in substantial costs, divert our management and other resources and
materially harm our business. Infringement or other claims could be asserted or
prosecuted against us in the future, and it is possible that such assertions or
prosecutions could harm our business. Any such claims, with or without merit,
likely would be time consuming, result in costly litigation, divert technical
and management personnel, cause delays in the development and release of our
products, or require us to develop non-infringing technology or enter into
royalty or licensing arrangements. Such royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, or at all. For these
reasons, infringement claims could materially harm our business.
We rely upon certain software that we license from third parties, including
an operating system "kernel" that is integrated with our internally developed
software and used in our products to perform key functions. Our inability to
maintain any such software licenses could result in shipment delays or
reductions until equivalent software could be developed or licensed and
integrated into our products, which could materially and adversely affect our
results of operations.
EMPLOYEES
At July 31, 1999, we had 120 employees with 42 engaged in research and
development; 23 in manufacturing; 15 in sales; 18 in marketing and customer
support; and 22 in administration, information technology and finance. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
FACILITIES
Our corporate headquarters facility consists of approximately 24,000 square
feet in Austin, Texas. We lease our corporate headquarters facility pursuant to
a lease agreement that expires in December 2003. At this time, our needs have
exceeded the available space in our current location. We anticipate moving to a
larger headquarters facility in 2000. Although we believe a suitable facility
can be obtained to meet our future requirements, we cannot be certain that we
will be able to find such a facility on commercially reasonable terms.
Our final assembly and test facility of approximately 11,250 square feet is
also located in Austin, Texas. The lease on this facility expires in June 2004.
We also maintain sales offices, each with 400 square feet or less, in
Boston, Massachusetts; Boulder, Colorado; and San Diego, California.
LITIGATION
We are not party to any legal proceedings.
47
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE
The following table sets forth certain information concerning our executive
officers, directors and a key employee:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Executive Officers and Directors
Brian R. Smith............................... 34 Chief Executive Officer and Chairman of the
Board of Directors
James H. Moore............................... 61 President and Chief Operating Officer
Reagan Y. Sakai.............................. 40 Vice President, Chief Financial Officer,
Secretary and Treasurer
Robert F. LiVolsi............................ 47 Senior Vice President of Sales and Marketing
John R. Middleton............................ 42 Vice President of Engineering
Richard D. Eyestone(1)....................... 53 Director
Wo Overstreet(1)............................. 49 Director
David L. Riegel(2)........................... 61 Director
William P. Wood(2)........................... 43 Director
Key Employee
T. Dale Quisenberry.......................... 40 Vice President of Corporate Accounts
</TABLE>
- ---------------
(1) Member of the compensation committee
(2) Member of the audit committee
Executive Officers and Directors
Brian R. Smith, a co-founder of Crossroads, has served as our Chief
Executive Officer and Chairman of the Board of Directors since our inception in
April 1995. From inception until October 1997, Mr. Smith also served as our
President. From October 1994 to April 1995, Mr. Smith was President of a
consulting services company. From January 1985 to October 1994, Mr. Smith held
various development and management positions at IBM. Among other things, he led
the development of IBM's Fibre Channel products and FDDI products and worked on
several ESCON projects. He was also a technical representative for IBM on the
Fibre Channel Systems Initiative for TCP/IP and SCSI. Mr. Smith has served on
the American National Standards Institute committee developing many Fibre
Channel standards since 1992. Mr. Smith holds a B.S.E.E. from the University of
Cincinnati and a M.S.E.E. from Purdue University.
James H. Moore has served as our President and Chief Operating Officer
since October 1997. From October 1996 to October 1997, Mr. Moore served as Vice
President and General Manager at Cirrus Logic, a linear circuit and mixed-signal
chip manufacturer. From October 1993 to October 1996, Mr. Moore served as a
Director of Computer Products at Analog Devices, an integrated circuit
manufacturer. From 1966 to 1990, Mr. Moore was employed by Texas Instruments
where he last served as Vice President -- General Manager for Texas
Instruments-Mexico. Mr. Moore holds a B.S.E.E. from Christian Brothers
University and an M.B.A. from Southern Methodist University.
Reagan Y. Sakai has served as our Vice President, Chief Financial Officer,
Secretary and Treasurer since May 1999. From August 1996 to April 1999, he
served as the Director of Corporate Finance and as Division Controller of the
Eagle Product Division at Exabyte, a public data storage company. From April
1994 to July 1996, he served as Director of Corporate Financial Planning and
Analysis at Maxtor, a disk drive company. Prior to that, he held various
management positions at McDATA and StorageTek. Mr. Sakai holds a B.S. in finance
and an M.B.A., both from the University of Colorado.
48
<PAGE> 51
Robert F. LiVolsi has served as our Vice President of Sales and Marketing
since April 1998. From August 1995 to January 1998, Mr. LiVolsi was Vice
President and General Manager of the Eagle Division at Exabyte Corporation. From
February 1991 to August 1995, Mr. LiVolsi served as Vice President of Sales and
Marketing for Hewlett-Packard's Colorado Memory Systems subsidiary. Mr. LiVolsi
holds a B.A. in political science from Kent State University.
John R. Middleton has served as our Vice President of Engineering since
July 1999. From February 1997 to July 1999, Mr. Middleton served as our Senior
Director of Engineering. From November 1995 to January 1997, Mr. Middleton
served as an Engineering Manager at Compaq, where he managed the development of
LAN switches and hubs. From July 1992 to November 1995, he served as an
Engineering Manager at Thomas-Conrad Corporation, a networking company. Mr.
Middleton holds a B.S.E.E. from the University of Texas at Austin.
Richard D. Eyestone has served as a member of our board of directors since
May 1999. From 1993 to September 1996, Mr. Eyestone was employed at Bay Networks
as Vice President of Sales and, from September 1996 to September 1998, as Senior
Vice President of Market and Product Management. Mr. Eyestone currently serves
on the board of directors of eSoft, Inc. and several private companies. Mr.
Eyestone holds a B.S.E. in education from Drake University and an M.B.A. from
the University of Iowa.
Wo Overstreet has served as a member of our board of directors since March
1997. Since January 1998, Ms. Overstreet has served as the President and Chief
Executive Officer of Creative Design Solutions, a network-attached storage
solution company. From December 1995 to September 1997, she served as Vice
President of Corporate Development and Vice President of Marketing and Sales of
McDATA, a subsidiary of EMC Corporation. From February 1992 to May 1995, Ms.
Overstreet served as a Senior Staff member for the Chief Operating Officer of
Exabyte. Ms. Overstreet serves on the board of directors of several private
companies. Ms. Overstreet holds a B.A. in philosophy and math from John Carroll
University.
David L. Riegel has served as a member of our board of directors since
November 1997. From November 1992 to September 1997, Mr. Riegel served as Chief
Operating Officer of Exabyte Corporation. Mr. Riegel has served on the board of
directors of Bolder Technologies Corporation, an energy technology company
involved in the development of rechargeable battery systems, since May 1992. Mr.
Riegel holds a B.S.E.E. from Purdue University.
William P. Wood has served as a member of our board of directors since
December 1996. Since 1984, Mr. Wood has been a general partner and, for funds
created since 1996, a special limited partner, of various funds associated with
Austin Ventures, a venture capital firm located in Austin, Texas. Mr. Wood
serves on the board of directors of Intelliquest Information Corp. and several
private companies. Mr. Wood holds an B.A. in history from Brown University and
an M.B.A. from Harvard University.
Key Employee
T. Dale Quisenberry, a co-founder of Crossroads, has served as our Vice
President of Corporate Accounts since March 1999. From January 1998 to March
1999, he served as our Vice President of Corporate Resources, and from September
1996 to December 1997, as our Vice President of Finance and Administration. From
April 1995 to September 1996, Mr. Quisenberry served as the Vice President of
Sales and Marketing at our predecessor, Infinity Commstor, LLC. From October
1994 to April 1995, Mr. Quisenberry was Vice President of a consulting services
company. Mr. Quisenberry also served as our Secretary from our inception until
May 1999.
49
<PAGE> 52
CLASSIFIED BOARD OF DIRECTORS
At the first annual meeting of stockholders following the closing of our
initial public offering, our board of directors will be divided into three
classes of directors, as nearly equal in size as is practicable, to serve
staggered three-year terms:
- Class I, whose term will expire at the annual meeting of stockholders to
be held in fiscal 2001;
- Class II, whose term will expire at the annual meeting of stockholders to
be held in fiscal 2002; and
- Class III, whose term will expire at the annual meeting of stockholders
to be held in fiscal 2003.
Upon expiration of the term of a class of directors, the directors for that
class will be elected for three-year terms at the annual meeting of stockholders
in the year in which their term expires. Each director's term is subject to the
election and qualification of his or her successor, or his or her earlier death,
resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a
compensation committee.
Audit Committee. The audit committee reports to the board of directors with
regard to the selection of our independent auditors, the scope of our annual
audits, fees to be paid to the auditors, the performance of our independent
auditors, compliance with our accounting and financial policies, and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Riegel and
Wood.
Compensation Committee. The compensation committee reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our directors, executive officers and certain
other employees. In addition, the compensation committee reviews bonus and stock
compensation arrangements for all of our other employees. The compensation
committee also administers our stock option and stock purchase plans. The
members of the compensation committee are Mr. Eyestone and Ms. Overstreet.
DIRECTOR COMPENSATION
Directors currently do not receive any fees from us for their service as
directors, although by resolution of the board, they may receive a fixed sum and
reimbursement for expenses in connection with their attendance at board and
committee meetings or a stated salary. On November 12, 1997, we granted David L.
Riegel options to purchase 45,000 shares of common stock at a price of $0.23 per
share. Mr. Riegel's options are fully vested.
In August 1999, the disinterested members of our board of directors
accelerated the vesting of all unvested stock options of Ms. Overstreet and Mr.
Riegel. 29,063 options held by Ms. Overstreet and 31,876 options held by Mr.
Riegel became immediately vested.
Non-employee directors will receive option grants at periodic intervals
under the automatic option grant program of our 1999 Stock Incentive Plan, which
will become effective when the underwriting agreement for this offering is
signed. Non-employee directors will also be eligible to receive option grants
under the discretionary option grant program of that plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee. Our compensation committee currently consists of Mr. Eyestone and Ms.
Overstreet, neither of whom currently serves or has previously served as an
officer or employee of our company.
50
<PAGE> 53
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our current certificate of incorporation, as well as the amended
certificate of incorporation that we intend to file prior to the commencement of
this offering, limits the liability of our directors to us or our stockholders
for breaches of the directors' fiduciary duties to the fullest extent permitted
by Delaware law. In addition, our certificate of incorporation and bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. Prior to consummation of this offering, we
also intend to obtain directors' and officers' liability insurance and enter
into indemnification agreements with all of our directors and executive
officers.
EXECUTIVE COMPENSATION
The following table provides the total compensation paid to our chief
executive officer and our other executive officers whose compensation (salary
and bonus) exceeded $100,000 in fiscal 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
- --------------------------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C>
Brian R. Smith............................ $ 150,000 $ 2,000 -- --
Chief Executive Officer
James H. Moore............................ 200,000 -- 1,015(1) 570,000
President and Chief Operating Officer
Robert F. LiVolsi......................... 100,849 9,420 -- 187,500
Senior Vice President of Sales and
Marketing
T. Dale Quisenberry(2).................... 120,000 -- -- --
Vice President
</TABLE>
- ---------------
(1) Represents the amount we paid in premiums for a life insurance policy for
Mr. Moore.
(2) Mr. Quisenberry served as an executive officer in fiscal 1998. He ceased to
be an executive officer in March 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during fiscal 1998 to each of our executive officers named in
the Summary Compensation Table. We have never granted any stock appreciation
rights.
The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including our financial condition and operating
results, recent transactions and the market for comparable stocks.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of our common stock from the fair market value on the
date of grant. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of the future price of our common
stock. Actual gains, if any, on stock option exercises depend on the future
performance of our common stock. The amounts reflected in the table may not
necessarily be achieved.
We granted these options under our 1996 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. Except as otherwise noted, these options
are immediately exercisable, but we have the right to repurchase, at the
51
<PAGE> 54
exercise price, any shares that have not vested at the time the optionee
terminates employment with us. The percentage of total options granted to our
employees in the last fiscal year is based on options to purchase an aggregate
of 1,273,500 shares of common stock granted during fiscal 1998. The following
table sets forth information concerning the individual grants of stock options
to each of our named executive officers in fiscal 1998. All options were granted
under our 1996 Stock Option Plan/Stock Issuance Plan.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------ OF ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED TO EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS EMPLOYEES IN FISCAL PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1) 1998 YEAR (%) ($/SH) DATE 5%($) 10%($)
- ---- -------------------- ------------------- -------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Smith....... -- -- -- -- -- --
James H. Moore....... 570,000(2) 44.8 0.233 11/11/07 83,643 211,968
Robert F. LiVolsi.... 187,500(3) 14.7 0.233 05/12/08 27,514 69,726
T. Dale
Quisenberry........ -- -- -- -- -- --
</TABLE>
- ---------------
(1) These options are fully exercisable but if the employee leaves us before he
has vested in his option shares, we have the right to repurchase, at the
exercise price, any shares that have not vested.
(2) These options vested as to 25% on October 1, 1998 and vest as to the
remaining 75% in equal quarterly installments over the following 12
quarters.
(3) These options vested as to 25% on April 6, 1999 and vest to the remaining
75% in equal quarterly installments over the following 12 quarters.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of
October 31, 1998 by each of our executive officers named in the Summary
Compensation Table. Neither of these executive officers exercised any options in
fiscal 1998. Actual gains on exercise, if any, will depend on the value of our
common stock on the date on which the shares are sold.
FISCAL 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
OCTOBER 31, 1998(#) OCTOBER 31, 1998($)(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brian R. Smith............................. -- -- -- --
James H. Moore(2).......................... 570,000 -- $ --
Robert F. LiVolsi(3)....................... 187,500 -- --
T. Dale Quisenberry........................ -- -- -- --
</TABLE>
- ---------------
(1) There was no public trading market for our common stock as of October 31,
1998. Accordingly, we have based the value of unexercised in-the-money
options at October 31, 1998 on an assumed initial public offering price of
$ per share, less the applicable exercise price per share, multiplied by
the number of shares underlying the options. Actual gains on exercise, if
any, will depend on the value of our common stock on the date on which the
shares are sold.
(2) As of October 31, 1998, Mr. Moore's options were exercisable as to all
570,000 shares, 142,500 of which were vested and 427,500 of which were
unvested. If Mr. Moore leaves us before all of his option shares vest, we
have the right to repurchase the unvested option shares at the exercise
price paid per share.
(3) As of October 31, 1998, Mr. LiVolsi's options were exercisable as to all
187,500 shares, none of which had vested. If Mr. LiVolsi leaves us before
all of his option shares vest, we have the right to repurchase the unvested
shares at the exercise price paid per share.
52
<PAGE> 55
1999 STOCK INCENTIVE PLAN
Introduction. The 1999 Stock Incentive Plan is intended to serve as the
successor program to our 1996 Stock Option/Stock Issuance Plan. The 1999 plan is
expected to be adopted by our board of directors and approved by our
stockholders prior to the commencement of this offering. The 1999 plan will
become effective when the underwriting agreement for this offering is signed. At
that time, all outstanding options under the 1996 plan will be transferred to
the 1999 plan, and no further option grants will be made under the 1996 plan.
The transferred options will continue to be governed by their existing terms,
unless our compensation committee decides to extend one or more features of the
1999 plan to those options. Except as otherwise noted below, the transferred
options have substantially the same terms as will be in effect for grants made
under the discretionary option grant program of our 1999 plan.
Share reserve. shares of our common stock will be authorized for
issuance under the 1999 plan. This share reserve consists of the number of
shares we estimate will be carried over from the 1996 plan plus an additional
increase of shares. The share reserve under our 1999 plan will
automatically increase on the first trading day in January of each calendar
year, beginning with calendar year 2001, by an amount equal to two percent (2%)
of the total number of shares of our common stock outstanding on the last
trading day of December in the prior calendar year, but in no event will this
annual increase exceed shares. In addition, no participant in the 1999
plan may be granted stock options or direct stock issuances for more than
shares of common stock in total in any calendar year.
Programs. Our 1999 plan has five separate programs:
- the discretionary option grant program, under which our eligible
employees may be granted options to purchase shares of our common stock
at an exercise price not less than the fair market value of those shares
on the grant date;
- the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones or the completion of a specified period of service
or as a bonus for past services;
- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below-market stock option grants;
- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and
- the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash each year to the acquisition of
special below-market option grants.
Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our non-employee board members and any
consultants we hire.
Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.
53
<PAGE> 56
Plan features. Our 1999 plan will include the following features:
- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at the fair market value on
the exercise date. The option may also be exercised through a same-day
sale program without any cash outlay by the optionee.
- The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1996 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.
- Stock appreciation rights may be issued to certain officers subject to
Section 16 of the Securities Exchange Act of 1934 under the discretionary
option grant program. These rights will provide the holders with the
election to surrender their outstanding options for a payment from us
equal to the fair market value of the shares subject to the surrendered
options less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1996 plan have any stock appreciation rights.
Change in control. The 1999 plan will include the following change in
control provisions which may result in the accelerated vesting of outstanding
option grants and stock issuances:
- In the event that we are acquired by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our
outstanding voting stock, each outstanding option under the discretionary
option grant program which is not to be assumed by the successor
corporation or otherwise continued in effect will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation or otherwise continued in effect.
- The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently involuntarily
terminated. The vesting of any outstanding shares under our 1999 plan may
be accelerated upon similar terms and conditions.
- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a hostile take-over effected
through a successful tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board through one or more
contested elections. Such accelerated vesting may occur either at the
time of such transaction or upon the subsequent termination of the
optionee's services.
- The options currently outstanding under our 1996 plan will immediately
vest in the event we are acquired by merger or asset sale, unless those
options are assumed by the acquiring entity or our repurchase rights with
respect to any unvested shares subject to those options are assigned to
such entity. If the options are so assumed by the acquiring entity and
our repurchase rights are so assigned to such entity, then no accelerated
vesting will occur at the time of the acquisition but the options will
accelerate and vest in full upon an involuntary termination of the
optionee's employment within 18 months following the acquisition.
Salary investment option grant program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees may
elect to reduce his or her base salary for the calendar year by an amount not
less than $5,000 nor more than $50,000. Each selected individual who makes such
an election will automatically be granted, on the first trading day in January
of the calendar year for which his or her salary reduction is to be in effect,
an option to purchase that number of shares of common stock
54
<PAGE> 57
determined by dividing the salary reduction amount by two-thirds of the fair
market value per share of our common stock on the grant date. Each option will
have an exercise price per share equal to one-third of the fair market value of
the option shares on the grant date. As a result, the option will be structured
so that the fair market value of the option shares on the grant date less the
exercise price payable for those shares will be equal to the amount of the
salary reduction. The option will become exercisable in a series of twelve equal
monthly installments over the calendar year for which the salary reduction is to
be in effect.
Automatic option grant program. Each individual who first becomes a
non-employee board member at any time after the effective date of this offering
will receive an option grant to purchase 15,000 shares of common stock on the
date such individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase shares of common stock,
provided such individual has served on the board for at least six months.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
-share automatic option grant will vest in a series of three successive
annual installments upon the optionee's completion of each year of board service
over the three-year period measured from the grant date. However, the shares
will immediately vest in full upon certain changes in control or ownership or
upon the optionee's death or disability while then serving as a board member.
The shares subject to each annual -share automatic grant will vest upon
the optionee's completion of one year of service measured from the grant date.
Director fee option grant program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January of the calendar year for which the non-employee
board member would otherwise be paid the cash retainer fee in the absence of his
or her election. The option will have an exercise price per share equal to
one-third of the fair market value of the option shares on the grant date, and
the number of shares subject to the option will be determined by dividing the
amount of the retainer fee applied to the program by two-thirds of the fair
market value per share of our common stock on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while then serving as a board member.
Additional program features. Our 1999 plan also will have the following
features:
- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.
- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution
55
<PAGE> 58
from us in an amount per surrendered option share based upon the highest
price per share of our common stock paid in that tender offer.
- The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later than
, 2009.
EMPLOYEE STOCK PURCHASE PLAN
Introduction. Our Employee Stock Purchase Plan is expected to be adopted by
our board of directors and approved by our stockholders prior to the
commencement of this offering. The plan will become effective immediately upon
the signing of the underwriting agreement for this offering. The plan is
designed to allow our eligible employees and the eligible employees of our
participating subsidiaries to purchase shares of common stock, at semi-annual
intervals, with their accumulated payroll deductions.
Share reserve. shares of our common stock will initially be reserved
for issuance. The reserve will automatically increase on the first trading day
of January in each calendar year, beginning in calendar year 2001, by an amount
equal to one percent (1%) of the total number of outstanding shares of our
common stock on the last trading day of December in the prior calendar year. In
no event will any such annual increase exceed shares.
Offering periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for this offering is signed
and will end on the last business day in August 2001. The next offering period
will start on the first business day in September 2001, and subsequent offering
periods will be set by our compensation committee.
Eligible employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
their start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of March and September each
year. Individuals who become eligible employees after the start date of an
offering period may join the plan on any subsequent semi-annual entry date
within that offering period.
Payroll deductions. A participant may contribute up to 15% of his or her
base salary through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of February and August each
year. However, a participant may not purchase more than 750 shares on any one
semi-annual purchase date, and no more than shares may be purchased in
total by all participants on any one semi-annual purchase date. Our compensation
committee will have the authority to change these limitations for any subsequent
offering period.
Reset feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately prior to the acquisition.
Termination and amendment of plan. The plan will terminate no later than
the last business day of August 2009. The board may at any time amend, suspend
or discontinue the plan. However, certain amendments may require stockholder
approval.
56
<PAGE> 59
CHANGE OF CONTROL ARRANGEMENTS
If we are acquired in a stockholder-approved transaction, whether by merger
or asset sale, then all of the outstanding options under our 1996 Stock
Option/Stock Issuance Plan, including those held by our executive officers, will
accelerate in full, unless those options are assumed by the successor company
and our repurchase rights with respect to unvested option shares are assigned to
that company. In addition, if the optionee's employment is terminated other than
for cause within 18 months after the acquisition, the options will accelerate
and become fully vested, and such options may be exercised at any time prior to
the earlier of the expiration date of the option or one year after such
termination without cause.
57
<PAGE> 60
CERTAIN TRANSACTIONS
PRIVATE PLACEMENTS OF EQUITY
5% Stockholders. Since our inception in September 1996, we have raised
capital primarily through the sale of our securities, including:
- In December 1996 and May 1997, we sold an aggregate of 3,500,000 shares
of our Series A preferred stock at a price of $1.00 per share to funds
affiliated with Austin Ventures for an aggregate purchase price of $3.5
million. Concurrently with the closing of the financing, investment funds
affiliated with Austin Ventures became a 5% stockholder and William P.
Wood, a general partner of certain investment funds affiliated with
Austin Ventures, and a special limited partner of other funds associated
with Austin Ventures, became a director on our board of directors.
- In August 1997, we sold an aggregate of 2,173,914 shares of our Series B
preferred stock at a price of $2.30 per share to Advanced Digital
Information Corporation and investment funds affiliated with Austin
Ventures for an aggregate purchase price of $5.0 million. Concurrently
with the closing of this financing, ADIC became a 5% stockholder.
- In September 1998, we sold an aggregate of 1,000,000 shares of our Series
C preferred stock at a price of $4.00 per share to Hewlett-Packard
Company and investment funds affiliated with Austin Ventures for an
aggregate purchase price of $4.0 million. Concurrently with the closing
of this financing, Hewlett-Packard became a 5% stockholder.
- In April 1999, we sold an aggregate of 970,210 shares of our Series D
preferred stock at a price of $5.45 per share to Intel Corporation and
Hewlett-Packard Company for an aggregate purchase price of $5.29 million.
Concurrently with the closing of this financing, Intel became a 5%
stockholder.
- In August 1999, we sold an aggregate of 266,667 shares of our Series E
preferred stock at a price of $15.00 per share to Intel Corporation and
investment funds affiliated with Austin Ventures for an aggregate
purchase price of $4.0 million.
The following table summarizes the shares of our securities purchased by
our 5% stockholders since our inception.
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR STOCK STOCK STOCK STOCK STOCK
- -------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Funds Affiliated with Austin
Ventures............................. 3,500,000 434,783 250,000 -- 200,000
Advanced Digital Information
Corporation.......................... -- 1,739,131 -- -- --
Hewlett-Packard Company................ -- -- 750,000 52,779 --
Intel Corporation...................... -- -- -- 917,431 66,667
</TABLE>
Registration rights. We have granted the investors in our preferred stock
rights to require us to register or include their shares in a registered
offering of our securities. Please see "Description of Capital
Stock -- Registration Rights" for a description of these registration rights.
OTHER TRANSACTIONS
Advanced Digital Information Corporation. Concurrently with our Series B
preferred stock financing in which Advanced Digital Information Corporation
became a 5% stockholder, we entered into an OEM and Reseller Agreement with
ADIC. This agreement sets forth the terms and conditions whereby ADIC may
purchase our storage router products for use in connection with certain ADIC
products as well as for resale to third parties. Pursuant to this agreement, we
recorded revenue from product sales to ADIC in amounts of approximately $275,000
in fiscal 1997 and $800,000 in fiscal 1998. In fiscal 1997 and fiscal 1998,
product sales to ADIC accounted for 27% and 25% of our total revenue.
58
<PAGE> 61
Hewlett-Packard. Concurrently with our sale of Series C preferred stock in
which Hewlett-Packard Company became a 5% stockholder, we entered into a
Purchase and Licensing Agreement with Hewlett-Packard. Pursuant to this
agreement, Hewlett-Packard may license our storage router technology or purchase
our storage routers. Additionally, the agreement sets forth the terms by which
Hewlett-Packard will test and qualify our new products, as well as participate
in our new product planning and development process. Pursuant to these
agreements, we recorded revenue from Hewlett-Packard in amounts of approximately
$107,000 in fiscal 1997 and $500,000 in fiscal 1998. In fiscal 1997 and 1998,
revenue from Hewlett-Packard accounted for 11% and 16% of our total revenue,
respectively. In addition, from time to time, we purchase certain components for
our products from Hewlett-Packard.
Intel Corporation. Concurrently with our sale of Series D preferred stock
in which Intel Corporation became a 5% stockholder, we entered into a
Collaboration Agreement with Intel. Pursuant to this agreement, we intend to
collaborate with Intel on certain technical, public relations and marketing
activities. Specifically, Intel is providing technical and consulting support to
help us develop NGIO-enabled versions of our storage routers. Both parties have
agreed to assume full responsibility for their own expenses associated with
their activities under this agreement. Due to the nature of this agreement, we
are unable to place a monetary value on it.
Transactions with promoters. Upon the formation of our predecessor,
Infinity Commstor, LLC in April 1995, we issued membership interests to Brian R.
Smith and T. Dale Quisenberry in exchange for services and for certain equipment
and technology that we used in the formation of our business operations. In
September 1996, Infinity Commstor was merged into and became Crossroads.
Pursuant to this transaction, we issued Messrs. Smith and Quisenberry 4.8
million and 1.2 million shares of common stock, respectively. Messrs. Smith and
Quisenberry may be deemed to be promoters of our company. Our board, on which
Messrs. Smith and Quisenberry served at the time, valued this equipment and
technology according to its own judgment and did not obtain any independent
third-party valuation in determining the number of shares to issue in exchange
for this equipment and technology.
Stock options granted to executive officers and directors. For more
information regarding the grant of stock options to executive officers and
directors, please see "Management -- Director Compensation" and "-- Executive
Compensation."
Indemnification and insurance. We intend to provide indemnity agreements
and directors' and officers' insurance for our directors and executive officers.
For more information, please see " " and "Description of Capital
Stock -- Indemnification."
Loans to officers. In May 1999, we made loans to James H. Moore, Reagan Y.
Sakai, Robert F. LiVolsi and John R. Middleton in the amounts of $216,000,
$99,999, $103,750 and $22,250, respectively, to allow each such individual to
exercise certain of his outstanding stock options. Each officer delivered a
full-recourse promissory note to us with respect to his loan. Each promissory
note is secured by the purchased shares and accrues interest at a rate of 7.0%
per annum, compounded semi-annually. Each note becomes due on May 26, 2003, or
earlier if the officer leaves us or if the shares securing the promissory note
are sold.
In addition, on September 9, 1997, we loaned Mr. Moore $90,000 pursuant to
a full recourse promissory note that bears interest at the rate of 6.23% per
annum. In the event that Mr. Moore remains employed with us for a period of five
years, we will forgive all principal and accrued interest that is due under this
note.
We also entered into a License Agreement with Hewlett-Packard in April
1998. Pursuant to this, we granted to Hewlett-Packard a non-exclusive license to
the software and related hardware designs associated with our 4200 storage
router. Under this license, Hewlett-Packard may incorporate this licensed
technology into their products but may not directly sell our 4200 storage
router.
59
<PAGE> 62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of August 13, 1999, as adjusted to reflect the
sale of common stock offered by us and by certain selling stockholders in this
offering for:
- each person known by us to beneficially own more than 5% of our common
stock;
- each executive officer named in the Summary Compensation Table;
- each of our directors; and
- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock used to
calculate the percentage ownership of each listed person includes the shares of
common stock underlying options or warrants held by such persons that are
exercisable within 60 days of this offering. The percentage of beneficial
ownership before the offering is based on 21,940,676 shares, consisting of
8,340,828 shares of common stock outstanding as of August 13, 1999, and
13,599,848 shares issuable upon the conversion of the preferred stock.
Percentage of beneficial ownership after the offering is based on shares,
including shares sold in this offering.
Mr. Smith, Mr. Quisenberry and investment funds affiliated with Austin
Ventures may sell shares in connection with the exercise of the over-allotment
option. Mr. Smith may sell up to shares, Mr. Quisenberry may sell up to
shares and investment funds affiliated with Austin Ventures may sell up to
shares. Any shares that may be sold by selling stockholders upon the
underwriters' exercise of the over-allotment option have not been reflected in
this table.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON
STOCK BENEFICIALLY
OWNED
--------------------
SHARES BEFORE
BENEFICIALLY THE AFTER THE
NAME OF BENEFICIAL OWNER OWNED(#) OFFERING OFFERING
------------------------ ------------ -------- ---------
<S> <C> <C> <C>
Executive Officers and Directors:
Brian R. Smith............................................ 4,770,000 21.7% %
James H. Moore............................................ 660,000 3.0
Robert F. LiVolsi......................................... 247,500 *
Richard D. Eyestone....................................... 37,500 *
Wo Overstreet............................................. 67,500 *
David L. Riegel........................................... 52,500 *
William P. Wood........................................... 6,277,175 28.6
T. Dale Quisenberry....................................... 1,200,000 5.5
All directors and executive officers as a group (9
persons)............................................... 12,622,175 57.5% %
Other 5% Stockholders:
Advanced Digital Information Corporation.................. 2,608,697 11.9
Funds affiliated with Austin Ventures..................... 6,577,175 30.0
Hewlett-Packard........................................... 1,204,169 5.5
Intel Corporation......................................... 1,476,147 6.7
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.
60
<PAGE> 63
Executive Officers and Directors. Certain additional information regarding
the beneficial ownership of shares held by our executive officers and directors
is contained below. The address for each executive officer and director, other
than Mr. Wood, is 9390 Research Boulevard, Suite II-300, Austin, Texas 78759.
- Brian R. Smith. These shares include 120,000 shares held in trust for the
benefit of Mr. Smith's children. Mr. Smith disclaims beneficial ownership
for the 120,000 shares held in trust for the benefit of his children.
- James H. Moore. 410,625 of these shares are currently unvested and are
subject to our right to repurchase them if Mr. Moore's services are
terminated prior to vesting.
- Robert F. LiVolsi. 188,907 of these shares are currently unvested and are
subject to our right to repurchase them if Mr. LiVolsi's services are
terminated prior to vesting.
- Richard D. Eyestone. Represents 37,500 shares of common stock issuable
upon exercise of stock options.
- David L. Riegel. These shares include options to purchase 38,437 shares
of common stock that are immediately exercisable.
- William P. Wood. All shares indicated as owned by Mr. Wood are included
because of his affiliation with funds affiliated with Austin Ventures
Group. Mr. Wood is a general partner of AV Partners IV, L.P., the general
partner of (a) Austin Ventures IV-A, L.P. and (b) Austin Ventures IV-B,
L.P. Mr. Wood disclaims beneficial ownership of the shares held by Austin
Ventures IV-A, L.P., Austin Ventures IV-B, L.P., and Austin Ventures VI,
L.P., except to the extent of his pecuniary interest in such shares
arising from his general partnership interest in AV Partners IV, L.P. Mr.
Wood is a special limited partner of AV Partners VI, L.P., the general
partner of Austin Ventures VI, L.P., and as such the 300,000 shares owned
by Austin Ventures VI, L.P. are not included in Mr. Wood's beneficial
ownership amount. Mr. Wood's address is c/o Austin Ventures, 114 West
Seventh Street, Suite 1300, Austin, Texas 78701.
- T. Dale Quisenberry. Includes 780,000 shares owned by Mr. Quisenberry and
420,000 shares held in trusts for which Mr. Quisenberry serves as trustee
for the benefit of his children. Mr. Quisenberry disclaims beneficial
ownership for the 420,000 shares held in trust for the benefit of his
children. Mr. Quisenberry ceased to serve as an executive officer on
March 1999.
Other 5% Stockholders. Certain information regarding the beneficial owners
of 5% or more of our stock is set forth below.
- Funds affiliated with Austin Ventures. Includes (a) 2,026,211 shares held
by Austin Ventures IV-A, L.P.; (b) 4,250,964 shares held by Austin
Ventures IV-B, L.P.; and (c) 300,000 shares held by Austin Ventures VI,
L.P. Austin Ventures IV-B, L.P. and Austin Ventures VI, L.P. may be
deemed to beneficially own each other's shares because the general
partners of each partnership are affiliated. Each partnership, however,
disclaims beneficial ownership of the others' shares. The general
partners of AV Partners IV, L.P., which is the general partner of Austin
Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. are Joseph C. Aragona,
Kenneth DeAngelis, Jeffrey Garvey and William P. Wood, each of whom
disclaims beneficial ownership of the shares except to the extent of
their pecuniary interests, if any. The general partners of AV Partners
VI, L.P., which is the general partner of Austin Ventures VI, L.P., are
Joseph C. Aragona, Kenneth DeAngelis, Jeffrey Garvey, Edward Olkkola,
John D. Thornton and Blaine Wesner, each of whom disclaims beneficial
ownership of the shares except to the extent of their pecuniary
interests, if any. The address of the investment funds affiliated with
Austin Ventures is 114 West Seventh Street, Suite 1300, Austin, Texas
78701.
- Addresses. ADIC's address is 10201 Willows Road, Redmond, Washington
98052. Hewlett-Packard's address is 3000 Hanover Street, MS20BT, Palo
Alto, California 94304-1181. Intel's address is 2200 Mission College
Boulevard, Santa Clara, California 95052.
61
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of shares of common stock, par value $.0001 per share, and shares
of preferred stock, par value $0.001 per share. The rights and preferences of
the authorized preferred stock may be designated from time to time by our board
of directors. The following summary is qualified in its entirety by reference to
our certificate of incorporation and bylaws, as in effect upon the completion of
this offering, copies of which will be filed as exhibits to the registration
statement of which this prospectus is a part.
COMMON STOCK
As of August 13, 1999, there were 8,340,828 shares of common stock
outstanding that were held of record by 50 stockholders. Holders of our common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of common stock are not entitled to cumulate voting
rights with respect to the election of directors, and as a result, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to limitations under Delaware law and preferences that may apply
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends or other distribution, if any, as may
be declared by our board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the liquidation preference of any outstanding preferred
stock. The common stock has no preemptive, conversion or other rights to
subscribe for additional securities of Crossroads. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of the offering will be, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.
PREFERRED STOCK
As of August 13, 1999, there were 9,066,565 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock will automatically convert into 13,599,848 shares of common
stock, and our certificate of incorporation will authorize the issuance of up to
shares of preferred stock. Our board of directors will have the
authority, without further action by the stockholders, to designate the rights,
preferences, privileges and restrictions of the authorized preferred stock in
one or more series and to issue shares of each such series. The issuance of
preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power for the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. At present, we have no plans to
issue any shares of preferred stock after completion of this offering.
REGISTRATION RIGHTS
According to the terms of an investors' rights agreement, beginning 180
days after the closing of this offering, some of our stockholders, who will hold
in the aggregate 13,599,848 shares of common stock, may require us to file a
registration statement under the Securities Act of 1933 with respect to the
resale of their shares. To demand such registration, investors holding an
aggregate of at least 9,066,565 shares must request that the registration
statement register the resale of at least 6,799,924 shares. We are not required
to effect more than two demand registrations under any twelve-month period.
Additionally, the holders of 19,599,848 shares of common stock, including
our co-founders Brian R. Smith and T. Dale Quisenberry, will have piggyback
registration rights with respect to the future registration of our shares of
common stock under the Securities Act. If we propose to register any shares of
common stock under the Securities Act, the holders of shares having piggyback
registration rights are entitled to receive notice of such registration and are
entitled to include their shares in the registration.
62
<PAGE> 65
At any time after we become eligible to file a registration statement on
Form S-3 under the Securities Act, holders of demand registration rights may
require us to file an unlimited number of registration statements on Form S-3
with respect to their shares of common stock.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and commissions. The investors'
rights agreement also contains our commitment to indemnify the holders of
registration rights for losses they incur in connection with registrations under
the agreement. Registration of any of the shares of common stock held by
security holders with registration rights would result in those shares becoming
freely tradeable without restriction under the Securities Act.
ANTI-TAKEOVER EFFECTS
Provisions of Delaware law, our certificate of incorporation, our bylaws
and certain contracts to which we are a party, could have the effect of delaying
or preventing a third party from acquiring us, even if the acquisition would
benefit our stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of Crossroads. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of Crossroads.
Delaware anti-takeover statute. We are subject to the provisions of Section
203 of the Delaware General Corporation Law, an anti-takeover law. Subject to
certain exceptions, 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 of the transaction in which the person
became an interested stockholder, unless:
- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
- on or after such date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the date of determination whether the person is an "interested stockholder," did
own, 15% or more of the corporation's voting stock.
In addition, provisions of our certificate of incorporation and bylaws
which will take effect upon the closing of this offering may also have an
anti-takeover effect. These provisions may delay, defer or prevent a tender
offer or takeover attempt of our company that a stockholder might consider in
his or her best
63
<PAGE> 66
interest, including attempts that might result in a premium over the market
price for the shares held by our stockholders. The following summarizes these
provisions.
Classified board of directors. Our certificate of incorporation will
provide that at the first annual meeting following the closing of our initial
public offering, our board of directors will be divided into three classes of
directors, as nearly equal in size as is practicable, serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions, when coupled with the provisions of
our certificate of incorporation and bylaws authorizing our board of directors
to fill vacant directorships or increase the size of our board, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors.
Stockholder action; special meeting of stockholders. Our certificate of
incorporation will eliminate the ability of stockholders to act by written
consent. Our bylaws will provide that special meetings of our stockholders may
be called only by a majority of our board of directors.
Advance notice requirements for stockholder proposals and director
nominations. Our bylaws will provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide us with timely
written notice of their proposal. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 120 days before the date we released the notice of annual meeting to
stockholders in connection with the previous year's annual meeting. If, however,
no meeting was held in the prior year or the date of the annual meeting has been
changed by more than 30 days from the date contemplated in the notice of annual
meeting, notice by the stockholder, in order to be timely, must be received a
reasonable time before we release the notice of annual meeting to stockholders.
Our bylaws will also specify certain requirements as to the form and content of
a stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders.
Authorized but unissued shares. Our authorized but unissued shares of
common stock and preferred stock are available for our board to issue without
stockholder approval. We may use these additional shares for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of our
authorized but unissued shares of common stock and preferred stock could render
it more difficult or discourage an attempt to obtain control of our company by
means of a proxy context, tender offer, merger or other transaction.
Supermajority vote provisions. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless a corporation's certificate of incorporation
or bylaws, as the case may be, requires a greater percentage. Our certificate of
incorporation will impose supermajority vote requirements in connection with the
amendment of certain provisions of our certificate of incorporation, including
the provisions relating to the classified board of directors and action by
written consent of stockholders.
Indemnification. We will indemnify our directors and officers to the
fullest extent permitted by Delaware law. We intend to enter into indemnity
agreements with all of our directors and officers and to purchase directors' and
officers' liability insurance. In addition, our charter limits the personal
liability of our board members for breaches by the directors of their fiduciary
duties where permitted under Delaware law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ,
, .
NASDAQ NATIONAL MARKET LISTING
We have applied to list our stock on the Nasdaq National Market under the
trading symbol "CRDS."
64
<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our common
stock could decline. Furthermore, because we do not expect any shares will be
available for sale for 180 days after this offering as a result of the
contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price of the
common stock and our ability to raise equity capital in the future.
Upon the closing of this offering, we will have outstanding an aggregate of
shares of our common stock, based upon the number of shares outstanding
at August 13, 1999 and assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, all shares sold
in this offering will be freely tradeable without restriction or further
registration under the Securities Act unless they are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act. The
remaining shares will be eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
After the date of this
prospectus, freely tradeable
shares sold in this offering and
shares saleable under Rule 144(k)
that are not subject to the
180-day lock-up.
18,211,574 After 180 days from the date of
this prospectus, the 180-day
lock-up is released and these
shares are eligible for sale on
the public markets under Rule 144
(subject, in some cases, to
volume limitations), Rule 144(k)
or Rule 701.
3,498,020 After 180 days from the date of
this prospectus, restricted
securities that are held for less
than one year and are not
eligible for sale on the public
markets under Rule 144. However,
1,455,316 of these shares will
become eligible for sale on the
public markets within 14 days
after the expiration of the
lock-up.
</TABLE>
Lock-up agreements. All of our directors and officers and substantially all
of our stockholders and option holders have signed or are otherwise subject to
lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock
for 180 days after the date of this prospectus. Transfers or dispositions can be
made sooner: (a) with the prior written consent of SG Cowen Securities
Corporation, in the case of certain transfers to affiliates who sign identical
lock-up agreements or (b) if the transfer is a bona fide gift and the donee
signs an identical lock-up agreement.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of certain prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a) 1%
of the number of shares of our common stock then outstanding, which will equal
approximately shares immediately after the offering, or (b) the average
weekly trading volume of our common stock on the Nasdaq National Market
65
<PAGE> 68
during the four calendar weeks preceding the filing of a notice on Form 144 with
respect to that sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale and who
has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with a
compensatory stock plan or other written compensatory agreement is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.
Registration rights. After this offering, the holders of 19,599,848 shares
of our common stock will be entitled to certain rights with respect to the
registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." After any such registration of these
shares, such shares will be freely tradeable without restriction under the
Securities Act. These sales could cause the market price of our common stock to
decline.
Stock plans. After this offering, we intend to file one or more Form S-8
registration statement under the Securities Act covering shares of common
stock issued or reserved for issuance under our 1999 Stock Incentive Plan and
our Employee Stock Purchase Plan. We expect these registration statements to
become effective as soon as practicable after the effective date of this
offering.
As of August 13, 1999, options to purchase 1,712,043 shares of our common
stock were issued and outstanding. All of these shares will be eligible for sale
in the public market from time to time, subject to vesting provisions, Rule 144
volume limitations applicable to our affiliates and the expiration of lock-up
agreements.
66
<PAGE> 69
UNDERWRITING
Crossroads, the selling stockholders and the underwriters named below will
enter into an underwriting agreement with respect to the shares being offered.
Subject to the terms and conditions of the underwriting agreement, each
underwriter will severally agree to purchase the number of shares indicated in
the following table at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus. SG Cowen
Securities Corporation, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated and Morgan Keegan & Company, Inc. are the representatives of the
underwriters.
<TABLE>
<CAPTION>
NAME AMOUNT
- ---- --------
<S> <C>
SG Cowen Securities Corporation.............................
Dain Rauscher Wessels.......................................
Morgan Keegan & Company, Inc................................
--------
Total.............................................
========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common stock being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.
The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $ per share. Securities dealers may reallow a
concession not in excess of $ per share to other dealers. After the shares
of the common stock are released for sale to the public, the underwriters may
vary the offering price and other selling terms from time to time.
Our company and four of our stockholders have granted to the underwriters
an option to purchase up to an aggregate of additional shares of common
stock at the public offering price set forth on the cover of this prospectus to
cover over-allotments, if any. The option is exercisable for a period of 30
days. If the underwriters exercise their over-allotment option, the underwriters
have severally agreed to purchase shares in approximately the same proportion as
shown in the table above.
We and, if the over-allotment option is exercised, the selling stockholders
have agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, and to contribute to payments that
the underwriters may be required to make in respect of those liabilities.
Crossroads, our directors and executive officers, all principal
stockholders and certain other existing stockholders who hold an aggregate of
shares (including shares issuable pursuant to options
exercisable within 60 days of October 1, 1999) have agreed with the underwriters
that for a period of 180 days following the date of this prospectus, without the
prior written consent of SG Cowen Securities Corporation, they will not dispose
of or hedge any shares of common stock or any securities convertible into or
exchangeable for common stock.
67
<PAGE> 70
Certain persons associated with Dain Rauscher Wessels and Morgan Keegan &
Company, Inc. are stockholders of Crossroads. In August 1999, Dain Rauscher
Wessels Investors LLC, an affiliate of Dain Rauscher Wessels, acquired 16,667
shares of Crossroads' Series E preferred stock convertible into an aggregate of
25,001 shares of common stock at a price of $15.00 per share and an aggregate
purchase price of $250,000. In addition, certain individuals, including a family
trust of one such individual, who are associated with Morgan Keegan & Company,
Inc. acquired 16,667 shares of Crossroads' Series E preferred stock convertible
into an aggregate of 25,001 shares of common stock at a price of $15.00 per
share and an aggregate purchase price of $250,000 in August 1999.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when the
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price will be determined by
negotiations between us and the underwriters. Among the factors to be considered
in these negotiations are prevailing market conditions, the market
capitalizations and the states of development of other companies that we and the
underwriters believe to be comparable to us, estimates of our business
potential, our results of operation in recent periods, the present state of our
development and other factors deemed relevant.
We estimate that our out-of-pocket expenses for this offering will be
approximately $750,000.
68
<PAGE> 71
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas. Certain attorneys and
investment funds affiliated with Brobeck, Phleger & Harrison LLP own shares of
our Series E preferred stock which are convertible into an aggregate of 7,500
shares of our common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Gray Cary Ware &
Freidenrich LLP, Austin, Texas.
EXPERTS
Our financial statements as of October 31, 1997 and 1998 and for each of
the three years in the period ended October 31, 1998 included in this prospectus
and registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT CROSSROADS
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act of 1933 with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement and the exhibits thereto. For further information about
us and the shares of our common stock to be sold in this offering, please refer
to this registration statement. Complete exhibits have been filed with our
registration statement on Form S-1.
You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our filings at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our filings with the Securities and Exchange Commission,
including our registration statement, are also available to you without charge
at the Securities and Exchange Commission's Web site, http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and will file and
furnish to our stockholders annual reports containing financial statements
audited by our independent auditors, make available to our stockholders
quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year, proxy statements and other information with the
Securities and Exchange Commission.
You may read and copy any reports, statements or other information on file
at the public reference rooms or at the Securities and Exchange Commission's Web
site referred to above. You can also request copies of these documents, for a
copying fee, by writing to the Commission.
Our Web site is www.crossroads.com. THE INFORMATION CONTAINED ON OUR WEB
SITE IS NOT INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.
69
<PAGE> 72
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of October 31, 1997 and 1998
and July 31, 1999, historical and pro forma (unaudited)... F-3
Consolidated Statements of Operations for each of the three
years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 and 1999 (unaudited)...... F-4
Consolidated Statements of Changes in Stockholders' Deficit
for each of the three years in the period ended October
31, 1998 and for the nine months ended July 31, 1999
(unaudited)............................................... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 and 1999 (unaudited)...... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Crossroads Systems, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows listed in the index on page F-1 of this Form S-1 Registration
Statement present fairly, in all material respects, the financial position of
Crossroads Systems, Inc. and Subsidiary as of October 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1998 in conformity with generally accepted
accounting principles. These consolidated financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Austin, Texas
August 16, 1999
F-2
<PAGE> 74
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, JULY 31, 1999
----------------- ----------------------
1997 1998 HISTORICAL PRO FORMA
------- ------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 6,063 $ 1,695 $ 6,492 $ 18,467
Short-term investments............................. -- 2,239 -- --
Accounts receivable, net of allowance for doubtful
accounts of $8, $14, $59 and $59;
respectively.................................... 353 906 2,641 2,641
Inventories........................................ 197 896 2,447 2,447
Prepaids and other current assets.................. 56 230 505 505
------- ------- -------- --------
Total current assets....................... 6,669 5,966 12,085 24,060
Note receivable from related party................... 90 90 90 90
Property and equipment, net.......................... 632 968 1,816 1,816
Other assets......................................... 224 163 149 149
------- ------- -------- --------
Total assets............................... $ 7,615 $ 7,187 $ 14,140 $ 26,115
======= ======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable................................... $ 636 $ 875 $ 3,692 $ 3,692
Accrued expenses................................... 98 138 1,191 1,191
Deferred revenue................................... 7 -- 220 220
Current portion of long-term debt.................. 171 492 762 762
------- ------- -------- --------
Total current liabilities.................. 912 1,505 5,865 5,865
Long-term debt, net of current portion............... 301 591 936 936
Commitments (Note 6)
Redeemable convertible preferred stock, $.001 par
value, 11,000,000 shares authorized, 6,294,688,
7,544,688, 8,614,898 and 9,481,565 shares
designated, respectively, 6,294,688, 7,294,688 and
8,264,898 issued and outstanding, respectively, and
none issued and outstanding pro forma, aggregate
liquidation value of $13,278 at October 31, 1998
and $18,565 at July 31, 1999....................... 9,219 13,184 18,441 --
Stockholders' deficit:
Common stock, $.001 par value, 49,000,000 shares
authorized, 6,000,000, 6,378,468 and 8,283,078
shares issued and outstanding, respectively, and
21,882,926 shares issued and outstanding pro
forma........................................... 6 6 8 22
Additional paid-in capital......................... 12 280 5,562 35,964
Deferred stock-based compensation.................. -- (188) (4,389) (4,389)
Notes receivable from stockholders................. -- -- (447) (447)
Accumulated deficit................................ (2,835) (8,189) (11,834) (11,834)
Treasury stock at cost (22,500 shares at October
31, 1998 and July 31, 1999)..................... -- (2) (2) (2)
------- ------- -------- --------
Total stockholders' (deficit) equity....... (2,817) (8,093) (11,102) 19,314
------- ------- -------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders'
(deficit) equity......................... $ 7,615 $ 7,187 $ 14,140 $ 26,115
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 75
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. $ 160 $ 821 $ 2,930 $ 1,721 $ 11,728
Other revenue.................... 332 188 279 276 65
--------- --------- ---------- --------- ----------
Total revenue............ 492 1,009 3,209 1,997 11,793
Cost of revenue.................... 170 465 1,861 1,003 6,965
--------- --------- ---------- --------- ----------
Gross profit....................... 322 544 1,348 994 4,828
--------- --------- ---------- --------- ----------
Operating expenses:
Sales and marketing.............. -- 641 2,461 1,886 2,791
Research and development......... 291 1,329 2,386 1,600 3,539
General and administrative....... 235 1,323 1,896 1,411 1,699
Amortization of stock-based
compensation.................. -- -- 41 14 534
--------- --------- ---------- --------- ----------
Total operating
expenses............... 526 3,293 6,784 4,911 8,563
--------- --------- ---------- --------- ----------
Loss from operations............... (204) (2,749) (5,436) (3,917) (3,735)
Other income (expense):
Interest income.................. -- 83 183 149 158
Interest expense................. (8) (29) (65) (44) (76)
Other income (expense)........... -- 2 (36) -- 8
--------- --------- ---------- --------- ----------
Other income (expense), net... (8) 56 82 105 90
--------- --------- ---------- --------- ----------
Net loss........................... $ (212) $ (2,693) $ (5,354) $ (3,812) $ (3,645)
========= ========= ========== ========= ==========
Basic and diluted net loss per
share............................ $ (0.04) $ (0.45) $ (0.87) $ (0.62) $ (0.52)
========= ========= ========== ========= ==========
Shares used in computing basic and
diluted net loss per share....... 6,000,000 6,000,000 6,146,115 6,120,220 7,005,174
========= ========= ========== ========= ==========
Pro forma basic and diluted net
loss per share................... $ (0.31) $ (0.18)
========== ==========
Shares used in computing pro forma
basic and diluted net loss per
share............................ 17,088,147 20,605,022
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 76
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
------------------ PAID-IN STOCK-BASED FROM ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT STOCK
--------- ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1995... 6,000,000 $6 $ 12 $ -- $ -- $ 70 $ --
Net loss.............. -- -- -- -- -- (212) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1996... 6,000,000 6 12 -- -- (142) --
Net loss.............. -- -- -- -- -- (2,693) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1997... 6,000,000 6 12 -- -- (2,835) --
Issuance of common stock.... 378,468 -- 39 -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- -- (2)
Stock-based compensation.... -- -- 229 (188) -- -- --
Net loss.............. -- -- -- -- -- (5,354) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1998... 6,378,468 6 280 (188) -- (8,189) (2)
Issuance of common stock
(unaudited)............... 1,904,610 2 547 -- (447) -- --
Stock-based compensation
(unaudited)............... -- -- 4,735 (4,201) -- -- --
Net loss
(unaudited)......... -- -- -- -- -- (3,645) --
--------- -- ------ ------- ----- ---------- ----
Balance at July 31, 1999
(unaudited)................. 8,283,078 $8 $5,562 $(4,389) $(447) $ (11,834) $ (2)
========= == ====== ======= ===== ========== ====
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balance at November 1, 1995... $ 88
Net loss.............. (212)
--------
Balance at October 31, 1996... (124)
Net loss.............. (2,693)
--------
Balance at October 31, 1997... (2,817)
Issuance of common stock.... 39
Purchase of treasury
stock..................... (2)
Stock-based compensation.... 41
Net loss.............. (5,354)
--------
Balance at October 31, 1998... (8,093)
Issuance of common stock
(unaudited)............... 102
Stock-based compensation
(unaudited)............... 534
Net loss
(unaudited)......... (3,645)
--------
Balance at July 31, 1999
(unaudited)................. $(11,102)
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 77
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------- -----------------
1996 1997 1998 1998 1999
----- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(212) $(2,693) $(5,354) $(3,737) $(3,645)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 25 208 471 284 639
Amortization of stock-based
compensation............................ -- -- 41 14 534
Loss on disposal of property and
equipment............................... -- 4 136 -- 12
Provision for doubtful accounts........... -- 8 6 1 45
Changes in assets and liabilities:
Accounts receivable..................... 27 (319) (559) (152) (1,780)
Inventories............................. -- (197) (699) (584) (1,551)
Prepaids and other assets............... -- (248) (130) (114) (488)
Accounts payable........................ 114 523 239 (128) 2,817
Accrued expenses........................ 27 71 40 38 1,053
Deferred revenue........................ 4 3 (7) (7) 220
----- ------- ------- ------- -------
Net cash used in operating
activities......................... (15) (2,640) (5,816) (4,385) (2,144)
----- ------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment........... (123) (719) (956) (640) (1,499)
Proceeds from sale of property and
equipment................................. -- -- 13 -- --
Purchase of held to maturity investments..... -- -- (2,239) -- --
Maturity of held to maturity investments..... -- -- -- -- 2,239
Other assets................................. (1) (31) 17 -- (25)
Note receivable from related party........... -- (90) -- -- --
----- ------- ------- ------- -------
Net cash (used in) provided by
investing activities............... (124) (840) (3,165) (640) 765
----- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock....... -- -- 39 12 102
Proceeds from issuance of preferred stock,
net of issuance costs..................... -- 9,219 3,965 -- 5,257
Purchase of treasury stock................... -- -- (2) -- --
Borrowings under long-term debt agreements... 131 602 852 644 963
Repayment of long-term indebtedness.......... (23) (278) (241) (151) (348)
Deferred offering costs...................... -- -- -- -- 202
----- ------- ------- ------- -------
Net cash provided by financing
activities......................... 108 9,543 4,613 505 6,176
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.................................. (31) 6,063 (4,368) (4,520) 4,797
Cash and cash equivalents, beginning of
period....................................... 31 -- 6,063 6,063 1,695
----- ------- ------- ------- -------
Cash and cash equivalents, end of period....... $ -- $ 6,063 $ 1,695 $ 1,543 $ 6,492
===== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 78
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND BUSINESS:
Crossroads Systems, Inc. (the "Company"), a Delaware corporation, is a
provider of storage routers for storage area networks ("SANs"). The Company's
storage routes interconnect Fibre Channel SANs with small computer system
interface ("SCSI") servers and SCSI storage systems. The Company is organized
and operates as one business segment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, Crossroads Systems (Texas), Inc.
All intercompany transactions and balances have been eliminated in
consolidation.
Fiscal Year
During 1999, the Company changed its fiscal year-end from December 31 to
October 31. The Company's consolidated financial statements have been restated
for all periods presented to reflect this change.
Unaudited Interim Financial Information
The accompanying interim consolidated statements of operations and cash
flows for the nine months ended July 31, 1998 and 1999 are unaudited but include
all adjustments, consisting only of normal recurring adjustments, which
management of the Company considers necessary for a fair presentation of the
results of operations and cash flows for the nine months ended July 31, 1998 and
1999. The results of operations and cash flows for the nine months ended July
31, 1999 are not necessarily indicative of the results to be expected for the
full year. The data disclosed in these notes to the consolidated financial
statements for these periods are unaudited.
Unaudited Pro Forma Information
The pro forma balance sheet as of July 31, 1999 reflects the
issuance/conversion of the following equity securities into an aggregate of
13,599,848 shares of common stock:
(i) 4,000,000 shares of Series A redeemable convertible preferred stock;
(ii) 2,294,688 shares of Series B redeemable convertible preferred stock;
(iii) 1,000,000 shares of Series C redeemable convertible preferred stock;
(iv) 970,210 shares of Series D redeemable convertible preferred stock;
and
(v) the issuance of 801,667 shares Series E redeemable convertible
preferred stock for net cash proceeds of approximately $11,975 in
August 1999, and subsequent conversion into common stock, as if such
sale and conversion had occurred as of July 31, 1999.
Use of Estimates
The preparation of the 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 assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.
F-7
<PAGE> 79
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Risk and Uncertainties
The Company's products are concentrated in the storage area network
industry which is highly competitive and subject to rapid technological change.
These products are manufactured under contract by one supplier and revenue is
concentrated with several major customers. The Company's supplier arrangement
for the production of certain vital components of its storage routers is
concentrated with a small number of key suppliers.
The loss of a major customer, interruption of product from the contract
manufacturer, a change of suppliers or significant technological change in the
industry could affect operating results adversely.
The percentage of sales to significant customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED
------------ JULY 31,
1997 1998 1999
---- ---- -----------
<S> <C> <C> <C>
Customer A................................................ 17% 20% 44%
Customer B................................................ 3% 14% 30%
Customer C................................................ 27% 25% 3%
Customer D................................................ 11% 16% 4%
</TABLE>
For fiscal 1996, sales to three customers represented 16%, 16% and 19% of
total revenue.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and on deposit. Highly
liquid investments with a maturity of three months or less when purchased are
considered to be cash equivalents. Cash equivalents consist primarily of cash
deposited in money market accounts. While the Company's cash and cash
equivalents are on deposit with high quality FDIC insured financial
institutions, at times such deposits exceed insured limits. The Company has not
experienced any losses in such accounts.
Short-Term Investments
Short-term investments consist primarily of high grade commercial paper and
corporate debt with original maturities at the date of purchase greater than
three months and less than twelve months. All short-term investments have been
classified as held to maturity and are carried at cost, which approximates fair
value, due to the short period of time to maturity.
Concentrations of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's sales are primarily concentrated in the
United States and in the technology industry. The Company had trade accounts
receivable from four customers which comprised approximately 68% and 78% of
total trade accounts receivable at October 31, 1998 and July 31, 1999,
respectively. Additionally, the Company had trade accounts receivable from two
customers which comprised approximately 74% of total trade accounts receivable
at October 31, 1997. The Company does not require collateral on accounts
receivable balances and provides allowances for potential credit losses.
F-8
<PAGE> 80
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out method. Provisions, when required, are made to
reduce excess and obsolete inventories to their estimated net realizable values.
Property and Equipment
The Company's property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the respective
assets, generally one to three years for equipment and five years for furniture
and fixtures. Leasehold improvements are amortized on a straight-line basis over
the shorter of the estimated useful life of the related asset or the remaining
life of the lease. Upon retirement or disposition of assets, the cost and
related accumulated depreciation are removed from the accounts, and the related
gains or losses are reflected in operations.
Fair Value of Financial Instruments
The fair values of the Company's cash and cash equivalents and accrued
expenses approximate their carrying values due to their short maturities. The
fair value of the Company's debt obligations approximates their carrying values
based on interest rates currently available for instruments with similar terms.
Revenue Recognition
Revenue from product sales to customers that do not have rights of return,
including product sales to original equipment manufacturers and certain
distributors, resellers and system integrators, are recognized upon shipment.
Revenue and related cost of revenue from product sales to customers that have
rights of return are deferred and subsequently recognized upon sell-through to
end users.
The Company provides for the estimated cost to repair or replace products
under warranty when the related product revenue is recognized.
Research and Development
Expenditures related to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.
The Company capitalizes certain software development costs subsequent to
the establishment of technological feasibility. To date, such costs incurred
following technological feasibility, but prior to general release, have been
insignificant.
Comprehensive Income
The Company has had no items of comprehensive income for each of the three
years in the period ended October 31, 1998 and the nine month period ended July
31, 1999.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Under the liability method, deferred tax assets and liabilities are
recorded for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The
F-9
<PAGE> 81
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Company recorded no income tax expense during the years ended October 31, 1996,
1997 and 1998, or the nine months ended July 31, 1998 and 1999. The Company has
provided a full valuation allowance because the realization of tax benefits
associated with net operating loss carryforwards is not assured.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock amortized over the vesting period.
Computation of Net Loss Per Share
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), effective January 1,
1998. SFAS No. 128 requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by giving effect to all
dilutive potential common shares that were outstanding during the period. The
Company has excluded all redeemable convertible preferred stock and outstanding
stock options from the calculation of diluted net loss per share because all
such securities are antidilutive for all periods presented. The total number of
common stock equivalents excluded from the calculations of diluted net loss per
common share were 1,230,000, 11,639,532, 13,556,157, 14,103,750, and 13,950,690
for the years ended October 31, 1996, 1997 and 1998 and the nine months ended
July 31, 1998 and 1999, respectively.
Pro forma net loss per share, as presented in the statements of operations,
has been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the redeemable convertible
preferred stock (using the as-if-converted method).
The numerator in the pro forma net loss per share calculation is equivalent
to the net loss for each period presented. The denominator in the pro forma net
loss per share calculation is comprised of the following:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JULY 31,
OCTOBER 31, 1998 1999
---------------- --------------
<S> <C> <C>
Weighted average number of common shares outstanding..... 6,146,115 7,005,174
Effect of convertible securities:
Redeemable convertible preferred stock................... 10,942,032 13,599,848
---------- ----------
Shares used in pro forma calculation................... 17,088,147 20,605,022
========== ==========
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (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 derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company currently does not
engage or plan to engage in derivative instruments or hedging activities.
F-10
<PAGE> 82
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
3. INVENTORIES:
Inventories consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------ JULY 31,
1997 1998 1999
---- ---- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $194 $317 $1,269
Finished goods........................................... 3 579 1,178
---- ---- ------
$197 $896 $2,447
==== ==== ======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------- JULY 31,
1997 1998 1999
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment.............................................. $ 716 $1,403 $ 2,848
Furniture and fixtures................................. 108 117 100
Leasehold improvements................................. 39 140 202
----- ------ -------
863 1,660 3,150
Less: accumulated depreciation......................... (231) (692) (1,334)
----- ------ -------
$ 632 $ 968 $ 1,816
===== ====== =======
</TABLE>
5. LONG-TERM DEBT:
At October 31, 1998 and July 31, 1999, the Company had an unused line of
credit of $2,500 and an equipment line of $1,000. The amount available for
borrowings under the line of credit arrangement at any point in time is based
upon eligible accounts receivable and inventory balances. Borrowings under the
equipment line may be used to purchase general operating equipment. Interest
accrues and is payable monthly on outstanding balances under these lines at the
bank's prime rate (8% at October 31, 1998 and July 31, 1999). The line of credit
arrangement and the equipment line will expire in December 1999. Outstanding
borrowings under the equipment line were $780 and $902 at October 31, 1998 and
July 31, 1999, respectively.
The Company has term loans with a bank, the proceeds of which were used to
finance equipment purchases. Borrowings outstanding under the term loans bear
interest at the bank's prime rate plus 0.5% (8.5% at October 31, 1998 and July
31, 1999) and are payable in equal monthly installments of principal and
interest through April 2002. Borrowings outstanding on the term loans were $303
and $796 at October 31, 1998 and July 31, 1999, respectively.
Borrowings under the line of credit, equipment line and term loan
arrangements are collateralized by substantially all assets of the Company,
excluding intellectual property. Under the provisions of these credit
arrangements, the Company is prohibited from declaring or paying dividends.
Additionally, the Company must meet certain quarterly minimum financial
covenants, including minimum tangible net worth, liquidity ratio and
profitability covenants. During certain quarters in 1998 and 1999, the Company
was not in compliance with its profitability covenant. The profitability
covenant defaults were waived under the Company's credit arrangements in a
letter to the Company dated July 27, 1999.
F-11
<PAGE> 83
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The scheduled maturities of the Company's outstanding debt at October 31,
1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999..................................................... $ 492
2000..................................................... 373
2001..................................................... 202
2002..................................................... 16
------
$1,083
======
</TABLE>
6. COMMITMENTS:
The Company leases office space and equipment under long-term operating
lease agreements which expire on various dates through April 30, 2002. Rental
expense under these agreements was approximately $29, $154, $327, $238 and $300
for the years ended October 31, 1996, 1997, 1998, and the nine month periods
ended July 31, 1998 and 1999, respectively. The minimum annual future rentals
under the terms of these leases at October 31, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999...................................................... $238
2000...................................................... 238
2001...................................................... 242
2002...................................................... 157
----
$875
====
</TABLE>
In December 1998, the Company entered into an agreement to lease additional
office space for approximately $10 per month through December 12, 2003. In May
1999, the Company entered into an agreement to lease space for its new
manufacturing facility for approximately $8 per month through May 2004.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Following is a summary of redeemable convertible preferred stock issued by
the Company at October 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES ISSUED
SERIES DESIGNATED AND OUTSTANDING AMOUNT
- ------ ---------- --------------- -------
<S> <C> <C> <C>
Series A.......................................... 4,000,000 4,000,000 $ 3,971
Series B.......................................... 2,294,688 2,294,688 5,247
Series C.......................................... 1,250,000 1,000,000 3,966
--------- --------- -------
7,544,688 7,294,688 $13,184
========= ========= =======
</TABLE>
The carrying value of the redeemable convertible preferred stock represents
the proceeds from the sale of the stock net of issuance costs of $94 at October
31, 1998.
In April 1999, the Company's board of directors designated 1,070,210 shares
of preferred stock as Series D redeemable convertible preferred stock. Also in
April 1999, the Company sold 970,210 of Series D preferred stock for proceeds of
$5,257, net of issuance costs of $31.
F-12
<PAGE> 84
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
In August 1999, the Company's board of directors designated 866,667 shares
of preferred stock as Series E redeemable convertible preferred stock. Also in
August 1999, the Company sold 801,667 shares of Series E preferred stock for
proceeds of approximately $11,975, net of issuance costs of $50.
The rights with respect to Series A, B, C, D and E are as follows:
Dividends
The holders of shares of Series A, B, C, D and E preferred stock are
entitled to quarterly noncumulative dividends at the rate of $0.07, $0.16,
$0.28, $0.38 and $1.05 per annum per share, respectively, when and if
declared by the Company's board of directors through May 1, 2004. Beginning
May 1, 2004, dividends become cumulative and will accrue at the rates
aforementioned whether or not earned or declared. The Company's board of
directors has never declared a dividend on the Company's redeemable
convertible preferred stock.
Conversion
The Series A, B, C, D and E preferred stock may be converted into
common stock of the Company at the preferred stockholders' option, and
automatically in the event of an underwritten public offering of the
Company's common stock at a price not less than $10.00 per share and with
aggregate proceeds of not less than $10,000. The preferred stock is
convertible into common stock at a ratio determined by dividing the
original purchase price plus unpaid dividends by the conversion price,
initially the original purchase price, as adjusted for certain dilutive
events. Automatic conversion will also occur, at the then-applicable
conversion price, upon the conversion of two-thirds or more of the number
of Series A, B, C, D and E preferred stock issued. At October 31, 1998 and
July 31, 1999, the Company had reserved 10,942,032 and 12,397,347 shares of
common stock for the conversion of the Company's redeemable convertible
preferred stock.
Liquidation and Redemption
In the event of liquidation, the Series A, B, C, D and E preferred
stockholders are entitled to be paid $1.00, $2.30, $4.00, $5.45 and $15.00
per share, respectively, plus accrued dividends. The Series A, B, C, D and
E preferred stock is senior to all common stock with regard to liquidation
and dividend preferences. Commencing on September 4, 2006, the Company may
be required to redeem, upon the affirmative vote of two-thirds of the
preferred stockholders voting as a group, 50% of the outstanding shares of
preferred stock, and an additional 50% on September 4, 2007 with any
remaining shares of preferred stock to be redeemed at September 4, 2008, at
a redemption price equal to $1.00, $2.30, $4.00, $5.45 and $15.00 for
Series A, B, C, D and E respectively, plus accrued dividends.
Voting
The holder of each share of Series A, B, C, D and E preferred stock is
entitled to vote the number of shares of common stock into which each
preferred share is then convertible. All common and as-if-converted
preferred stockholders vote together as one group.
8. STOCK OPTION PLAN:
The Company has established the 1996 Stock Option/Stock Issuance Plan (the
"Plan"), providing for two separate equity programs: (i) the option grant
program providing for the granting of both incentive and non-statutory stock
options, as defined by the Internal Revenue Code, and (ii) the stock issuance
F-13
<PAGE> 85
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
program providing for the issuance of common stock directly, either through the
immediate purchase of such shares or for services rendered to the Company.
The Plan provides for a maximum number of common shares to be
optioned/issued of 4,875,000. Accordingly, the Company has reserved a sufficient
number of shares of common stock to permit exercise of options or issuance of
common shares in accordance with the terms of the Plan. Under the Plan,
incentive stock options may be granted only to Company employees (including
officers and directors who are also employees) and shall be issued at an
exercise prices not less than 100% of the fair market value of the Company's
common stock at the grant date, as determined by the Company's board of
directors or by a committee of the board appointed to administer the Plan,
except for incentive stock option grants to a stockholder that owns greater than
10% of the Company's outstanding stock in which case the exercise price per
share is not less than 110% of the fair market value of the Company's common
stock at date of grant. Non-Statutory stock options may be granted to Company
employees, members of the board, and consultants at the exercise price
determined by the board of directors or a committee appointed by the board of
directors to administer the Plan. Options granted under the Plan are exercisable
no later than ten years from the date of grant except for incentive stock
options granted to an optionee that owns more than 10% of the voting stock at
the date of grant in which case the option term shall be five years from the
date of grant or shorter based on the terms enumerated in the related option
agreement. At the time of the grant, the Company's board of directors or
committee appointed by the board to administer the Plan determines the exercise
price and vesting schedules. Generally, 25% of each option is exercisable one
year from the vesting commencement date, as defined in the option agreement
after the grant and an additional 1/16th each quarter thereafter. The Plan
allows for options to be immediately exercisable, subject to the Company's right
of repurchase for unvested shares at the original exercise price.
The stock issuance program under the Plan allows eligible persons to
purchase shares of common stock at an amount that may be less than, equal to or
greater than the fair market value of the common shares on the issuance date.
Such shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained
as determined by the board of directors or a committee appointed by the board to
administer the Plan. The Company retains the right to repurchase shares issued
in conjunction with the stock issuance program upon voluntary or involuntary
termination of service, provided that the stock purchase right has not been
exercised, at an amount equal to the original price paid by the purchaser.
Option activity under the Plan and related information follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, NINE MONTHS
------------------------------------------------------------------ ENDED
1996 1997 1998 JULY 31, 1999
-------------------- -------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- -------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 1,230,000 $0.09 2,197,500 $0.10 2,614,125 $0.16
Granted................... 1,230,000.. 0.09 978,750 0.12 1,273,500 0.25 998,820 0.92
Exercised................. -- -- -- -- (400,968) 0.10 (1,904,610) 0.29
Cancelled................. -- -- (11,250) 0.10 (455,907) 0.15 (154,992) 0.19
--------- --------- --------- ----------
Outstanding at end of
period.................. 1,230,000.. $0.09 2,197,500 $0.10 2,614,125 $0.16 1,553,343 $0.50
========= ========= ========= ==========
Options exercisable at the
end of the period....... 1,230,000 2,197,500 2,614,125 1,553,343
========= ========= ========= ==========
</TABLE>
F-14
<PAGE> 86
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
At October 31, 1998 and July 31, 1999 the Company had the right to
repurchase 75,000 and 849,740 shares of outstanding common stock, respectively,
previously issued under its 1996 Plan.
The Company has elected to follow the provisions prescribed by the
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations, for financial reporting purposes and
has adopted the disclosure only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation expense has been
recognized for the Plan under the provisions of SFAS No. 123. Had compensation
cost for the Plan been determined based upon the fair value at the grant date
for employee awards under the Plan consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss would have been increased to the
following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED
-------------------------- JULY 31,
1996 1997 1998 1999
------ ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss -- as reported...................... $ (212) $(2,693) $(5,354) $(3,645)
Net loss -- pro forma........................ $ (216) $(2,702) $(5,402) $(3,851)
Basic and diluted net loss per share -- as
reported................................... $(0.04) $ (0.45) $ (0.87) $ (0.52)
Basic and diluted net loss per share -- pro
forma...................................... $(0.04) $ (0.45) $ (0.88) $ (0.55)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED
------------------------ JULY 31,
1996 1997 1998 1999
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Weighted average grant-date fair value of options granted:
Exercise price equal to market price of stock on
the grant date:
Aggregate value............................ $ 11 $ 21 $ 38 --
===== ===== ===== ==========
Per share value............................ $0.01 $0.02 $0.04 --
===== ===== ===== ==========
Exercise price less than the market price of
stock on the grant date:
Aggregate value............................ -- -- $ 288 $4,893,319
===== ===== ===== ==========
Per share value............................ -- -- $0.84 $ 4.90
===== ===== ===== ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996, 1997, 1998 and 1999: no dividend yield;
risk-free interest rate of 6.37%, 6.32%, 5.71% and 5.72%; and expected lives of
five years, respectively. The volatility of the Company's common stock
underlying the options was not considered because the Company's equity is not
publicly-traded as of October 31, 1996, 1997, 1998 and July 31, 1999,
respectively.
F-15
<PAGE> 87
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table summarizes information with respect to stock options
outstanding at October 31, 1998 and July 31, 1999:
October 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- --------------- ----------- ----------------
<S> <C> <C>
$0.08..................................................... 792,000 7.85
$0.10..................................................... 605,625 8.30
$0.23..................................................... 1,156,500 9.16
$0.50..................................................... 60,000 9.73
---------
2,614,125 8.58
=========
</TABLE>
July 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- --------------- ----------- ----------------
<S> <C> <C>
$0.08..................................................... 276,000 7.10
$0.10..................................................... 233,906 7.54
$0.23..................................................... 304,689 8.42
$0.50..................................................... 222,938 9.29
$0.83..................................................... 133,515 9.63
$1.00..................................................... 229,850 9.82
$1.33..................................................... 152,445 9.93
---------
1,553,343 8.64
=========
</TABLE>
Options granted to directors and non-employees are recorded at fair value
in accordance with SFAS No. 123. The Company granted 112,500 and 7,500 options
to directors and non-employees for consulting services in fiscal 1997 and 1998.
9. INCOME TAXES:
As of October 31, 1998 and July 31, 1999 the Company had federal net
operating loss carryforwards of approximately $7,740 and $10,580, respectively
and experimentation tax credit carryforwards of approximately $167 and $263,
respectively.
For federal income tax purposes, net operating loss carryforwards begin to
expire in 2011.
F-16
<PAGE> 88
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JULY 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 1,006 $ 2,865 $ 3,940
Inventory and warranty reserves................... -- 78 94
Depreciation...................................... 64 95 163
Research and experimentation credit............... 75 167 263
Net deferred tax assets before valuation
allowance......................................... 1,145 3,205 4,460
Valuation allowance................................. (1,145) (3,205) (4,460)
------- ------- -------
Net deferred tax asset.............................. $ -- $ -- $ --
======= ======= =======
</TABLE>
Following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory Federal income tax rates to pretax loss
and the reported amount of income tax benefit:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, NINE MONTHS
-------------------------- ENDED
1996 1997 1998 JULY 31, 1999
---- ------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax benefit at statutory rate of 34%........ $72 $ 916 $ 1,810 $ 1,239
State income tax benefit.................... 6 81 160 109
Research and experimentation credit......... 3 72 92 96
Net increase in valuation allowance......... (80) (1,065) (2,060) (1,256)
Amortization of stock-based compensation.... -- -- -- (182)
Permanent difference........................ (1) (4) (9) (6)
Other....................................... -- -- 7 --
--- ------- ------- -------
$-- $ -- $ -- $ --
=== ======= ======= =======
</TABLE>
Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. Certain of the Company's operating losses that can be
utilized in any one taxable year for federal tax purposes have been limited by
one or more such ownership changes.
10. RELATED PARTY TRANSACTIONS:
Product Sales
The Company recorded product sales of $80, $383, $1,343 and $810 to certain
holders of shares of redeemable convertible preferred stock of the Company for
the years ended October 31, 1996, 1997, 1998, and the nine month period ended
July 31, 1999, respectively. Accounts receivable from these preferred
stockholders totaled approximately $277, $181 and $111 at October 31, 1997, 1998
and July 31, 1999 respectively.
Notes Receivable
In September 1997, the Company loaned an officer of the Company $90 in
exchange for a promissory note due in full, with accrued interest at a rate of
6.23%, in five years or upon the date in which the officer ceases to remain in
service. The Company has agreed to forgive the principal and interest due in the
event the employee remains in service continuously for five years from the date
of hire.
F-17
<PAGE> 89
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
During May 1999, the Company's board of directors approved the acceptance
of full recourse notes in the amount of $447,000 from certain of the Company's
officers as consideration for the exercise of 1,014,999 options. The notes
accrue interest at 7% per year, compounded semi-annually and principal and
accrued interest and are due in one lump sum in 2003.
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest totaled $8, $29, $65, and $76 during fiscal year
1996, 1997, 1998 and the nine month period ended July 31, 1999, respectively.
12. EMPLOYEE BENEFITS:
In 1996, the Company established the Crossroads Systems, Inc. 401(k)
Savings Plan, which is a qualified plan under section 401(k) of the Internal
Revenue Code. All employees who have attained 18 years of age are eligible to
enroll in the Plan. The Company may make matching contributions to those
employees participating in the plan based upon Company productivity and
profitability. Company contributions vest over a period of six years. The
Company made no matching contributions for the years ended October 31, 1996,
1997 and 1998, and the nine month period ended July 31, 1999.
13. AMENDMENT TO CERTIFICATE OF INCORPORATION
In August 1999, the Company's Board of Directors authorized the amendment
of the Company's Certificate of Incorporation and changed the aggregate number
of shares of capital stock authorized to be issued to 49,000,000 shares of
common stock and 11,000,000 shares of preferred stock. The Board of Directors
also authorized and the Company effected a three-for-two stock split for
outstanding shares of common stock. All share information included in the
accompanying consolidated financial statements and notes thereto have been
retroactively adjusted to reflect the stock split and the increase in the number
of authorized shares.
F-18
<PAGE> 90
[INSIDE BACK COVER GRAPHIC]
<PAGE> 91
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[CROSSROADS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
SG COWEN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 92
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 the
underwriting discount, payable by Registrant in connection with the sale of
common stock being registered hereby. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $12,788
NASD fee.................................................... 5,100
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses.................................. 7,500
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of Registrant may and, in
certain cases, must be indemnified by Registrant against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorneys' fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorneys' fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Registrant. This indemnification does not apply, in a derivative action, to
matters as to which it is adjudged that the director, officer, employee or agent
is liable to Registrant, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
Article V of our Fifth Amended and Restated Certificate of Incorporation,
as amended, provides that no director shall be liable to Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director to
the fullest extent permitted by the DGCL.
Reference is made to Section of the underwriting agreement to be filed as
Exhibit 1.1 hereto, pursuant to which the underwriters have agreed to indemnify
Registrant's officers and directors against certain liabilities under the
Securities Act of 1933.
Registrant intends to enter into Indemnification Agreements with each
Director, a form of which is filed as Exhibit 10.1 to this Registration
Statement. Pursuant to such agreements, we will be obligated, to the extent
permitted by applicable law, to indemnify such directors against all expenses,
judgments, fines and penalties incurred in connection with the defense or
settlement of any actions brought against them by reason of the fact that they
were directors of Registrant or assumed certain responsibilities at the
direction of Registrant. Registrant also intends to purchase directors and
officers liability insurance in order to limit its exposure to liability for
indemnification of directors and officers.
II-1
<PAGE> 93
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 31, 1996, Registrant has issued unregistered securities to a
limited number of people as described below. These issuances were deemed exempt
from registration under the Securities Act in reliance on Rule 701 or Section
4(2) promulgated thereunder. The following share and dollar amounts are adjusted
to reflect Registrant's 3-for-2 split effective as of August 12, 1999.
1. In September 1996, Registrant issued 6,000,000 shares of common stock to
its co-founders, Brian R. Smith and T. Dale Quisenberry, upon the merger
of Registrant with and into its predecessor, Infinity Commstor, LLC.
These shares were issued upon the conversion of Messrs. Smith and
Quisenberry's membership interests in Infinity Commstor into shares of
Registrant's common stock.
2. In December 1996 and May 1997, Registrant issued and sold 6,000,000
shares of Series A Convertible Preferred Stock for $0.67 per share, for
an aggregate purchase price of $4,000,000. The following stockholders
purchased our Series A Convertible Preferred Stock: Austin Ventures
IV-A, L.P.; Austin Ventures IV-B, L.P.; Peter Harvey; and Hypertech
Consultants, Ltd.
3. In August 1997, Registrant issued and sold 3,442,032 shares of Series B
Convertible Preferred Stock for $1.53 per share, for an aggregate
purchase price of $5,277,782. The following stockholders purchased our
Series B Convertible Preferred Stock: Austin Ventures IV-A, L.P.; Austin
Ventures IV-B, L.P.; Advanced Digital Information Corporation; Hypertech
Consultants, Ltd.; and Prototech.
4. In September 1998, Registrant issued and sold 1,500,000 shares of Series
C Convertible Preferred Stock for $2.67 per share, for an aggregate
purchase price of $4,000,000. The following stockholders purchased our
Series C Convertible Preferred Stock: Austin Ventures IV-A, L.P.; Austin
Ventures IV-B, L.P.; and Hewlett-Packard Company.
5. In April 1999, Registrant issued and sold 1,455,315 shares of Series D
Convertible Preferred Stock for $3.63 per share, for an aggregate
purchase price of $5,287,644. The following stockholders purchased our
Series D Convertible Preferred Stock: Hewlett-Packard Company and Intel
Corporation.
6. In August 1999, Registrant issued and sold 1,202,501 shares of Series E
Convertible Preferred Stock for $10.00 per share, for an aggregate
purchase price of $12,025,005. The following stockholders purchased our
Series E Convertible Preferred Stock: Admirals, LP; Austin Ventures VI,
L.P.; certain attorneys and investment funds affiliated with Brobeck
Phleger & Harrison LLP,; Dain Rauscher Wessels Investors LLC; Essex
Private Placement Fund Limited Partnership; HLM/CB Fund, L.P.; Intel
Corporation; Seligman New Technologies Fund, Inc.; Seligman Investment
Opportunities (Master) Fund -- NTV Portfolio; certain individuals and
entities associated with Morgan Keegan & Company, Inc.; Raptor Global
Fund L.P.; and Raptor Global Fund Ltd.
7. Through August 13, 1999, Registrant has issued and sold 2,327,078 shares
of its Common Stock to directors, employees and consultants upon the
exercise of options granted under its 1996 Stock Option/Stock Issuance
Plan at a weighted average exercise price of $0.26.
II-2
<PAGE> 94
8. From time to time Registrant has granted stock options to employees,
directors and consultants. The following table sets forth information
regarding these grants.
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
September 1996....................................... 900,000 $0.083
October 1, 1996 through July 31, 1997................ 1,196,250 0.10
August 1, 1997 through June 30, 1998................. 1,325,500 0.23
July 1, 1998 through January 31, 1999................ 264,000 0.50
March 1999........................................... 160,725 0.833
May 1999............................................. 481,650 1.00
July 1999............................................ 129,945 1.33
August 1999.......................................... 158,700 10.00
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement by and among Registrant
and the Underwriters
3.1* -- Form of Fifth Amended and Restated Certificate of
Incorporation, as amended, of Crossroads Systems, Inc.
3.2* -- Form of Amended and Restated Bylaws of Crossroads
Systems, Inc.
4.1* -- Specimen certificate for shares of Common Stock
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP
10.1 -- Form of Indemnity Agreement between Registrant and each
of its directors and executive officers
10.2* -- Crossroads Systems, Inc. 1999 Stock Incentive Plan
10.3* -- Crossroads Systems, Inc. 1999 Employee Stock Purchase
Plan
10.4 -- Fourth Amended and Restated Investors' Rights Agreement
dated August 6, 1999 by and among Registrant and certain
stockholders of Registrant
10.5+ -- OEM Agreement dated April 23, 1998 by and between
Registrant and Storage Technology Corporation
10.6 -- Lease Agreement dated February 28, 1997 by and between
Registrant and Eurus Estates II, Ltd.
10.7 -- First Supplement to Lease Agreement dated October 6, 1997
by and between Registrant and Eurus Estates II, Ltd.
10.8 -- Second Supplement to Lease Agreement dated September 28,
1998 by and between Registrant and Eurus Estates II, Ltd.
10.9 -- Third Supplement to Lease Agreement dated December 1,
1998 by and between Registrant and Eurus Estates II, Ltd.
10.10 -- Fourth Supplement to Lease Agreement dated June 23, 1999
by and between Registrant and Eurus Estates II, Ltd.
10.11 -- Fifth Supplement to Lease Agreement dated June 22, 1999
by and between Registrant and Eurus Estates II, Ltd.
10.12 -- Form of Stock Pledge Agreement by and between Registrant
and each of James H. Moore, Reagan Y. Sakai, Robert F.
LiVolsi and John R. Middleton
10.13 -- Form of Note Secured by Stock Pledge Agreement issued to
Registrant by each of James H. Moore, Reagan Y. Sakai,
Robert F. LiVolsi and John R. Middleton
</TABLE>
II-3
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.14* -- Amended and Restated Loan and Security Agreement by and
between Registrant and Silicon Valley Bank
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1 -- Power of Attorney (see page II-5)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Application has been made to the Commission to seek confidential treatment of
certain provisions. Omitted material for which confidential treatment has been
requested has been filed separately with the Commission.
(b) Financial Statement Schedules
Not included because the information required to be set forth therein is
not applicable or is shown in Registrant's Consolidated Financial Statements or
the related Notes.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the DGCL, our Certificate of Incorporation or our Bylaws, the underwriting
agreement or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers, or
controlling persons 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 hereunder, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act,
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 us 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, 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 this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, we
have duly caused this registration statement to be signed on our behalf by the
undersigned, thereunto duly authorized, in Austin, Texas, on August 18, 1999.
CROSSROADS SYSTEMS, INC.
By: /s/ BRIAN R. SMITH
----------------------------------
BRIAN R. SMITH
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Brian R. Smith and Reagan Y. Sakai, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, and to sign any registration statement for the
same offering covered by this registration statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ BRIAN R. SMITH Chief Executive Officer and August 18, 1999
- ------------------------------------------------ Chairman of the Board (principal
BRIAN R. SMITH executive officer)
/s/ REAGAN Y. SAKAI Chief Financial Officer (principal August 18, 1999
- ------------------------------------------------ financial and accounting
REAGAN Y. SAKAI officer)
/s/ RICHARD D. EYESTONE Director August 18, 1999
- ------------------------------------------------
RICHARD D. EYESTONE
/s/ WO OVERSTREET Director August 18, 1999
- ------------------------------------------------
WO OVERSTREET
/s/ DAVID L. RIEGEL Director August 18, 1999
- ------------------------------------------------
DAVID L. RIEGEL
/s/ WILLIAM P. WOOD Director August 18, 1999
- ------------------------------------------------
WILLIAM P. WOOD
</TABLE>
II-5
<PAGE> 97
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* -- Form of Underwriting Agreement by and among Registrant
and the Underwriters
3.1* -- Form of Fifth Amended and Restated Certificate of
Incorporation, as amended, of Crossroads Systems, Inc.
3.2* -- Form of Amended and Restated Bylaws of Crossroads
Systems, Inc.
4.1* -- Specimen certificate for shares of common stock
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP
10.1 -- Form of Indemnification Agreement between Registrant and
each of its directors and executive officers
10.2* -- Crossroads Systems, Inc. 1999 Stock Incentive Plan
10.3* -- Crossroads Systems, Inc. 1999 Employee Stock Purchase
Plan
10.4 -- Fourth Amended and Restated Investors' Rights Agreement
dated August 6, 1999 by and among Registrant and certain
stockholders of Registrant
10.5+ -- OEM Agreement dated April 23, 1998 by and between
Registrant and Storage Technology Corporation
10.6 -- Office Lease dated February 28, 1997 by and between
Registrant and Eurus Estates II, Ltd.
10.7 -- First Supplement to Lease Agreement dated October 6, 1997
by and between Registrant and Eurus Estates II, Ltd.
10.8 -- Second Supplement to Lease Agreement dated September 28,
1998 by and between Registrant and Eurus Estates II, Ltd.
10.9 -- Third Supplement to Lease Agreement dated December 1,
1998 by and between Registrant and Eurus Estates II, Ltd.
10.10 -- Fourth Supplement to Lease Agreement dated June 23, 1999
by and between Registrant and Eurus Estates II, Ltd.
10.11 -- Fifth Supplement to Lease Agreement dated June 22, 1999
by and between Registrant and Eurus Estates II, Ltd.
10.12 -- Form of Stock Pledge Agreement by and between Registrant
and each of James H. Moore, Reagan Y. Sakai, Robert F.
LiVolsi and John R. Middleton
10.13 -- Form of Note Secured by Stock Pledge Agreement issued to
Registrant by each of James H. Moore, Reagan Y. Sakai,
Robert F. LiVolsi and John R. Middleton
10.14* -- Amended and Restated Loan and Security Agreement by and
between Registrant and Silicon Valley Bank
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1 -- Power of Attorney (see page II-5)
27.1 -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
+ Application has been made to the Commission to seek confidential treatment of
certain provisions. Omitted material for which confidential treatment has been
requested has been filed separately with the Commission.
<PAGE> 1
EXHIBIT 10.1
INDEMNITY AGREEMENT
THIS INDEMNITY AGREEMENT is made and entered into as of this
_____ day of ________, 1999 between Crossroads Systems, Inc., a Delaware
corporation (the "Corporation"), and _______________________________
("Indemnitee").
I N T R O D U C T I O N:
A. Indemnitee is an executive officer, director and/or agent
of the Corporation (or a subsidiary of the Corporation), as the case may be from
time to time, and performs a valuable service for the Corporation in such
capacity (or capacities); and
B. The Certificate of Incorporation (the "Certificate") and
the Bylaws (the "Bylaws") of the Corporation contain provisions providing for
the indemnification of the officers, directors and agents of the Corporation to
the maximum extent authorized by Section 145 of the Delaware General Corporation
Law, as amended ("DGCL"); and
C. The Certificate, the Bylaws and the DGCL, by their
non-exclusive nature, permit contracts between the Corporation and the members
of its Board of Directors and officers with respect to indemnification of such
directors and officers; and
D. In accordance with the authorization as provided by the
DGCL, the Corporation has purchased and presently maintains a policy or policies
of Directors and Officers Liability Insurance ("D & O Insurance"), covering
certain liabilities which may be incurred by its directors and officers in the
performance of their duties as directors or officers of the Corporation; and
E. As a result of developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded members of the Board of Directors and executive
officers of the Corporation by such D & O Insurance and by statutory and bylaw
indemnification provisions; and
F. In order to induce Indemnitee to continue to serve as an
executive officer, director or agent of the Corporation, the Corporation has
determined and agreed to enter into this contract with Indemnitee.
A G R E E M E N T:
NOW, THEREFORE, in consideration of Indemnitee's continued
service as an executive officer and a member of the Board of Directors after the
date hereof, the parties hereto agree as follows:
1. INDEMNIFICATION OF INDEMNITEE. The Corporation hereby
agrees to hold harmless and indemnify Indemnitee and any partnership,
corporation, trust or other entity of
<PAGE> 2
which Indemnitee is or was a partner, shareholder, trustee, director, officer,
employee or agent (Indemnitee and each such partnership, corporation, trust or
other entity being hereinafter referred to collectively as an "Indemnitee") to
the fullest extent authorized or permitted by the provisions of the DGCL, as may
be amended from time to time.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set
forth in Section 3 hereof, the Corporation hereby further agrees to hold
harmless and indemnify Indemnitee:
(a) against any and all expenses (including attorney's
fees), witness fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by Indemnitee in connection with any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (including an action
by or in the right of the Corporation) to which Indemnitee is, was or
at any time becomes a party, or is threatened to be made a party, by
reason of the fact that Indemnitee is, was or at any time becomes a
director, officer, employee or agent of the Corporation or any
subsidiary of the Corporation, or is or was serving or at any time
serves at the request of the Corporation or any subsidiary of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise, if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe Indemnitee's conduct
was unlawful; and
(b) otherwise to the fullest extent as may be provided to
Indemnitee by the Corporation under the non-exclusivity provisions of
Article XI of the Corporation's Bylaws (as the same, including such
article, may be amended, modified or restated from time to time) and
the DGCL.
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant
to Section 2 hereof shall be paid by the Corporation:
(a) except to the extent the aggregate of losses to be
indemnified thereunder exceeds the sum of such losses for which the
Indemnitee is indemnified pursuant to Section 1 hereof or pursuant to
any D & O Insurance purchased and maintained by the Corporation;
(b) in respect to remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication
that such remuneration was in violation of law;
(c) on account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase
or sale by Indemnitee of securities of the Corporation pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934 and
amendments thereto or similar provisions of any federal, state or local
statutory law;
2
<PAGE> 3
(d) on account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest,
or to constitute willful misconduct;
(e) on account of Indemnitee's conduct which is the subject
of an action, suit or proceeding described in Section 7(c)(ii) hereof;
(f) on account of any action, claim or proceeding (other
than a proceeding referred to in Section 8(b) hereof) initiated by the
Indemnitee unless such action, claim or proceeding was authorized in
the specific case by action of the Board of Directors; and
(g) if a final decision by a Court having jurisdiction in
the matter shall determine that such indemnification is not lawful
(and, in this respect, both the Corporation and Indemnitee have been
advised that the Securities and Exchange Commission believes that
indemnification for liabilities arising under the federal securities
laws is against public policy and is, therefore, unenforceable and that
claims for indemnification should be submitted to appropriate courts
for adjudication).
4. CONTRIBUTION. If the indemnification provided in Sections 1
and 2 hereof is unavailable by reason of a Court decision described in Section
3(g) hereof based on grounds other than any of those set forth in paragraphs (b)
through (f) of Section 3 hereof, then in respect of any threatened, pending or
completed action, suit or proceeding in which the Corporation is jointly liable
with Indemnitee (or would be if joined in such action, suit or proceeding), the
Corporation shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred and paid or payable by Indemnitee in such proportion as is appropriate
to reflect (a) the relative benefits received by the Corporation on the one hand
and Indemnitee on the other hand from the transaction from which such action,
suit or proceeding arose, and (b) the relative fault of the Corporation on the
one hand and of Indemnitee on the other in connection with the events which
resulted in such expenses, judgments, fines or settlement amounts, as well as
any other relevant equitable considerations. The relative fault of the
Corporation on the one hand and of Indemnitee on the other shall be determined
by reference to, among other things, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent the circumstances
resulting in such expenses, judgments, fines or settlement amounts. The
Corporation agrees that it would not be just and equitable if contribution
pursuant to this Section 4 were determined by pro rata allocation or any other
method of allocation that does not take account of the foregoing equitable
considerations.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations
of the Corporation contained herein shall continue during the period Indemnitee
is a director, officer or agent of the Corporation or any subsidiary of the
Corporation (or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) if Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Corporation, except that no indemnification
shall be made in respect of any claim, issue or matter as to which Indemnitee
shall have been adjudged to be liable to the Corporation unless
3
<PAGE> 4
and only to the extent that the Court of Chancery of the State of Delaware or
the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of the State of Delaware
or such other court shall deem proper and shall continue thereafter so long as
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal or investigative,
by reason of the fact that Indemnitee was an officer of the Corporation or
serving in any other capacity referred to herein.
6. NOTIFICATION AND DEFENSE OF CLAIM. Not later than thirty
days after receipt by Indemnitee of notice of the commencement of any action,
suit or proceeding, Indemnitee will, if a claim in respect thereof is to be made
against the Corporation under this Agreement, notify the Corporation of the
commencement thereof; but the omission so to notify the Corporation will not
relieve it from any liability which it may have to Indemnitee otherwise than
under this Agreement. With respect to any such action, suit or proceeding as to
which Indemnitee notifies the Corporation of the commencement thereof:
(a) the Corporation will be entitled to participate therein
at its own expense;
(b) except as otherwise provided below, to the extent that
it may wish, the Corporation jointly with any other indemnifying party
similarly notified will be entitled to assume the defense thereof, with
counsel reasonably satisfactory to Indemnitee. After notice from the
Corporation to Indemnitee of its election so as to assume the defense
thereof, the Corporation will not be liable to Indemnitee under this
Agreement for any legal or other expenses subsequently incurred by
Indemnitee in connection with the defense thereof other than reasonable
costs of investigation or as otherwise provided below. Indemnitee shall
have the right to employ its counsel in such action, suit or proceeding
but the fees and expenses of such counsel incurred after notice from
the Corporation of its assumption of the defense thereof shall be at
the expense of Indemnitee unless (i) the employment of counsel by
Indemnitee has been authorized by the Corporation, (ii) Indemnitee
shall have reasonably concluded that there may be a conflict of
interest between the Corporation and Indemnitee in the conduct of the
defense of such action or (iii) the Corporation shall not in fact have
employed counsel to assume the defense of such action, in each of which
cases the fees and expenses of Indemnitee's separate counsel shall be
at the expense of the Corporation. The Corporation shall not be
entitled to assume the defense of any action, suit or proceeding
brought by or on behalf of the Corporation or as to which Indemnitee
shall have made the conclusion provided for in (ii) above; and
(c) the Corporation shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of
any action or claim effected without its written consent. The
Corporation shall be permitted to settle any action except that it
shall not settle any action or claim in any manner which would impose
any penalty or limitation on Indemnitee without Indemnitee's written
consent. Neither the Corporation nor Indemnitee will unreasonably
withhold its consent to any proposed settlement.
4
<PAGE> 5
7. ADVANCEMENT AND REPAYMENT OF EXPENSES.
(a) In the event that Indemnitee employs his own counsel
pursuant to Section 6(b)(i) through (iii) above, the Corporation shall
advance to Indemnitee, prior to any final disposition of any threatened
or pending action, suit or proceeding, whether civil, criminal,
administrative or investigative, any and all reasonable expenses
(including legal fees and expenses) incurred in investigating or
defending any such action, suit or proceeding within ten days after
receiving copies of invoices presented to Indemnitee for such expenses;
(b) Indemnitee agrees that Indemnitee will reimburse the
Corporation for all reasonable expenses paid by the Corporation in
defending any civil or criminal action, suit or proceeding against
Indemnitee in the event and only to the extent it shall be ultimately
determined by a final judicial decision (from which there is no right
of appeal) that Indemnitee is not entitled, under the provisions of the
DGCL, the Certificate, the Bylaws, this Agreement or otherwise, to be
indemnified by the Corporation for such expenses; and
(c) Notwithstanding the foregoing, the Corporation shall
not be required to advance such expenses to Indemnitee if Indemnitee
(i) commences any action, suit or proceeding as a plaintiff unless such
advance is specifically approved by a majority of the Board of
Directors or (ii) is a party to an action, suit or proceeding brought
by the Corporation and approved by a majority of the Board which
alleges willful misappropriation of corporate assets by Indemnitee,
disclosure of confidential information in violation of Indemnitee's
fiduciary or contractual obligations to the Corporation, or any other
willful and deliberate breach in bad faith of Indemnitee's duty to the
Corporation or its shareholders.
8. PROCEDURE. Any indemnification and advances provided for in
Section 1 and Section 2 shall be made no later than 45 days after receipt of the
written request of Indemnitee. If a claim under this Agreement, under any
statute, or under any provision of the Corporation's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Corporation within 45 days after a written request for payment thereof has
first been received by the Corporation, Indemnitee may, but need not, at any
time thereafter bring an action against the Corporation to recover the unpaid
amount of the claim and, subject to Section 12 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Corporation to indemnify Indemnitee for the amount claimed, but the
burden of proving such defense shall be on the Corporation and Indemnitee shall
be entitled to receive interim payments of expenses pursuant to Subsection 2(a)
unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Corporation contests Indemnitee's right to
indemnification, the question of Indemnitee's right to indemnification shall be
for the court to decide, and neither the failure of the Corporation (including
its Board of Directors, any committee or subgroup of the Board of Directors,
5
<PAGE> 6
independent legal counsel, or its stockholders) to have made a determination
that indemnification of Indemnitee is proper in the circumstances because
Indemnitee has met the applicable standard of conduct required by applicable
law, nor an actual determination by the Corporation (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) that Indemnitee has not met such applicable
standard of conduct, shall create a presumption that Indemnitee has or has not
met the applicable standard of conduct.
9. ENFORCEMENT.
(a) The Corporation expressly confirms and agrees that it
has entered into this Agreement and assumed the obligations imposed on
the Corporation hereby in order to induce Indemnitee to continue as an
executive officer, director or agent of the Corporation, and
acknowledges that Indemnitee is relying upon this Agreement in
continuing in such capacity; and
(b) In the event Indemnitee is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, the Corporation shall reimburse Indemnitee
for all Indemnitee's reasonable fees and expenses in bringing and
pursuing such action.
10. SUBROGATION. In the event of payment under this agreement,
the Corporation 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
Corporation effectively to bring suit to enforce such rights.
11. NON-EXCLUSIVITY OF RIGHTS. The rights conferred on
Indemnitee by this Agreement shall not be exclusive of any other right which
Indemnitee may have or hereafter acquire under any statute, provisions of the
Corporation's Certificate of Incorporation or Bylaws, agreement, vote of
stockholders or directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office.
12. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under
any provision of this Agreement to indemnification by the Corporation for some
or a portion of the expenses, judgments, fines or penalties actually or
reasonably incurred by Indemnitee in the investigation, defense, appeal or
settlement of any civil or criminal action, suit or proceeding, but not,
however, for the total amount thereof, the Corporation shall nevertheless
indemnify Indemnitee for the portion of such expenses, judgments, fines or
penalties to which Indemnitee is entitled.
13. SURVIVAL OF RIGHTS. The rights conferred on Indemnitee by
this Agreement shall continue after Indemnitee has ceased to be a director,
officer, employee or other agent of the Corporation and shall inure to the
benefit of Indemnitee's heirs, executors and administrators.
14. SEPARABILITY. Each of the provisions of this Agreement is
a separate and distinct agreement and independent of the others, so that if any
or all of the provisions hereof shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof or the obligation of
6
<PAGE> 7
the Corporation to indemnify the Indemnitee to the full extent provided by the
Certificate, Bylaws or the DGCL.
15. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement
shall be interpreted and enforced in accordance with the laws of the State of
Delaware. The Corporation and Indemnitee each hereby irrevocably consent to the
jurisdiction of the courts of the State of Delaware 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
brought only in the state courts of the State of Delaware.
16. BINDING EFFECT. This Agreement shall be binding upon
Indemnitee and upon the Corporation, its successors and assigns, and shall inure
to the benefit of Indemnitee, his heirs, personal representatives and assigns
and to the benefit of the Corporation, its successors and assigns.
17. AMENDMENT AND TERMINATION. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless in
writing signed by both parties hereto.
18. COUNTERPARTS. This Agreement may be executed in one or
more counterparts, each of which shall constitute an original.
[Signature Page Follows]
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed this Indemnity
Agreement on and as of the day and year first above written.
CROSSROADS SYSTEMS, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
INDEMNITEE
-----------------------------------------
Print Name:
------------------------------
[SIGNATURE PAGE TO INDEMNITY AGREEMENT]
<PAGE> 1
EXHIBIT 10.4
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
BY AND AMONG
CROSSROADS SYSTEMS, INC.
AND
THE STOCKHOLDERS LISTED ON SCHEDULE A
AND THE INVESTORS LISTED ON SCHEDULE B
DATED AS OF AUGUST 6, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Registration Rights.....................................................................................1
1.1 Definitions......................................................................................1
1.2 Request for Registration.........................................................................3
1.3 Company Registration.............................................................................4
1.4 Obligations of the Company.......................................................................4
1.5 Furnish Information..............................................................................6
1.6 Expenses of Demand Registration..................................................................7
1.7 Expenses of Company Registration.................................................................7
1.8 Underwriting Requirements........................................................................7
1.9 Delay of Registration............................................................................8
1.10 Indemnification..................................................................................8
1.11 Reports Under Securities Exchange Act...........................................................10
1.12 Form S-3 Registration...........................................................................11
1.13 Assignment of Registration Rights...............................................................11
1.14 Limitations on Subsequent Registration Rights...................................................12
1.15 "Market Stand-Off" Agreement....................................................................12
1.16 Termination of Registration Rights..............................................................13
2. Covenants of the Company...............................................................................13
2.1 Delivery of Financial Statements................................................................13
2.2 Inspection......................................................................................14
2.3 Termination of Information and Inspection Covenants.............................................14
2.4 Right of First Offer............................................................................14
2.5 Stock Option Repurchases........................................................................16
2.6 Key-Man Insurance...............................................................................16
3. Miscellaneous..........................................................................................16
3.1 Certain Confidentiality and Non-Disclosure Provisions Relating to Intel.........................16
3.2 Successors and Assigns..........................................................................17
3.3 Governing Law...................................................................................18
3.4 Counterparts....................................................................................18
3.5 Titles and Subtitles............................................................................18
3.6 Notices.........................................................................................18
3.7 Expenses........................................................................................18
3.8 Amendments and Waivers..........................................................................19
3.9 Severability....................................................................................19
3.10 Aggregation of Stock............................................................................19
3.11 Entire Agreement; Amendment; Waiver.............................................................19
</TABLE>
SCHEDULE A - Schedule of Prior Holders
SCHEDULE B - Schedule of Investors
i
<PAGE> 3
FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
THIS FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT
(the "Agreement") is made as of the 6th day of August, 1999, by and among
Crossroads Systems, Inc., a Delaware corporation formerly known as Crossroads
Holding Corp. (the "Company"), the stockholders of the Company's Common Stock,
including permitted transferees, listed on Schedule A hereto, each of which is
herein referred to as a "Prior Holder," and the investors listed on Schedule B
hereto, each of which is herein referred to as an "Investor."
R E C I T A L S:
WHEREAS, certain of the Investors hold shares of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred
Stock"), Series B Convertible Preferred Stock (the "Series B Preferred Stock"),
the Series C Convertible Preferred Stock (the "Series C Preferred Stock")
and/or the Series D Convertible Preferred Stock (the "Series D Preferred
Stock") and possess registration rights, information rights and other rights
pursuant to the Third Amended and Restated Investors' Rights Agreement dated as
of April 29, 1999, between the Company and such Investors (the "Prior
Agreement");
WHEREAS, the Company and certain Purchasers (as defined in
the Purchase Agreement) are parties to the Series E Convertible Preferred Stock
Purchase Agreement of even date herewith (the "Purchase Agreement") pursuant to
which the Company has agreed to sell, and such Purchasers have agreed to
purchase, shares of the Company's Series E Convertible Preferred Stock (the
"Series E Preferred Stock");
WHEREAS, the Company's and such Purchasers' respective
obligations under the Purchase Agreement are conditioned upon the execution and
delivery of this Agreement; and
WHEREAS, in order to induce the Company to enter into the
Purchase Agreement and to induce such Purchasers to invest funds in the Company
pursuant to the Purchase Agreement, the Investors and the Company hereby agree
that this Agreement shall govern the rights of the Investors to cause the
Company to register shares of Common Stock issuable to the Investors and
certain other matters as set forth herein.
A G R E E M E N T:
NOW, THEREFORE, in consideration of the mutual promises and
covenants set forth herein, the Investors who are parties to the Prior
Agreement hereby amend and restate the Prior Agreement in its entirety and the
parties hereto agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
1.1 Definitions. For purposes of this Section 1:
1
<PAGE> 4
(a) The term "Securities Act" means the Securities Act of
1933, as amended.
(b) The term "Form S-3" means such form under the Securities
Act as in effect on the date hereof or any registration form(s) under the
Securities Act subsequently adopted by the SEC which permits inclusion or
incorporation of substantial information by reference to other documents filed
by the Company with the SEC.
(c) The term "Holder" means any person owning or having the
right to acquire Registrable Securities or any assignee thereof in accordance
with Section 1.13 hereof.
(d) The term "Exchange Act" shall mean the Securities
Exchange Act of 1934, as amended.
(e) The term "register," "registered" and "registration"
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement or
document.
(f) The term "Registrable Securities" means (i) the Common
Stock issuable or issued upon conversion of the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock, the Series D Preferred
Stock or the Series E Preferred Stock of the Company and (ii) any Common Stock
of the Company issued as (or issuable upon the conversion or exercise of any
warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the
shares referenced in (i) above, excluding in all cases, however, any
Registrable Securities sold by a Holder in a transaction in which his rights
under this Section 1 are not assigned.
(g) The term "Prior Holder Registrable Securities" means (i)
the Common Stock of the Company issued to the Prior Holders and (ii) any Common
Stock of the Company issued as (or issuable upon the conversion or exercise of
any warrant, right or other security which is issued as) a dividend or other
distribution with respect to, or in exchange for or in replacement of the
shares referenced in (i) above, excluding in all cases, however, any Prior
Holder Registrable Securities sold by a Prior Holder in a transaction in which
his rights under this Section 1 are not assigned.
(h) The number of shares of "Registrable Securities then
outstanding" shall be determined by the number of shares of Common Stock
outstanding which are, and the number of shares of Common Stock issuable
pursuant to then exercisable or convertible securities which are, Registrable
Securities.
(i) The term "SEC" shall mean the Securities and Exchange
Commission.
2
<PAGE> 5
1.2 Request for Registration.
(a) If the Company shall receive at any time after the
earlier of (A) five years after the date hereof or (B) one hundred eighty (180)
days following the consummation of the sale of securities pursuant to a
registration statement filed by the Company under the Securities Act in
connection with the initial firm commitment underwritten offering of its
securities to the general public, a written request from the Holders of at
least two-thirds of the Registrable Securities then outstanding that the
Company file a registration statement under the Securities Act covering the
registration of at least fifty percent (50%) of the Registrable Securities then
outstanding, then the Company shall:
(i) within 10 days of the receipt thereof, give written
notice of such request to all Holders; and
(ii) effect as soon as practicable, and in any event
within 60 days of the receipt of such request, the registration under the
Securities Act of all Registrable Securities which the Holders request to be
registered, subject to the limitations of subsection 1.2(b), within 20 days of
the mailing of such notice by the Company in accordance with Section 3.5.
(b) If the Holders initiating the registration request
hereunder ("Initiating Holders") intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to subsection
1.2(a) and the Company shall include such information in the written notice
referred to in subsection 1.2(a). The underwriter will be selected by the
Company and shall be reasonably acceptable to a majority in interest of the
Initiating Holders. In such event, the right of any Holder to include such
Holder's Registrable Securities in such registration shall be conditioned upon
such Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting (unless otherwise mutually
agreed by a majority in interest of the Initiating Holders and such Holder) to
the extent provided herein. All Holders proposing to distribute their
securities through such underwriting shall (together with the Company as
provided in subsection 1.4(e)) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting. Notwithstanding any other provision of this Section 1.2, if the
underwriter advises the Initiating Holders in writing that marketing factors
require a limitation of the number of shares to be underwritten, then the
Initiating Holders shall so advise all Holders of Registrable Securities which
would otherwise be underwritten pursuant hereto, and the number of shares of
Registrable Securities that may be included in the underwriting shall be
allocated among all Holders thereof, including the Initiating Holders, in
proportion (as nearly as practicable) to the amount of Registrable Securities
of the Company owned by each Holder; provided, however, that the number of
shares of Registrable Securities to be included in such underwriting shall not
be reduced unless all other securities are first entirely excluded from the
underwriting.
(c) Notwithstanding the foregoing, if the Company shall
furnish to Holders requesting a registration statement pursuant to this Section
1.2, a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be filed and it is therefore essential to defer the filing of such
3
<PAGE> 6
registration statement, the Company shall have the right to defer taking action
with respect to such filing for a period of not more than 90 days after receipt
of the request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve-month period.
(d) In addition, the Company shall not be obligated to
effect, or to take any action to effect, any registration pursuant to this
Section 1.2:
(i) After the Company has effected two registrations
pursuant to this Section 1.2 and such registrations have been declared or
ordered effective;
(ii) Within twelve months after the effective date of
the first registration made pursuant to this Section 1.2;
(iii) During the period starting with the date 60 days
prior to the Company's good faith estimate of the date of filing of, and ending
on a date 180 days after the effective date of, a registration subject to
Section 1.3 or Section 1.12 hereof; provided, that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or
(iv) If the Initiating Holders propose to dispose of
shares of Registrable Securities that may be immediately registered on Form S-3
pursuant to a request made pursuant to Section 1.12 below.
1.3 Company Registration. If, but without any obligation to do so, the
Company proposes to register (including for this purpose a registration
effected by the Company for the Holders or stockholders other than the Holders)
any of its stock or other securities under the Securities Act in connection
with the public offering of such securities solely for cash (other than a
registration relating solely to the sale of securities to participants in a
Company stock plan, a registration on any form which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Securities or a
registration in which the only Common Stock being registered is Common Stock
issuable upon conversion of debt securities which are also being registered),
the Company shall, at such time, promptly give each Holder and Prior Holder
written notice of such registration. Upon the written request of each Holder or
Prior Holder given within 20 days after mailing of such notice by the Company
in accordance with Section 3.5, the Company shall, subject to the provisions of
Section 1.8, cause to be registered under the Securities Act all of the
Registrable Securities and Prior Holder Registrable Securities that each such
Holder and Prior Holder, as the case may be, has requested to be registered.
1.4 Obligations of the Company. Whenever required under this Section 1
to effect the registration of any Registrable Securities or Prior Holder
Registrable Securities, the Company shall, as expeditiously as reasonably
possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and Prior Holder Registrable
Securities and use its best efforts to
4
<PAGE> 7
cause such registration statement to become effective, and, upon the request of
the holders of a majority of the Registrable Securities and Prior Holder
Registrable Securities registered thereunder, keep such registration statement
effective for a period of up to 120 days or until the distribution contemplated
in the Registration Statement has been completed; provided, however, that (i)
such 120-day period shall be extended for a period of time equal to the period
the Holder or Prior Holder, as the case may be, refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company and (ii) in the case of any
registration of Registrable Securities and Prior Holder Registrable Securities
on Form S-3 which are intended to be offered on a continuous or delayed basis,
such 120-day period shall be extended, if necessary, to keep the registration
statement effective until all such Registrable Securities and Prior Holder
Registrable Securities are sold, provided that Rule 415, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment which (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be
included in (I) and (II) above to be contained in periodic reports filed
pursuant to Section 13 or 15(d) of the Exchange Act in the registration
statement.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders and Prior Holders, as the case may
be, such numbers of copies of a prospectus, including a preliminary prospectus,
in conformity with the requirements of the Securities Act, and such other
documents as they may reasonably request in order to facilitate the disposition
of Registrable Securities and Prior Holder Registrable Securities owned by
them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities
or Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders or the Prior Holders; provided, that the Company shall not be required
in connection therewith or as a condition thereto to qualify to do business or
to file a general consent to service of process in any such states or
jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder and
Prior Holder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities, and each
Prior Holder of Prior Holder Registrable Securities, covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration
5
<PAGE> 8
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the light of the circumstances
then existing.
(g) Cause all such Registrable Securities and Prior Holder
Registrable Securities registered pursuant hereunder to be listed on each
securities exchange on which similar securities issued by the Company are then
listed.
(h) Provide a transfer agent and registrar for all
Registrable Securities and Prior Holder Registrable Securities registered
pursuant hereunder and a CUSIP number for all such Registrable Securities and
Prior Holder Registrable Securities, in each case not later than the effective
date of such registration.
(i) Use its best efforts to furnish, at the request of any
Holder or Prior Holder requesting registration of Registrable Securities or
Prior Holder Registrable Securities pursuant to this Section 1, on the date
that such Registrable Securities or Prior Holder Registrable Securities are
delivered to the underwriters for sale in connection with a registration
pursuant to this Section 1, if such securities are being sold through
underwriters, or, if such securities are not being sold through underwriters,
on the date that the registration statement with respect to such securities
becomes effective, (i) an opinion, dated such date, of the counsel representing
the Company for the purposes of such registration, in form and substance as is
customarily given to underwriters in an underwritten public offering, addressed
to the underwriters, if any, and to the Holders and Prior Holders requesting
registration of Registrable Securities and Prior Holder Registrable Securities
and (ii) a letter dated such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Holders and
Prior Holders requesting registration of Registrable Securities and Prior
Holder Registrable Securities.
1.5 Furnish Information.
(a) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 1 with respect to the
Registrable Securities or Prior Holder Registrable Securities of any selling
Holder or Prior Holder, as the case may be, that such Holder or Prior Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities and Prior Holder Registrable Securities held by it, and the intended
method of disposition of such securities as shall be required to effect the
registration of such Holder's Registrable Securities or such Prior Holder's
Prior Holder Registrable Securities, as the case may be.
(b) The Company shall have no obligation with respect to any
registration requested pursuant to Section 1.2 or Section 1.12 if, due to the
operation of subsection 1.5(a), the number of shares or the anticipated
aggregate offering price of the Registrable Securities to be included in the
registration does not equal or exceed the number of shares or the anticipated
aggregate offering price required to originally trigger the Company's
6
<PAGE> 9
obligation to initiate such registration as specified in subsection 1.2(a) or
subsection 1.12(b)(2), whichever is applicable.
1.6 Expenses of Demand Registration. All expenses other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 1.2, including
(without limitation) all registration, filing and qualification fees, printers'
and accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company; provided, however, that the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to Section 1.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered (in which case all participating Holders shall bear such expenses
pro rata), unless the Holders of a majority of the Registrable Securities agree
to forfeit their right to one demand registration pursuant to Section 1.2;
provided further, however, that if at the time of such withdrawal, the Holders
have learned of a material adverse change in the condition, business, or
prospects of the Company from that known to the Holders at the time of their
request and have withdrawn the request with reasonable promptness following
disclosure by the Company of such material adverse change, then the Holders
shall not be required to pay any of such expenses and shall retain their rights
pursuant to Section 1.2.
1.7 Expenses of Company Registration. The Company shall bear and pay
all expenses incurred in connection with any registration, filing or
qualification of Registrable Securities and Prior Holder Registrable Securities
with respect to the registrations pursuant to Section 1.3 for each Holder and
Prior Holder (which right may be assigned as provided in Section 1.13),
including (without limitation) all registration, filing and qualification fees,
printers and accounting fees relating or apportionable thereto and the
reasonable fees and disbursements of one counsel for the selling Holders, but
excluding underwriting discounts and commissions relating to Registrable
Securities and Prior Holder Registrable Securities.
1.8 Underwriting Requirements. In connection with any offering
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under Section 1.3 to include any of the Holders' or Prior
Holders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected
by it (or by other persons entitled to select the underwriters), and then only
in such quantity as the underwriters determine in their sole discretion will
not jeopardize the success of the offering by the Company. If the total amount
of securities, including Registrable Securities and Prior Holder Registrable
Securities, requested by stockholders to be included in such offering exceeds
the amount of securities sold other than by the Company that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of such securities, including Registrable Securities and Prior
Holder Registrable Securities, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned pro rata among the selling stockholders according to
the total amount of securities entitled to be included therein owned by each
selling stockholder or in such other proportions as shall mutually be agreed to
by such selling stockholders) but in no event shall (i) the amount of
securities of the selling Holders included in the offering be reduced below
7
<PAGE> 10
twenty-five percent (25%) of the total amount of securities included in such
offering, unless such offering is the initial public offering of the Company's
securities in which case the selling stockholders may be excluded if the
underwriters make the determination described above and no other stockholder's
securities are included or (ii) notwithstanding (i) above, any shares being
sold by a stockholder exercising a demand registration right similar to that
granted in Section 1.2 be excluded from such offering. For purposes of the
preceding parenthetical concerning apportionment, for any selling stockholder
which is a holder of Registrable Securities and which is a partnership or
corporation, the partners, retired partners and stockholders of such holder, or
the estates and family members of any such partners and retired partners and
any trusts for the benefit of any of the foregoing persons shall be deemed to
be a single "selling stockholder," and any pro-rata reduction with respect to
such "selling stockholder" shall be based upon the aggregate amount of shares
carrying registration rights owned by all entities and individuals included in
such "selling stockholder," as defined in this sentence.
1.9 Delay of Registration. No Holder or Prior Holder shall have any
right to obtain or seek an injunction restraining or otherwise delaying any
such registration as the result of any controversy that might arise with
respect to the interpretation or implementation of this Section 1.
1.10 Indemnification. In the event any Registrable Securities or Prior
Holder Registrable Securities are included in a registration statement under
this Section 1:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, each Prior Holder, any underwriter (as
defined in the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act or
the Exchange Act, against any losses, claims, damages, or liabilities (joint or
several) to which they may become subject under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any of the following statements, omissions or violations (each, a
"Violation"): (i) any untrue statement or alleged untrue statement of a
material fact contained in such registration statement, including any
preliminary prospectus or final prospectus contained therein or any amendments
or supplements thereto; (ii) the omission or alleged omission to state therein
a material fact required to be stated therein, or necessary to make the
statements therein not misleading; or (iii) any violation or alleged violation
by the Company of the Securities Act, the Exchange Act, any state securities
law or any rule or regulation promulgated under the Securities Act, the
Exchange Act or any state securities law; and the Company will pay to each such
Holder, Prior Holder, underwriter or controlling person, as incurred, any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the indemnity agreement contained in this subsection 1.10(a)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage, liability
or action to the extent that it arises out of or is based upon a Violation
which occurs in reliance upon and in conformity with written information
furnished expressly for use in connection with such registration by any such
Holder, Prior Holder underwriter or controlling person.
8
<PAGE> 11
(b) To the extent permitted by law, each selling Holder and
each selling Prior Holder will indemnify and hold harmless the Company, each of
its directors, each of its officers who has signed the registration statement,
each person, if any, who controls the Company within the meaning of the
Securities Act, any underwriter, any other Holder or Prior Holder selling
securities in such registration statement and any controlling person of any
such underwriter or other Holder, against any losses, claims, damages or
liabilities (joint or several) to which any of the foregoing persons may become
subject, under the Securities Act, the Exchange Act or other federal or state
law, insofar as such losses, claims, damages or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder or Prior
Holder expressly for use in connection with such registration; and each such
Holder or Prior Holder, will pay, as incurred, any legal or other expenses
reasonably incurred by any person intended to be indemnified pursuant to this
subsection 1.10(b), in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this subsection 1.10(b) shall not apply to amounts paid
in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder or Prior Holder, as
the case may be, which consent shall not be unreasonably withheld; provided,
that, in no event shall any indemnity under this subsection 1.10(b) exceed the
gross proceeds from the offering received by such Holder or such Prior Holder.
(c) Promptly after receipt by an indemnified party under this
Section 1.10 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1.10,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties which may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.10, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.10.
(d) If the indemnification provided for in this Section 1.10
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability, claim, damage or expense
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such loss, liability, claim, damage or
expense in such
9
<PAGE> 12
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage or expense as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a material fact
relates to information supplied by the indemnifying party or by the indemnified
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering are
in conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
(f) The obligations of the Company, Holders and Prior Holders
under this Section 1.10 shall survive the completion of any offering of
Registrable Securities or Prior Holder Registrable Securities in a registration
statement under this Section 1, and otherwise.
1.11 Reports Under Securities Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 promulgated under the
Securities Act and any other rule or regulation of the SEC that may at any time
permit a Holder to sell securities of the Company to the public without
registration or pursuant to a registration on Form S-3, the Company agrees to:
(a) make and keep public information available, as those
terms are understood and defined in SEC Rule 144, at all times after 90 days
after the effective date of the first registration statement filed by the
Company for the offering of its securities to the general public;
(b) take such action, including the voluntary registration of
its Common Stock under Section 12 of the Exchange Act, as is necessary to
enable the Holders to utilize Form S-3 for the sale of their Registrable
Securities, such action to be taken as soon as practicable after the end of the
fiscal year in which the first registration statement filed by the Company for
the offering of its securities to the general public is declared effective;
(c) file with the SEC in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a written statement by the
Company that it has complied with the reporting requirements of SEC Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company), the Securities Act and the Exchange Act (at
any time after it has become subject to such reporting requirements), or that
it qualifies as a registrant whose securities may be resold pursuant to Form
S-3 (at any time after it so qualifies), (ii) a copy of the most recent annual
or quarterly report of the Company and such other reports and documents so
filed by the Company and (iii) such other information as may be
10
<PAGE> 13
reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
1.12 Form S-3 Registration. In case the Company shall receive a
written request from the Holder or Holders of at least twenty-five percent
(25%) of the Registrable Securities then outstanding that the Company effect a
registration on Form S-3, and any related qualification or compliance with
respect to all or a part of the Registrable Securities owned by such Holder or
Holders, the Company will:
(a) promptly give written notice of the proposed
registration, and any related qualification or compliance, to all other
Holders; and
(b) as soon as practicable, effect such registration and all
such qualifications and compliances as may be so requested and as would permit
or facilitate the sale and distribution of all or such portion of such Holder's
or Holders' Registrable Securities as are specified in such request, together
with all or such portion of the Registrable Securities of any other Holder or
Holders joining in such request as are specified in a written request given
within 15 days after receipt of such written notice from the Company; provided,
however, that the Company shall not be obligated to effect any such
registration, qualification or compliance, pursuant to this Section 1.12: (i)
if Form S-3 is not available for such offering by the Holders; (ii) if the
Holders, together with the holders of any other securities of the Company
entitled to inclusion in such registration, propose to sell Registrable
Securities at an aggregate price to the public (net of any underwriters'
discounts or commissions) of less than $1,000,000; (iii) if the Company shall
furnish to the Holders a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its stockholders
for such Form S-3 registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement for a period of not more than 90 days after receipt of the request of
the Holder or Holders under this Section 1.12; provided, however, that the
Company shall not utilize this right more than once in any twelve month period;
or (iv) in any particular jurisdiction in which the Company would be required
to qualify to do business or to execute a general consent to service of process
in effecting such registration, qualification or compliance.
(c) Subject to the foregoing, the Company shall file a
registration statement covering the Registrable Securities and other securities
so requested to be registered as soon as practicable after receipt of the
request or requests of the Holders. All expenses incurred in connection with
registrations requested pursuant to this Section 1.12, including (without
limitation) all registration, filing, qualification, printer's and accounting
fees and the reasonable fees and disbursements of a single counsel for the
selling Holder or Holders and counsel for the Company, but excluding any
underwriters' discounts or commissions associated with Registrable Securities,
shall be borne by the Company. Registrations effected pursuant to this Section
1.12 shall not be counted as demands for registration or registrations effected
pursuant to Sections 1.2 or 1.3, respectively.
1.13 Assignment of Registration Rights. The rights to cause the Company
to register Registrable Securities pursuant to this Section 1 may be assigned
(but only with all
11
<PAGE> 14
related obligations) by a Holder or Prior Holder to a transferee or assignee of
such securities who, after such assignment or transfer, holds at least 100,000
shares of Registrable Securities or Prior Holder Registrable Securities, as the
case may be (in each case subject to appropriate adjustment for stock splits,
stock dividends, combinations and other recapitalizations), provided:
(a) the Company is, within a reasonable time after such
transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned;
(b) such transferee or assignee agrees in writing to be bound
by and subject to the terms and conditions of this Agreement, including
(without limitation) the provisions of Section 1.15 below; and
(c) such assignment shall be effective only if immediately
following such transfer, the further disposition of such securities by the
transferee or assignee is restricted under the Securities Act.
For the purposes of determining the number of shares of Registrable
Securities or Prior Holder Registrable Securities held by a transferee or
assignee, the holdings of transferees and assignees of a partnership who are
partners or retired partners of such partnership (including spouses and
ancestors, lineal descendants and siblings of such partners or spouses who
acquire Registrable Securities or Prior Holder Registrable Securities by gift,
will or intestate succession) shall be aggregated together and with the
partnership; provided, that all assignees and transferees who would not qualify
individually for assignment of registration rights shall have a single
attorney-in-fact for the purpose of exercising any rights, receiving notices or
taking any action under this Section 1.
1.14 Limitations on Subsequent Registration Rights. From and after the
date of this Agreement, the Company shall not, without the prior written
consent of the Holders of a majority of the outstanding Registrable Securities,
enter into any agreement with any holder or prospective holder of any
securities of the Company which would allow such holder or prospective holder
(a) to include such securities in any registration filed under Section 1.2 or
Section 1.3 hereof, unless under the terms of such agreement, such holder or
prospective holder may include such securities in any such registration only to
the extent that the inclusion of such holder's securities will not reduce the
amount of the Registrable Securities of the Holders which is included or (b) to
make a demand registration which could result in such registration statement
being declared effective prior to the earlier of either of the dates set forth
in subsection 1.2(a) or within 120 days of the effective date of any
registration effected pursuant to Section 1.2.
1.15 "Market Stand-Off" Agreement. Each Holder and Prior Holder hereby
agrees that, during the period of up to 180 days following the date of the
first sale to the public pursuant to a registration statement of the Company
filed under the Securities Act, it shall not, to the extent requested by the
Company and such underwriter, directly or indirectly sell, offer to sell,
contract to sell (including, without limitation, any short sale), grant any
option to purchase or otherwise transfer or dispose of (other than to donees
who agree to be similarly bound) any
12
<PAGE> 15
securities of the Company held by it at any time during such period except
Common Stock included in such registration; provided, however, that:
(a) such agreement shall be applicable only to the first such
registration statement of the Company which covers Common Stock (or other
securities) to be sold on its behalf to the public in an underwritten offering;
and
(b) all officers and directors of the Company enter into
similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder and the Prior Holder Registrable Securities of each Prior Holder (and
the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
Notwithstanding the foregoing, the obligations described in this
Section 1.15 shall not apply to a registration relating solely to employee
benefit plans on Form S-8 or similar forms which may be promulgated in the
future, or a registration relating solely to an SEC Rule 145 transaction on
Form S-4 or similar form which may be promulgated in the future.
1.16 Termination of Registration Rights.
(a) No Holder or Prior Holder shall be entitled to exercise
any right provided for in this Section 1 after five (5) years following the
consummation of the sale of securities pursuant to a registration statement
filed by the Company under the Securities Act in connection with the initial
firm commitment underwritten offering of its securities to the general public.
(b) In addition, the right of any Holder or Prior Holder to
request registration or inclusion in any registration pursuant to this Section
1 shall terminate on the closing of the first Company-initiated registered
public offering of Common Stock of the Company if all shares of Registrable
Securities or Prior Holder Registrable Securities held or entitled to be held
upon conversion by such Holder or Prior Holder may immediately be sold under
Rule 144 during any 90-day period, or on such date after the closing of the
first Company-initiated registered public offering of Common Stock of the
Company as all shares of Registrable Securities or Prior Holder Registrable
Securities held or entitled to be held upon conversion by such Holder or Prior
Holder may immediately be sold under Rule 144 during any 90-day period;
provided, however, that the provisions of this Section 1.16(b) shall not apply
to any Holder or Prior Holder who owns more than two percent (2%) of the
Company's outstanding stock until such time as such Holder or Prior Holder owns
less than two percent (2%) of the outstanding stock of the Company.
2. Covenants of the Company.
2.1 Delivery of Financial Statements. The Company shall deliver to
each Holder of at least 250,000 shares of Registrable Securities (a "Major
Stockholder"):
13
<PAGE> 16
(a) as soon as practicable, but in any event within 90 days
after the end of each fiscal year of the Company, a consolidated balance sheet
of the Company and a consolidated statement of stockholders' equity as of the
end of such year, and a consolidated statement of operations and a consolidated
statement of cash flows for such year, such year-end financial reports to be in
reasonable detail, prepared in accordance with generally accepted accounting
principles, and audited and certified by an independent "Big Five" public
accounting firm selected by the Company;
(b) within 30 days of the end of each month, an unaudited
consolidated balance sheet of the Company for and as of the end of such month,
an unaudited consolidated statement of operations and a consolidated statement
of cash flows, in reasonable detail, and a monthly executive summary of the
Company's activities;
(c) as soon as practicable, but in any event at least 30 days
prior to the end of each fiscal year, a budget for the next fiscal year
prepared on a monthly basis, including balance sheets, sources and applications
of funds statements for each of the months therein, and, as soon as prepared,
any other budgets or revised budgets prepared by the Company; and
(d) such other information relating to the financial
condition, business, prospects or corporate affairs of the Company as the Major
Stockholder may from time to time request, provided, however, that the Company
shall not be obligated under this subsection (d) or any other subsection of
Section 2.1 to provide information which it deems in good faith to be a trade
secret or similar confidential information.
2.2 Inspection. The Company shall permit each Major Stockholder, at
such Major Stockholder's expense, to visit and inspect the Company's and its
wholly owned subsidiary's, Crossroads Systems (Texas), Inc. ("Crossroads
Texas"), properties, to examine their books of account and records and to
discuss the Company's and Crossroads Texas' affairs, finances and accounts with
their officers, all at such reasonable times as may be requested by the Major
Stockholder; provided, however, that the Company and Crossroads Texas shall not
be obligated pursuant to this Section 2.2 to provide access to any information
which they reasonably consider to be a trade secret or similar confidential
information.
2.3 Termination of Information and Inspection Covenants. The covenants
set forth in Sections 2.1 and 2.2 shall terminate as to the Major Stockholders
and be of no further force or effect when the sale of securities pursuant to a
registration statement filed by the Company under the Securities Act in
connection with the firm commitment underwritten offering of its securities to
the general public is consummated or when the Company first becomes subject to
the periodic reporting requirements of Sections 12(g) or 15(d) of the Exchange
Act, whichever event shall first occur.
2.4 Right of First Offer. Subject to the terms and conditions
specified in this Section 2.4, the Company hereby grants to each Investor, so
long as such Investor is a Major Stockholder, a right of first offer with
respect to future sales by the Company of its Shares (as hereinafter defined).
Each time the Company proposes to offer any shares of, or securities
convertible into or exercisable for any shares of, any class of its capital
stock ("Shares"), the
14
<PAGE> 17
Company shall first make an offering of such Shares to each Investor in
accordance with the following provisions:
(a) The Company shall deliver a notice ("Offer Notice") to
the Investor (so long as such Investor is a Major Stockholder) at least 30 days
prior to the date on which the Shares are proposed to be sold stating (i) its
bona fide intention to offer such Shares, (ii) the number of such Shares to be
offered, and (iii) the price and terms, if any, upon which it proposes to offer
such Shares.
(b) After the date of the Offer Notice, each Investor (so
long as such Investor is a Major Stockholder) may elect to purchase or obtain,
at the price and on the terms specified in the Offer Notice, up to that portion
of such Shares which equals the proportion that the number of shares of Common
Stock issued and held, or issuable upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock then held, by such Investor bears to the
total number of shares of Common Stock of the Company then outstanding
(assuming full conversion or exercise of all outstanding securities convertible
into or exercisable for Common Stock).
(c) If all Shares which the Investors who are Major
Stockholders are entitled to obtain pursuant to subsection 2.4(b) are not
elected to be obtained as provided in subsection 2.4(b) hereof, the Company
may, during the 30-day period following the expiration of the period provided
in subsection 2.4(a) hereof, offer the remaining unsubscribed portion of such
Shares to any person or persons at a price not less than, and upon terms no
more favorable to the offeree than those specified in the Offer Notice. If the
Company does not enter into an agreement for the sale of the Shares within such
period, or if such agreement is not consummated within 30 days of the execution
thereof, the right provided hereunder shall be deemed to be revived and such
Shares shall not be offered unless first reoffered to the Investors who are
Major Stockholders in accordance herewith.
(d) The right of first offer in this Section 2.4 shall not be
applicable (i) to the issuance or sale to employees, consultants, advisors and
non-employee directors of the Company or any subsidiary of shares of the
capital stock of the Company (or options therefor) pursuant to the provisions
of any stock option or other plan or agreement of the Company, including, but
not limited to, the Company's 1996 Stock Option/Stock Issuance Plan, which plan
has been duly adopted and approved by the Board of Directors of the Company,
(ii) to or after consummation of a bona fide, firmly underwritten public
offering of shares of Common Stock, registered under the Securities Act
pursuant to a registration statement on Form S-1, at an offering price of at
least $15.00 per share (appropriately adjusted for any stock split, dividend,
combination or other recapitalization) and with gross proceeds to the Company
and any selling stockholders of at least $10,000,000 in the aggregate, (iii)
the issuance of securities pursuant to the conversion or exercise of
convertible or exercisable securities, (iv) the issuance of securities in
connection with a bona fide business acquisition of or by the Company, whether
by merger, consolidation, sale of assets, sale or exchange of stock or
otherwise, or (v) the issuance of shares of Common Stock, or warrants or other
securities convertible into or exercisable for shares of Common Stock, to
persons or entities with which the Company has business relationships,
including (without limitation) under leasing arrangements, broker's or finder's
fee arrangements,
15
<PAGE> 18
underwriting arrangements, bank or similar institutional financing arrangements
and other similar transactions, provided such issuances (other than with
respect to the payment of brokers' or finders' fees) are for other than
primarily equity financing purposes.
(e) The right of first refusal set forth in this Section 2.4
may not be assigned or transferred, except that (i) such right is assignable by
each Investor who is a Major Stockholder to any wholly owned subsidiary or
parent of, or to any corporation or entity that is, within the meaning of the
Securities Act, controlling, controlled by or under common control with, any
such Major Stockholder and (ii) such right is assignable between and among any
persons that qualify as Major Stockholders as of the date hereof.
2.5 Stock Option Repurchases. The Company hereby agrees that, in the
event that it shall opt not to exercise its right to repurchase shares of
Common Stock of the Company issued to employees pursuant to the Company's 1996
Stock Option/Stock Issuance Plan (the "Repurchase Right"), the Company shall
assign such Repurchase Right to the Investors so that each Investor shall have
the option to purchase up to that portion of an employee's shares of Common
Stock that is subject to the Repurchase Right and that equals the proportion
that the number of shares of Common Stock issued and held, or issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock then
held, by such Investor bears to the total number of shares of Common Stock
(assuming full conversion and exercise of all convertible and exercisable
securities into Common Stock) owned by all of the Investors.
2.6 Key-Man Insurance. The Company has as of the date hereof or shall
within 90 days of the date hereof use its best efforts to obtain from a
financially sound and reputable insurer term life insurance on the life of
Brian R. Smith in the amount of $2,000,000 except as otherwise decided in
accordance with policies adopted by the Company's Board of Directors. Such
policies shall name the Company as loss payee and shall not be cancelable by
the Company without prior approval of the Board of Directors.
3. Miscellaneous.
3.1 Certain Confidentiality and Non-Disclosure Provisions Relating to
Intel. The terms and conditions of this Agreement, the Purchase Agreement, the
Fourth Amended and Restated Co-Sale and First Refusal Agreement and the Second
Amended and Restated Voting Agreement, each dated as of even date herewith, and
the Letter Agreement dated as of April 29, 1999 (collectively, the "Financing
Terms"), including their existence, shall be considered confidential
information and shall not be disclosed by any party hereto to any third party
except in accordance with the provisions set forth below:
(a) Press Releases, Etc. Within sixty (60) days of the
Closing (as defined in the Purchase Agreement), the Company may issue a press
release in the form provided by Intel Corporation ("Intel") disclosing that
Intel has invested in the Company; provided that the release does not disclose
any of the Financing Terms and the final form of the press release is approved
in advance in writing by Intel. No other announcement regarding Intel in a
press release, conference, advertisement, announcement, professional or trade
publication, mass
16
<PAGE> 19
marketing materials or otherwise to the general public may be made without such
Intel's prior written consent.
(b) Permitted Disclosures. Notwithstanding the foregoing, (i)
any party may disclose any of the Financing Terms to its current or bona fide
prospective investors, employees, investment bankers, lenders, accountants and
attorneys, in each case only where such persons or entities are under
appropriate nondisclosure obligations; (ii) any party may disclose (other than
in a press release or other public announcement described in subsection 3.1
(b)) solely the fact that Intel is an investor in the Company to any third
parties without the requirement for the consent of any other party or
nondisclosure obligations; and (iii) Intel may disclose its investment in the
Company and the Financing Terms to third parties or to the public at its sole
discretion and, if it does so, the other parties hereto shall have the right to
disclose to third parties any such information disclosed in a press release or
other public announcement by Intel.
(c) Legally Compelled Disclosure. In the event that any party
is requested or becomes legally compelled (including without limitation,
pursuant to securities laws and regulations) to disclose the existence of this
Agreement, the Purchase Agreement, the Fourth Amended and Restated Co-Sale and
First Refusal Agreement, the Second Amended and Restated Voting Agreement or
the Letter Agreement or any of the Financing Terms hereof or thereof in
contravention of the provisions of this Section 3.1, such party (the
"Disclosing Party") shall provide the other parties (the "Non-Disclosing
Parties") with prompt written notice of that fact so that the appropriate party
may seek (with the cooperation and reasonable efforts of the other parties) a
protective order, confidential treatment or other appropriate remedy. In such
event, the Disclosing Party shall furnish only that portion of the information
which is legally required and shall exercise reasonable efforts to obtain
reliable assurance that confidential treatment will be accorded such
information to the extent reasonably requested by any Non-Disclosing Party.
(d) Other Information. The provisions of this Section 3.1
shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by any of the parties hereto with
respect to the transactions contemplated hereby; provided, however, that the
provisions of this Section 3.1 shall terminate as to the Investors, other than
Intel, sixty (60) days after the Closing (as defined in the Purchase
Agreement).
(e) All notices required under this Section 3.1 shall be made
pursuant to Section 3.6 of this Agreement.
3.2 Successors and Assigns. Except as otherwise provided herein, the
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities and Prior Holder
Registrable Securities). Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
17
<PAGE> 20
3.3 Governing Law. This Agreement shall be governed by and construed
under the laws of the State of Texas, without giving effect to conflicts of
laws principles.
3.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.5 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
3.6 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with confirmation of receipt) to the parties
at the address for each party set forth beneath each party's name in the
signature pages hereof (or at such other address for a party as shall be
specified by like notice) with copies to: (i) in the case of the Company:
9390 Research Boulevard
Kaleido II
Austin, Texas 78759
Fax: (512) 349-0304
Attn: President
with a copy to:
Brobeck, Phleger & Harrison LLP
Attn: S. Michael Dunn, P.C.
301 Congress Avenue, Suite 1200
Austin, Texas 78701
Fax: (512) 477-5813
(ii) in the case of the Investors, to such Investors
at the addresses provided for such Investor on the signature pages hereto.
Notice given by personal delivery, courier service or mail shall be
effective upon actual receipt. Notice given by telecopier shall be confirmed by
appropriate answer back and shall be effective upon actual receipt if received
during the recipient's normal business hours, or at the beginning of the
recipient's next business day after receipt if not received during the
recipient's normal business hours. All notices by telecopier shall be confirmed
promptly after transmission in writing by certified mail or personal delivery.
Any party may change any address to which notice is to be given to it by giving
notice as provided above of such change of address.
3.7 Expenses. If any action at law or in equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable
18
<PAGE> 21
attorneys' fees, costs and necessary disbursements in addition to any other
relief to which such party may be entitled.
3.8 Amendments and Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company, the holders of at
least a majority of the Registrable Securities then outstanding and the holders
of at least a majority of the Prior Holder Registrable Securities then
outstanding. Any amendment or waiver effected in accordance with this Section
shall be binding upon each holder of any Registrable Securities or Prior Holder
Registrable Securities then outstanding, each future holder of all such
Registrable Securities and Prior Holder Registrable Securities, and the
Company. Notwithstanding, Section 3.1 may not be amended, or the observance of
any term thereof waived, unless consented in writing by Intel, which consent
Intel may withhold in its sole discretion.
3.9 Severability. If one or more provisions of this Agreement are held
to be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
3.10 Aggregation of Stock. All shares of Registrable Securities held
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
3.11 Entire Agreement; Amendment; Waiver. This Agreement (including
the Exhibits hereto, if any) constitutes the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof
and supersedes any and all prior agreements relating to the subject matter
hereof, including, without limitation, the Prior Agreement.
[SIGNATURE PAGES FOLLOW]
19
<PAGE> 22
IN WITNESS WHEREOF, the parties have executed this Fourth
Amended and Restated Investors' Rights Agreement as of the date first above
written.
CROSSROADS SYSTEMS, INC.
By: /s/ Brian R. Smith
-------------------------------------
Brian R. Smith
Chief Executive Officer
CROSSROADS SYSTEMS (TEXAS), INC.
By: /s/ Brian R. Smith
-------------------------------------
Brian R. Smith
Chief Executive Officer
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 23
INVESTORS:
ADVANCED DIGITAL INFORMATION
CORPORATION
By: /s/ Leslie S. Rock
-------------------------------------
Name: Leslie S. Rock
-----------------------------------
Title: Treasurer, CAO
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 24
ADMIRALS LP
By: /s/ Ari Arjavalingam
-------------------------------------
Name: Ari Arjavalingam
-----------------------------------
Title: General Partner
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 25
AUSTIN VENTURES IV-A, L.P.
By: AV Partners IV, L.P.
its general partner
By: /s/ Joe Aragona
-------------------------------------
Name: Joe Aragona
-----------------------------------
Title: General Partner
----------------------------------
AUSTIN VENTURES IV-B, L.P.
By: AV Partners IV, L.P.
its general partner
By: /s/ Joe Aragona
-------------------------------------
Name: Joe Aragona
-----------------------------------
Title: General Partner
----------------------------------
AUSTIN VENTURES VI, L.P.
By: AV PARTNERS VI, L.P.
its general partner
By:
By: /s/ Joe Aragona
-------------------------------------
Name: Joe Aragona
-----------------------------------
Title: General Partner
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 26
BROBECK PHLEGER & HARRISON LLP
By: /s/ S. Michael Dunn
-------------------------------------
Name: S. Michael Dunn
-----------------------------------
Title: Partner
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 27
UMB BANK, N.A. AS TRUSTEE FOR THE
BROBECK, PHLEGER & HARRISON LLP
RETIREMENT BENEFIT PLAN FOR THE
BENEFIT OF CARMELO M. GORDIAN
By: /s/ Dale E. McAllister
-------------------------------------
Name: Dale E. McAllister
-----------------------------------
Title: Asst. Vice President
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 28
DAIN RAUSCHER WESSELS
INVESTORS LLC
By: /s/ Peter M. Grant
--------------------------------------
Name: Peter M. Grant
------------------------------------
Title: President Dain Rauscher Wessels
-----------------------------------
A Division of Dain Rauscher
-----------------------------------
Inc., and managing member of
-----------------------------------
Dain Rauscher Wessels
-----------------------------------
Investors L.L.C.
-----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 29
ESSEX PRIVATE PLACEMENT
FUND LIMITED PARTNERSHIP
By: ESSEX INVESTMENT
MANAGEMENT COMPANY, LLC
its General Partner
By: /s/ S. P. Stickells
-------------------------------------
Name: S. P. Stickells
-----------------------------------
Title: Principal/VP
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 30
HEWLETT-PACKARD COMPANY
By: /s/ Ross Katchman
-------------------------------------
Name: Ross Katchman
-----------------------------------
Title: Corporate Counsel
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 31
HLM/CB FUND, L.P.
By: HLM/CB ASSOCIATES, LLC
its General Partner
By: HLM MANAGEMENT CO., INC.
its Managing Member
By: /s/ Peter Grua
-------------------------------------
Name: Peter Grua
-----------------------------------
Title: General Partner
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 32
HYPERTECH CONSULTANTS, LTD. a
British Virgin Islands Company
By: /s/ Lister Chang
-------------------------------------
Name: Lister Chang
-----------------------------------
Title: Chairman & CEO
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 33
INTEL CORPORATION
By: /s/ Arvind Sathane
-------------------------------------
Name: Arvind Sathane
-----------------------------------
Title: VP & Treasurer
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 34
SELIGMAN NEW TECHNOLOGIES FUND, INC.
SELIGMAN INVESTMENT
OPPORTUNITIES (MASTER)
FUND - NTV PORTFOLIO
By: J. & W. SELIGMAN & CO.
INCORPORATED
As investment adviser
By: /s/ Richard R. Schmaltz
-------------------------------------
Name: Richard R. Schmaltz
-----------------------------------
Title: Managing Director
----------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 35
/s/ Stephen P. Laffey
---------------------------------------
STEPHEN P. LAFFEY
/s/ Jeffrey B. Meskin
---------------------------------------
JEFFREY B. MESKIN
/s/ Robert M. Montague
---------------------------------------
ROBERT M. MONTAGUE
/s/ Charles A. Montague
----------------------------------------
THE MONTAGUE FAMILY LIMITED PARTNERSHIP
/s/ Minor W. Perkins
----------------------------------------
MINOR W. PERKINS
/s/ John W. Stokes, Jr.
----------------------------------------
JOHN W. STOKES, JR.
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 36
TUDOR GLOBAL TRADING
By: /s/ William T. Flaherty
------------------------------------
Name: William T. Flaherty
----------------------------------
Title: Tudor Investment Corporation as
---------------------------------
General Partner
---------------------------------
Raptar Global Fund L.P.
---------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 37
/s/ Park G. Vestal
---------------------------------------
PARK G. VESTAL
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 38
PROTOTECH, INC.
By: /s/ P.A. Bain
------------------------------------
Name: P.A. Bain
----------------------------------
Title: Director
---------------------------------
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 39
COMMON STOCKHOLDERS:
/s/ Brian R. Smith
---------------------------------------
BRIAN R. SMITH
/s/ T. Dale Quisenberry
---------------------------------------
T. DALE QUISENBERRY
PERMITTED TRANSFEREES:
COLIN ISAAC SMITH GIFT TRUST
By: /s/ Donald W. Smith
------------------------------------
DONALD W. SMITH, Trustee
CAITLIN ELIZABETH SMITH GIFT TRUST
By: /s/ Donald W. Smith
------------------------------------
DONALD W. SMITH, Trustee
/s/ Donald W. Smith
---------------------------------------
DONALD W. SMITH, tenant in common with
Barbara Smith
/s/ Barbara Smith
---------------------------------------
BARBARA SMITH, tenant in common with
Donald W. Smith
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 40
/s/ Donna McCarthy
---------------------------------------
DONNA MCCARTHY
/s/ Dolores Matamoros
---------------------------------------
DOLORES MATAMOROS
/s/ Loren Martin
---------------------------------------
LOREN MARTIN
/s/ Matthew H. Smith
---------------------------------------
MATTHEW H. SMITH
/s/ Leah Madigan
---------------------------------------
LEAH MADIGAN
/s/ T. Dale Quisenberry
---------------------------------------
STACEY QUISENBERRY 1999 GRAT
/s/ T. Dale Quisenberry
---------------------------------------
T. DALE QUISENBERRY 1999 GRAT
/s/ T. Dale Quisenberry
---------------------------------------
C.T.Q. 1999 TRUST
/s/ T. Dale Quisenberry
---------------------------------------
J.E.Q. 1999 TRUST
[SIGNATURE PAGE TO FOURTH AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT]
<PAGE> 41
SCHEDULE A
PRIOR HOLDERS
Brian R. Smith
2303 Falcon Drive
Round Rock, Texas 78681
T. Dale Quisenberry
10706 Spicewood Club Drive
Austin, Texas 78750
PERMITTED TRANSFEREE
Colin Isaac Smith Gift Trust Donna McCarthy
c/o Donald W. Smith, Trustee 5465 Saulsbury Court
9662 Clyo Road Arvada, CO 80020
Dayton, Ohio 45458
Caitlin Elizabeth Smith Gift Trust Dolores Matamoros
c/o Donald W. Smith, Trustee 435 Daisy Lane
9662 Clyo Road Lancaster, PA 17602
Dayton, Ohio 45458
Donald W. Smith and Barbara Smith Stacey Quisenberry 1999 GRAT
9662 Clyo Road 10706 Spicewood Club Drive
Dayton, Ohio 45458 Austin, Texas 78750
Matthew H. Smith Dale Quisenberry 1999 GRAT
9662 Clyo Road 10706 Spicewood Club Drive
Dayton, Ohio 45458 Austin, Texas 78750
Leah Madigan C.T.Q. 1999 Trust
1849 Pleasant Hills Drive 10706 Spicewood Club Drive
Loveland, Ohio 45140 Austin, Texas 78750
Loren Martin J.E.Q. 1999 Trust
435 Daisy Lane 10706 Spicewood Club Drive
Lancaster, PA 17602 Austin, Texas 78750
<PAGE> 42
SCHEDULE B
Investors
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
SERIES E PREFERRED
STOCK BEING AGGREGATE PURCHASE
NAME OF PURCHASER PURCHASED AT CLOSING PRICE AT CLOSING
- ----------------- -------------------- ----------------
<S> <C> <C>
Admirals LP 120,000 $ 1,800,000
Attn: Ari Arjavalingam
2350 Mission College Blvd., Suite 300
Santa Clara, California 95054
Fax: (408) 982-8227
Austin Ventures VI, L.P. 200,000 $ 3,000,000
Attn: John Thornton
114 West 7th Street, Suite 1300
Austin, Texas 78701
Fax: (512) 476-3952
Brobeck Phleger & Harrison LLP 4,722 $ 70,830
Attn: S. Michael Dunn, P.C.
301 Congress Avenue, Suite 1200
Austin, Texas 78701
Fax: (512) 477-5813
Dain Rauscher Wessels Investors LLC 16,667 $ 250,000
Attn: Mary Zimmer
60 South 6th Street
Minneapolis, Minnesota 55402-4422
Fax: (612) 371-2763
Essex Private Placement Fund Limited Partnership 150,000 $ 2,250,000
Attn: Colin McNay
125 High Street, 29th Floor
Boston, Massachusetts 02110-2702
Fax: (617) 342-3280
</TABLE>
<PAGE> 43
<TABLE>
<S> <C> <C>
HLM/CB Fund, L.P. 80,000 $ 1,200,000
Attn: Al Wiegman
Ann Hutchins
222 Berkeley Street
Boston, Massachusetts 02116
Fax: (612) 266-3619
Intel Corporation 66,667 $ 1,000,000
Attn: M&A Portfolio Manager
2200 Mission College Blvd.
Santa Clara, California 95052
Mail Stop: RN6-46
Fax: (408) 765-6038
with copy to:
Intel Corporation
Attn: General Counsel
2200 Mission College Blvd.
Santa Clara, California 95052
Mail Stop: SC4-203
Fax: (408) 765-1859
Seligman New Technologies Fund, Inc. 67,200 $ 1,008,000
Attn: Paul Goucher
100 Park Avenue
New York, New York 10017
Fax: (212) 922-5731
Seligman Investment Opportunities 12,800 $ 192,000
(Master) Fund - NTV Portfolio
Attn: Paul Goucher
100 Park Avenue
New York, New York 10017
Fax: (212) 922-5731
Stephen P. Laffey 2,533 $ 38,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
Jeffrey B. Meskin 2,533 $ 38,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
</TABLE>
<PAGE> 44
<TABLE>
<S> <C> <C>
The Montague Family Limited Partnership 3,333 $ 50,000
Attn: Charles A. Montague
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
Robert M. Montague 667 $ 10,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
Minor W. Perkins 2,533 $ 38,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
Raptor Global Fund L.P. 11,334 $ 170,000
Attn: Mike Barrone
40 Rowes Wharf, 2nd Floor
Boston, Massachusetts 02110
Fax: (617)
Raptor Global Fund LTD. 55,334 $ 830,000
Attn: Mike Barrone
40 Rowes Wharf, 2nd Floor
Boston, Massachusetts 02110
Fax: (617)
John W. Stokes, Jr. 2,533 $ 38,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
UMB Bank, N.A. as Trustee for the 278 $ 4,170
Brobeck, Phleger & Harrison LLP
Retirement Benefit Plan for the
benefit of Carmelo M. Gordian
P. O. Box 419692
Kansas City, Missouri 64141-6692
Park G. Vestal 2,533 $ 38,000
50 North Front Street, 19th Floor
Memphis, Tennessee 38103
Fax: (901) 579-4355
======= ===========
TOTAL 801,667 $12,025,000
</TABLE>
<PAGE> 1
EXHIBIT 10.5
**** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 UNDER THE SECURITIES ACT OF 1933, AS
AMENDED.
[CROSSROADS LOGO]
OEM AGREEMENT
between
CROSSROADS SYSTEMS, INC.
and
STORAGE TECHNOLOGY CORPORATION
<PAGE> 2
OEM AGREEMENT
This OEM Agreement ("Agreement") is made and entered into as
of April 23, 1998 ("Effective Date"), by and between Crossroads Systems, Inc., a
Delaware corporation, having a principal place of business at 9390 Research
Blvd., Suite II-300, Austin, Texas 78759 ("Crossroads"), and Storage Technology
Corporation, a Delaware corporation, having a principal place of business at
2270 South 88th Street, Louisville, Colorado 80028 ("OEM").
WHEREAS, Crossroads is in the business of, among other things,
developing, manufacturing and distributing certain storage router products;
WHEREAS, OEM desires to purchase such Crossroads products for
use in connection with certain OEM products; and
WHEREAS, Crossroads desires to sell such Crossroads products
to OEM on the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the mutual covenants and
promises set forth below, the parties hereto agree as follows:
ARTICLE 1
DEFINITIONS
1.1 "OEM Product" shall mean an OEM product specified in Exhibit A
attached hereto.
1.2 "Crossroads Product" or "Product" shall mean the Crossroads
product (comprised of both Hardware and Software, as such terms are defined
below) specified in Exhibit B attached hereto and all documentation thereto
provided by Crossroads to OEM hereunder.
1.3 "Hardware" shall mean the hardware portion of the Crossroads
Product specified in Exhibit B attached hereto.
1.4 "Software" shall mean the software or firmware portion of the
Crossroads Product specified in Exhibit B, in object code format only, including
updates, modifications or new releases of such software that may be provided by
Crossroads to OEM from time to time pursuant to the terms of this Agreement.
1.5 "Spare Parts" or "FRUs" (Field Replaceable Units) shall mean
those parts or components of Product specified in Exhibit D attached hereto.
1.6 "Written" shall mean in writing, including facsimile or e-mail
/EDI.
1
<PAGE> 3
ARTICLE 2
OEM APPOINTMENT; SOFTWARE LICENSE
2.1 OEM Appointment.
(a) OEM shall have the right to purchase and market, sell and
distribute Crossroads Products only as set forth below:
(i) OEM shall have the worldwide, non-exclusive right to
market, sell and distribute Crossroads Product as bundled together with or
incorporated into an OEM Product and under OEM's brand name and trademark to its
customers, distributors and end users; and
(ii) OEM shall have the right to market, sell and
distribute Crossroads Product worldwide on a standalone basis under OEM's brand
name and trademark TO its customers, distributors and end users.
(b) OEM shall have the right to request in writing that future
Crossroads products be added to this Agreement. Crossroads shall accept or
reject such request in its reasonable discretion.
2.2 Software License
(a) Subject to the terms and conditions of this Agreement,
Crossroads grants OEM a worldwide non-transferable, non-sublicensable (except
as set forth in Section 2.2(c) below), nonexclusive right and license
("License") to use the Software only as incorporated into the Hardware as part
of a Crossroads Product and only in accordance with the applicable user
documentation provided by Crossroads. The License for any Software (or portion
thereof) is not transferable from the particular Hardware specified in Exhibit B
to any other system or any upgrade of that Hardware without the prior written
consent of Crossroads. OEM has no right to receive, use or examine any source
code or design documentation relating to the Software, without the prior written
consent of Crossroads.
(b) As between the parties, Crossroads retains all right, title
and interest in and to and ownership of, and all proprietary rights with respect
to, the Software and all copies and portions thereof, whether or not
incorporated into or with other software or products. The License does not
constitute a sale of the Software or any portion or copy thereof.
(c) OEM shall have the right to sublicense the Software (i) only
to its customers, distributors and end users of the Crossroads Product as
bundled together with an OEM Product or on a standalone basis under OEM's brand
name and trademark, (ii) only in object code form and (iii) only as incorporated
into the Hardware as part of a Crossroads Product. OEM agrees that each copy of
the Software sublicensed to its customers, distributors or end users hereunder
will only be distributed pursuant to license agreements that are pursuant to
license agreements that are substantially in the form of the shrink-wrap
agreement as provided by Crossroads and containing all material terms thereof.
(d) Copying of the Software or any portion thereof, including,
without limitation, Software that has been modified or incorporated into or with
other software, is expressly forbidden except in those cases where field
upgrades are required. Only in such instances, Crossroads will explicitly grant
OEM written approval for same. OEM shall not (and shall not knowingly allow any
third party to): (i) decompile, disassemble or otherwise reverse engineer or
attempt to reconstruct or discover any source code or underlying ideas or
algorithms or file formats or programming or interoperability interfaces of the
Software or any files contained in or generated using the Software by any means
whatsoever, (ii) remove any product identification, copyright or other notices,
(iii) provide or use the Software to or for the benefit of third parties, (iv)
modify, incorporate into or with other software or create a derivative work of
any part of the Software, (v) load or use any portion of the Software (whether
or not modified or incorporated into or with other software) on or with any
hardware, machine or system other than the applicable Hardware.
2
<PAGE> 4
2.3 Certain Obligations of OEM. OEM agrees:
(a) to not (i) disassemble, decompile or otherwise reverse
engineer the Crossroads Product or otherwise attempt to learn the structure,
source code, algorithms or ideas underlying the Crossroads Product or (ii) copy,
alter or modify the Crossroads Product;
(b) to acknowledge Crossroads as the manufacturer of the
Crossroads Product where appropriate and to include and maintain Crossroads'
proprietary notices (including, without limitation, patent, trademark and
copyright notices) on the Crossroads Product where appropriate as Crossroads may
reasonably require;
(c) to comply with all applicable laws and regulations in
connection with its activities relating to the Crossroads Product; and
(d) to immediately notify Crossroads of any adverse or unexpected
results or any actual or potential government action relevant to a Crossroads
Product and, if and to the extent requested by Crossroads in writing, to suspend
use of that Crossroads if reasonably necessary in accordance with such actual or
potential action.
2.4 Technology Escrow. Upon OEM's written request, Crossroads shall,
at OEM's expense, place and maintain all source code and related documentation
for the Software and all design materials and specifications relating to the
Hardware that are necessary to manufacture the Crossroads Product ("Escrow
Materials") in escrow with an escrow agent of Crossroads' choice and pursuant to
a written escrow agreement ("Escrow Agreement"). Under the Escrow Agreement, OEM
shall be entitled to obtain the Escrow Materials only in the event that
Crossroads (or any successor in interest) completely ceases its business
operations or seeks protection under any Chapter 7 bankruptcy, receivership,
trust deed, creditors arrangement or comparable proceeding. OEM shall not
sublicense, distribute or disclose Escrow Materials to any third party except as
provided in the Escrow Agreement. In the event that Crossroads is unable to
deliver the Product to OEM in accordance with and subject to all terms and
conditions of this Agreement for a continuous period of four months, Crossroads
agrees to negotiate in good faith with OEM regarding granting OEM appropriate
manufacturing rights.
ARTICLE 3
FORECASTS; ORDERS; DELIVERY;
RESCHEDULING: CANCELLATION
3.1 Forecasts.
(a) Upon execution of this Agreement, OEM shall deliver to
Crossroads a non-binding good faith forecast of its quantity requirements and
shipping dates for Crossroads Product for the six (6) month period commencing
with the month of the Effective Date. Thereafter, OEM shall submit to Crossroads
at or prior to the end of each month a non-binding good faith rolling forecast
of its quantity requirements for Crossroads Product for the following six (6)
months.
(b) For each monthly forecast of Crossroads Product, the amount of
any Crossroads Product forecasted for delivery may be adjusted by OEM only as
specified in Exhibit F attached hereto.
(c) OEM's forecasts and orders shall be made in good faith, and
OEM shall act in a commercially reasonable manner to schedule orders to avoid
creating over or under capacity problems for Crossroads.
3
<PAGE> 5
3.2 Orders.
(a) All orders for Crossroads Product hereunder shall be submitted
by OEM to Crossroads in writing in advance of requested delivery as specified in
Exhibit F. All purchase orders submitted by OEM to Crossroads hereunder shall be
subject to Section 3.1 above. Each purchase order shall specify the quantity,
Crossroads and/or OEM's part number, price, shipping date, shipping
destination, shipping method and any other relevant information relating to the
ordered Crossroads Product. It is agreed that all such orders shall be governed
by the provisions of this Agreement and that any conflicting provisions of
OEM's purchase order, or Crossroads' acknowledgment thereof, either printed,
stamped, typed or written shall not be applicable unless specifically approved
in writing by both parties.
(b) Orders may be issued, submitted or communicated, as
applicable, either in writing or by electronic data exchange ("EDI"). All EDI
orders, verifications, forecasts, responses, acknowledgements and other
communications shall be subject to the terms and conditions of this Agreement.
(c) In the event of a shortage of Product for whatever reason
other than for unplanned-for increases in orders, Crossroads will determine a
fair share allocation of available Crossroads Product by giving special
consideration to its OEMs whose forecasts are both timely and generally
accurately reflected by their order histories. The allocation percentages of
Product available to each of Crossroads' OEMs will be based on the average of
the last 90-days of an OEM's orders vis a vis that OEM's associated order
forecast for the affected allocation period and each OEM's actual portion of
Crossroads' Product shipment history for that same period. Notice of any such
allocation issue and Crossroads' follow-on determinations will be promptly made
to and reviewed with the OEM.
3.3 Acknowledgment/Acceptance.
(a) Within one (1) business day after its receipt of a purchase
order from OEM hereunder, Crossroads shall provide OEM with acknowledgment of
receipt of such purchase order.
(b) Within two (2) business days after its receipt of a purchase
order from OEM hereunder, Crossroads shall provide OEM with written acceptance
or rejection of such purchase order (or portion thereof).
3.4 Delivery.
(a) All Crossroads Product delivered hereunder shall be F.O.B.
Crossroads' warehouse or place of production. Shipment will be deemed complete
and risk of loss or damage to the Crossroads Products will pass to OEM upon
delivery to the carrier at Crossroads' warehouse or place of production.
(b) Crossroads shall use reasonable commercial efforts to ship
Crossroads Product on the applicable shipping date. On-time delivery will
include those shipments made up to five (5) days early and zero (0) days late.
Subject to the other terms and conditions of this Agreement, Crossroads shall
use reasonable commercial efforts to promptly fill OEM's written orders for
Crossroads Product which are accepted in writing by Crossroads.
(c) Crossroads will, for a reasonable handling fee, facilitate
drop-shipments FOB Crossroads' plant to OEM's end users, provided that the OEM's
requests do not adversely impact Crossroads' ability to perform under this
Agreement. Should a drop-shipment fail upon initial plug-in, such DOA failures
will immediately be replaced with Product shipped from the OEM's DOA spares
stock. Spares will be new-build Product only. Crossroads will make every effort
to replenish OEM's DOA spares stock on an expedited basis to ensure OEM's
ability to maintain this stock at a minimum mutually agreed upon level of units.
4
<PAGE> 6
3.5 Incidental Charges.
(a) All customs, duties, costs, insurance premiums, other expenses
relating to such transportation and delivery, all costs of compliance with
export and import controls and regulations, and all sales, use, withholding,
value-added, excise and similar taxes or charges are not included in the prices
of the Crossroads Product and shall be borne by OEM.
(b) Crossroads agrees to transfer to OEM all relevant customs duty
and import drawback rights, if any.
3.6 Rescheduling.
(a) OEM may, at no charge to OEM, reschedule the delivery of
Crossroads Product to any date within the same calendar quarter of the original
Ship Date for such purchase order, provided that written notice of such
rescheduled delivery date is received in accordance with Exhibit F and accepted
in writing by Crossroads.
(b) OEM shall not have the right to cancel any unshipped order for
Crossroads Product that has been previously rescheduled.
3.7 Cancellation.
(a) OEM may, at no charge to OEM, cancel any unshipped order for
Crossroads Product, provided that Crossroads receives written cancellation
notice in accordance with Exhibit F.
(b) Notwithstanding the above, OEM shall not have the right to
cancel any unshipped order for Crossroads Product that has been previously
rescheduled.
(c) OEM may, at no charge to OEM, cancel any unshipped order for
Crossroads Product that is more than 30 days past due, including any unshipped
order that has been on stop-ship for quality/reliability reasons for more than
30 days.
3.8 Unique Components.
(a) Notwithstanding the above, OEM shall be liable for either
custom or any low-usage standard components (collectively, "unique components")
required to satisfy forecasts hereunder for which orders are neither timely
placed nor forthcoming. Unique components include, but are not limited to:
low-usage parts (such as long-wave GLMs, special rails, etc.); custom chassis
color, label or artwork; customized printed materials (such as manuals, warranty
cards, quick-install guides); customized packaging/shipping materials or labels;
OEM-specific firmware; or other non-standard Crossroads Product components that
are required by OEM, but not otherwise readily usable by or for Crossroads'
other OEMs. OEM-authorized unique components will be specified on the OEM
Requirements Document created by Crossroads and OEM.
(b) In the event that OEM significantly reduces or completely
eliminates its forecast and/or orders, OEM shall be liable for any and all
costs associated with unique components, including all product in WIP that
cannot be reworked for resale to other Crossroads' customers, all components
that cannot be returned to supplier by Crossroads, and all associated rework
expenses or restocking charges. OEM's liability for unique components is limited
to existing orders plus an additional stock sufficient to cover OEM's follow-on
3 months of potential orders as projected by OEM in its forecast that was in
effect 3 months prior to the most recently received order or notice of OEM's
decision to significantly, or even completely, reduce purchases of the affected
Crossroads Product.
(c) Any Proprietary Information which is independently developed
in the course of performance and development of unique components to the
Crossroads Products by the employees and/or agents of one of the parties hereto
shall be and remain the property of that party. Any such
5
<PAGE> 7
Proprietary Information may be licensed by such party to the other party on a
non-exclusive basis and subject to the parties entering into a mutually
acceptable written license agreement.
3.9 Authorized Purchasers. For purposes of this Agreement, those
OEM-related entities who are authorized by OEM to also submit purchase orders
directly to Crossroads in accordance with Section 3.2 above are identified on
Exhibit H.
ARTICLE 4
PRICE AND PAYMENTS
4.1 Price.
(a) For Crossroads Product purchased hereunder, OEM shall pay to
Crossroads the prices specified in Exhibit D attached hereto and incorporated
herein by this reference, as may be amended from time to time by the mutual
written agreement of the parties.
(b) Pursuant to Article 7, OEM may from time to time request a
change in the Specifications for a Crossroads Product. If such OEM changes
result in a material change in Crossroads' costs or in the time for performance,
Crossroads and OEM shall negotiate in good faith such adjustments as the parties
deem appropriate to address such changes and modify Exhibit D accordingly.
(c) OEM may at anytime request a quotation from Crossroads to
reconfigure Crossroads Product. Such pricing and the amount of time for
Crossroads' performance of such reconfiguration will be provided to OEM within
five (5) business days of Crossroads' receipt of OEM's written request. Pursuant
to Section 6, the warranty for such reconfigured product will be the longer of
(a) a period of ninety (90) days after delivery of such reconfigured Crossroads
Product to OEM or (b) the remaining Warranty Period of the original Crossroads
Product that was reconfigured. The procedure for return of such material will be
in accordance with the RMA Procedure attached hereto as Exhibit G. All cost of
shipping, insurance, screening, and reconfiguration will be borne by OEM.
4.2 Terms of Payment. All payments for Crossroads Product due hereunder
to Crossroads shall be paid to Crossroads in United States dollars no later than
thirty (30) days following the date of Crossroads' applicable invoice. Late
payments not promptly corrected after notification to OEM by Crossroads or
persistent late payments may be assessed a service fee of one and one-half
percent (1.5%) per month or, if lower, the maximum extent allowed by law.
4.3 [****]
6
****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO SUCH OMITTED PORTIONS.
<PAGE> 8
ARTICLE 5
TRAINING; TECHNICAL SUPPORT; DOCUMENTATION
5.1 Training. During the term of this Agreement and upon OEM's written
request, Crossroads will provide, at no charge to OEM, an agreed upon number of
days of training regarding the Crossroads Product for an agreed upon number of
OEM personnel at Crossroads' facilities (or such other location mutually agreed
upon by both parties) and at mutually agreeable times. Each party will bear its
own expenses in connection with such training. Additional training requested by
OEM will be provided by Crossroads at Crossroads' then current training fee
rates and at OEM's sole cost and expense (including, without limitation,
reimbursement to Crossroads for reasonable out-of-pocket costs and traveling and
accommodation expenses incurred by Crossroads in providing such additional
training). Crossroads' training fees as of the Effective Date of this Agreement
are set forth in Exhibit E attached hereto and incorporated herein by this
reference.
5.2 Technical Maintenance and Support.
(a) OEM shall be responsible for providing first and second level
technical maintenance and support for the Crossroads Product to its distributors
and to end users to whom OEM or its distributors have sold or distributed
Crossroads Product as bundled together with an OEM Product or on a standalone
basis under OEM's brand name and trademark. For the purpose of this Agreement,
"first level" technical maintenance and support shall mean: direct customer
interaction; information collection and analysis; identification of whether the
problem is known and has a known solution; problem recreation; problem report
administration and tracking. "Second level" technical maintenance and support is
expected to resolve all "known problems" and non-latent defect problems.
Problems that are unable to be resolved at this level will be escalated by the
OEM to the "third level" support provided by Crossroads.
(b) Crossroads shall provide to OEM only third level technical
maintenance and support for the Crossroads Product. For the purpose of this
Agreement, "third level" technical maintenance and support shall mean: (i)
resolving technical problems with the Crossroads Product, (ii) on line
simulation of Hardware failures and corrective actions to remedy such failures
and (iii) on-line simulation of Software failures and corrective actions to
remedy such failures. Such technical support shall be provided via telephone or
electronic support during Crossroads' normal business hours (or such other times
as mutually agreed upon by both parties in writing) or on-site visits as
necessary and mutually agreed upon by both parties in writing. Each party shall
designate one of its employees as a technical representative ("Technical
Representative") and shall promptly advise the other party in writing of such
Technical Representative's name. The Technical Representative shall be
responsible for, among other things, all technical support inquiries hereunder.
(c) Crossroads' and OEM's Technical Support Escalation will be
mutually established and agreed upon.
(d) Upon termination of this Agreement, except if termination is
for cause by Crossroads, Crossroads shall provide OEM with up to six (6) months
of continued technical support.
5.3 Documentation. Crossroads will provide OEM with technical
documentation, in a mutually agreed upon format, describing techniques needed to
isolate and/or repair Product failures with minimum customer impact (these
techniques will emphasize both a "how to fix" and a "how it works" approach). In
addition, Crossroads will provide OEM with copies of all training materials and
permit OEM to utilize same to conduct appropriate product training for its
customers or distributors.
5.4 Quality and Reliability. Crossroads will provide OEM with the
remedies as specified in EXHIBIT 1.
7
<PAGE> 9
ARTICLE 6
ACCEPTANCE; WARRANTY; OUT-OF-WARRANTY REPAIRS
6.1 Acceptance/Rejection of Crossroads Product in Case of
Nonconformity.
(a) Acceptance. Crossroads Product delivered by Crossroads to OEM,
will be deemed accepted if not rejected by OEM pursuant to Section 6.1(b)
below. In the event OEM requests drop-shipment delivery directly to OEM's
end-users pursuant to Section 3.4 above, such drop-shipments will also be
covered by the acceptance procedures under this Section 6.1.
(b) Rejection. OEM may reject any shipment of Crossroads Product
that does not substantially conform with the specifications contained in Exhibit
C attached hereto. In order to reject a shipment, OEM must (i) give written
notice to Crossroads of OEM's intent to reject the shipment within fifteen (15)
days of receipt together with a written indication of the reasons for such
possible rejection, and (ii) as promptly as reasonably possible thereafter, but
in any event within an additional five (5) business days, provide Crossroads
with written notice of final rejection and the full basis therefor. After notice
of intent to reject is given, OEM shall cooperate with Crossroads in determining
whether rejection is necessary or justified. If no such notice of intent to
reject is received by Crossroads within the fifteen (15) day period specified
above, OEM shall be deemed to have accepted such delivery of Crossroads Product.
Crossroads shall notify OEM as promptly as reasonably possible whether it
accepts OEM's basis for any rejection, but in any event within an additional
five (5) business days
(c) Return of Rejected Material. OEM must obtain a Return Material
Authorization ("RMA") in writing from Crossroads prior to returning any rejected
Crossroads Product to Crossroads, in accordance with the RMA Procedure outlined
in Exhibit G. OEM must return any such Crossroads Product with any bar code
labels intact and in commercially acceptable packaging to ensure damage-free
transportation to Crossroads. Such packaging shall conspicuously bear the Return
Material Authorization ("RMA") number. If Product is received in damaged
condition due to inadequate packaging, the Product will, at OEM's option and
expense, either be returned as-is, repaired according to Crossroads then-current
repair prices, or replaced. Cost of shipping, insurance, screening, repair and/
or replacement of rejected material will be borne by Crossroads.
(d) Replacement of Product. Crossroads will use its diligent
commercial efforts to repair or replace such rejected Crossroads Product with
new or like-new components within thirty (30) days or as otherwise agreed by the
Parties, after receipt of the rejected Crossroads Product. With respect to such
repaired or replacement Product, the warranty set forth in Section 6.2 below
shall commence on the date of delivery of such repaired or replacement Product.
(e) Corrective Action. A written corrective action report
addressing the steps that will be taken to eliminate the recurrence of the
problem will be provided prior to reshipment.
(f) Credit. OEM may request credit for Crossroads Product not
replaced within thirty (30) days or as otherwise agreed by the parties.
6.2 Warranty.
(a) Limited Warranty. Crossroads warrants only to OEM that the
Crossroads Product will comply in all material respects to Crossroads'
specifications therefor for a period of fifteen (15) months after delivery to
OEM ("Warranty Period"). Crossroads Product provided hereunder by Crossroads
that does not comply with the warranty set forth in this section and is returned
by OEM to Crossroads during the Warranty Period will, at Crossroads' sole
option, either be repaired, replaced or, if neither of the foregoing is
feasible, credited at the then-current purchase price therefor.
8
<PAGE> 10
(b) Return of Material Under Warranty. OEM must obtain a Return
Material Authorization ("RMA") in writing from Crossroads prior to returning any
Crossroads Product under warranty, in accordance with the RMA Procedure outlined
in Exhibit G. OEM must return any such Crossroads Product with any bar code
labels intact and in commercially acceptable packaging to ensure damage-free
transportation to Crossroads. Such packaging shall conspicuously bear the Return
Material Authorization ("RMA") number. If Product is received in damaged
condition due to inadequate packaging, the Product will, at OEM's option and
expense, either be returned as-is, repaired according to Crossroads then-current
repair prices, or replaced. OEM shall bear the cost of freight and insurance to
the point of Crossroads' designated facility. Crossroads will bear the cost of
freight and insurance for return of goods to OEM.
(c) Repair Warranty Period. With respect to Crossroads Product
repaired or replaced by Crossroads under Section 6.2(a) above, Crossroads
warrants only to OEM that such repaired or replacement Crossroads Product will
comply in all material respects to Crossroads' specifications therefor for the
longer of (a) a period of ninety (90) days after delivery of such repaired or
replacement Crossroads Product to OEM or (b) the remaining Warranty Period of
the original Crossroads Product that was repaired or replaced.
(d) Advance Replacement Stock. To expedite replacement and ensure
minimal downtime, OEM and Crossroads agree to each hold a reasonable number of
replacement units in inventory for quick advance fulfillment using the RMA
process outlined in Exhibit G.
(e) Voided Warranties. The foregoing warranty does not extend to
any Crossroads Product that is modified or altered, is used, maintained or
stored other than in conformity with Crossroads' recommendations or
instructions, has its serial number or bar code label removed or altered or is
treated with abuse, negligence or other improper treatment (including, without
limitation, use outside the recommended environment). OEM's SOLE REMEDY WITH
RESPECT TO ANY WARRANTY OR DEFECT IS AS STATED ABOVE.
6.3 Warranty Disclaimer. EXCEPT FOR THE LIMITED WARRANTY SET FORTH
ABOVE IN SECTION 6.1 AND INFRINGEMENT INDEMNIFICATION PROVISION SET FORTH IN
SECTION 9.1 BELOW, CROSSROADS MAKES NO OTHER WARRANTIES WITH RESPECT TO THE
CROSSROADS PRODUCT, HARDWARE, SOFTWARE, DOCUMENTATION, LICENSES, SPECIFICATIONS
OR ANY SERVICES AND DISCLAIMS ALL OTHER WARRANTIES, INCLUDING WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND
NONINFRINGEMENT. FURTHER, CROSSROADS DOES NOT WARRANT, GUARANTEE, OR MAKE ANY
REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE SOFTWARE OR
ASSOCIATED OR WRITTEN MATERIALS IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY
OR OTHERWISE.
6.4 Out-of-Warranty Repairs. During the term of this Agreement,
Crossroads agrees to use reasonable commercial efforts to refurbish to a "like
new" condition any out-of-warranty Crossroads Product at Crossroads' then
current refurbishment prices and estimated turn-around times. Crossroads'
refurbishment prices as of the Effective Date of this Agreement are set forth in
Exhibit E. Such prices may be changed from time to time at Crossroads' sole
discretion, but only with a minimum of thirty (30) days written notice to OEM.
Any such changes will be deemed automatically incorporated into Exhibit E by
such written notice. With respect to Crossroads Product that are refurbished
under this Section 6.4, Crossroads warrants only to OEM that such refurbished
Crossroads Product will comply in all material respects to Crossroads'
specifications therefor attached as Exhibit C for a period of ninety (90) days
after delivery to OEM. Except for the duration of the Warranty Period, the terms
and conditions of Section 6.2 shall apply to such warranty for refurbished
Crossroads Product.
(a) Return of Out-of-Warranty Material. OEM must obtain a Return
Material Authorization ("RMA") in writing from Crossroads prior to returning any
out-of-warranty Product, in accordance with the RMA Procedure outlined in
Exhibit G. OEM must return any such Crossroads Product with any bar code labels
intact and in commercially acceptable packaging to ensure damage-free
9
<PAGE> 11
transportation to Crossroads. Such packaging shall conspicuously bear the Return
Material Authorization ("RMA") number. If Product is received in damaged
condition due to inadequate packaging, the Product will, at OEM's option and
expense, either be returned as-is, repaired according to Crossroads then-current
repair prices, or replaced. All cost of shipping, insurance, screening, repair
and/or replacement of rejected material will be borne by OEM.
(b) Repair of EOL Product. Out-of-warranty repair of EOL
("end-of-life") Product will be offered on a time-and-materials basis for a
period of five (5) years after discontinuance, as long as the proper components
remain available.
ARTICLE 7
PRODUCT MODIFICATIONS; DISCONTINUANCE
7.1 Product Modifications
(a) Crossroads' Modifications. From time to time, Crossroads may,
in its sole discretion, determine that certain changes or modifications to a
Crossroads Product are appropriate or desirable. In such event, Crossroads will
provide written notice to OEM that includes, without limitation, a summary of
the change, engineering documentation supporting the technical acceptability
(test verification) of the change, and other data as appropriate that shows the
change will have no net adverse effect on the Crossroads Product. Such notice
shall be provided to OEM pursuant to the following schedule:
(i) Crossroads will provide OEM with thirty (30) days prior
written notice for non-material changes to Crossroads Product that do not
materially affect the functionality, performance interchangeability or
maintainability of the Crossroads Product. Crossroads is not obligated to obtain
OEM's approval in order to make and implement such modifications;
Notwithstanding the foregoing, should OEM object to such change, OEM must notify
Crossroads in writing within 5 business days of receipt together with a written
indication of the reasons for such disapproval, including the full basis
therefor. OEM agrees to not unreasonably disapprove such non-material changes.
(ii) Crossroads will provide OEM with sixty (60) days prior
written notice for material changes to Crossroads Product that do materially
affect the functionality, performance interchangeability or maintainability of
the Crossroads Product (including point of manufacture). In order to disapprove
a change, OEM must (i) give written notice to Crossroads of OEM's intent to
disapprove the change within fifteen (15) days of receipt together with a
written indication of the reasons for such possible disapproval, and (ii) as
promptly as reasonably possible thereafter but in any event within an additional
fifteen (15) days, provide Crossroads with written notice of final disapproval
and the full basis therefor. After notice of intent to disapprove is given, OEM
shall cooperate with Crossroads in determining whether disapproval is necessary
or justified. If no such notice of intent to disapprove is received by
Crossroads within the fifteen (15) day period specified above, OEM shall be
deemed to have approved of such proposed change in its entirety. Crossroads
shall notify OEM as promptly as reasonably possible whether it accepts OEM's
basis for any disapproval. OEM agrees to not unreasonably withhold or delay its
approval under this Section.
(iii) Crossroads will provide support for up to two (2) of
the most recent prior major releases of the Software.
(b) OEM's Modifications From time to time, OEM may request certain
changes or modifications to a Crossroads Product. In such event, OEM will
provide written notice to Crossroads that includes, without limitation, a
summary of the change, engineering or other documentation supporting the
request. The parties agree to negotiate such changes in good faith, including
whether such changes are exclusive or custom.
10
<PAGE> 12
(c) Specifications / Price Changes. If any modification to
Crossroads Product requires a change to the specifications for or price of
Crossroads Product, the parties agree to amend Exhibit C and / or Exhibit D as
appropriate and as mutually agreed upon by the parties.
(d) Performance Impact. If any modification, or implementation
delay thereof, to Crossroads Product affects the time for performance under this
Agreement, the parties agree to negotiate in good faith adjustments as the
parties deem appropriate to swiftly resolve such impact.
(e) Availability. During the term of this Agreement, Crossroads
agrees to make available to OEM, at Crossroads' then current price (if any), all
modifications to Crossroads Products (including, without limitation, Software
upgrades) that Crossroads makes generally available to its other OEMs.
Crossroads shall not be obligated to make available to OEM any customized
modifications made by or for Crossroads for any third party.
(f) Proprietary Information. Any Proprietary Information which is
independently developed in the course of performance and development of
modifications to the Crossroads Products by the employees and/or agents of one
of the parties hereto shall be and remain the property of that party. Any such
Proprietary Information may be licensed by such party to the other party on a
non-exclusive basis and subject to the parties entering into a mutually
acceptable written license agreement.
(g) Mandatory Field Changes. Changes to the Product that
Crossroads deems are required to correct or ensure proper functionality of
previously shipped product to satisfy the attached Product Specification will be
jointly reviewed by the parties to determine the appropriate method of
modification. All materials will be supplied by Crossroads for previously
shipped Product. Labor to install any such changes in the field for Product
under Warranty will be borne by OEM and reimbursed by Crossroads at the maximum
charge of one (1) hour per customer site at OEM's fully burdened hourly cost for
technical support, the current rate of which is $150 per hour. Such
reimbursement will be in the form of a credit against any account receivables of
OEM. The cost of any field changes made to Product that is out-of-warranty will
be borne solely by OEM.
(h) Emergency Changes. Notwithstanding the notice periods set
forth above, in the event that the parties mutually agree that any change should
be made on an emergency basis, the parties agree to promptly and in good faith
negotiate and implement such emergency change.
7.2 Discontinuance of Crossroads Product.
(a) End-of-Life. If, during the term of this Agreement, Crossroads
decides to discontinue any Crossroads Product, Crossroads will provide OEM with
six (6) months prior written notice of such discontinuance. Crossroads will
advise OEM if a follow-on product is expected to have performance / features
that are equal to or better than the Product being discontinued, offering the
potential to be purchased as a replacement product. In addition, Crossroads will
offer OEM the opportunity to make a one-time end-of-life purchase of such
discontinued Crossroads Product in at least such quantities necessary for OEM to
fulfill its forecast requirements for such discontinued Crossroads Product
("End-of-Life Order"). Notwithstanding Section 3, an End-of-Life order must be
received by Crossroads at least 60 days prior to discontinuance and scheduled
for delivery within 60 days after discontinuance. Crossroads shall use
reasonable commercial efforts to deliver such discontinued Crossroads Product
ordered by OEM pursuant to an End-of-Life Order.
(b) Government Contracts. If, during the term of this Agreement,
OEM is obligated to provide any discontinued Crossroads Product under any
government contract that requires twelve (12) months or more advance notice of a
discontinued Crossroads Product for which there is no follow-on replacement
product, and if OEM and Crossroads agree in good faith that it is necessary,
Crossroads will, in its sole discretion, either:
11
<PAGE> 13
(i) Offer OEM a Crossroads product that is functionally
equivalent to the discontinued Crossroads Product at the same price for OEM's
previously forecasted requirements for such discontinued Crossroads Product for
the six (6) month period immediately following the six (6) month period
specified in Section 7.2(a) above; or
(ii) Subject to the forecast requirements set forth in
Section 3.1 above, offer OEM an opportunity to purchase such discontinued
Crossroads Product for delivery during the twelve (12) month period following
Crossroads' notice of discontinuance as follows: (A) OEM may place one (1) order
of up to sixty percent (60%) of its total forecasted requirements of
discontinued Crossroads Product up to 90 days prior to discontinuance for
delivery within 90 days after discontinuance; and (B) OEM may place one (1)
additional order of up to forty percent (40%) of its total forecasted
requirements for discontinued Crossroads within 45-days of discontinuance for
delivery within 180 days after discontinuance.
(c) For purposes of this Section, all orders for discontinued
Crossroads Product placed by OEM pursuant to this Section shall be deemed a
non-cancelable End-of-Life Order.
ARTICLE 8
TERM; TERMINATION; RIGHTS AND OBLIGATIONS UPON TERMINATION
8.1 Term. Unless terminated earlier as provided herein, this Agreement
shall have a term of three (3) years commencing on the Effective Date of this
Agreement. Thereafter, this Agreement shall be automatically renewed for
subsequent one (1) year terms unless either party provides the other party with
sixty (60) days' notice of non-renewal before the end of the applicable term.
8.2 Termination. This Agreement may be terminated by either party for
cause immediately by written notice upon the occurrence of any of the following
events:
(a) if the other party breaches any material provision of this
Agreement and fails to cure such breach within thirty (30) days (immediately in
the case of a breach of Section 2.3(a) or Article 9) of written notice
describing the breach; or
(b) if the other ceases to do business, or otherwise terminates
its business operations; or
(c) if the other becomes insolvent or seeks protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
other.
8.3 Rights and Obligations on Expiration or Termination.
(a) Except to the extent expressly provided to the contrary in
this Agreement, all rights to payment and the following provisions shall survive
the termination of this Agreement: Article 1, Sections 2.2(b), 2.2(d), 2.3(a),
3.8, 6.2, 7.1(f), this Section 8.3 and 8.4, and Articles 9, 10, 11, and 13. Any
rights of Crossroads to payments accrued through termination as well as
obligations of the parties under firm orders for purchase and delivery of
Crossroads Product at the time of such termination shall remain in effect,
except that in the case of termination under Section 8.2(a), the terminating
party may elect whether obligations under firm orders will remain in effect and
except that Crossroads will not be obligated with respect to Delivery Dates more
than three (3) months after termination.
(b) Upon expiration or termination of this Agreement, all rights
and licenses granted to OEM under this Agreement and any sublicenses will
immediately cease; provided, however, that
12
<PAGE> 14
(i) end user sublicenses to Crossroads Product granted pursuant to this
Agreement shall not be revoked by the termination of this Agreement, (ii) unless
termination is due to OEM's material breach, OEM may continue to distribute
Crossroads Product in accordance with the terms of this Agreement for bona fide
orders placed by OEM's distributors and other customers and accepted by OEM
prior to the termination of this Agreement; provided such Crossroads Product are
distributed pursuant to normal payment terms within thirty (30) days after
termination of this Agreement, and (iii) Crossroads Product in the possession of
OEM's distributors as of termination may be distributed in accordance with the
terms of this Agreement to meet bona fide orders placed by customers or end
users and accepted prior to termination; provided such Crossroads Product are
distributed pursuant to normal payment terms within thirty (30) days after
termination of this Agreement. In addition, upon any expiration or termination
of this Agreement and subject to OEM's right to continue distribution of
Crossroads Product as set forth above in this Section 8.3, OEM will, upon
request by Crossroads, immediately return to Crossroads all Crossroads Product
and related documentation in its possession, custody or control in whichever
form held (including all copies, portions or embodiments thereof) and will
immediately cease using any trademarks, service marks and other designations of
Crossroads. Any Product returned pursuant to Crossroads' request will be
credited to OEM at the then-current price less any depreciation in value and any
reasonable administrative costs borne by Crossroads.
(c) Termination is not the sole remedy under this Agreement and,
whether or not termination is effected, all other remedies will remain
available.
8.4 No Liability. Each party understands that the rights of termination
hereunder are absolute and that it has no rights to a continued relationship
with the other after termination except as expressly stated herein. Neither
party shall incur any liability whatsoever for any damage, loss or expenses of
any kind suffered or incurred by the other (or for any compensation to the
other) arising from or incident to any termination of this Agreement by such
party which complies with the terms of the Agreement whether or not such party
is aware of any such damage, loss or expenses.
ARTICLE 9
INFRINGEMENT INDEMNIFICATION
9.1 Infringement Indemnification. Crossroads shall defend and hold
harmless OEM and its officers, directors, agents and employees from liability
resulting from infringement by the Crossroads Product of any valid patent,
trademark, trade secret or United States copyright as well as foreign
counterparts, provided (a) Crossroads is promptly notified by OEM of any and all
threats, claims and proceedings related thereto, (b) if requested by Crossroads,
OEM provides Crossroads reasonable assistance in connection therewith and (c)
Crossroads has sole control over the defense and all negotiations for a
settlement or compromise provided that Crossroads shall consider in good faith
OEM's input prior to any settlement or compromise Crossroads will not be
responsible for any settlement it does not approve in writing. The foregoing
obligation of Crossroads does not apply with respect to any Crossroads Product
or portions or components thereof (i) not supplied by Crossroads, (ii) to the
extent made in accordance to OEM specifications or requests, (iii) modified
post-shipment by OEM, if the alleged infringement relates to such modification,
(iv) combined, processed or used with other products, processes or materials
where the alleged infringement relates to such combination, process or use or
(v) where OEM continues allegedly infringing activity after being notified
thereof or after being informed of modifications that would have avoided the
alleged infringement. OEM will indemnify Crossroads and its officers, directors,
agents and employees from all actual damages, settlements, reasonable attorneys'
fees and expenses (i) related to a claim of infringement or misappropriation
excluded from Crossroads' indemnity obligation by the immediately preceding
sentence or (ii) in connection with OEM's activities regarding the Crossroads
Product other than in accordance with the terms and conditions of this
Agreement.
<PAGE> 15
ARTICLE 10
LIMITED LIABILITY
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY WILL
BE LIABLE TO THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT
UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE
THEORY FOR (A) ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS OR (B)
COST OF PROCUREMENT OF SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES. CROSSROADS
SHALL HAVE NO LIABILITY, EXCEPT WITH RESPECT TO SECTION 9.1 "INFRINGEMENT
INDEMNIFICATION", FOR ANY AMOUNTS IN EXCESS IN THE AGGREGATE OF THE AMOUNTS PAID
TO CROSSROADS HEREUNDER DURING THE TWELVE (12) MONTH PERIOD PRIOR TO THE DATE
THE CAUSE OF ACTION AROSE OR FOR ANY FAILURE OR DELAY DUE TO MATTERS BEYOND ITS
REASONABLE CONTROL OR FOR ANY ALLOCATION OF CROSSROADS PRODUCT BETWEEN ITS
CUSTOMERS IN THE EVENT OF A SHORTAGE.
ARTICLE 11
CONFIDENTIALITY
11.1 "Proprietary Information" of a party will mean, to the extent
previously, currently or subsequently disclosed to the other party hereunder or
otherwise, any technical business or financial information, ideas, know-how,
processes or the like; provided, however, that any of the foregoing relating to
the Crossroads Product, Hardware or Software or the manufacture, properties,
computer code, algorithms, structure, use, composition or handling thereof shall
be deemed solely the Proprietary Information of Crossroads.
11.2 Each party receiving or holding (the "Receiving Party")
Proprietary Information of the other (the "Disclosing Party") agrees (a) to hold
the Disclosing Party's Proprietary Information in confidence and to take
reasonable precautions to protect such Proprietary Information (including,
without limitation, at least all precautions the Receiving Party employs with
respect to its confidential materials), (b) not to divulge any such Proprietary
Information or any information derived therefrom to any third person, and (c)
not to make any use whatsoever at any time of such Proprietary Information
except as expressly authorized in this Agreement. Any employee given access to
any such Proprietary Information must have a legitimate "need to know" and shall
be similarly bound in writing. Without granting any right or license, the
Disclosing Party agrees that the foregoing clauses (a), (b) and (c) shall not
apply with respect to information the Receiving Party can show (i) is in or
(through no improper action or inaction by the Receiving Party or any agent or
employee) enters the public domain, or (ii) was rightfully in its possession or
known by it without restriction prior to receipt from the Disclosing Party, or
(iii) was rightfully disclosed to it by another person without restriction.
11.3 Immediately upon termination of this Agreement, the Receiving
Party will deliver to the Disclosing Party all Proprietary Information of the
Disclosing Party and all documents or media containing any such Proprietary
Information and any and all copies or extracts thereof.
11.4 The Receiving Party acknowledges and agrees that due to the unique
nature of the Disclosing Party's Proprietary Information, there can be no
adequate remedy at law for any breach of its obligations under this Article 11,
that any such breach may allow the Receiving Party or third parties to unfairly
compete with the Disclosing Party resulting in irreparable harm to the
Disclosing Party and, therefore, that upon any such breach or any threat
thereof, the Disclosing Party shall be entitled to appropriate equitable relief
in addition to whatever remedies it might have at law, The Receiving Party will
notify the Disclosing Party in writing immediately upon the occurrence of any
such unauthorized release or other breach.
14
<PAGE> 16
ARTICLE 12
INSURANCE
12.1 During the term of this Agreement, Crossroads agrees to carry
comprehensive general liability insurance in an amount no less than One Million
Dollars ($1,000,000) per occurrence. Upon OEM's reasonable request, Crossroads
shall deliver to OEM a copy of a certificate of insurance evidencing such
coverage.
12.2 During the term of this Agreement, OEM agrees to carry
comprehensive general liability insurance in an amount no less than One Million
Dollars ($1,000,000) per occurrence. Upon Crossroads' reasonable request, OEM
shall deliver to Crossroads a copy of a certificate of insurance evidencing such
coverage.
ARTICLE 13
MISCELLANEOUS
13.1 Amendments and Modifications. This Agreement may not be changed,
modified, amended or supplemented except by a written instrument signed by both
parties. Furthermore, it is the intention of the parties that this Agreement be
controlling over additional or different terms of any order, confirmation,
invoice or similar document, even if accepted in writing by both parties, and
that waivers and amendments shall be effective only if made by non-pre-printed
agreements clearly understood by both parties to be an amendment or waiver.
13.2 Publicity. The parties agree to issue a mutually agreed upon joint
press release regarding this Agreement at a time mutually agreed upon by the
parties, but in no event later than May 1, 1998.
13.3 Assignability. Neither this Agreement nor any rights, licenses or
obligations hereunder, may be assigned by either party without the prior written
approval of the non-assigning party. Notwithstanding the foregoing, either party
may assign this Agreement to any acquirer of all or of substantially all of such
party's stock, assets or business to which this Agreement relates.
13.4 Severability. If any provision of this Agreement shall be held
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
13.5 Further Assurances. Each party hereto agrees to execute,
acknowledge and deliver such further instruments, and to do all such other acts,
as may be necessary or appropriate in order to carry out the purposes and intent
of this Agreement.
13.6 Notice and Reports. All notices, consents or approvals required by
this Agreement shall be in writing sent by certified or registered air mail,
postage prepaid, or by commercial overnight courier service with tracking
capabilities, costs prepaid, to the parties at the following addresses or such
other addresses as may be designated in writing by the respective parties:
15
<PAGE> 17
To Crossroads: Crossroads Systems, Inc.
100 Century Center Court, Suite 100
San Jose, California 95112
Attention: Barbara Bardach
To OEM: StorageTek Network Systems Group
7625 Boone Avenue North
Minneapolis, Minnesota 55428
Attention: Carrie Barberena
13.7 Relationships of the Parties. The parties hereto expressly
understand and agree that OEM is an independent contractor in the performance of
each and every part of this Agreement and is solely responsible for all of its
employees and agents and its labor costs and expenses arising in connection
therewith and is responsible for any and all claims, liabilities, damages,
debts, settlements, costs, attorneys' fees, expenses and liabilities of any type
whatsoever [except as otherwise expressly indicated in this Agreement] that may
arise on account of OEM's activities or those of its employees or agents
(including, without limitation, subdistributors), including without limitation,
providing unauthorized representations or warranties (or failing to effectively
disclaim all warranties and liabilities on behalf of Crossroads) to its
customers or breaching any term, representation or warranty of this Agreement.
Nothing contained in this Agreement is intended nor is to be construed so as to
constitute Crossroads and OEM as partners, agents or joint venturers with
respect to this Agreement. Neither party hereto shall have any express or
implied right or authority to assume or create any obligations on behalf of or
in the name of the other party or to bind the other party to any contract,
agreement or undertaking with any third party.
13.8 Waiver. The waiver by either party of a breach of any provision
contained herein shall be effective only if set forth in a writing signed by
both parties and shall in no way be construed as a waiver of any succeeding
breach of such provision or the waiver of the provision itself.
13.9 Applicable Law; Actions. This Agreement shall be governed by and
construed in accordance with the laws of the State of California without regard
to the conflicts of laws provisions thereof and without regard to the United
Nations Convention on Contracts for the International Sale of Goods. [Except
with respect to injunctive relief as allowed under this Agreement, any dispute
arising under this Agreement shall be resolved by arbitration, in accordance
with the then-current American Arbitration Association Rules, in Palo Alto, CA,
if action is brought by OEM and in Denver, Colorado, if action is brought by
Crossroads.] The prevailing party in any legal action to enforce or interpret
this Agreement shall be entitled to reasonable costs and attorneys' fees.
13.10 Headings. Paragraph headings used in this Agreement are inserted
for convenience only and in no way are to be construed to define, limit or
affect the construction or interpretation hereof.
13.11 Export Control. Both parties agree to comply with the U.S.
Foreign Corrupt Practices Act (regarding among other things, payments to
government officials) and all export laws, restrictions, national security
controls and regulations of the United States or other applicable foreign agency
or authority, and not to export or re-export or allow the export or re-export of
any Crossroads Product, Hardware, Software, documentation relating to any of the
foregoing, Crossroads Proprietary Information (or technical data or information
related thereto) or any copy or direct product thereof in violation of any such
restrictions, laws or regulations, or without all required licenses and proper
authorizations, to Cuba, Libya, North Korea, Iran, Iraq, or Rwanda or to any
Group D:1 or E:2 country (or any national of such country) specified in the then
current Supplement No. 1 to part 740 of the U.S. Export Administration
Regulations (or any successor supplement or regulations).
16
<PAGE> 18
13.12 Entire Agreement. This Agreement (including all Exhibits hereto)
contains the entire agreement of the parties regarding the subject matter hereof
and supersedes all prior agreements, understandings and negotiations regarding
the same.
13.13 Force Majeure. If the performance of this Agreement, or of any
obligation hereunder, is prevented, restricted or interfered with by reason of
acts of God, wars, revolution, civil commotion, acts of public enemies, blockage
or embargo, act of government in its sovereign capacity, labor difficulties,
including with limitation strikes, slowdowns, picketing or boycotts, or any
other circumstances beyond the reasonable control of the party affected
(collectively "Force Majeure Event"), the party affected, upon giving prompt
notice to the other party (but in no event to exceed more than seven (7) days
after learning of the Force Majeure Event) shall be excused from such
performance on a day-to-day basis to the extent of such prevention, restriction
or interference (and the other party shall likewise be excused from performance
of its obligations on a day-to-day basis to the extent such party's obligations
are dependant upon the performance so prevented, restricted or interfered with);
provided, however, that both parties shall proceed whenever such Force Majeure
Event is removed or ceases.
13.14 Year 2000 Compliance. Crossroads warrants that the Software is
Year 2000 Compliant. For the purposes of this Agreement, "Year 2000 Compliant"
shall mean that the Software will (i) accurately address, present, produce,
store and calculate data involving dates beginning with January 1, 2000 and will
not produce abnormally ending or incorrect results involving such dates as used
in any forward or regression date based function; and (ii) provide that all
date-related functionalities and data fields include the indication of century
and millennium; and will perform calculations which involve a four-digit year
field.
Notwithstanding the foregoing, OEM acknowledges and agrees that (i) the Software
does not identify or remedy Year 2000 problems in third party operating systems
or other applications not supplied by Crossroads, and (ii) the Software operates
with the date information it receives; thus, if incorrect date information is
provided by the user, the operating system, or from any other external product
or other source, this information will be used by the Software as received. The
foregoing Year 2000 Compliant warranty of Crossroads shall not apply to Year
2000 problems caused by such external sources.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to
be effective as of the date first written above.
CROSSROADS SYSTEMS, INC.
By: /s/ BARBARA C. BARDACH
------------------------------------------------------
Printed Name: Barbara C. Bardach
--------------------------------------------
Title: Vice President, Business Development
---------------------------------------------------
STORAGE TECHNOLOGY CORPORATION - NETWORK SYSTEMS GROUP
By: /s/ JOAN M. WRABETZ
------------------------------------------------------
Printed Name: Joan M. Wrabetz
--------------------------------------------
Title: Vice President, General Manager
---------------------------------------------------
17
<PAGE> 19
EXHIBIT A
OEM PRODUCT
OEM will bundle Crossroads Product with the StorageTek 9730 Tape Library.
The 9730 Library Storage Module is a rack mountable robotic tape handler capable
of accepting 1 to 4 Quantum DLT 4000 (Digital Linear Tape) cartridge tape
drives, Differential or Single Ended; or 1 to 4 DLT 7000 cartridge tape drives,
Differential or Single Ended; or a combination.
Two 9730 configurations are available, one containing 18 cartridge locations and
the other containing a maximum of 30 cartridge locations. When the fourth drive
is installed in the library two cartridge slots are lost.
Drive specifications for the DLT 4000 verses the DLT 7000 have different
nomenclature. Therefore the "N/A"s listed below may be found with a different
parameter title.
<TABLE>
<CAPTION>
PARAMETER DLT 4000 DLT 7000
--------------------------------------------------------------------------------------
<S> <C> <C>
Media CompacTape I VDLTtape IV(1.)
Cartridge Capacity
Native 20 Mbytes 35 Mbytes
Compressed 40 Mbytes 70 Mbytes
Transfer Rate
Native 1.5 Mbytes/sec 5 Mbytes/sec
Compressed 3.0 Mbytes/sec 10 Mbytes/sec
Interface SCSI-2 Fast/Narrow SCSI-2 Fast/Wide
Read/Write Tape Speed 98 in/sec 160 in/sec
Rewind Tape Speed 150 in/sec 175 in/sec
Average Rewind Time 70 sec 60 sec
Maximum Rewind Time 140 sec 120 sec
Average Multi-Track Search Time 69.6 sec N/A
Average Access(from BOT) N/A 60 sec
Maximum Access(from BOT) N/A 120 sec
Load Times (Typical) 30 N/A
Load media (& ready for 1/0)
Load to BOT (formatted) N/A 35 sec
Load to BOT (unformatted) N/A 52 sec
Unload from BOT 9 sec 17 sec
</TABLE>
StorageTek intends to support a wide range of Open System Servers and Operating
Systems with its Fibre Channel Product offering. The Operating Systems which
will be supported are:
Windows NT HPUX
AIX UNIX
The following Host Bus Adapters (along with their implicit Drivers) are being
supported:
Servers with a PCI Bus (Emulex)
SBUS with RAID Storage (Jaycor)
SBUS with non-RAID (SunPhoton)
SGI (Native SGI)
Hewlett-Packard (Native HP)
OEM will not incorporate Crossroads Product within any Product at this time.
18
<PAGE> 20
EXHIBIT B
CROSSROADS PRODUCT; HARDWARE; SOFTWARE
CROSSROADS PRODUCT
The Crossroads Fibre Channel-to-SCSI Router, CrossPoint 4100 ("CP4100"),
provides bi-directional connectivity for data transfers between a Fibre Channel
network and one SCSI bus. It translates (bridges) the SCSI protocol between the
two media types.
The Crossroads Fibre Channel-to-SCSI CP4100 Router has a single Gigabit Fibre
Channel port to connect to either a switched or FC-AL (Fibre Channel Arbitrated
Loop) network. Cabling support includes copper, multi-mode and single-mode
optical fiber cables. SCSI support includes either single-ended or differential
SCSI with automatic adjustment for narrow, wide, fast, fast/wide and Ultra SCSI.
HARDWARE
The CrossPoint 4100 is a self-contained system consisting of a power supply, a
microprocessor, several megabytes of memory, and controllers for SCSI, Fibre
Channel, 802.3 Ethernet, and a serial connection. The Hardware is comprised of:
o Chassis
o Main board with the following components:
1. Fibre Channel interface
2. GLM media interface
3. Processor, incorporating independent data buffer and program
memory spaces, and associated logic required to implement a stand
alone processing system
4. Serial port is provided for system configuration
5. SCSI interface
o Power supply
o Fan
o Final Pack-out items include:
o US Power Cord
o Manual
o Terminator
o Stick-on-Feet
o Mounting Ears
SOFTWARE
Crossroads' proprietary CP4100 software controls the protocol translation
between Fibre Channel nodes and SCSI devices. Crossroads software shall
constitute that software providing functionality as referenced in Exhibit C.
OEM VERSION OF THE PRODUCT
The OEM's version of the CP4100 will be identified by the OEM Requirements
Document and differentiated by the OEM-specific part numbers assigned thereto by
Crossroads. Such part numbers are referenced on Exhibit D.
19
<PAGE> 21
EXHIBIT C
CROSSROADS PRODUCT SPECIFICATIONS
The parties agree that Crossroads Product Specifications for the CP4100 are
already in OEM's possession and need not be attached hereto. The parties further
agree that at any given point the active Product Specifications are those with
the most recent revision date at the time in question and that such Product
Specifications will routinely be provided to OEM under Crossroads' ECN
(Engineering Change Notice) procedures. For the record, as of the date of this
Agreement, the current CP4100 Product Specification revision number is DP64116
Rev A.
The parties further agree that the Crossroads Product Specification identifies
all completed standard Agency Certifications. Should OEM require any special
additional Agency Certification, the parties agree that Crossroads will perform,
at the OEM's expense, the necessary work to obtain such Agency Certification and
provide copies of such related reports to OEM.
MTBF calculations for the CP4100 are: 94,000 hours.
The parties further agree that from time to time and by mutual agreement, the
parties may wish to add other Crossroads products to this Agreement. In each
such case, both this Exhibit C and Exhibit D must be altered to incorporate and
reflect any such agreed changes.
20
<PAGE> 22
EXHIBIT D
PRICES
Crossroads Product Prices per Unit:
CP4100 Box [Differential SCSI with Short-Wave (multi-mode) Media]:
<TABLE>
<S> <C> <C> <C>
Evaluation Units [****]
Pre-Production Units (through First Article approval) [****]
Production (Volume) Units (Calendar 1998) [****] [****] [****]
----- ----- -----
[****] [****] [****]
Changes to above: Single-Ended SCSI less $ 40
Copper Media less $175
Long-Wave (single-mode) Media plus $800
Standard Rails plus $ 38
</TABLE>
Warranty Extension: Warranty extension is a one-time selectable option (i.e.,
all CP4100 units must carry the same warranty). Above pricing includes 15-month
warranty. Warranty may be extended to a total of either option shown below by
adding one of the following to above pricing:
24-month total Warranty plus $100
36-month total Warranty plus $200
FRU Prices: No "Spare Parts" or FRUs" (Field Replaceable Units) are provided
under this Agreement.
Drop-Shipment Fees: $50/unit (FOB Crossroads); up to $100 per destination per
shipment
Product Part Number Cross-Reference List: For ease of ordering, each of the
following OEM Part #s will be associated with a single specific total price that
reflects the actual combination of the appropriate per unit prices shown above.
A price list reflecting this information will be issued on a quarterly basis.
<TABLE>
<CAPTION>
OEM Part # STK Model/Feature OEM Product Description Crossroads Part #
---------- ----------------- ----------------------- -----------------
<S> <C> <C> <C>
1. 89129980-01 SNFC311 StorageNet Fibre Channel/ AF78020
SCSI Bridge 3100 w/
SE SCSI & Copper plus Rails
2. 89129980-02 SNFC312 StorageNet Fibre Channel/ AF78021
SCSI Bridge 3100 w/
Diff SCSI & Copper plus Rails
3. 89129980-03 SNFC313 StorageNet Fibre Channel/ AF78022
SCSI Bridge 3100 w/
SE SCSI & SW Optical plus Rails
4. 89129980-04 SNFC314 StorageNet Fibre Channel/ AF78023
SCSI Bridge 3100 w/
Diff SCSI & SW Optical plus Rails
5. 89129980-05 SNFC315 StorageNet Fibre Channel/ AF78024
SCSI Bridge 3100 w/
SE SCSI & LW Optical plus Rails
</TABLE>
21
****CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN
REQUESTED WITH RESPECT TO SUCH OMITTED PORTIONS.
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
6. 89129980-06 SNFC316 StorageNet Fibre Channel/ AF78025
SCSI Bridge 3100 w/
Diff SCSI & LW Optical plus Rails
</TABLE>
22
<PAGE> 24
EXHIBIT E
TRAINING FEES: REFURBISHMENT PRICES; SPECIAL RETEST/RECONFIGURATION FEES
1. Training Fees
As of the Effective Date, Crossroads' additional training fee for
one-day on-site training is $2,000 per day plus travel and expenses.
2. Refurbishment Prices and Turn-Around Times.
As of the Effective Date, Crossroads' refurbishment prices and
turn-around times are as follows:
$1,000 per out-of-warranty unit;
three (3) business day turn-around time; and
$250 "Premium Service Fee" for one (1) business day expedited
turn-around time
The above out-of-warranty repair pricing does not include any repair to
any Crossroads Product that has been subject to fraud, tampering, unauthorized
modifications or improper servicing, unusual physical or electrical stress,
unsuitable operating or physical conditions, misuse, abuse, negligence or
accidents, and further provided, however, that the Product is not missing any
parts, and contains only genuine Crossroads parts.
Out-of-warranty repair process and pricing will be reviewed by
Crossroads and OEM on at least an annual basis.
3. Retest Fees.
As of the Effective Date, Crossroads' retest and repackaging fee for
undamaged Product under the acceptance or warranty period will be $75.
4. Reconfiguration Fees.
As of the Effective Date, Crossroads' reconfiguration fee for the
CP4100 will be $225 plus any required parts.
23
<PAGE> 25
EXHIBIT F
FORECAST & ORDER FLEXIBILITY
1. Forecast Adjustments. Orders placed by OEM will reflect its regular forecasts
submitted under Section 3. When such regular forecasts are increased
month-to-month by more than 25% within the closest 90-day period, OEM and
Crossroads will work together to ensure that Crossroads is prepared to support
such increases.
2. Order Lead-time. The following schedule is applicable to OEM's orders that
are placed on a regular monthly basis in accordance with Section 3. In all other
cases, order lead-time remains sixty (60) days.
a. OEM's initial monthly purchase order for each Crossroads Product
hereunder ("Initial Purchase Order") will be placed sixty (60) days in advance
of requested delivery.
b. Subsequent consecutive purchase orders for such Crossroads Product
placed during the next three months (3) months after the Initial Purchase Order
must be submitted to Crossroads by OEM at least forty-five (45) days in advance
of OEM's requested ship date.
c. Thereafter, all purchase orders for such Crossroads Product shall be
submitted to Crossroads by OEM at least thirty (30) days in advance of OEM's
requested ship date.
3. Order Adjustments. OEM may increase or decrease the number of units of
Crossroads Product ordered in a purchase order hereunder only as provided below
and only upon providing Crossroads with prior written notice pursuant to the
schedule set forth below. Such adjustment schedule is expressly conditioned upon
OEM meeting the lead-time requirements above and not adjusting any monthly
forecast hereunder more than twenty-five percept (25%) month to month. OEM has
the right to cancel any unshipped order that will be delivered more than 30 days
late unless otherwise agreed in writing with Crossroads.
<TABLE>
<CAPTION>
Number of Months Commencing
after the month of OEM's Initial Written Notice Received Prior % %
Purchase Order to Scheduled Delivery Date Increase Decrease
- -------------------------------- ----------------------------- -------- --------
<S> <C> <C> <C>
Months 1-3 45-60 days + 25% -50%
61-120 days + 50% -100%
>120 days +100%
Month 4+ 20-30 days + 25% -50%
31-60 days + 50% -100%
>60 days +100%
</TABLE>
4. Reschedules: OEM may reschedule a purchase order hereunder only as provided
in Section 3.6 of this Agreement and only upon providing Crossroads with prior
written notice of the rescheduled delivery date pursuant to the schedule set
forth below:
Months 1-3 28 days written notice prior to the scheduled ship date
Month 4+ 14 days written notice prior to the scheduled ship date
24
<PAGE> 26
EXHIBIT G
RETURN MATERIAL PROCEDURE
Crossroads' Customer Service Repair (CSR) is available for in- and
out-of-warranty repair of our products as well as special rework and
reconfiguration requests. All repairs will be made at the applicable Crossroads
out-source manufacturer's site. Failure analysis can be performed on CSR
repaired/replaced product upon request. A Crossroads Customer Quality Engineer
is available to address questions and concerns about failed Product.
RMA Process
OEM will contact their Crossroads Account Manager to initiate a request for
return of any Product. An RMA (Return Material Authorization) number must be
issued by Crossroads prior to any product, including DOAs, being returned by
OEM.
Typically, the Crossroads Account Manager will issue a Return Material
Authorization (RMA) number to the OEM within one (1) business day receipt of the
of the request. Under certain circumstances, advance replacement of units is
possible using a pre-agreed upon bank of RMA (return material authorization)
numbers. The Account Manager will also notify Order Administration of the RMA
number and terms of replacement.
The OEM's RMA request must include the following:
Unit Model Number (OEM's and/or Crossroads')
Unit Serial Number
Description of Failure (if known; must specify if request for RMA is for DOA)
Quantity to Return
Ship-to and Bill-to Address
Debit Amount, if Applicable (must specify Purchase Order against which to
apply)
OEM Contact Name and Telephone Number
Any Special Requests (including rework or expedite, etc.)
Return of Product to Crossroads
In all cases, the RMA number must be clearly visible on the shipping box and the
packing slip. All shipments should be sent to the following address:
Crossroads Customer Service Repair
RMA #
c/o Xetel Corporation
2105 Gracy Farms Lane
Austin, Texas 78758
DOA Product
New Build product that fails during a specified time frame (acceptance period)
is considered to be DOA Product. Such acceptance failures (DOAs) may require
verification by a Crossroads Field Applications Engineer prior to issuance of an
RMA. DOA Product return and replacement will be handled according to the OEM
Agreement.
Failed Product
All non-DOA defective Product must be returned to Crossroads within ten (10)
business days of issuance of the RMA.
25
<PAGE> 27
CSR RMA Procedure cont'd
Repair Turnaround Time
Crossroads maintains a buffer of repaired product in order to support an advance
replacement of Failed Product within three (3) business days or less of issuance
of an RMA. Crossroads may repair or replace the Failed Product with either new
or refurbished product. Replaced Product for which the OEM does not return the
Failed Product within ten (10) business days after issuance of the RMA, will be
invoiced at the full current value of the Product.
Expedited Replacements
To ensure minimal downtime, OEM and Crossroads plan to each hold a reasonable
number of replacement units in inventory for quick advance fulfillment of Failed
Product. In the event that the OEM does not have a replacement unit in stock for
a failed product, a priority shipment from Crossroads' stock may be requested,
for a special expedite fee, to be made within one (1) business day.
Repair Warranty
Crossroads warrants the repaired or replaced product for the greater of either:
a period of ninety (90) days after return of repaired or replaced product to
OEM; or, the remaining warranty period of the original product that was
requested to be repaired or replaced.
Freight Costs
DOA: Crossroads specifies carrier and pays freight/insurance both
ways.
In-Warranty: OEM specifies in-bound carrier and pays associated
freight/insurance; Crossroads specifies return carrier and
pays associated freight/insurance.
Out-of-Warranty: OEM specifies carrier and pays freight/insurance both ways.
Expedite Fees: OEM pays all expedite fees.
RMA Request Form
A copy of Crossroads' RMA Request Form is available from your Crossroads Account
Manager.
26
<PAGE> 28
EXHIBIT H
AUTHORIZED PURCHASERS
There are no Authorized Purchasers other than OEM who may purchase Crossroads
Product under this Agreement.
27
<PAGE> 29
EXHIBIT I
PRODUCT QUALITY/RELIABILITY
Overall Product Reliability Performance
Crossroads agrees to ensure that over an assumed five (5) year useful life the
Product purchased by OEM under this Agreement meets the reliability standards
(based on FRU Life) set forth in the Reliability Standards section below. If
over an assumed five (5) year life, the Product fails to meet the reliability
standards by more than fifteen percent (15%), then Crossroads shall use its
best efforts to implement a corrective action plan as defined in the Reliability
Standards section below and will deliver engineering change orders free of
charge to OEM in order to achieve such reliability standards.
Decisions of non-compliance shall be statistical based. Population sampling
shall be random. Statistical tests for non-compliance shall involve hypothesis
testing with a probability level of 0.05 for rejection statements of the null
hypothesis. In statistical terms the null hypothesis is that the product equals
the reliability standards with the adjustment described elsewhere within this
document. The alternate hypothesis is that the product performance is worse than
the reliability standards with the described adjustment.
In addition, if such failure (i.e., over the said 15% limit) causes additional
service requirements on the part of OEM over and above those assumed in the
Specifications, then Crossroads shall provide OEM with a credit against any
account receivable due from OEM pursuant to this Agreement (or, if no such
account receivable is then due, OEM shall have the right to offset against
future purchase order amounts). The credit shall be one (1) hour of OEM's then
current fully burdened hourly cost for technical support for each service call
that is required over those contemplated by those standards set out in the
Reliability Standards section below. OEM's current fully burdened hourly cost is
$150.
Actual performance against the performance standards set forth in the
reliability specifications in the Reliability Standards section below will be
reviewed on a quarterly basis using statistical control charting techniques
unless OEM requests a monthly review. Data from a control chart shall be used
within a hypothesis test to assess unsatisfactory common cause performance.
Unsatisfactory special cause issues identified from a control chart will be
reported to Crossroads for improvement plans. To the extent that failures have
exceeded this standard using statistical analysis techniques, it will be the
responsibility of OEM to initiate discussion with Crossroads concerning
improvements in the actual performance, and at OEM's option, any firm orders not
yet Delivered may be deferred or canceled until such standards have been met.
Notwithstanding the above procedure, if the warranty claims begin to escalate
such that OEM has discovered a failure trend using statistical analysis
technique, Crossroads agrees to work with OEM to promptly validate such a trend
and implement a corrective action plan, including mandatory changes in the field
population. To assist Crossroads with its efforts for continual improvement and
issue investigation, OEM agrees to supply the data, control charts, and Pareto
analysis of failure types resulting from all quarterly or monthly reviews even
though the criterion is not exceeded. Crossroads might be able to identify from
this information opportunities for improvement that would make product
performance even better.
Epidemic Failures
In the event that OEM has a statistically valid reason to believe that any
Product or Spare Parts contain one or more Epidemic Failure Defects, OEM shall
promptly give Crossroads written notice of all relevant details with respect to
such potential Epidemic Failure Defect or Defects. If, after joint
investigation, it is determined that such defect is an Epidemic Failure Defect,
then Crossroads shall reimburse OEM for the cost, if any, of providing repaired
or replacement Spare Parts from the lot or lots subject to the defect. In
addition, Crossroads shall, at its option, either:
1. to the extent necessary to meet OEM's requirements for field
replacement and inventory
28
<PAGE> 30
renewal, exchange the Spare Parts from the lot or lots subject to the
defect or, if not practicable, the Product containing the Epidemic
Failure Defects for new Spare Parts or Product; or
2. repair all Epidemic Failure Defects at Crossroads' cost; or
3. accept return of the Spare Parts, or, if not practicable, the Product
with Epidemic Failure Defects and grant OEM credit for such Spare
Parts or Product, as the case may be, as depreciated on the basis of a
straight-line depreciation schedule based on a life expectancy of
sixty (60) months.
In addition, if OEM has supplied any labor to install any exchange or
replacement Spare Parts to Units already delivered, then Crossroads shall
provide OEM with a credit against any account receivable due from OEM pursuant
to this Agreement (or if no such account receivable is due, OEM shall have the
right to offset against future purchase order amounts). The credit shall be one
(1) hour of OEM's then current fully burdened hourly cost for technical support
for each service call that is required over those contemplated by those
standards set out in the Reliability Standards section below. OEM's current
fully burdened hourly cost is $150. At OEM's option, any firm orders not yet
Delivered may be deferred or canceled until such standards have been met.
Notwithstanding the above procedure, if the warranty claims begin to escalate
such that OEM reasonably believes that it has discovered a failure trend,
Crossroads agrees to work with OEM to promptly validate such a trend and
implement a corrective action plan, including mandatory engineering changes in
the field population.
Reliability Standards
The FRU life of Crossroads Product shall comply to the requirements specified in
the following table:
<TABLE>
<CAPTION>
OEM'S Part Crossroads FRU LIFE
Number Product FITS MTBF (in years)
----------- ---------- ------ ---- ----------
<S> <C> <C> <C> <C>
89129980-01 CP4100-SC 10,638 94,000 10.7
89129980-02 CP4100-DC 10,638 94,000 10.7
89129980-03 CP4100-SF 10,638 94,000 10.7
89129980-04 CP4100-DF 10,638 94,000 10.7
89129980-05 CP4100-SL 10,638 94,000 10.7
89129980-06 CP4100-DL 10,638 94,000 10.7
</TABLE>
The following table specifies the FRU life for OEM's product Model Feature
combination based upon the reliability standard specified above.
FRU Life per Model/Feature Combination
<TABLE>
<CAPTION>
Total FRU LIFE
Model Fits MTBF (in years)
------- ------ ------ ----------
<S> <C> <C> <C>
SNFC311 10,638 94,000 10.7
SNFC312 10,638 94,000 10.7
SNFC313 10,638 94,000 10.7
SNFC314 10,638 94,000 10.7
SNFC315 10,638 94,000 10.7
SNFC316 10,638 94,000 10.7
</TABLE>
The above Mean Time Between Failure (MTBF) calculations are based upon an
industry standard method such as Bellcore, MIL-STD-217, etc., which demonstrate
compliance with the reliability standards. For purposes of this Appendix, the
MTBF calculations are based upon an ambient temperature of 40 degrees C.
If the Product purchased by OEM under this Agreement fails to meet the
reliability standards (based on FRU Life) set forth in this Appendix and based
on the terms of Section 21 of this Agreement, then Crossroads shall use its best
efforts to implement a corrective action plan which shall include elements
29
<PAGE> 31
which are substantially equivalent to the following:
o a list of RCI (Reliability Critical Items) which identify major
reliability risk components or assemblies based on the following criteria:
1. Single Source Parts
2. New Technology (i.e. new processing methodology, unproven design,
immature technology, etc.)
3. Custom components (ASICs, etc.)
4. Poor quality/reliability history
5. Tight design/operating margin (i.e. possible timing problems due to
thermal or other influences)
o a plan to identify alternatives and risk reduction methods related to RCI
items.
o the following evaluative testing:
1. Design verification test (DVT) both hardware and software (voltage and
timing margins, data stress tests, normal operating temperature
testing)
2. Accelerated life testing (HALT) - design limits, thermal ramping,
elevated vibration and temperature
3. Mechanical testing (fragility, packaging, acoustics; altitude/humidity
if required)
4. Environmental stress screen (ESS) determination and thermal evaluation
for hot spots and lack of cooling. Parameters for manufacturing
burn-in of all units determined.
o resolution of all deficiencies uncovered by the evaluation tests.
o a closed loop corrective action system to provide:
1. Failure tracking and resolution
2. Data retrieval to determine field performance and MTBF
3. Trend analysis for defective parts or symptoms of design deficiency
30
<PAGE> 1
EXHIBIT 10.6
BASIC LEASE INFORMATION
The following Basic Information is incorporated into and made a part of this
lease. Each reference in this lease to any of the Basic Lease Information shall
mean the respective information set forth below and shall be construed to
incorporate all of the terms provided under the particular lease paragraph(s)
pertaining to such information. In the event of a conflict between any Basic
Lease Information and the lease, the lease shall control.
IDENTIFICATION DATE OF LEASE: 02/28/97
X
____ New _____ Renewal _____ Expansion _____ Other
1. NAME OF BUILDING: Kaleido II
__________
ADDRESS: 9390 Research Boulevard/Austin, TX 78759
________________________________________
2. OWNER/LESSOR: Eurus Estates II, Ltd.
______________________
ADDRESS: 7200 North Mopac #420/Austin, TX 78731
______________________________________
3. SUITE NUMBER: II-300
______
4. USABLE SF: 7,121 ADD-ON FACTOR: 22.73% RENTABLE SF: 8,739
_____ ______ _____
TOTAL BLDG. SF: 73,149 PRO RATA SHARE: 11.95%
______ _______
5. LESSEE NAME: Crossroads Systems, Inc.
_________________________
a) Lessee is a corporation
b) Lessee Address for Notice:
9390 Research Boulevard, Suite II-300/Austin, TX 78759
_______________________________________________________
c) Lessee Contact Person: _____________________________
Phone: ______________________________ Fax: ______________________________
d) Lessee Taxpayer ID#: __________________________________________________
SS#: ___________________________ DL#/State: ________________________
6. LEASE TERM: Sixty (60) full calendar months
Commencement Date: 05/01/97 Expiration Date: 04/30/02
________ ________
Rent and Pass Thru Commencement Date: 05/01/97 Expiration Date: 04/30/02
________ ________
<TABLE>
<CAPTION>
7. BASE RENT: TERM MONTHLY RENT ANNUAL RENT ANNUAL RENT psf OF NRA
____ ____________ ___________ ______________________
<S> <C> <C> <C> <C>
From 05/01/97 To 04/30/98 $13,108.50 $157,302.00 $18.00
From 05/01/98 To 04/30/99 $13,472.63 $161,671.56 $18.50
From 05/01/99 To 04/30/00 $13,836.75 $166,041.00 $19.00
From 05/01/00 To 04/30/01 $14,200.88 $170,410.56 $19.50
From 05/01/01 To 04/30/02 $14,565.00 $174,780.00 $20.00
</TABLE>
Late Charge: 5% of monthly base rent.
________________________
Date assessed: Five (5) days after due date.
_____________________________
8. EXPENSE STOP: $7.38 per square foot per year
________
a) Estimated Operating Expenses Per Budget $7.38 /sq.ft./year
__________________
b) Less Expense Stop $7.38 /sq.ft./year
__________________
c) Estimated Initial Pass-Thru $0.00 /sq.ft./year
__________________
d) Estimated Monthly Pass-Thru (actual) $0.00 /mo
(Subject to annual adjustment for actual expenses) __________________
9. PARKING: Number of Spaces: N/A (reserved) Rate Per Space $N/A /month reserved
___ ___
Number of Spaces: (unreserved) Rate Per Space $0.00 /month unreserved
_____ ____
10. SECURITY DEPOSIT: a) Amount: $14,565.00 (last month's rent)
__________
b) Paid by Cash: X Yes No
_______ ______
11. TENANT FINISH OUT PROVISIONS:
a)
b) $5.00 /sq.ft. of net USABLE area allowance
____
c) $35,605.00 allowance (actual amount)
_________
d) Amount of overage owed by Tenant $ Payment Schedule:
_________ __________
e) Notes: SEE EXHIBIT E.
12. SPECIAL CONDITIONS (EXHIBIT J)
a) Current Financials received: Yes No
______ ______
Credit Report received: Yes No
______ ______
OT HVAC charge: X Yes No $10.00 / hour
______ ______ ______
b) Other/Notes: RIGHT TO TERMINATE (SEE EXHIBIT J). OPTION FOR ADDITIONAL
SPACE (SEE EXHIBIT M).
Lessor DT
-----------
Lessee BRS
-----------
Page 1 of 2
<PAGE> 2
BASIC LEASE INFORMATION FOR CROSSROADS SYSTEMS, INC.
13. GUARANTY INFORMATION
This lease ( ) is (X) is not (check one) guaranteed by others. The name
and title of each guarantor is shown below a and on the signature page(s)
at the end of this lease.
14. LESSEE SIGNATURE REQUIREMENTS
Lessee is ( ) an individual(s), ( ) several individuals, ( ) a general
partnership, ( ) a limited partnership, ( ) a joint venture, ( ) an
unincorporated association, ( ) a professional association, ( ) sole
proprietorship, or (X) a corporation (check one).
Such partnership, joint venture, unincorporated association, or corporation
is organized or chartered under the laws of the State of TEXAS.
_____
Lessee's name stated at the beginning of this lease ( ) is or ( ) is not
an assumed name. If so, has an assumed name certificate name been received?
Yes No
______ ______
15. BROKER INFORMATION:
a) Listing Broker: Steve McMillon & Don Barr/ The Kucera Company
______________________________________________
b) Leasing Co-Broker and Company: Steve McMillon/The Kucera Company
_________________________________
c) Tenant Rep letter attached: Yes No
_____ _____
d) Written agreement for renewal commission: Yes No %
_____ _____ _____
16. SIGNATURES:
LESSOR LESSEE
Eurus Estates II, Ltd. Crossroads Systems, Inc.
----------------------------------- ----------------------------------
Printed name of company or firm Printed name of company or firm
Don Tait, CPM Brian Smith
----------------------------------- ----------------------------------
Printed name of person signing Printed name of person signing
/s/ DON TAIT /s/ BRIAN SMITH
----------------------------------- ----------------------------------
Authorized Person's Signature Authorized Person's Signature
Vice President, Kucera Management, Inc.
Authorized Managing Agent for
Eurus Estates II, Ltd. President
----------------------------------- ----------------------------------
Title of person signing Title of person signing
March 31, 1997 March 3, 1997
----------------------------------- ----------------------------------
Date signed (must be filled in) Date signed (must be filled in)
Page 2 of 2
Lessor DT
----------
Lessee BRS
----------
<PAGE> 3
INDEX TO OFFICE LEASE
EURUS ESTATES 11, LTD. (Lessor) and
CROSSROADS SYSTEMS, INC. (Lessee)
<TABLE>
<CAPTION>
SECTION TITLE Lease Page
<S> <C> <C>
1.1. The leased premises .............................. 3
1.2. Use .............................................. 3
1.3. Usable area ...................................... 3
1.4. Rentable area .................................... 3
2.1. Base rent and additional rents ................... 3
3.1. Date and place of payment ........................ 3
3.2. Late payments .................................... 4
3.3. Security deposit ................................. 4
4.1. Term, commencement, and anniversary .............. 4
4.2. Acknowledgment of lease .......................... 4
4.3. Delivery of possession ........................... 4
5.1. Tenant finish-out ................................ 5
6.1. Quiet possession ................................. 5
7.1. Utilities and services by Lessor ................. 5
7.2. Utilities and services by Lessee ................. 5
7.3. Interruption of utilities or services ............ 5
7.4. Extra electricity ................................ 5
7.5. Extra heating or air conditioning ................ 6
8.1. Maintenance and repairs by Lessor ................ 6
8.2. Maintenance and repairs by Lessee ................ 6
8.3. Telecommunications ............................... 6
9.1. Access, keys, locks, and security ................ 6
9.2. Parking .......................................... 7
10.1. Occupancy, nuisance, and hazards ................. 7
11.1. Taxes ............................................ 7
12.1. Insurance ........................................ 7
12.2. Waiver of subrogation ............................ 8
12.3. Hold harmless .................................... 8
13.1. Alterations by Lessee ............................ 8
13.2. Americans with Disabilities Act .................. 9
14.1. Removal of property by Lessee .................... 9
15.1. Subletting and assignment ........................ 9
16.1. Destruction by fire or other casualty ............ 9
17.1. Condemnation . ................................... 10
18.1. Default by Lessor ................................ 10
19.1. Default by Lessee ................................ 10
20.1. Lien for rent .................................... 12
21.1. Attorney's fees, interest, and other expenses .... 12
22.1. Nonwaiver ........................................ 12
23.1. Building rules ................................... 12
24.1. Transfer of ownership by Lessor .................. 13
25.1. Mortgages ........................................ 13
26.1. Surrender of premises ............................ 13
27.1. Holding over ..................................... 13
28.1. Signs and building name .......................... 13
28.2. Relocation of Lessee ............................. 13
29.1. Notices .......................................... 14
30.1. Estoppel certificates ............................ 14
</TABLE>
Page 1
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 4
<TABLE>
<S> <C> <C>
31.1. Successors .............................................................................................. 14
31.2. Leasing agent commissions ............................................................................... 14
32.1. Building operating expense .............................................................................. 14
33.1. Representations and warranties by lessor ................................................................ 14
34.1. Representations and warranties by lessee ................................................................ 14
35.1. Place of performance .................................................................................... 15
36.1. Miscellaneous ........................................................................................... 15
37.1. Special conditions ...................................................................................... 15
38.1. Exhibit list ............................................................................................ 15
39.1. Lease dates and authority to sign ....................................................................... 16
</TABLE>
<TABLE>
<CAPTION>
Exhibit Page
<S> <C> <C>
Exhibit A Floor Plan of Lessee's Office Space (paragraph 1.1.) ........................................... 18
Exhibit B Legal Description of Office Building (paragraph 1.1.) .......................................... 19
Exhibit C Building Operating Expense Passthrough Calculations (paragraphs 2.1. and 32.1.) ................ 20
Exhibit D Acknowledgment of Lease (paragraph 4.2.) ....................................................... 22
Exhibit E Construction by Lessor (paragraph 5.1.) ........................................................ 24
Exhibit F-1 Office Building Parking Rules (paragraph 9.2.) ................................................. 25
Exhibit F-2 Office Building Rules (paragraphs 9.2. and 23.1.) .............................................. 26
Exhibit G Estoppel Certificate (paragraph 30.1.) ......................................................... 29
Exhibit H Office Lease Guaranty (paragraph 37.1.) ........................................................ 31
Exhibit I Certificate of Corporate Resolution Authorizing Lease or Guaranty (paragraphs 37.1 & 39.1) ..... 33
Exhibit J Special Conditions (paragraph 37.2.) ........................................................... 34
Financial Statement Requirement
Exhibit K Hazardous Materials Statement .................................................................. 35
Exhibit L Acknowledgment of Receipt of Agency Disclosure ................................................. 36
EXHIBIT M OPTION FOR ADDITIONAL SPACE .................................................................... 37
</TABLE>
Page 2
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 5
OFFICE LEASE
KALEIDO II
This is a Lease Agreement made and entered into between Lessor Name Specified in
Basic Lease Information #2, as "Lessor", and Lessee Name Specified in Basic
Lease Information #5, as "Lessee", whether one or more.
1.1. THE LEASED PREMISES. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor the "Leased Premises" which consists of "Lessee's Office
Space" and "Common Areas" as defined below.
(a) LESSEE'S OFFICE SPACE. "Lessee's Office Space", to which Lessee shall have
exclusive use rights, consists of suite(s) Specified in Basic Lease Information
#3, representing the office space outlined and shaded on the floor plan
contained in Exhibit A. Such space is located in the building on a tract of
land, legally described by lot and block or metes and bounds in Exhibit B. The
street address of the building is Specified in Basic Lease Information #1.
(b) COMMON AREAS. The "common area", to which Lessee shall have non-exclusive
use rights, consists of (1) the interior common area located in the above
described building, i.e., areas normally accessible to tenants such as the
hallways, stairwells, elevators, lobby, restrooms, and snack bar areas, and (2)
the exterior common area located outside the building on the above described
land, i.e., loading areas, sidewalks, driveways, parking garage, parking areas,
and other open areas (if any), subject to paragraph 9.2 on parking.
1.2. USE. Lessee's office space may be used only for general office purposes.
The name of Lessee's business is Specified in Basic Lease Information #5.
1.3. USABLE AREA. Lessee's approximate "usable area" is Specified in Basic Lease
Information #4. It is the office space outlined and shaded in Exhibit A. Such
area is measured from the interior of the exterior walls and the exterior glass
lines of the building to the middle of the remaining perimeter walls of the
office space. This is in accordance with the BOMA International Standard of
Floor Measurement.
1.4. RENTABLE AREA. Lessee's approximate "rentable area" is Specified in Basic
Lease Information #4. It consists of Lessee's "usable area" as defined above,
plus Lessee's prorata share of the building common areas as set forth in Basic
Lease Information #4. Building common areas are defined as all corridors,
restrooms, snack bars, building equipment rooms, telephone closets, janitor
closets, enclosed lobby, entrance areas, and other public areas in the building,
excluding elevator shafts, stairwells, vertical chases, and enclosed parking
areas. This is in accordance with the BOMA International Standard of Floor
Measurement.
2.1. BASE RENT AND ADDITIONAL RENTS. Lessee shall pay to Lessor a "base rent"
Specified in Basic Lease Information #7 per calendar year, which amounts to the
sum(s) Specified in Basic Lease Information #7 per calendar month. Such base
rent is equivalent to the sums Specified in Basic Lease Information #7 per
square foot per year for Lessee's rentable area. The base rent is subject to
adjustment as provided in paragraph 32.1. Additional rent (representing
Lessee's prorata share of building operating expenses over the expense stop
Specified in Basic Lease Information #8 shall be paid in accordance with
paragraph 32.1. Building operating expenses up to such expense stop amount
shall be paid by Lessor.
3.1. DATE AND PLACE OF PAYMENT. The monthly rent and one-twelfth of Lessee's
share of estimated building operating expenses under paragraph 32.1 shall be due
on the first day of each calendar month without demand. Partial months shall be
prorated. All rent and other sums are due in the county where the building is
located at the address designated by Lessor from time to time. All sums due by
Lessee are without right of setoff or deduction. Monies mailed are considered
timely paid only if received by Lessor by the due date; however rents
Page 3
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 6
postmarked one or more days before due date and received after the due date
shall be considered as timely received by Lessor. Rent and late payment charges
shall be paid without notice or demand. All other sums shall be due upon
delivery of written notice in accordance with paragraph 29.1.
3.2. LATE PAYMENTS. If any rent payment or other sum due by Lessee to Lessor is
received and accepted by Lessor later than five (5) days after its due date,
Lessee shall pay a late charge of 5% of such rent payment or other sum plus 1%
thereof for each day thereafter (for up to 15 days) until such rent or other sum
is paid. Late charges shall be considered liquidated damages for Lessor's time
inconvenience and overhead (except for attorneys fees and litigation costs) in
collecting late rent. Lessor's acceptance of late rent or other sum shall not
constitute permission for Lessee to pay the rent or other sum late thereafter
and shall not constitute a waiver of Lessor's remedies for subsequent late
payments. Late payment charges are due immediately upon notice or demand. All
payments shall be by check or money order on a local bank, not cash. For each
returned check, Lessee shall pay all applicable bank charges incurred by Lessor
plus $50.00. Payments of any kind received by Lessor on behalf of Lessee may be
applied at Lessor's option to nonrent items first, then to rent. Payment of rent
by Lessee shall be an independent covenant. If Lessee has not timely paid
rentals and other sums due on two or more occasions, or if a check from Lessee
is returned for insufficient funds or no account, Lessor may for the next 12
months require that all rent and other sums due be paid by cashier's check,
certified check, or money order, without prior notice.
3.3. SECURITY DEPOSIT. At the time of execution of this lease, Lessee shall
deposit with Lessor cash in the sum Specified in Basic Lease Information #10 to
secure performance of Lessee's obligations under this lease. Lessor shall have a
lien on the security deposit for that purpose. If Lessee fails to pay rent or
other sums when due under this lease, Lessor may apply any cash security deposit
toward amounts due and unpaid by Lessee. In lieu of a cash security deposit,
Lessee may furnish Lessor at time of execution of this lease an irrevocable
letter of credit in the sum Specified in Basic Lease Information #10-c on a
financial institution in Austin, Texas, expiring no sooner than the lease
expiration date. Lessor may draw against such letter of credit by affidavit
stating the amount due and unpaid by Lessee and the nature of Lessee's default
under this lease. If the letter of credit is not renewed or extended 30 days
before its expiration date, Lessor may by affidavit draw down the entire amount
to serve as a cash security deposit. Lessee shall immediately restore the
security deposit to its original amount after any portion of it is applied to
amounts due and unpaid by Lessee.
4.1. TERM, POSSESSION, AND ANNIVERSARY. The initial lease term shall be for the
number of full calendar months from commencement date, plus the remainder of the
last month. The commencement date of this lease shall be the earlier of (a) the
date Specified in Basic Lease Information #6, (b) the date Lessee opens for
business in Lessee's office space, or (c) five (5) days after Lessor delivers
possession of Lessor's office space to Lessee and gives Lessee written notice
that Lessor's work (as described in Exhibit E) is substantially complete.
Lessor's anticipated delivery date of possession is May 1, 1997. If Lessor
delays in delivering possession of Lessee's office space as shown on Exhibit A,
the commencement and anniversary dates shall be delayed in accordance with
Exhibit D.
4.2. ACKNOWLEDGMENT OF LEASE. Upon commencement of this lease, Lessor and
Lessee shall execute a recordable acknowledgment of this lease which is
attached as Exhibit D and which will confirm the commencement date, ending
date, annual anniversary date of the lease, and approximate square footage in
Lessee's office space.
4.3. DELIVERY OF POSSESSION. Lessor shall deliver keys and/or access cards or
codes and possession of Lessee's office space to Lessee on the lease
commencement date stated in paragraph 4.1 unless otherwise agreed in writing by
the parties. Lessee shall not be liable for rent until Lessor delivers
possession of the leased premises to Lessee. If there is a delay in delivery of
possession, rent shall be abated until Lessee's office space is ready for
occupancy; and neither Lessor nor Lessor's agents shall otherwise be liable for
any damages; and the lease shall not terminate. Internal construction shall, to
the extent "readily achievable", comply with state and federal architectural
barrier standards.
Page 4
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 7
5.1. TENANT FINISH-OUT. (Check one):
[ ] (a) Lessor shall provide no tenant finish-out or improvements
since Lessee has taken Lessee's office space "as is".
[X] (b) Lessor shall perform any special construction described in
Exhibit E. Costs of tenant finish-out or special construction
shall be paid for pursuant to such exhibit.
6.1. QUIET POSSESSION. If Lessee is current and in compliance with all of
Lessee's obligations under this lease, Lessee shall be entitled to peaceful and
quiet possession and enjoyment of Lessee's office space, subject to the terms
and conditions of this lease. Lessee shall have access to the building parking
garage, if applicable and common parking areas at all times, subject to parking
fees and the rules referred to in paragraphs 9.2 and 23.1. Lessor shall make
diligent efforts to have all other tenants in the building comply with building
rules. Otherwise, failure of other tenants to comply with such rules shall not
be considered a default by Lessor. Construction noise or vibrations shall not be
considered a default by Lessor.
7.1. UTILITIES AND SERVICES BY LESSOR. Except where otherwise stated in this
lease, Lessor shall pay for and furnish in a timely and diligent manner to
Lessee the following utilities (subject to Lessee being required to pay for same
directly to the utility provider) and services and no others, subject to
paragraph 32.1 regarding Lessee's payment of Lessee's prorata share of building
operating expenses.
(a) air conditioning and heating as reasonably required for comfortable use and
occupancy under normal office conditions from 7:00 a.m. to 6:00 p.m. on
Monday through Friday, and from 8:00 a.m. to 12:00 p.m. on Saturday, but
not on Sunday, New Year's Day, Memorial Day, July 4th, Labor Day,
Thanksgiving or Christmas so long as these times and dates comply with
present and future governmental laws or guidelines, including utilities
such as electricity, gas, and water necessary for operation of same;
(b) water and wastewater services for common areas;
(c) janitorial and cleaning services for the building five days a week;
(d) electricity for standard office equipment and lighting;
(e) trash collection services (dumpster or garbage cans);
(f) pest control services as needed in the reasonable judgment of Lessor;
(g) landscaping and parking lot maintenance services;
(h) repair and maintenance services pursuant to paragraph 8.1;
(i) replacement of fluorescent light bulbs and ballasts in building standard
lighting fixtures (but not incandescent light bulbs for nonstandard
fixtures or for Lessee's lamps); and
(j) elevator service, if there is an elevator in the building.
7.2. UTILITIES AND SERVICES BY LESSEE. If applicable, Lessee shall pay for all
utilities and services not expressly furnished by Lessor under paragraph 7.1.
Lessee shall pay for all electricity consumed through any individual electrical
meter(s) or submeter(s) serving Lessee's office space. Costs of such utilities
are not considered building operating expenses to be allocated among all tenants
under paragraph 32.1. Service through individual electrical meters which
exclusively serve Lessee's office space shall be in the name of Lessee. Lessor
reserves the right to submeter electricity and/or water. Any electricity or
water submetering shall be billed to and paid by Lessee at Lessor's average cost
per KWH or gallon, and no more. If the water bill from the utility company
includes wastewater charges, Lessee's liability for water submetering shall
include corresponding wastewater costs (if any).
7.3. INTERRUPTION OF UTILITIES OR SERVICES. Temporary interruption or
malfunction of utilities, services, and/or telephones shall not render Lessor
liable for damages, rent abatements, or release of any Lessee obligation. Lessor
shall use diligent efforts to have such utilities and services restored as soon
as reasonably possible.
7.4. EXTRA ELECTRICITY. There shall be no extra electricity charges for
typewriters, facsimile machines, word processors, dictating equipment, adding
machines, desk top calculators, lamps, or other standard 110 volt office
Page 5
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 8
equipment. However, Lessee shall pay Lessor monthly, as billed, for charges
which are separately metered or which Lessor may reasonably compute for
electricity utilized by Lessee for the following purposes: x-ray machines,
hotplates, electric heaters, 220 volt equipment, computers (other than desktop
or word processor computers), or other electrical service not standard for the
building.
7.5. EXTRA HEATING OR AIR CONDITIONING. If Lessee requests air conditioning or
heating after the hours as set forth in paragraph 7.1 (a), Lessor may charge
Lessee the same extra hourly fee charged by Lessor for after-hour air
conditioning or heating to other tenants in the building.
8.1. MAINTENANCE AND REPAIRS BY LESSOR. Lessor shall repair and/or replace, as
needed, the following items as a building expense under paragraph 32.1, so long
as they are building standard items: light bulbs, ballasts, and fixtures;
plumbing; hardware; appliances; doors; and wall and window coverings. Lessor
shall use diligence to provide for the reasonable cleaning, maintenance, repair,
reconnection of interrupted utilities or services, and landscaping of common
areas, subject to any reimbursement obligations of Lessee under paragraph 8.2.
Lessor may rekey at any time. Lessor may temporarily close any part of the
common facilities if reasonably necessary for repairs or construction. Repairs
and maintenance shall be in accordance with applicable governmental
requirements.
8.2. MAINTENANCE AND REPAIRS BY LESSEE. Lessee shall promptly reimburse Lessor
for the cost of repairing or replacing non-building standard items and the cost
of repairing or replacing damage which is caused inside Lessee's office space by
Lessee, Lessee's agents, employees, family, or licensees, invitees, visitors, or
customers or outside Lessee's office space by Lessee or Lessee's employee's,
agents, or contractors. Cost of repair shall include 5% for supervision fee.
Lessor may require advance payment therefor prior to repair or replacement.
Lessor shall have right of approval of all repairmen or maintenance personnel.
Lessee shall not damage or allow other persons listed above to damage any
portion of the leased premises. Lessee shall pay for replacement of all
nonbuilding standard light bulbs and for unstopping any drains or water closets
in Lessee's office space. If Lessee or Lessee's workmen or contractors are
permitted to repair, alter, or modify Lessee's office space, Lessee shall
warrant that no mechanic or materialman's lien shall be filed against the leased
premises and that all such contractors shall provide evidence of liability
insurance as required by Lessor. All such work shall be in accordance with
applicable governmental requirements.
8.3. TELECOMMUNICATIONS. All telecommunications equipment necessary to serve
Lessee shall be located in Lessee's office space and paid for by Lessee, or, at
Lessor's option and at Lessee's expense, in a lockable enclosure in a common
area location designated by Lessor. Lessee may not require Lessor to install or
allow others to install telecommunication lines or equipment elsewhere in the
building. Lessee expressly waives any rights to require same under any
circumstances.
9.1. ACCESS, KEYS, LOCKS, AND SECURITY. (a) Access. Lessee shall have access to
Lessee's office space at all times. Lessor shall have access to Lessee's office
space at reasonable times for reasonable business purposes upon prior notice to
Lessee except notice shall not be necessary in the event of an emergency
threatening life or property or the lawful exercise of Lessor's remedies in case
of default by Lessee. Lessor may show Lessee's office space ninety (90) days
before the lease expiration date or the date Lessee gives notice to vacate,
whichever is earlier.
(b) Keys. Lessor shall furnish Lessee up to five (5) keys or access codes or
cards for Lessee's office space, up to five (5) keys or access codes or cards
for the main exterior entry doors of the building if such door is locked after
hours, and two (2) keys or access codes or cards to Lessee's mailbox in the
building. An initial deposit of $10.00 shall be charged for each mailbox key and
office key, or access card. Additional or replacement keys or access codes or
cards shall be furnished at the same deposit charged to all other tenants in the
building at the time of Lessee's request. Lessor shall not be liable for risk of
loss resulting from Lessee's keys, access codes, or cards being stolen, lost or
used by unauthorized persons. Lessor reserves the right to rekey or change locks
for security reasons if new keys are timely furnished to Lessee.
Page 6
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 9
(c) Locks. Lessee may not add locks, change locks, or rekey locks without
written permission of Lessor. Locks may be changed at Lessee's request and
expense. If locks to the office space are changed, Lessor may specify kind and
brand of locks, placement, installation, master key compatibility, etc. If
Lessee or any of Lessee's employees lock themselves out of Lessee's suite, said
person must call a fellow-employee to gain access. NEITHER LESSOR NOR THE
MANAGEMENT COMPANY PERSONNEL ARE AUTHORIZED TO UNLOCK A DOOR AFTER HOURS EXCEPT
FOR EMERGENCY OR CLEANING PURPOSES.
(d) Security. Lessor shall have no duty to provide any security services of any
kind unless expressly provided in this lease. Lessor shall not be liable to
Lessee or Lessee's employees, family, customers, invitees, contractors, or
agents for injury, damage, or loss to person or property caused by criminal
conduct of other persons, including theft, burglary, assault, vandalism or other
crimes. Lessee shall lock its office space doors when the last person leaves
such office space for the day.
9.2. PARKING. (a) Lessor shall have sole control over parking. Parking rules, if
applicable, are contained in attached Exhibit F-1. If vehicles are parked in
violation of Lessor parking rules or in violation of state statutes, Lessor may
exercise vehicle removal remedies under Article 6701g-2 of the Texas Civil
Statutes upon compliance with statutory notice. There shall be no reserved
parking spaces unless agreed in writing by Lessor. IF APPLICABLE, Lessee and
Lessee's employees and customers shall have exclusive right to park in Lessee's
assigned parking spaces which are shown on the map contained in Exhibit A.
(b) Lessee shall have the right to rent from Lessor, on a month-to-month basis
at rates in effect from time to time, one vehicle parking space in the
building's parking garage (if applicable) for each N/A square feet of Lessee's
rentable area as set forth in paragraph 1.4. Such parking spaces shall not be
specified permanent spaces unless otherwise agreed in writing by Lessor. Lessor
shall have sole control over the parking of all vehicles (including but not
limited to cars, trucks, recreational vehicles, trailers, bicycles, and
motorcycles) and shall designate parking areas and building service areas.
Parking rules are contained in attached Exhibit F-1.
10.1. OCCUPANCY, NUISANCE, AND HAZARDS. Lessee's office space shall be occupied
only by Lessee or Lessee's employees and shall not be left entirely vacant or
used exclusively for storage. Lessee and Lessee's agents, employees, family,
licensees, invitees, visitors, and contractors shall comply with all federal,
state, and local laws relating to occupancy or to criminal conduct while such
persons are on the leased premises. Lessee and the persons listed above shall
not (1) use, occupy, or permit the use or occupancy of the leased premises for
any purpose which is directly or indirectly forbidden by such laws or which may
be dangerous to life or property, (2) permit any public or private nuisance, (3)
disturb the quiet enjoyment of other tenants, (4) do anything which might emit
offensive odors or fumes, (5) make undue noise or vibrations, (6) permit
anything which would cancel insurance coverage or increase the insurance rate on
the building or contents, or (7) otherwise damage the leased premises.
11.1. TAXES. Lessor shall be responsible for payment of all taxes and
assessments against the building subject to Lessee's obligation to pay Lessor
for Lessee's share thereof, on a prorata square foot basis, as additional rent
pursuant to paragraph 32.1. Lessee shall timely pay all taxes assessed against
Lessee's furniture, equipment, fixtures, or other personal property in Lessee's
office space.
12.1. INSURANCE. Lessor and Lessee shall comply with the respective insurance
obligations as set forth below:
(a) Lessor. Lessor shall maintain (1) fire and extended coverage insurance,
including vandalism and malicious mischief, on the office building, and (2)
comprehensive general liability insurance. The amounts shall be as required by
Lessor's mortgagee or as Lessor may deem reasonably appropriate, whichever is
greater. Lessor shall have no responsibility to maintain fire and extended
coverage insurance on Lessee's contents. The portion of Lessor's insurance
premiums reasonably due to Lessee's acts or omissions or Lessee's special use,
improvements, or tenant finish-out (over and above Lessee's normal use as
contemplated in paragraph 1.1(a)) shall be paid for by Lessee.
Page 7
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 10
(b) Lessee. Lessee shall provide Lessee's own public liability insurance for its
operations on the leased premises in an amount equal to the minimum "primary
coverage" amount required by Lessor's insurance carrier as a condition for
purchasing umbrella liability insurance by Lessor. In no event shall such
coverage be less than $1,000,000. Upon written notice by Lessor to Lessee, such
dollar amount of Lessee's liability policy shall be increased by the amount of
any increase required by Lessee's carrier for "primary coverage" under an
umbrella liability policy. Lessee is encouraged to maintain fire and extended
coverage insurance (including theft, vandalism and malicious mischief) on the
contents in Lessee's office space, including fixtures, furniture, equipment,
supplies, inventory, and other personal property. Such property is not covered
by Lessor's insurance.
(c) Insurance certificates. Lessee shall provide Lessor with a certificate of
Lessee's insurance or a copy thereof as required above within 7 days after
Lessee initially occupies Lessee's office space or any portion thereof. Lessor
and Lessor's managing agent (if any) shall be named as additional insureds on
Lessee's liability insurance policy. Upon written request by Lessor, changes in
the name of Lessor or Lessor's managing agent shall be reflected on such
certificate.
(d) Notice from Lessee's Insurance Carrier. All policies of insurance to be
provided by Lessee shall contain a provision (to the extent legally permitted)
that the insurance company shall give Lessor 10 days' written notice to Lessor,
in advance of (1) any cancellation or non-renewal of the policy, (2) any
reduction in the policy amount, and (3) any deletion of additional insureds.
12.2. WAIVER OF SUBROGATION. (a) If waiver of subrogation is not contained in
the form language of the insurance policy, Lessor and Lessee may require that
the other party's fire, casualty, or liability insurance policy contain a waiver
of subrogation clause. FOR PURPOSES OF WAIVER OF SUBROGATION, LESSOR AND LESSEE
RELEASE EACH OTHER AND THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AND
AGENTS FROM ANY CLAIMS FOR BASED ON NEGLIGENCE OR OTHERWISE, FOR LOSS, DAMAGE,
OR INJURY WHICH OCCUR HEREAFTER AND ARE INSURED AGAINST UNDER INSURANCE POLICIES
CARRIED BY LESSOR AND/OR LESSEE. The foregoing shall not apply to losses,
damages, or injuries that are in excess of policy limits or that are not covered
due to a deductible clause in the policy.
(b) Upon written request, Lessor and Lessee shall furnish to each other copies
of the policies of insurance referred to in this lease, including any waivers of
subrogation, or satisfactory evidence of same.
12.3. HOLD HARMLESS. To the extent that it is not covered by Lessor or Lessor's
insurance, Lessee shall indemnify Lessor for and shall hold Lessor harmless from
all fines, claims, liabilities, and suits (including costs and expenses of
defending against same) resulting from any breach or nonperformance of the lease
by Lessee or Lessee's agents, employees, family, licensees, or invitees. To the
extent that it is not covered by Lessor or Lessor's insurance, Lessor shall
indemnify Lessee for and shall hold Lessee harmless from all fines, claims,
liabilities, and suits (including costs and expenses of defending against same)
resulting from any breach or nonperformance of the lease by Lessor or Lessor's
agents, employees, family, licensees, or invitees. To the extent that it is not
covered by Lessor or Lessor's insurance, Lessor and Lessee shall not be liable
to the other or the other's agents, employees, or family for any damage to
personal property resulting from any act, omission, or negligence of any other
tenant, visitor, or occupant of the office building.
13.1. ALTERATIONS BY LESSEE. Lessee may not make any alterations, improvements,
doorlock changes, or other modifications of any kind to the leased premises
without Lessor's written consent. Consent for governmentally required changes
may not be unreasonably withheld. "Alterations" include but are not limited to
improvements glued, screwed, nailed, or otherwise permanently attached to the
building, structural changes, roof and wall penetrations, and all plumbing,
electrical, and HVAC changes. Requests for Lessor's approval shall be in writing
and shall be detailed to Lessor's reasonable satisfaction. The foregoing shall
be done only by Lessor's contractors or employees or by third parties approved
by Lessor in writing. Lessee shall pay in advance for any requested alterations,
improvements, lock changes, or other modifications which are approved and
performed by Lessor. If same are performed by Lessee with Lessor's permission,
Lessee shall not allow any liens to be placed against the buildings as a result
of such additions or alterations. Alterations, improvements, and modifications
done at Lessee's request shall comply with all applicable
Page 8
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 11
laws. Changes in Lessee's alterations or improvements in Lessee's space which
may be later required by governmental action shall also be paid for by Lessee.
13.2. AMERICANS WITH DISABILITIES ACT. Lessor shall be responsible for any
requirements under the Americans with Disabilities Act or similar state or local
laws as relate to any common area entrance and exit doorways and elevators and
any doors into Lessee's office space and to structural building items that
Lessor is required to maintain under the terms of this lease. Lessor agrees to
indemnify Lessee for any liability Lessee shall incur as a result of Lessor's
failure to comply with the provisions of this paragraph. Lessee agrees to
cooperate fully with Lessor to enable Lessor to timely comply with the
provisions of this paragraph and to immediately forward to Lessor any notice
Lessee receives regarding complaints, injuries, or claims by anyone claiming
that those items which are the responsibility of Lessor do not comply with the
provisions of the Americans with Disabilities Act. Lessee shall be responsible
for any requirements under such architectural barrier laws as they relate to
Lessee's use of Lessee's office space, including, but not limited to, the
positioning of Lessee's furnishings within the office space. Lessee agrees to
indemnify Lessor for any liability Lessor shall incur as a result of Lessee's
failure to comply with the provisions of this paragraph.
14.1. REMOVAL OF PROPERTY BY LESSEE. Lessee may remove its trade fixtures,
furniture, and equipment only if (1) such removal is made prior to the end of
the lease term, (2) Lessee is not in default under this lease at time of
removal, and (3) such removal is not in anticipation of an early moveout prior
to the end of the lease term. Lessee shall pay all costs of removal. Lessee
shall have no rights to property remaining on the leased premises after moveout.
Lessee may not remove any alterations as defined in paragraph 13.1 or
improvements such as wall-to-wall carpeting, book shelves, window coverings,
drapes, cabinets, paneling, counters, kitchen or breakroom built-ins, shelving,
wall covering, and anything else attached to the floor, walls, or ceilings. If
Lessor requests in writing, Lessee shall, immediately prior to moving out,
remove any alterations, fixtures, equipment, and other property installed by
Lessee. Lessee shall pay for cleaning or repairing damage caused by Lessee's
removal of any property.
15.1. SUBLETTING AND ASSIGNMENT. Lessee may not sublet, assign, pledge, or
mortgage this lease and may not grant licenses, commissions, or other rights of
occupancy to all or any part of the leased premises without Lessor's prior
written approval which shall not be unreasonably withheld. Sublessee's financial
strength, reputation, personnel and length of sublease or assignment shall be
important factors in Lessor's approval. Sale, transfer, or merger of majority of
the voting shares or voting partnership interests in Lessee (if a corporation or
partnership) shall be considered an assignment. Lessor shall not be obligated to
approve any sublease or assignment. However, if Lessor gives such approval,
Lessor shall be entitled to (1) 50% of any excess between Lessee's rental per
square foot under the lease and the rental per square foot under the sublease or
assignment, and (2) 50% of any other consideration flowing directly or
indirectly from the sublessee or assignee to Lessee or Lessee's agents. The
foregoing is in consideration of additional management performed or to be
performed by Lessor under such sublease or assignment. In addition to the
foregoing, Lessor may charge Lessee a one-time fee equal to one month's lease
rental for such additional administrative, investigative, and management
services. Violation of this lease by sublessees or assignees shall be deemed a
violation by Lessee. Approval by Lessor of any sublease or assignment shall not
release Lessee from any obligation under this lease and shall not constitute
approval for subsequent subletting or assignment. Sublessees or assignees shall
be liable for all of Lessee's obligations under this lease unless otherwise
specified in writing. Upon default by Lessee, any Sublessee shall pay all
sublease rentals and other sums due Lessor, direct to Lessor, to be credited
against sums owed to Lessor by Lessee under this lease. Unless otherwise agreed
in writing, no sublease or assignment shall be valid unless (1) a copy of this
lease is attached thereto, (2) the sublessee or assignee agrees in writing to be
liable for all of Lessee's obligations under this lease, and (3) Lessor's
written approval is attached to the sublease or assignment. At any time, Lessor
may, at Lessor's option, release Lessee from further liability for all or any
portion of Lessee's office space that has been subleased or assigned to a third
party; and Lessor may terminate the lease to the extent that it applies to such
space.
16.1. DESTRUCTION BY FIRE OR OTHER CASUALTY. (a) Total destruction, rent
abatement, and restoration. If Lessee's office space is totally damaged by fire
or other casualty so that it cannot reasonably be used by Lessee and
Page 9
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 12
if this lease is not terminated as provided in subparagraph (d) below, there
shall be a total abatement of Lessee's rent and Lessee's obligation to pay
office building operating expenses until Lessee's office space is restored by
Lessor and Lessee.
(b) Partial destruction, rent abatement, and restoration. If Lessee's office
space is partially destroyed or damaged by fire or other hazard so that it can
be only partially used by Lessee for the purposes allowed in this lease and if
this lease is not terminated as provided in subparagraph (d) below, there shall
be a partial abatement of Lessee's rent and Lessee's obligation to pay office
building operating expenses which fairly and reasonably corresponds to the time
and extent to which Lessee's office space cannot reasonably be used by Lessee.
(c) Restoration. Lessor's obligation to restore shall be limited to the
condition of the leased premises existing prior to the casualty. Lessor shall
proceed with diligence to restore. During restoration, Lessee shall continue
business to the extent practical in Lessee's reasonable judgment.
(d) Lease termination. If Lessee's office space or the office center is so badly
damaged that restoration and repairs cannot be completed within 6 months after
the fire or casualty, then this lease may be terminated as of the date of the
destruction by either Lessor or Lessee by serving written notice upon the other.
Termination notice must be delivered within 30 days after the casualty.
17.1. CONDEMNATION. If the leased premises or any material portion thereof,
including any portion of the parking lot is taken by condemnation and if the
leased premises is thereby reasonably rendered unusable for Lessee's business
use and activities, this lease shall automatically terminate as of the date
title vests in the condemning authority pursuant to such taking or acquisition;
and Lessor and Lessee shall be relieved of all further obligations under this
lease. Lessor shall be entitled to recover from the condemning authority the
full amount of Lessor's interest in this lease and in the property which is
taken in condemnation; provided, however, if Lessee is not in default hereunder
on the day of taking or acquisition by the condemning authority, Lessee shall be
allowed to recover from the condemning authority, at Lessee's own expense, the
value of Lessee's remaining leasehold interest and Lessee's trade fixtures, if
any, which are taken in condemnation; but not otherwise. Lessee shall be
responsible for Lessee's own attorney's fees and for proving its own damages.
18.1. DEFAULT BY LESSOR. Lessee shall be entitled to recover actual damages and
terminate this lease if (1) Lessor fails to pay any sum due and owing to Lessee
within 7 days after written demand from Lessee, or (2) Lessor remains in default
on any other obligation for 7 days after Lessee's written demand for
performance. However, Lessor shall not be in default if Lessor promptly
commences to cure such noncompliance and diligently proceeds in good faith to
cure same after receiving written notice of such default. If taxes and utilities
are not timely paid, Lessee may pay same to the extent that it is necessary to
avert foreclosure or cutoff. If Lessor fails to perform any covenant, term or
condition of this lease that Lessor is obligated to perform and, as a
consequence of such nonperformance, Lessee shall recover a money judgment
against Lessor, such judgment shall be satisfied only out of Lessor's equity in
the property. Lessor shall have no liability whatsoever for any deficiency, and
no other property or assets of Lessor shall be subject to levy, execution or
other enforcement procedures as a result of such judgment.
19.1. DEFAULT BY LESSEE. If Lessee defaults, Lessor shall have any or all
remedies set forth below.
(a) Definition of default. The occurrence of any of the following shall
constitute a default by Lessee: (1) failure to pay rent or any other sum due by
Lessee under this lease within 7 days after written demand therefor by Lessor;
(2) failure to vacate on or before the last day of the lease term, renewal term,
or extension period; (3) failure to pay rent in advance on a daily basis in the
event of unlawful holdover by Lessee; (4) unauthorized early move-out or notice
of same as set forth below; (5) acquisition of Lessee's interest in the lease by
a third party by judicial or non-judicial process; or (6) failure to comply with
any other provision of the lease (including rules) if such failure to comply is
not cured as soon as possible after delivery of written notice by Lessor to
Lessee. However, Lessee shall not be in default under subclause (6) above if
Lessee promptly commences to cure such noncompliance and diligently proceeds in
good faith to cure same after receiving written notice of such default.
Page 10
Lessor DT
KALEIDO II -----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 13
(b) Utilities and services. If Lessee is in default for nonpayment of rent or
other sums due and if Lessee fails to pay same in full within 3 days after
Lessor hand delivers to Lessee or to Lessee's representative written notice of
Lessor's intent to terminate utilities or services which are furnished by
Lessor, then Lessor may terminate such utilities or services after such 3-day
notice period, without further notice. Lessor's right to terminate such
utilities or services shall occur automatically and without notice if Lessee's
rent is accelerated under subparagraph (d) below, relating to unlawful early
move-out.
(c) Acceleration after notice of rental delinquency. If Lessee is in default for
nonpayment of rent or other sums due and if Lessee fails to pay same in full
within 7 days after Lessor delivers to Lessee or to Lessee's office space a
written notice of Lessor's intent to accelerate, then all rent for the remainder
of the lease term shall be accelerated due, and delinquent at the end of such 7
day notice period without further demand or notice. Such acceleration rights are
in consideration of the rentals for the entire term being payable in monthly
installments rather than in one lump sum at the beginning of the lease
term. If Lessee has already vacated the leased premises, notice of acceleration
may be delivered to Lessee pursuant to paragraph 29.1. Liability for additional
rents accruing in the future (over and above any base rents) shall not be waived
by such acceleration.
(d) Acceleration upon early move-out. If Lessee is lawfully evicted, or if
Lessee moves out or gives verbal or written notice (in person or by an
authorized employee or agent) of intent to move-out prior to the end of the
lease term without the rent being paid in full for the entire remainder of the
lease term or renewal or extension period or without prior written consent of
Lessor, all remaining rents for the remainder of the lease term shall be
accelerated immediately and automatically, without demand or notice. Such
accelerated rents shall be due and delinquent without notice before or after
such acceleration. Such acceleration shall occur even if the rent for the
current month has been paid in full.
(e) Termination of possession. If Lessee is in default as defined in
subparagraph (a) above and if Lessee remains in default for 3 days after Lessor
gives notice of such default to Lessee, or if Lessee abandons the leased
premises, Lessor may (with or without demand for performance) terminate Lessee's
right of possession by giving one day's written notice to vacate; and Lessor
shall be entitled to immediate possession without termination of Lessee's
obligations under the lease. Lessor's repossession shall not be considered an
election to terminate this lease unless written notice of such intention to
terminate is given to Lessee by Lessor. Repossession may be by voluntary
agreement or by eviction lawsuit. Commencement of an eviction lawsuit shall not
preclude other Lessor remedies under this lease or other laws.
(f) Reletting costs. If Lessee is in default under this lease and if Lessor
terminates Lessee's right of possession without terminating this lease and
Lessee's space is released, Lessee shall pay upon Lessor's demand the following:
(1) all costs of reletting (which in no event shall be less than one month's
rent), including leasing commissions, rent concessions (whether in the form of
assuming or buying out lease remainders elsewhere, free rent for a period of
time, or reduced rental rates), utilities during the vacancy, advertising costs,
administrative overhead, and all costs of repair, remodeling, or redecorating
for replacement tenants in Lessee's office space, (2) all rent and other
indebtedness due from Lessee to Lessor through the date of termination of
Lessee's right of possession, and (3) all rent and other sums required to be
paid by Lessee during the remainder of the entire lease term, subject to the
acceleration paragraphs above.
(g) Mitigation by Lessor. Upon eviction or voluntary vacation of the leased
premises by Lessee without the lease being terminated by Lessor, Lessor shall
make reasonable efforts to relet the leased premises. After deduction of
reasonable expenses incurred by Lessor, Lessee shall receive credit for any
rentals received by Lessor through reletting the leased premises during the
remainder of the lease term or renewal or extension period. Such deductible
expenses may include real estate commissions, attorney's fees, and all other
expenses in connection with reletting. Lawsuit to collect amounts due by Lessee
under this lease may be brought from time to time on one or more occasions
without the necessity of Lessor's waiting until the expiration of the lease
term. If judgment for accelerated rents is recovered, Lessor shall give credit
against such judgment for subsequent payments made by Lessee and subsequent
rentals received by Lessor from other tenants of Lessee's office space, less
lawful deductions and expenses of reletting.
Page 11
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 14
(h) Termination of lease. Lessor may terminate this lease (as contrasted to
termination of possession rights only) upon default by Lessee or at any time
after Lessor's lawful re-entry or repossession following default by Lessee.
Lessor's agents have authority to terminate the lease only by written notice
given pursuant to paragraph 29.1.
(i) Damages. In addition to other remedies, Lessor may recover actual damages
incurred.
20.1. LIEN FOR RENT. (a) Notwithstanding anything to the contrary in this lease,
Lessor's landlord lien shall be subordinate to any existing security interest
and any future purchase money security interests on Lessee's personal property
if such security interest is properly perfected and timely recorded as required
by the Texas Business Code. Lessor shall cooperate in signing lien
subordinations in accordance with the foregoing. Any lien subordination shall be
on forms reasonably acceptable to Lessor.
(b) Subject to the limitations of subparagraph (a) above, Lessee gives to Lessor
a contractual lien on all of Lessee's property which may be found on the leased
premises to secure payment of all monies and damages owed by Lessee under the
lease. Such lien also covers all insurance proceeds on such property. Lessee
shall not remove such property while rent or other sums remain due and unpaid to
Lessor and such property shall not be removed until all Lessee's obligations
under the lease have been complied with. This lien is in addition to Lessor's
statutory lien under Section 54.021 of the Texas Property Code. If Lessee is in
default for nonpayment of rent or any other sums due by Lessee, Lessor's
representatives may peacefully enter the leased premises and remove and store
all property. If Lessor removes any property under this lien, Lessor shall leave
the following information in a conspicuous place inside Lessee's office space:
(1) written notice of exercise of lien, (2) a list of items removed, (3) the
name of Lessor's representative who removed such items, and (4) the date of such
removal. Lessor shall be entitled to reasonable charges for packing, removing,
or storing abandoned or seized property, and may sell same at public or private
sale (subject to any properly recorded chattel mortgage or recorded financing
statement) after 30 days' written notice of time and place of sale is given to
Lessee by certified mail, return receipt requested. Upon request by Lessor,
Lessee shall acknowledge the above lien rights by executing a UCC-1 form or
similar form reflecting same.
21.1. ATTORNEY'S FEES, INTEREST, AND OTHER EXPENSES. If Lessee or Lessor is in
default and if the nondefaulting party places the lease in the hands of an
attorney in order to enforce lease rights or remedies, the nondefaulting party
may recover reasonable attorney's fees from the defaulting party even if suit
has not been filed. In any lawsuit enforcing lease rights, the prevailing party
shall be entitled to recover reasonable attorney's fees from the nonprevailing
party, plus all out-of-pocket expenses. Trial shall be to court only; and all
parties waive jury trial. All delinquent sums due by Lessor or Lessee shall bear
interest at the maximum lawful rate of interest, compounded annually, from date
of default until paid, plus any late payment fees. Late payment fees as set
forth in paragraph 3.2 shall be considered reasonable liquidated damages for the
time, trouble, inconvenience, and administrative overhead expense incurred by
Lessor in collecting late rentals, such elements of damages being uncertain and
difficult to ascertain. Late payment fees shall not be liquidated damages for
attorney's fees or for Lessor's loss of use of such funds during the time of
delinquency.
22.1. NONWAIVER. The acceptance of monies past due or the failure to complain of
any action, nonaction, delayed payment, or default, whether singular or
repetitive, shall not constitute a waiver of rights or obligations under the
lease. Lessor's or Lessee's waiver of any right or any default shall not
constitute waiver of other rights, violations, defaults, or subsequent rights,
violations, or defaults under this lease. No act or omission by Lessor or
Lessor's agents shall be deemed an acceptance or surrender of the leased
premises, and no agreement by Lessor to accept a surrender of the leased
premises shall be valid unless it is in writing and signed by a duly authorized
agent of Lessor.
23.1. BUILDING RULES. Lessor's rules for the office building are attached as
Exhibit F-2 and are subject to reasonable change if the changes are applicable
to all tenants of the office building. Separate parking rules are contained in
paragraph F-1. Lessee agrees to provide a copy of the Office Building Rules
(Exhibit F-2) to each of Lessee's employees.
Page 12
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 15
24.1. TRANSFER OF OWNERSHIP BY LESSOR. If Lessor transfers ownership of the
office building (other than as security for a mortgage) and if Lessor has
delivered to the transferee all of Lessee's security deposits and any prepaid
rents, Lessor shall be released from all liability under the lease; and such
transferee shall become liable as Lessor. Such right to be released of liability
shall accrue to subsequent owners only if such transfer is in good faith and for
consideration.
25.1. MORTGAGES. Unless otherwise provided in this lease, Lessee shall
subordinate and attorn to mortgage liens now or hereafter on the office
building. Lessee agrees to execute, from time to time, documentation therefor
which is necessary in the reasonable judgment of Lessor. Other than the
provisions already set forth in this lease, there are no special lease
provisions which are required by lienholders of the office building. This lease
shall be subordinate to all existing and future mortgages. However, such
mortgagees may at any time subordinate their lien to this lease by filing a
subordination notice in the county real property records without necessity of
notice to Lessee. Lessee waives and holds any mortgagee or holder of a security
interest harmless from all claims of Lessee against Lessor arising prior to such
mortgagee succeeding to the Lessor's ownership interest in the property. Since a
Mortgagee Nondisturbance Agreement is contemplated, any foreclosure of such
mortgagee's lien shall not terminate this lease even if such lien is superior to
the lease.
26.1. SURRENDER OF PREMISES. When Lessee moves out, Lessee shall surrender
Lessee's office space in the same condition as on the date of lease commencement
by Lessee (as changed or improved from time to time in accordance with this
lease), less ordinary wear. Removal of property from the leased premises is
subject to paragraph 14.1. Upon surrender, Lessee shall provide Lessor with all
of Lessee's keys, access codes and cards to the Leased Premises and the
combination to all safes and vaults, if any in the Leased Premises.
27.1. HOLDING OVER. If Lessee remains in possession of the leased premises
after the expiration or mutually-agreed termination date of the lease, without
the execution by Lessor and Lessee of a new lease or a renewal or extension of
the lease, then (1) Lessee shall be deemed to be occupying the leased premises
as a tenant-at-sufferance on a daily basis, subject to all obligations of the
lease, (2) Lessee shall pay rent for the entire holdover period at the rate of
125% of the then-current rental rate, (3) Lessee shall be subject to all other
remedies of Lessor as provided in paragraph 19.1, (4) Lessee shall indemnify
Lessor and/or prospective tenants for damages, including lost rentals, storage
expenses, and attorney's fees, and (5) at Lessor's sole option, Lessee may
extend the lease term for a period of one month at the then current rental rates
for the office building, as reasonably determined by Lessor, by hand delivering
written notice to Lessee or to Lessee's office space while Lessee is holding
over. Holdover rents shall be immediately due on a daily basis and delinquent
without notice or demand; and the prior written notice and waiting period
requirements of this lease shall not be necessary in order for Lessor to
exercise remedies thereunder.
28.1. SIGNS AND BUILDING NAME. Except for standard suite signage and building
directory listings, there shall be no signs, symbols, or identifying marks on or
in the building, halls, elevators, staircases, entrances, parking areas,
landscape areas, doors, walls, or windows without prior written approval of
Lessor. If the lease term is less than twelve (12) months, the cost of initial
suite signage for Lessee's space and initial directory strips shall be at
Lessee's expense. All signs or lettering shall conform to the sign and lettering
criteria established by Lessor. Unless otherwise stated in the rules, suite
signage and building directory changes shall be done exclusively by Lessor and
at Lessee's expense. Lessor may remove all unapproved signs without prior notice
to Lessee and at Lessee's expense. Lessor may change the name of the building
upon six months' written notice to Lessee.
28.2. RELOCATION OF LESSEE. Upon at least 60 days' notice to Lessee, Lessor
shall have the right to relocate Lessee within the building in lease space which
is the same size or larger and usable for Lessee's intended use. Such relocation
shall be made at Lessor's sole expense, including necessary reprinting of
Lessee's stationary, envelopes, business cards, door signs, etc. Rent shall not
be increased if the relocation office space is larger or better quality.
Relocation date shall be contained in the relocation notice referred to above.
Lessor shall not be liable to Lessee in
Page 13
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 16
connection with such relocation except for undue delay or property damages
caused by Lessor or Lessor's employees, agents, or contractors.
29.1. NOTICES. Whenever written notice is required or permitted under this
lease, such notice shall be in writing and shall be either (a) hand delivered
personally to the party being notified, (b) hand delivered to or inside such
party's mailing address, or (c) delivered at such party's mailing address by
certified mail, return receipt requested, postage prepaid. The mailing address
of Lessor shall be the address to which Lessee normally mails or delivers the
monthly rent unless Lessor notifies Lessee of a different address in writing.
The mailing address of Lessee shall be Lessee's office space under this lease.
However, if Lessee moves out, it shall be Lessee's last address known by Lessor.
Hand delivered notice is required only when expressly required in the lease.
Notice by noncertified mail is sufficient if actually received by the addressee
or an employee or agent of addressee. The term "notice" shall be inclusive of
notices, billings, requests, and demands.
30.1. ESTOPPEL CERTIFICATES. From time to time, upon 7 days' prior written
request from Lessor, Lessee shall execute and deliver to Lessor the estoppel
certificate attached as Exhibit G. The form in Exhibit G may be changed as
reasonably required by a prospective purchaser or lender. If any statement in
the estoppel certificate form is contrary to the facts existing at the time of
execution of such form, Lessee may correct same before signing. Reasonable
modifications in the form may be made as requested by a prospective lienholder
or purchaser. The estoppel certificate may be conclusively relied upon by Lessor
and by any prospective lienholder or purchaser of the leased premises. If Lessee
fails to comply with the foregoing by the end of such 7-day period, it shall be
conclusively presumed that (1) this lease is in full force and effect without
any subleases or assignments and is unamended or modified except for amendments
verified by affidavit of Lessor to the prospective lienholder or purchaser, (2)
no rents, security deposits, or other charges have been prepaid, (3) the
statements contained in the estoppel certificate form (Exhibit G) are correct,
(4) there are no uncured defaults by Lessor, (5) Lessee has no right of offset
or rescission, and (6) any prospective purchaser or lienholder may conclusively
rely on such silence or noncompliance by Lessee and may conclusively assume no
Lessor defaults within the 120 days following Lessee's receipt of Lessor's
request for an estoppel certificate.
31.1. SUCCESSORS. This lease shall bind and inure to the benefit of the parties,
any guarantors of this lease, and their respective successors and assigns.
31.2. LEASING AGENT COMMISSIONS. No leasing commission shall be due by Lessor to
any leasing agent unless in writing. Commission agreements executed by Lessor
shall be binding on subsequent building owners if the tenant of the lease in
question is in possession at the time of transfer of building ownership.
32.1. BUILDING OPERATING EXPENSE. In addition to the monthly base rent in
paragraph 2.1, Lessee shall pay additional rent on a monthly basis, equivalent
to Lessee's prorata share of actual building operating expenses as per Exhibit
C. Lessee's responsibility for payment of building operating costs shall be
subject to the expense stop referred to in Basic Lease Information #8.
33.1. REPRESENTATIONS AND WARRANTIES BY LESSOR. Lessor warrants that Lessor is
the sole owner of the land and improvements comprising the office building and
that Lessor has full right to enter into this lease. Lessor's duties and
warranties are limited to those expressly stated in this lease and shall not
include any implied duties or implied warranties, now or in the future. No
representations or warranties have been made by Lessor other than those
expressly contained in this lease.
34.1. REPRESENTATIONS AND WARRANTIES BY LESSEE. Lessee warrants to Lessor that
(1) the financial statements of Lessee heretofore furnished to Lessor are true
and correct to the best of Lessee's knowledge, (2) there has been no significant
adverse change in Lessee's financial condition since the date of the financial
statements, (3) the
Page 14
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 17
financial statements fairly represent the financial condition of Lessee upon
those dates and at the time of execution hereof, (4) there are no delinquent
taxes due and unpaid by Lessee, and (5) Lessee and none of the officers or
partners of Lessee (if Lessee is a corporation or partnership) have ever
declared bankruptcy. Lessee warrants that Lessee has disclosed in writing to
Lessor all lawsuits pending or threatened against Lessee, and Lessee has made no
material misrepresentation or material omission of facts regarding Lessee's
financial condition or business operations. All financial statements must be
dated and signed by Lessee. Lessee acknowledges that Lessor has relied on the
above information furnished by Lessee to Lessor and that Lessor would not have
entered into this lease otherwise.
35.1. PLACE OF PERFORMANCE. Unless otherwise expressly stated in this lease,
all obligations under this lease, including payment of rent and other sums due,
shall be performed in the county where the office building is located, at the
address designated from time to time by Lessor.
36.1. MISCELLANEOUS. This lease contains the entire agreement of the parties. NO
OTHER WRITTEN OR ORAL PROMISES OR REPRESENTATIONS HAVE BEEN MADE, AND NONE
SHALL BE BINDING. This lease supersedes and replaces any previous lease between
the parties on Lessee's office space, including any renewals or extensions
thereunder. Except for reasonable changes in written rules, this lease shall not
be amended or changed except by written instrument, signed by both Lessor and
Lessee. LESSOR'S AGENTS DO NOT AND WILL NOT HAVE AUTHORITY TO (1) MAKE
EXCEPTIONS, CHANGES OR AMENDMENTS TO THIS LEASE, OR FACTUAL REPRESENTATIONS NOT
EXPRESSLY CONTAINED IN THIS LEASE, (2) WAIVE ANY RIGHT, REQUIREMENT, OR
PROVISION OF THIS LEASE, OR (3) RELEASE LESSEE FROM ALL OR PART OF THIS LEASE,
UNLESS SUCH ACTION IS IN WRITING AND SIGNED BY BOTH PARTIES TO THIS LEASE.
Multiple lessees shall be jointly and severally liable under this lease.
Notices, requests, or agreements to, from, or with one of multiple lessees shall
be deemed to be to, from, or with all such Lessees. Under no circumstances shall
Lessor or Lessee be considered an agent of the other. Nonsubstantial errors in
space footage calculations shall entitle the parties to correct the rental
figures in the lease and adjust rentals previously paid to present Owner
accordingly, but not to terminate the lease. The lease shall not be construed
against either party more or less favorably by reason of who drafted the lease
or changes in the lease. Texas law applies. If any date of performance or
exercise of a right ends on a Saturday, Sunday, or state holiday, such date
shall be automatically extended through the next business day. Time is of the
essence; and all performance dates, time schedules, and conditions precedent to
exercising a right shall be strictly adhered to without delay except where
otherwise expressly provided. If any provision of this lease is invalid under
present or future laws, the remainder of this lease shall not be affected.
37.1. SPECIAL CONDITIONS. Additional provisions of this lease are set forth in
Exhibit J.
38.1. EXHIBIT LIST. The exhibits attached to this lease are listed below. All
exhibits are a part of this lease except for those which have been lined out or
which have been shown below as omitted.
<TABLE>
<S> <C>
Exhibit A Floor Plan of Lessee's Office Space (paragraph 1.1)
Exhibit B Legal Description of Office Building (paragraph 1.1)
Exhibit C Building Operating Expense Passthrough Calculations (paragraphs 2.1 and 32.1)
Exhibit D Acknowledgment of Lease (paragraph 4.2)
Exhibit E Construction by Lessor (paragraph 5.1)
Exhibit F-1 Parking Rules (paragraphs 9.2 and 23.1)
Exhibit F-2 Building Rules (paragraph 23.1)
Exhibit G Estoppel Certificate (paragraph 30.1)
Exhibit H Lease Guaranty (paragraph 37.1)
Exhibit I Corporate Resolution Authorizing Lease or Guaranty (paragraphs 37.1 and 39.1)
Exhibit J Special Conditions (paragraph 37.2)
Exhibit K Hazardous Materials Statement
Exhibit L Acknowledgment of Receipt of Agency Disclosure
Exhibit M Option for Additional Space
</TABLE>
Page 15
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 18
39.1. LEASE DATES AND AUTHORITY TO SIGN. The "identification" date of this lease
is the 28th day of FEBRUARY 1997 (the same date as at the top of Basic Lease
Information). The "effective date" on which this lease becomes binding is the
date on which the lease has been signed by Lessor, Lessee, and any guarantors.
The names and signatures of all parties are shown below; and all persons signing
have been duly authorized to sign. IF LESSEE IS A CORPORATION, A CORPORATE
RESOLUTION AUTHORIZING LESSEE TO EXECUTE THIS LEASE IS ATTACHED AS EXHIBIT I.
Corporate seals are unnecessary under Texas law.
<TABLE>
<S> <C>
LESSOR LESSEE
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
- ------------------------------------------------ -------------------------------------------------
Printed name of company or firm (if applicable) Printed name of company or firm (if applicable)
DON TAIT, CPM BRIAN SMITH
- ------------------------------------------------ -------------------------------------------------
Printed name of person signing Printed name of person signing
/s/ DON TAIT /s/ BRIAN R. SMITH
- ------------------------------------------------ -------------------------------------------------
Signature Signature
VICE PRESIDENT, KUCERA MANAGEMENT, INC.,
AUTHORIZED MANAGING AGENT FOR
EURUS ESTATES II, LTD. PRESIDENT
- ------------------------------------------------ -------------------------------------------------
Title of person signing (if applicable) Title of person signing (if applicable)
3/31/97 March 3, 1997
- ------------------------------------------------ -------------------------------------------------
Date signed (Please initial all pages and exhibits) Date signed (Please initial all pages and exhibits
</TABLE>
Page 16
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 19
LEASING AGENT
THE KUCERA COMPANY
- ---------------------------------------------------
Printed name of company or firm (if applicable)
STEVEN G. MCMILLON
- ---------------------------------------------------
Printed name of person signing
/s/ STEVEN G. MCMILLON
- ---------------------------------------------------
Signature
SENIOR VICE PRESIDENT
- ---------------------------------------------------
Title of person signing (if applicable)
3/19/97
- ---------------------------------------------------
Date signed
Page 17
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 20
EXHIBIT A
FLOOR PLAN OF LESSEE'S OFFICE SPACE
(see paragraph 1.1 of lease)
The parties agree that the floor plan below is a true and correct diagram of
Lessee's office space referred to in paragraph 1.1.
KALEIDO II, Suite II-300
7,121 USF / 8,739 RSF
[FLOOR PLAN OF THIRD FLOOR]
Page 18
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 21
EXHIBIT B
LEGAL DESCRIPTION OF OFFICE BUILDING
by lot, block, subdivision, and county or
by metes and bounds description
(see paragraph 1.1 of lease)
KALEIDO I & II
4.32 acres of land, more or less, out of and a part of Tract Number Three (3) of
the partition of the J.O. Hamilton Estate, a subdivision of a portion of the
James P. Wallace League in Travis County, Texas, according to the map or plat of
said partition of the J.O. Hamilton Estate of record in Book 4, Page 14 of the
Plat Records of Travis County, Texas; SAVE AND EXCEPT the approximately 1.1242
acre portion thereof conveyed to the public for highway right-of-way purposes.
Page 19
Lessor DT
KALEIDO II ---------
CROSSROADS SYSTEMS, INC. Lessee BRS
---------
<PAGE> 22
EXHIBIT C
Page One of Two
BUILDING OPERATING EXPENSE PASSTHROUGH CALCULATIONS
(see paragraphs 2.1 and 32.1 of lease)
(a) "ESTIMATED" PRORATA BUILDING OPERATING EXPENSES. On or before the beginning
of each calendar year, Lessor shall calculate the estimated building operating
expenses for that calendar year, according to the criteria in subparagraph (c)
below. One-twelfth of Lessee's prorata share of estimated building operating
expenses which are in excess of any expense stop shall be due on the first of
each month as additional rent.
(b) YEAR-END ADJUSTMENT FOR OVERPAYMENT OR UNDERPAYMENT BY LESSEE BECAUSE OF
DIFFERENCES BETWEEN "ESTIMATED" AND "ACTUAL" BUILDING OPERATING EXPENSES. After
each calendar year of the lease term and renewal or extension periods, Lessor
shall determine the actual building operating expenses for that calendar year.
If it is then determined that actual building operating expenses were less than
estimated expenses and that Lessee's monthly payments of estimated expenses over
Lessee's expense stop figure were too much, Lessor shall promptly credit to
Lessee the excess amount paid by Lessee. If it is determined that actual
building operating expenses were more than estimated expenses and that Lessee's
monthly payments of estimated expenses over Lessee's expense stop figure were
insufficient, Lessor shall invoice Lessee for the amount of Lessee's
underpayment. Payment thereof shall be due upon delivery of invoice to Lessee.
Payment may be made prior to or with the next scheduled rental payment, but not
later. The foregoing calculations and adjustments may also be made one or more
times during the calendar year, at Lessor's option.
(c) DEFINITION OF BUILDING OPERATING EXPENSES. Building operating expenses for
each calendar year shall include: all ad valorem taxes, assessments and related
government charges becoming due on the building and on-site personal property
used in operation of the building in such period; utilities; insurance premiums
for fire, extended coverage, vandalism, and liability on the building and
personal property used in building management; landscape expenses; janitorial
expenses; window cleaning; supplies; painting, roof repairs, window replacement,
and other maintenance expenses; licenses; permits; advertising; maintenance
salaries and bonuses; payroll taxes; management office overhead and management
fees; and all other managerial, administrative and operating expenses which are
reasonably related to the operation of the building and utilities serving same.
No such category shall include more than 12 months' worth of expenses. Building
operating expenses shall also include the following improvements if amortized
over the useful life of such improvements for IRS purposes together with
interest at 12% per annum on the unamortized cost: (i) improvements to reduce
operating expenses, (ii) improvements required by governmental agencies
following completion of the building, and (iii) carpeting, floor covering,
draperies, and wall coverings for the common areas of the building. Building
operating expenses shall be calculated on an accrual basis in accordance with
generally accepted accounting principles, consistently applied. The word
"building" as referred to above shall include the building, parking areas,
parking garage (if any), and common areas.
Building operating expenses shall not include: principal and interest payments
on mortgages; depreciation or improvements which IRS requires to be depreciated
(except as provided above); expenses of repairing damage of the type normally
covered by fire, vandalism, flood, and EC insurance; any expense paid or
reimbursed from insurance proceeds; costs of repairing damage for which Lessor
is entitled to reimbursement from others; remodeling costs for new or existing
tenants; common area improvements or personal property required by other tenants
to be made, purchased, or furnished to such tenants; utility and air
conditioning or heating costs or other expenses which are separately billed to
specific tenants; franchise and income taxes of Lessor; leasing commissions;
expenses of marketing vacant space in the building; legal fees; structural
repairs to roof, foundation, and walls; asbestos removal; and installation of
sprinklers, fire alarms, and smoke detector systems.
If utilities and taxes included in "Building Operating Expense" are not payable,
billed or otherwise due so as to allow an accurate calculation of said factors
annually, then Lessor, in its reasonable discretion, may estimate and prorate
said expenses on an annual basis, and said factors shall be properly adjusted by
Lessor when they actually become due and payable. Otherwise, expenses must be
supported by invoices and actually paid.
(d) DEFINITION OF PRORATA SHARE. Lessee's prorata share of estimated and actual
building operating expenses is the percentage result of dividing "Lessee's
rentable area" (which is set forth in Basic Lease Information #4) by the total
rentable area in the entire building.
Page 20
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 23
EXHIBIT C (cont'd)
Page Two of Two
(e) DELAY IN IMPLEMENTATION. At Lessor's option, adjustments may be delayed.
Lessor's delay in implementing such adjustments shall not waive Lessor's right
thereto, and the most recent monthly rental figures shall continue to be paid
during such delay. If Lessor delays in timely calculating adjustments, such
adjustments shall be retroactive to the respective date on which Lessor had a
right to make such adjustment; and such delayed rent adjustments shall become
due upon written notice to Lessee.
(f) EXAMINATION OF RECORDS. Upon reasonable notice to Lessor in writing, Lessee
may examine or audit Lessor's accounting records for building operating expenses
for the year immediately preceding and other data used in calculating additional
rents or rent adjustments. Examination or audit of building operating expenses
for a particular year may be conducted no later than 120 days after Lessee's
receipt of a reconciliation notice or statement of building operating expenses
for that year. If not examined or audited within the 120 day period, such
reconciliation shall be deemed as accepted and agreed to by all parties.
Page 21
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 24
EXHIBIT D
Page One of Two
ACKNOWLEDGMENT OF LEASE
(TO BE SIGNED AT MOVE-IN)
The undersigned parties acknowledge that the lease described below is in full
force and effect and that Lessee has taken possession of the space.
Date of lease: February 28, 1997
--------------------------------------------------------------
Lessor: Eurus Estates II, Ltd.
---------------------------------------------------------------------
Lessee: Crossroads Systems, Inc.
---------------------------------------------------------------------
Guarantor, if any (not Lessee's name): N/A
--------------------------------------
Building name: Kaleido II
--------------------------------------------------------------
Suite No.: II-300
------------------------------------------------------------------
Building address: 5910 Courtyard Drive
-----------------------------------------------------------
City/County/State/Zip: Austin/Travis/Texas/78759
------------------------------------------------------
Legal description of property: See Exhibit B of Lease
----------------------------------------------
The commencement date, annual anniversary date, and ending date of the initial
lease term as defined in paragraph 4.1 of above lease are as follows:
Commencement date (month, day, year): May 1, 1997
---------------------------------------
Annual Anniversary date (month, day): May 1
---------------------------------------
Ending date (month, day, year): April 30, 2002
---------------------------------------------
The parties acknowledge that the lease has not been amended or modified and that
this acknowledgment may be filed of record with the Texas Secretary of State or
the county where the building is located in order to record (1) Lessee's
possession rights to the leased premises, and (2) Lessor's contractual landlord
lien rights over all personal property therein and any security deposit posted
by Lessee. The entire lease is hereby affirmed and incorporated herein. The
lease will cease to be an encumbrance to Lessor's title if Lessor files an
affidavit of record, stating that Lessee no longer occupies the premises and
that Lessee's right of possession has been lawfully terminated.
<TABLE>
<CAPTION>
LESSOR LESSEE
(To be signed at move-in) (To be signed at move-in)
<S> <C>
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
- ------------------------------------------------- -------------------------------------------------
Printed name of company or firm (if applicable) Printed name of company or firm (if applicable)
DON TAIT, CPM BRIAN SMITH
- ------------------------------------------------- -------------------------------------------------
Printed name of person signing Printed name of person signing
/s/ DON TAIT
- ------------------------------------------------- -------------------------------------------------
Signature Signature
VICE PRESIDENT, KUCERA MANAGEMENT, INC.
AUTHORIZED MANAGING AGENT FOR
EURUS ESTATES II, LTD. PRESIDENT
- ------------------------------------------------- -------------------------------------------------
Title of person signing (if applicable) Title of person signing (if applicable)
- ------------------------------------------------- -------------------------------------------------
Date signed Date signed
</TABLE>
Page 22
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 25
EXHIBIT D (cont'd)
Page Two of Two
STATE OF TEXAS
COUNTY OF ______________
This instrument was acknowledged before me on _______________________________ by
__________________________________________________ on behalf of the above stated
LESSOR and in the above stated capacity.
____________________________________
Notary Public for the State of Texas
Printed name of notary _____________
My commission expires ______________
STATE OF TEXAS
COUNTY OF ______________
This instrument was acknowledged before me on _______________________________ by
__________________________________________________ on behalf of the above stated
LESSEE and in the above stated capacity.
____________________________________
Notary Public for the State of Texas
Printed name of notary _____________
My commission expires ______________
Page 23
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 26
EXHIBIT E
CONSTRUCTION BY LESSOR
(see paragraph 5.1 of lease)
Lessor Eurus Estates II, Ltd.
--------------------------------------------------------------------------
Lessee Crossroads Systems, Inc.
--------------------------------------------------------------------------
Date of lease February 28, 1997
-------------------------------------------------------------------
Office space Suite II-300
-------------------------------------------------------------------
Building name/address Kaleido II/5910 Courtyard Drive/Austin, TX 78731
----------------------------------------------------------
Lessee agrees to lease Suite II-300 with the following improvements listed
(below) or (on the attached floor plan). The cost for said improvements,
including space planning fees, and construction management fees, shall not
exceed $35,605.00 ($5.00/usf).
Any modification to the existing improvements shall be applied against the
dollar allowance and improvement costs that exceed the above-referenced
allowance SHALL BE PAYABLE BY LESSEE one-half (1/2) upon commencement of the
work and one-half (1/2) upon completion or occupancy by Lessee, whichever is the
earlier.
If actual costs for capital improvements based on signed construction documents
by Lessee are less than the above-referenced allowance, including space
planning, and construction management fees, the Lessee will not receive a credit
for the unspent portion of the allowance.
Improvements: LESSOR SHALL REMODEL THE LEASED PREMISES AS PER A MUTUALLY
ACCEPTABLE SPACE PLAN.
Page 24
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 27
EXHIBIT F-1
OFFICE BUILDING
PARKING RULES
(see paragraph 9.2 of lease)
It is the desire of Lessor to maintain and operate the parking garage and
parking areas in an orderly manner. The following rules and regulations apply to
all tenants in the building and their agents, employees, family, licensees,
invitees, visitors, and contractors unless otherwise stated. Lessor reserves the
right to rescind these rules, make reasonable changes, or make other reasonable
rules and regulations for the safety, care, and cleanliness of the parking
garage, if applicable, and parking areas and for the preservation of good order.
1. TRAFFIC SIGNS. All persons parking in the parking areas and parking garage
shall observe posted signs and markings regarding speed, stop signs, traffic
lanes, reserved parking, no parking, parking stripes, etc.
2. LESSEE EMPLOYEE AND CUSTOMER PARKING. Lessees and their employees and
customers [X] may _____ OR may not park without charge. Lessor reserves the
right to utilize any reasonable system by which building tenants may pay for
parking of their guests or customers.
3. TRASH. All persons parking in the parking garage or parking areas shall
refrain from throwing trash, ashtray contents, or other debris on the garage
floor or parking areas.
4. FLAT TIRES. All vehicle owners and all persons parking in the parking garage
or parking areas shall be responsible for promptly repairing flat tires or other
conditions of the vehicle which cause unsightliness in the reasonable judgment
of Lessor.
5. REMOVAL OF UNAUTHORIZED VEHICLES. If vehicles are blocking driveways or
passageways or parked in violation of these rules and regulations or state
statutes, Lessor may exercise vehicle removal remedies under Article 6701g-1 and
6701g-2 upon compliance with statutory notice.
6. SECURITY. Lessor shall use reasonable diligence in the maintenance of
existing lighting in the parking garage or parking areas. Lessor shall have no
duty for additional lighting or any security measures in the parking areas,
including the parking garage.
7. PARKING OF EMPLOYEE VEHICLES. Lessor may from time to time designate specific
areas in which vehicles owned by Lessee and Lessee's employees, sublessees,
assignees, licensees, and concessionaires shall be parked. Lessee shall use best
efforts to see that such vehicles are parked in such areas. Upon request by
Lessor, Lessee shall furnish Lessor a complete list of license numbers of all
vehicles operated by Lessee and the above listed persons. Lessor may charge
reasonable parking fees for such vehicles not parked in the designated areas.
8. PARKING OF TRUCKS AND DELIVERY VEHICLES. Without Lessor's prior written
approval, no trailers or large trucks may be parked in the parking areas except
for temporary loading or unloading. Service and delivery vehicles may be parked
in loading zones only when necessary.
9. TIMELY PAYMENT OF PARKING RENT. If applicable, Lessee shall be entitled to
monthly parking rights in the parking garage only upon timely payment of the
then current monthly parking rent, in advance. Lessee may rent less than the
allowed number of spaces. Lessee may rent more than the allowed number of spaces
if available in the reasonable judgment of Lessor.
10. CONTROL DEVICES. Lessor reserves the right to install or utilize any
reasonable system of entry and exit control devices in marked loading areas.
Page 25
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 28
EXHIBIT F-2
Page One of Three
OFFICE BUILDING RULES
(see paragraphs 9.2 and 23.1 of lease)
LESSEE AGREES TO PROVIDE A COPY OF THESE RULES TO EVERY EMPLOYEE
It is the desire of Lessor to maintain in the building the highest standard of
dignity and good taste consistent with comfort and convenience for all tenants.
Any action or condition not meeting this high standard should be reported
directly to the building manager. Cooperation by all tenants will be sincerely
appreciated. The following rules and regulations apply to all tenants in the
building and their agents, employees, family, licensees, invitees, visitors, and
contractors unless otherwise stated. Pursuant to paragraph 23.1 of the lease,
Lessor reserves the right to rescind these rules, make reasonable modification
thereto, and make other reasonable rules and regulations for the safety, care,
and cleanliness of the building and for the preservation of good order.
1. DELIVERIES AND MOVEMENT OF FURNITURE. Movement into or out of the building of
furniture, equipment shall be restricted to hours, stairways, and elevators
designated by Lessor. Unless Lessor notifies Lessee otherwise, only the freight
elevator may be used for such purposes, and such elevator may be used only
during regular business hours without prior approval of Lessor. All such
movement and delivery shall be under the supervision of the building manager and
carried out in a manner agreed between Lessee and the building manager, by
prearrangement. Prearrangement shall include time, method, routing, and any
limitations imposed for reasons of safety or nondisturbance of others. The hold
harmless and indemnification provisions of paragraph 12.2 shall apply to the
foregoing. Lessor may require that movement of furniture or equipment which
interferes with normal building traffic shall be made at hours other than normal
business hours.
2. OBSTRUCTION OF PASSAGEWAYS. None of the passageways, outside entries,
exterior doors, elevators, hallways, or stairways shall be locked or obstructed.
No rubbish, trash, litter, or materials of any nature may be emptied or thrown
into these areas. These areas may be used only for ingress and egress.
3. DOORS AND DOORLOCKS. When Lessee's corridor doors are not in use, Lessee
shall use its best efforts to keep them closed on all floors where Lessee is a
partial tenant on the floor. No additional locks shall be placed on any doors in
Lessee's office space without written consent of Lessor. Lessee shall not
change, alter, or replace locks provided by Lessor on doors in the building,
except with written permission of the building manager. All necessary keys shall
be furnished by Lessor, and Lessor shall be entitled to have a key for every
door in Lessee's office space. Lessee shall surrender all keys upon termination
of Lessee's right of occupancy; and at such time, Lessee shall give Lessor the
combination to all vaults or combination locks remaining in Lessee's office
space after surrender by Lessee.
4. SAFES. Safes and other heavy articles shall be carried onto the leased
premises only at such times and in such manner as prescribed by Lessor. Lessor
shall have the right to specify weight limitations and positioning of safes or
other heavy articles. Any damage done to the building by installation, presence,
or removal of a safe or other article owned or controlled by Lessee on the
leased premises, shall be paid for by Lessee.
5. REMOVAL OF FURNITURE. Removal of furniture or equipment from Lessee's office
space shall require presentation of written authorization by an authorized
representative of Lessor. Security guards, watchmen, janitors, and other
building employees will have the right to challenge all persons leaving the
building with such items.
6. INSTALLATION AND REPAIR WORK. Lessee shall refer all contractors,
contractors' representatives, and installation technicians who render any
service on or to Lessee's office space, to the building manager for approval and
supervision before performance of any service. This provision shall apply to
all work performed in the building, including installation of telephones,
electrical lines, and other electrical devices where such installation affects
the floors, walls, woodwork, trim, windows, ceilings, mechanical equipment, or
any other part of the building. If Lessee desires telephone or other electronic
connections, Lessee shall notify Lessor; and Lessor shall then direct
installation servicemen as to where and how wires may be introduced. Without
such directions, no such installations shall be permitted.
7. HAZARDOUS MATERIALS. Lessee shall not place or install, on the leased
premises or any part of the building, any explosive, gasoline, kerosene, oil,
acids, caustics, or any other inflammable, explosive, or hazardous materials
without written consent of the building manager. Lessee shall not operate
electric space heaters, stoves, engines, or other equipment not typical of an
office building without written consent of the building manager.
Page 26
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 29
EXHIBIT F-2 (cont'd)
Page Two of Three
8. ENTRY BY LESSOR. Lessor shall have the right to enter for the purposes set
forth in paragraph 9.1 of the lease at all times.
9. PLUMBING. Plumbing fixtures and appliances shall be used only for the
purposes for which they were constructed. No sweeping, rubbish, rags, or other
unsuitable materials may be thrown or placed in plumbing fixtures or appliances.
The cost of any stoppage or damage resulting from negligence or improper use of
these fixtures and appliances by Lessee or Lessee's agents, employees, family,
invitees, licensees, or visitors shall be paid for by the Lessee.
10. WINDOWS. Lessee shall not allow windows within Lessee's office space to be
opened at any time, except in emergencies. Nothing shall be thrown out of the
windows of the building or down the stairwells or other passages. Lessor
reserves the right to cause any or all windows of the building to be locked,
sealed, closed, or otherwise made inoperable, or to install permanent or
temporary screens thereon, and to include the cost thereof with the operating
expenses of the building.
11. THEFT AND DAMAGES. Lessor shall not be responsible for lost or stolen
personal property, equipment, money, or jewelry from Lessee's office space or
from the public areas of the building, regardless of whether such loss occurs
when the area is locked against entry. Lessor will not be liable to Lessee, or
Lessee's employees, customers, or invitees for any damages or losses to persons
or property caused by other Lessees in the building or for damages or losses
caused by theft, burglary, assault, vandalism, or other crimes. Owner shall not
be liable for personal injury or loss of Lessee's property from fire, flood,
water leaks, rain, hail, ice, snow, smoke, lightning, wind, explosions, or
interruption of utilities unless such injury or damage is caused by negligence
of Lessor. LESSOR STRONGLY RECOMMENDS THAT LESSEE SECURE LESSEE'S OWN INSURANCE
TO PROTECT AGAINST THE ABOVE OCCURRENCES.
12. ANIMALS. No birds, fowl, or animals (except guide dogs for handicapped
persons) shall be brought into or kept in or about the building or common
areas.
13. BICYCLES AND OTHER VEHICLES. No bicycles, motorcycles, or similar vehicles
shall be allowed in the building. No trailers or large trucks may be parked in
the building parking areas except for temporary loading or unloading.
14. RESIDENTIAL USE. No sleeping, cooking, clothes cleaning, or laundering is
permitted on the leased premises without written consent of Lessor.
15. INTOXICATION. Lessor reserves the right to exclude or expel from the
building any person who in the reasonable judgment of Lessor, is intoxicated or
under the influence of liquor or drugs, or who shall in any manner do any act in
violation of any rules of the building.
16. DISTURBANCES. Lessee shall not obstruct, disturb, or interfere with the
rights of other Lessees or occupants or in any way injure or annoy them. Lessee
shall not make any noises by any means which, in the reasonable judgment of
Lessor, are likely to disturb other Lessees or occupants of the building.
17. COMPLIANCE WITH SAFETY AND SANITATION LAWS. Lessee shall comply with all
laws relating to fire, safety, and sanitation, and shall comply with any
requirements of Lessor's insurance company with respect to fire prevention,
safety standards, and sanitation.
18. CLEANING. Lessee shall not employ any person or persons without written
consent of Lessor, for the purpose of cleaning or maintaining of the leased
premises. Lessee shall cooperate with Lessor's employees, agents, and cleaning
personnel in keeping Lessee's premises neat and clean. Any special cleaning
requested by Lessee and performed by Lessor or Lessor's employees, agents, or
contractors shall be paid for by Lessee.
19. SOLICITING. Canvassing, soliciting, or peddling in the building is
prohibited without written permission of Lessor, and Lessee shall cooperate to
prevent same.
20. SIGNS. No signs, fixtures, or notices of any kind may be displayed except by
written consent of Lessor. All signs shall conform to the requirements of
paragraph 28.1 of the lease.
Page 27
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. ------------
Lessee BRS
------------
<PAGE> 30
EXHIBIT F-2 (cont'd)
Page Three of Three
21. NOTICE OF PERSONAL INJURIES OR UTILITY OR MECHANICAL PROBLEMS. Lessee shall
give prompt notice to the building manager, to the best of Lessee's knowledge,
of any significant accidents involving injury to persons or property, including
plumbing, electrical, heating, air conditioning, stairwell, corridor, and
elevator problems and/or personal injury and property damage caused thereby.
22. REQUESTS BY LESSEE. Except in emergencies, requests by Lessee shall be
attended to only after written request by Lessee to the building management.
Lessor's employees are not allowed to perform or do anything outside their
regular duties unless pursuant to special orders from Lessor. Lessee may not
contract with Lessor's employees for the performance of paid or free services to
Lessee. If, at the request of Lessee, Lessor or Lessor's agents furnish
services, goods, labor, or material to Lessee which are not required to be
furnished by Lessor under this lease, Lessee shall pay for same upon delivery of
a written statement therefor to Lessee.
23. BUILDING ACCESS. Anyone who does not reasonably satisfy a building security
guard (if any) that he has a right to enter the building may be excluded by the
guard. Lessor shall not be liable for damages for any good faith error with
regard to admission or exclusion from the building of any person. In case of
fire, destruction, invasion, mob, riot, or other commotion, Lessor reserves the
right to prevent access to the building by closing the doors or otherwise.
24. REQUEST FOR EXTRA AIR CONDITIONING. Requests for heating or air conditioning
before or after the hours of operation stated in paragraph 7.1 of the lease must
be received at the management office at least 24 hours in advance.
25. LEASE PROVISIONS REGARDING LESSEE'S CONDUCT. Lessee shall comply with all
the provisions of paragraph 9.2 regarding parking and paragraph 10.1 regarding
occupancy, nuisance, and hazards.
26. ELEVATORS. Lessor shall not be liable for damages from stoppage of elevators
for repair, service, or improvements. Nor shall Lessor be liable for delays of
any duration in connection with elevator repair, service, or improvements.
27. SMOKING. This is a non-smoking building; smoking is not permitted anywhere
inside the building.
28. ICE, SLEET, SNOW, OR WATER. Lessor shall have no duty to remove, in whole or
in part, ice, sleet, snow, or water from parking lots, walkways, sidewalks, or
stairs, regardless whether they are covered, uncovered, inside, or outside of
buildings. At Lessor's option, Lessor may remove such ice, sleet, snow, or water
at any time, in whole or in part, with or without notice to anyone.
Page 28
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 31
EXHIBIT G
Page One of Two
THIS FORM IS NOT TO BE EXECUTED AT TIME OF LEASE EXECUTION.
ESTOPPEL CERTIFICATE
(see paragraph 30.1 of lease)
The purpose of this certificate is to confirm the current status of matters
relating to the lease described below. It is for the benefit of the owner or
prospective purchaser or mortgagee of the building in which the leased premises
are located.
1. The undersigned is the Lessee under a lease between ________________________,
as Lessor, and ___________________________________, as Lessee, dated _________
___________ on leased premises locally known as the ____________________________
building and located at ______________________________, in ____________________,
Texas. A copy of the fully executed lease and any amendments or modifications
thereto are attached. There are no other modifications or amendments to the
above described lease. The dates of any amendments or modifications are: (put
"none" if inapplicable) _______________________________________________________.
2. There are no unfulfilled written or verbal promises, representations, or
warranties by Lessor.
3. There are no subleases of the leased premises or any portions thereof.
4. The lease (together with any amendments or modifications referred to above)
is in good standing and in full force and effect. Lessor is not in default.
Lessee agrees to give notice of any Lessor default to any purchaser or lender
making written requests to Lessee for same.
5. Except for rents (if any) which may be due under the lease for the current
month, there are no rents or other charges which have been prepaid by the
undersigned Lessee to Lessor under the lease other than the following:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
6. The amount of security deposit currently posted by Lessee with Lessor is
$ __________ in the form of ( ) cash or ( ) an irrevocable, unconditional letter
of credit issued by _____________________________ in favor of Lessor which is
still valid.
7. Lessee acknowledges that the space being leased consists of ______________
rentable square feet according to the lease, that the improvements to be
constructed by Lessor have been satisfactorily completed, that the lease space
has been accepted by Lessee, that Lessee now occupies the lease space, and that
the commencement date for the lease term was __________________________________.
8. There are no rentals which are due and unpaid. Rentals are fully paid (if
required by the lease) through the last day of the month in which this estoppel
certificate has been executed.
9. There are no known offsets or credits against rentals except as expressly
provided by the terms of the lease. There is no known right of rescission and no
known defense to Lessee's future obligations to pay the specified rentals at the
times and in accordance with the lease terms. Lessee has not received any
concession (rental or otherwise) or similar compensation not expressed in the
lease which is presently in effect.
10. Lessee has no options or rights of refusal regarding the leased premises or
additional rental space other than as set out in the lease.
11. Lessee has not: (a) made a general assignment for the benefit of creditors;
and (b) commenced any case, proceeding or other action seeking reorganization,
arrangement, adjustment, liquidation, dissolution, or composition of it or its
debts under any law relating to bankruptcy, insolvency, reorganization, or
relief of debtors; or (c) had any involuntary case, proceeding, or other action
commenced against it which seeks to have an order for relief entered against it,
as debtor, or seeks reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of it or its debts under any law relating to
Page 29
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 32
EXHIBIT G (cont'd)
Page Two of Two
bankruptcy, insolvency, reorganization, or relief of debtors; or (d) concealed,
removed, or permitted to be concealed or removed, any part of its property, with
intent to hinder, delay, or defraud its creditors or any of them, or made or
suffered a transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance, or similar law; or made any transfer of its
property to or for the benefit of a creditor at a time when other creditors
similarly situated have not been paid; or (e) had a trustee, receiver, custodian
or other similar official appointed for or take possession of all or any part of
its property or had any court take jurisdiction of any other of its property.
12. Lessee agrees to furnish Lessor with estoppel letters on this form within 10
days (stating the then-current facts) after written request by Lessor or
subsequent owners of the building.
13. Lessee acknowledges that, upon 10 days' prior written request of Lessor's
mortgagee at any time after foreclosure proceedings or a deed in lieu of
foreclosure, Lessee shall attorn to the mortgage or foreclosure purchaser by
recognizing such new owner as Lessor under the lease provided that such
purchaser shall recognize the rights of tenant under the lease as long as tenant
is not in default. The agreement of Lessee to attorn shall survive any
foreclosure sale or deed in lieu of foreclosure. Lessee shall, upon 10 days'
written notice from Lessor's mortgagee anytime before or after foreclosure sale,
execute, acknowledge, and deliver to Lessor's mortgagee all instruments and
certificates that in the reasonable judgment of Lessor's mortgagee may be
necessary or proper to confirm such attornment.
14. Lessee acknowledges that this estoppel certificate and the statements
therein may be conclusively relied upon by Lessor and by any prospective
purchaser or lien holder of the leased premises.
15. The form of this estoppel certificate may vary, depending on lender or
purchaser requirements. It is agreed that this certificate may be modified to
conform to reasonable requests by lenders or purchasers.
16. This agreement shall be binding upon and shall inure to the benefit of the
Lessor, any present or future mortgagee, any prospective buyer or master Lessee
of the property, and their successors and assigns.
Dated this ______________ day of __________, 19___.
LESSEE
----------------------------------------------
By
--------------------------------------------------
Printed name of signatory
---------------------------
Title
-----------------------------------------------
Page 30
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -------------
Lessee BRS
-------------
<PAGE> 33
EXHIBIT H
Page One of Two
OFFICE LEASE GUARANTY
(see paragraph 37.1 of lease)
[TEXT OMITTED]
Page 31
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -----------
Lessee BRS
-----------
<PAGE> 34
EXHIBIT H (cont'd)
Page Two of Two
[TEXT OMITTED]
Page 32
KALEIDO II Lessor DT
CROSSROADS SYSTEMS, INC. -----------
Lessee BRS
-----------
<PAGE> 35
EXHIBIT I
CERTIFICATE OF CORPORATE RESOLUTION
AUTHORIZING LEASE OR GUARANTY
(see paragraphs 37.1 and 39.1 of lease)
The undersigned, as secretary of the corporation named below, certifies that at
a special meeting of the board of directors of the corporation, duly called and
held on the ___ day of_____________, 19__, at which a quorum of the directors
were present and acting throughout, the following resolutions were unanimously
adopted and are still in force and effect:
RESOLVED that the president or the vice president of the corporation shall be
authorized to execute a lease for office space on behalf of the corporation
and/or to guarantee performance of a lease for office space, described below:
Date of lease: February 28, 1997
--------------------------------------------------------
Lessor: Eurus Estates II, Ltd.
--------------------------------------------------------------
Lessee: Crossroads Systems, Inc.
--------------------------------------------------------------
Guarantor, if any (not Lessee's name): N/A
--------------------------------
Building name: Kaleido II
--------------------------------------------------------
Suite No.: II-300
--------------------------------------------------------
Building address: 5910 Courtyard Drive
-----------------------------------------------------
City/County/State/Zip: Austin / Travis / Texas / 78759
------------------------------------------------
RESOLVED FURTHER, that the president or vice president is authorized on behalf
of the Corporation to execute and deliver to the Lessor all instruments
reasonably necessary for the lease. Lessor is entitled to rely upon the above
resolutions until the board of directors of the corporation revokes or alters
same in written form, certified by the secretary of the corporation, and
delivers same, certified mail, return receipt requested, to the Lessor. The
corporation is duly organized and is in good standing under the laws of the
State of Texas, and there are no proceedings pending to forfeit the
corporation's charter or right to do business in Texas. The undersigned further
certifies that on the meeting date referred to above, the names and respective
titles of the officers of the corporation were as follows:
President
- -------------------------------------- ----------------------------------------
Vice President
- -------------------------------------- ----------------------------------------
Secretary
- -------------------------------------- ----------------------------------------
Treasurer
- -------------------------------------- ----------------------------------------
WITNESS MY HAND this day of , 19
---------- ------- -------
CROSSROADS SYSTEMS, INC.
--------------------------------------
Typed name of corporation
/s/ T. DALE QUISENBERRY
--------------------------------------
Signature of secretary of corporation
T. Dale Quisenberry
--------------------------------------
Printed name of secretary
STATE OF TEXAS
COUNTY OF TRAVIS
This instrument was acknowledged before me on March 3, 1997 by
T. Dale Quisenberry on behalf of the above corporation and in the above stated
capacity.
/s/ MARY BRADLEY
---------------------------------------
Notary Public for the State of Texas
Printed name of notary
----------------
My commission expires
-----------------
[SEAL]
Page 33
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 36
EXHIBIT J
SPECIAL CONDITIONS
(see special conditions paragraph 37.2 of lease)
The following special conditions shall apply to this lease and shall prevail on
any other provisions to the contrary.
FINANCIAL STATEMENTS. Prior to execution of this lease and thereafter from time
to time, Lessee shall, upon written request, furnish to Lessor a financial
statement of Lessee's condition in a reasonably satisfactory form. All
financial statements shall be originally signed and dated by Lessee or Lessee's
agent and be current within 90 days.
RIGHT TO TERMINATE. LESSEE SHALL HAVE THE RIGHT TO
TERMINATE THIS LEASE AGREEMENT ANYTIME AFTER Lessor DT
THE THIRTY-SIXTH MONTH (MARCH 2000) WITH NINETY -----------
(90) DAYS WRITTEN NOTICE TO LESSOR AND A TERMINATION Lessee BRS
FEE FOR THE UNAMORTIZED PORTION OF THE ACTUAL TENANT -----------
FINISH-OUT COSTS AND LEASING COMMISSIONS.
Page 34
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 37
EXHIBIT K
HAZARDOUS MATERIALS STATEMENT
Various materials utilized in the construction of any improvements to the
property or in the use thereof, past or present, may contain materials that
have been or may in the future be determined to be hazardous. For example, some
electrical transformers and other electrical components can contain PCBs, and
asbestos may have been used in a wide variety of building components such as
fire-proofing, air duct insulation, acoustical tiles, spray-on acoustical
materials, linoleum, floor tiles and plaster. Such substances may be present on
or in soils, underground water, building components or other portions of the
leased premises in areas that may or may not be accessible or noticeable.
Current federal, state and local laws and regulations may require the clean-up
of such hazardous or undesirable materials.
Lessor, real estate brokers, and leasing agents in this transaction have no
expertise with respect to hazardous materials and have not made, nor will any
of their statements constitute representations, either express or implied,
regarding the existence or nonexistence of hazardous materials in or on the
leased premises.
Page 35
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 38
EXHIBIT L
APPROVED BY THE TEXAS REAL ESTATE COMMISSION FOR VOLUNTARY USE
Texas law requires all real estate licensees to give the
following information about brokerage services to prospective
buyers, tenants, sellers and landlords.
- --------------------------------------------------------------------------------
INFORMATION ABOUT BROKERAGE SERVICES
- --------------------------------------------------------------------------------
Before working with a real estate broker, you should know that the duties of a
broker depend on whom the broker represents. If you are as prospective seller or
landlord (owner) or a prospective buyer or tenant (buyer), you should know that
the broker who lists the property for sale or lease is the owner's agent. A
broker who acts as a subagent represents the owner in cooperation with the
listing broker. A broker who acts as a buyer's agent represents the buyer. A
broker may act as an intermediary between the parties if the parties consent in
writing. A broker can assist you in locating a property, preparing a contract or
lease, or obtaining financing without representing you. A broker is obligated by
law to treat you honestly.
IF THE BROKER REPRESENTS THE OWNER:
The broker becomes the owner's agent by entering into an agreement with the
owner, usually through a written listing agreement, or by agreeing to act as a
subagent by accepting an offer of subagency from the listing broker. A subagent
may work in a different real estate office. A listing broker or subagent can
assist the buyer but does not represent the buyer and must place the interests
of the owner first. The buyer should not tell the owner's agent anything the
buyer would not want the owner to know because an owner's agent must disclose to
the owner any material information known to the agent.
IF THE BROKER REPRESENTS THE BUYER:
The broker becomes the buyer's agent by entering into an agreement to represent
the buyer, usually through a written buyer representation agreement. A buyer's
agent can assist the owner but does not represent the owner and must place the
interests of the buyer first. The owner should not tell a buyer's agent anything
the owner would not want the buyer to know because a buyer's agent must disclose
to the buyer any material information known to the agent.
IF THE BROKER ACTS AS AN INTERMEDIARY:
A broker may act as an intermediary between the parties if the broker complies
with The Texas Real Estate License Act. The broker must obtain the written
consent of each party to the transaction to act as an intermediary. The written
consent must state who will pay the broker and, in conspicuous bold or
underlined print, set forth the broker's obligations as an intermediary. The
broker is required to treat each party honestly and fairly and to comply with
The Texas Real Estate License Act. A broker who acts as an intermediary in a
transaction:
(1) shall treat all parties honestly;
(2) may not disclose that the owner will accept a price less than the
asking price unless authorized in writing to or do so by the owner;
(3) may not disclose that the buyer will pay a price greater than the
price submitted in a written offer unless authorized in writing to do
so by the buyer; and
(4) may not disclose any confidential information or any information that
a party specifically instructs the broker in writing not to disclose
unless authorized in writing to disclose the information or required
to do so by The Texas Real Estate License Act or a court order or if
the information materially relates to the condition of the property.
With the parties' consent, a broker acting as an intermediary between the
parties may appoint a person who is licensed under The Texas Real Estate License
Act and associated with the broker to communicate with and carry out instruction
so one party and another person who is licensed under that Act and associated
with the broker to communicate with and carry out instruction of the other
party.
IF YOU CHOOSE TO HAVE A BROKER REPRESENT YOU,
you should enter into a written agreement with the broker that clearly
establishes the broker's obligations and your obligations. The agreement should
state how and by whom the broker will be paid. You have the right to choose the
type of representation, if any, you wish to receive. Your payment of a fee to a
broker does not necessarily establish that the broker represents you. If you
have any questions regarding the duties and responsibilities of the broker, you
should resolve those questions before proceeding.
- --------------------------------------------------------------------------------
Real estate licensee asks that you acknowledge receipt
of this information about brokerage services for the
licensee's records.
/s/ BRIAN R. SMITH March 3, 1997
- -------------------------------------------------------------------------------
Tenant Date
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Texas Real Estate Brokers and Salesmen are licensed and regulated by the Texas
Real Estate Commission (TREC). If you have a question or complaint regarding a
real estate licensee, you should contact TREC at P.O. Box 12188, Austin, Texas
78711-2188 or 512-465-3960.
- -------------------------------------------------------------------------------
Page 36
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 39
EXHIBIT M
Page 1 of 2
OPTION FOR ADDITIONAL SPACE
ANYTIME AFTER THE TWELFTH (12TH) MONTH OF THIS LEASE AGREEMENT AND NO LATER THAN
THE THIRTIETH (30TH) MONTH, Lessee shall be entitled, at its option, to lease
additional space of approximately 2,879 rentable square feet (2,346 square feet)
of usable area which is outlined on page 2 of this exhibit, as follows:
1. NOTICE OF ELECTION. If Lessee elects to exercise this option, Lessee shall be
required to give Lessor written notice of intent to exercise this option, at
least one-hundred and eighty (180) days prior to Lessee's desired occupancy date
for such space. If Lessee exercises this option for additional space, such
additional space shall be subject to all of the same terms and covenants of this
lease except that the base rental rate shall be at the then current building
rental rate (established from time to time by Lessor) which is being charged by
Lessor to new tenants for space of comparable size and location within the
building at the time of the exercise of this option by Lessee, AND THE FINISH
OUT ALLOWANCE SHALL BE BASED ON $0.0833 PER USEABLE SQUARE FOOT PER MONTH TIMES
THE NUMBER OF MONTHS FROM THE COMMENCEMENT DATE OF THE EXPANSION TO THE END OF
THE LEASE TERM.
2. LEASE AMENDMENT. If this option is exercised, Lessor shall submit a lease
amendment to Lessee within five (5) days after the date on which Lessee
delivered Lessor notice of exercise of this option. Lessee shall have three (3)
days after receipt of such amendment to execute and return same to Lessor. If
said amendment is not executed and returned to Lessor within such time period,
this option to lease additional space shall terminate automatically and without
further notice.
3.
4. TERMINATION UPON DEFAULT. The option for additional space granted herein
shall terminate automatically and without notice if Lessee is in default under
paragraph 19.1 of this lease or if Lessee vacates the office space described
in paragraph 1.1 of this lease prior to the exercise of the right of first
refusal granted herein.
Page 37
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 40
EXHIBIT M
Page 2 of 2
OPTION FOR ADDITIONAL SPACE
FLOOR PLAN
[MAP OF THIRD FLOOR]
Page 38
KALEIDO II Lessor DT
-----------
CROSSROADS SYSTEMS, INC. Lessee BRS
-----------
<PAGE> 1
EXHIBIT 10.7
October 6, 1997
FIRST SUPPLEMENT TO LEASE AGREEMENT
RE: Lease Agreement (the "Lease Agreement") dated February 28, 1997 by and
between EURUS ESTATES II, LTD., as Lessor, and CROSSROADS SYSTEMS, INC., as
Lessee, demising of 8,739 rentable square feet (7,121 usf) of space locally
known as Suite II-300 in the KALEIDO II office building located at 9390 Research
Boulevard, Austin, Travis County, Texas 78759.
This First Supplement to Lease Agreement entered into by and between EURUS
ESTATES II, LTD., hereinafter called "Lessor", and CROSSROADS SYSTEMS, INC.,
hereinafter called "Lessee", shall amend and modify the Lease Agreement as
follows:
1. LEASE EXPANSION. Effective November 1, 1997 and continuing through the
remainder of the lease term (05/31/02), Lessee shall lease from Lessor
additional space known as Suite II-350 consisting of 2,879 rentable square
feet (2,346 usf) as shown on the attached EXHIBIT A. Lessee's total leased
square footage shall, therefore, be 11,618 rentable square feet (9,467 usf)
2. Expansion Space Base Rent. Effective November 1, 1997, Lessee shall pay to
Lessor base rent for the expansion space in the amounts set forth in the
rent schedule below:
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
----------- --------- -------- -------------
<S> <C> <C> <C>
11/01/97 to 05/31/98 $4,558.42 $27,350.52 $19.00
06/01/98 to 05/31/99 $4,678.38 $56,140.56 $19.50
06/01/99 to 05/31/00 $4,798.33 $57,579.96 $20.00
06/01/00 to 05/31/01 $4,918.29 $59,019.48 $20.50
06/01/01 to 05/31/02 $5,038.25 $60,459.00 $21.00
</TABLE>
3. TENANT FINISH OUT. Per Lessee's Option for Additional Space (Exhibit M) of
the Lease Agreement, Lessor shall provide Lessee with a finish out
allowance for the expansion space, known as Suite II-350, of $0.0833 per
usable square foot per month times the number of months from the
commencement date of the lease of the expansion space to the end of the
lease term. Therefore, Lessee shall have a total allowance of $10,748.10
based on 2,346 usable square feet times $0.0833 times 55 months. Final
construction plans shall be mutually acceptable to both Lessee and Lessor.
4. Lease Buy Out. Lessee agrees to pay Lessor $13,414.35 to buy out the
current tenant of Suite II-250, Moddrell Enterprises, LLC, from its lease.
Lessor and Lessee acknowledge and agree that this amount represents
Lessor's unamortized finish out costs and leasing commissions from its
lease with Moddrell Enterprises.
Lessor DT
-----------
Lessee BRS
-----------
<PAGE> 2
Except as provided to the contrary herein, all the provisions of the Lease
Agreement shall be applied to the expansion space and all of the remaining
terms, covenants, and provisions of the Lease Agreement shall remain in full
force and effect and unmodified hereby. Each party hereby acknowledges that the
other is not in default under the Lease Agreement in any respect. Each signatory
hereto represents and warrants that he or she is authorized to execute this
document and that upon said execution by both parties, this document will
constitute the binding obligation of the party on behalf of whom such person has
signed, without the necessity of Joinder of any other person or entity.
EXECUTED on the dates set forth below our respective signatures.
LESSOR: LESSEE:
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS,
INC.
By: /s/ DON TAIT By: /s/ BRIAN SMITH
----------------------------------- ------------------
Don Tait, CPM, RPA, Vice-President, Brian Smith,
Kucera Management, Inc., CEO
Authorized Managing Agent for
Eurus Estates II, Ltd.
Date: 10/22/97 Date: October 15, 1997
---------------------------------- -----------------
<PAGE> 3
EXHIBIT A
CROSSROADS SYSTEMS, INC. EXPANSION SPACE
Kaleido II, Suite 350
2,879 rentable square feet (2,346 usf)
[FLOOR PLAN]
Lessor DT
---------------
Lessee BRS
---------------
<PAGE> 1
EXHIBIT 10.8
SEPTEMBER 28, 1998
SECOND SUPPLEMENT TO LEASE AGREEMENT
Re: Lease Agreement (the "Lease Agreement") dated February 28, 1997 by and
between, EURUS ESTATES II, LTD., as Lessor, and CROSSROADS SYSTEMS, INC., as
Lessee, and that certain First Supplement to Lease Agreement (the "First
Supplement") dated October 6, 1997, demising of 11,618 rentable square feet
(9,467 use of space locally known as Suites II-300 and II-350 in the KALEIDO II
office building located at 9390 Research Boulevard, Austin, Travis County, Texas
78759. The primary lease agreement, as amended by the First Supplement, shall
hereinafter be referred to as the "Lease Agreement".
This Second Supplement to Lease Agreement entered into by and between EURUS
ESTATES II, LTD., hereinafter called "Lessor", and CROSSROADS SYSTEMS, INC.,
hereinafter called "Lessee", shall amend and modify the Lease Agreement as
follows:
1. LEASE EXPANSION. Commencing January 1, 1999 and continuing for a period of
sixty (60) months to December 31, 2003, Lessee shall lease from Lessor
5,709 rentable square feet (4,656 usf) of additional space on the first
floor (the "Expansion Space"), locally known as Suite II-450, and as shown
on the attached Exhibit A. Lessee's total leased square footage shall,
therefor, adjust to 17,327 rentable square feet (14,123 usf).
2. LEASE RENEWAL. Commencing June 1, 2002, Lessee's lease of Suites II-300 and
II-350 shall be extended nineteen (19) months to December 31, 2003.
3. EXPANSION SPACE BASE RENT. Commencing January 1, 1999, Lessee shall pay to
Lessor base rent for the Expansion Space according to the rent schedule
below:
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
-------------------- ---------- ----------- -------------
<S> <C> <C> <C>
01/01/99 to 01/31/99 $ 0.00 $ 0.00 $ 20.00
02/01/99 to 05/31/99 $ 9,515.00 $ 38,060.00 $ 20.00
06/01/99 to 05/31/00 $ 9,752.88 $117,034.56 $ 20.50
06/01/00 to 05/31/01 $ 9,990.75 $119,889.00 $ 21.00
06/01/01 to 05/31/02 $10,228.63 $122,743.56 $ 21.50
06/01/02 to 05/31/03 $10,466.50 $125,598.00 $ 22.00
06/01/03 to 12/31/03 $10,704.38 $ 74,930.66 $ 22.50
</TABLE>
4. RENEWAL BASE RENT. Commencing June 1, 2002, Lessee shall pay to Lessor base
rent for the for Suites II-300 and II-350 according to the rent schedule
below:
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
-------------------- ---------- ----------- -------------
<S> <C> <C> <C>
06/01/02 to 05/31/03 $21,299.67 $255,596.04 $ 22.00
06/01/03 to 12/31/03 $21,783.75 $152,486.25 $ 22.50
</TABLE>
5. TENANT FINISH OUT FOR EXPANSION SPACE. Lessor shall provide Lessee with a
finish-out allowance equal to $0.0833 per usable square foot per month time
the number of months
Lessor TT
------------
Lessee BRS
------------
<PAGE> 2
from the commencement date of the lease of the Expansion Space to the end
of the lease term. Therefore, Lessee shall have a total allowance of
$23,280.00 based on 4,656 usable square feet times $0.0833 times 60 months.
Final construction plans shall be mutually acceptable to both Lessee and
Lessor.
Except as provided to the contrary herein, all the provisions of the Lease
Agreement shall be applied to the expansion space and all of the remaining
terms, covenants, and provisions of the Lease Agreement shall remain in full
force and effect and unmodified hereby. Each party hereby acknowledges that the
other is not in default under the Lease Agreement in any respect. Each signatory
hereto represents and warrants that he or she is authorized to execute this
document and that upon said execution by both parties, this document will
constitute the binding obligation of the party on behalf of whom such person has
signed, without the necessity of joinder of any other person or entity.
EXECUTED on the dates set forth below our respective signatures.
LESSOR: LESSEE:
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
By: /s/ TERRY THOMPSON By: /s/ BRIAN R. SMITH
-------------------------------- ------------------------------------
Terry Thompson, EVP/CEO Brian R. Smith
Kucera Management, Inc. CEO
Authorized Managing Agent for
Eurus Estates II, Ltd.
Date: 10-22-98 Date: October 13, 1998
------------------------------ ----------------------------------
<PAGE> 3
EXHIBIT A
CROSSROADS SYSTEMS, INC. EXPANSION SPACE
Kaleido II, Suite II-450
5,709 rentable square feet (4,656 usf)
[FLOOR PLAN]
Lessor TT
---------------
Lessee BRS
---------------
<PAGE> 1
EXHIBIT 10.9
DECEMBER 1, 1998
THIRD SUPPLEMENT TO LEASE AGREEMENT
Re: Lease Agreement (the "Lease Agreement") dated February 28, 1997 by and
between, EURUS ESTATES II, LTD., as Lessor, and CROSSROADS SYSTEMS, INC., as
Lessee, and that certain
* First Supplement to Lease Agreement (the "First Supplement") dated
October 6, 1997; and that certain
* Second Supplement to Lease Agreement (the Second Supplement) dated
September 28, 1998,
demising of 11,618 rentable square feet (9,467 usf) of space locally known as
Suites II-300 and II-350 and 5,709 rentable square feet (4,656 usf) of space
locally known as Suite II-450, in the KALEIDO II office building located at
9390 Research Boulevard, Austin, Travis County, Texas 78759. The primary lease
agreement, as amended by the First Supplement, shall hereinafter be referred to
as the "Lease Agreement".
This Third Supplement to Lease Agreement entered into by and between EURUS
ESTATES II, LTD., hereinafter called "Lessor", and CROSSROADS SYSTEMS, INC.,
hereinafter called "Lessee", shall amend and modify the Lease Agreement as
follows:
EXPANSION SPACE BASE RENT. Commencing December 1, 1998, Lessee shall pay
to Lessor base rent for the Expansion Space according to the rent schedule
below:
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
----------- --------- -------- -------------
<S> <C> <C> <C>
12/01/98 to 12/31/98 $ 0.00 $ 0.00 $20.00
01/01/99 to 05/31/99 $ 9,515.00 $ 47,575.00 $20.00
06/01/99 to 05/31/00 $ 9,752.88 $117,034.56 $20.50
06/01/00 to 05/31/01 $ 9,990.75 $119,889.00 $21.00
06/01/01 to 05/31/02 $10,228.63 $122,743.56 $21.50
06/01/02 to 05/31/03 $10,466.50 $125,598.00 $22.00
06/01/03 to 12/31/03 $10,704.38 $ 74,930.66 $22.50
</TABLE>
Except as provided to the contrary herein, all the provisions of the Lease
Agreement shall be applied to the expansion space and all of the remaining
terms, covenants, and provisions of the Lease Agreement shall remain in full
force and effect and unmodified hereby. Each party hereby acknowledges that the
other is not in default under the Lease Agreement in any respect, Each
signatory hereto represents and warrants that he or she is authorized to
execute this document and that upon said execution by both parties, this
document will constitute the binding obligation of the party on behalf of whom
such person has signed, without the necessity of joinder of any other person or
entity.
Lessor TT
--------------
Lessee BRS
--------------
<PAGE> 2
EXECUTED on the dates set forth below our respective signatures.
LESSOR: LESSEE:
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
By: /s/ TERRY THOMPSON By: /s/ BRIAN R. SMITH
----------------------------------- -----------------------------
Terry Thompson, EVP/CEO Brian R. Smith
Kucera Management, Inc. CEO
Authorized Managing Agent for
EURUS Estates II, Ltd.
Date: January 20, 1999 Date: December 17, 1998
--------------------------------- ---------------------------
<PAGE> 1
EXHIBIT 10.10
JUNE 23, 1999
FOURTH SUPPLEMENT TO LEASE AGREEMENT
Re: Lease Agreement (the "Lease Agreement") dated February 28, 1997 by and
between, EURUS ESTATES II, LTD., as Lessor, and CROSSROADS SYSTEMS, INC., as
Lessee, and that certain
o First Supplement to Lease Agreement (the "First Supplement") dated
October 6, 1997; and that certain
o Second Supplement to Lease Agreement (the "Second Supplement") dated
September 28, 1998; and that certain
o Third Supplement to Lease Agreement (the "Third Supplement") dated
December 1, 1998,
demising of 11,618 rentable square feet (9,467 usf) of space locally known
as Suites II-300 and II-350 and 5,709 rentable square feet (4,656 usf) of
space locally known as Suite II-450, in the KALEIDO II office building
located at 9390 Research Boulevard, Austin, Travis County, Texas 78759.
The primary lease agreement, as amended by the above referenced
Supplements, shall hereinafter be referred to as the "Lease Agreement".
This Fourth Supplement to Lease Agreement entered into by and between
EURUS ESTATES II, LTD., hereinafter called "Lessor", and CROSSROADS
SYSTEMS, INC., hereinafter called "Lessee", shall amend and modify the
Lease Agreement as follows:
1. LEASE EXPANSION. Commencing on or about August 1, 1999 and continuing for a
period of fifty-three (53) months to December 31, 2003, Lessee shall lease
from Lessor 4,043 rentable square feet (3,294 usf) of additional space on
the fourth floor (the "Expansion Space"), locally known as Suites II-420
and II-430, as shown on the attached Exhibit A. Lessee's total leased
square footage shall, therefore, adjust to 21,370 rentable square feet
(17,417 usf).
2. EXPANSION SPACE BASE RENT. Commencing on or about August 1, 1999, Lessee
shall pay to Lessor base rent for the Expansion Space according to the rent
schedule below:
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
----------- --------- ---------- -------------
<S> <C> <C> <C>
08/01/99 to 10/31/99 $6,923.64 $20,770.91 $20.55
11/01/99 to 10/31/00 $7,092.10 $85,105.15 $21.05
11/01/00 to 10/31/01 $7,260.55 $87,126.65 $21.55
11/01/01 to 10/31/02 $7,429.01 $89,148.15 $22.05
11/01/02 to 10/31/03 $7,597.47 $91,169.65 $22.55
11/01/03 to 12/31/03 $7,765.93 $15,531.86 $23.05
</TABLE>
Lessor TT
------------
Lessee BRS
------------
<PAGE> 2
3. TENANT FINISH OUT FOR EXPANSION SPACE. None. Lessee accepts premises in "As
Is" condition.
4. EXPENSE STOP. Commencing on or about August 1, 1999, Lessee shall pay to
Lessor additional rents for Lessee's pro rata share of the building
operating expenses in excess of the 1999 Base Year for Suites II-420 and
II-430 only.
5. COMMENCEMENT DATE. Lessor and Lessee acknowledge and agree that August 1,
1999 shall be the target Commencement Date, however the actual Commencement
date will occur when the Expansion Space is delivered to Lessee, see
attached Exhibit B.
6. RIGHT TO TERMINATE. Lessor and Lessee agree that Exhibit J, Special
Conditions paragraph 2 in the original Lease that allows Lessee to
terminate the Lease anytime after the thirty-six month of the Lease, the
date of March 1, 2000 shall be amended to June 1, 2000.
Except as provided to the contrary herein, all the provisions of the Lease
Agreement shall be applied to the expansion space and all of the remaining
terms, covenants, and provisions of the Lease Agreement shall remain in full
force and effect and unmodified hereby. Each party hereby acknowledges that the
other is not in default under the Lease Agreement in any respect. Each signatory
hereto represents and warrants that he or she is authorized to execute this
document and that upon said execution by both parties, this document will
constitute the binding obligation of the party on behalf of whom such person has
signed, without the necessity of joinder of any other person or entity.
EXECUTED on the dates set forth below our respective signatures.
LESSOR: LESSEE:
EURUS ESTATES , LTD. CROSSROADS SYSTEMS, INC.
By: /s/ TERRY THOMPSON By: /s/ BRIAN R. SMITH
------------------------------ -----------------------------------
Terry Thompson, EVP/CEO Brian R. Smith
Kucera Management, Inc. CEO
Authorized Managing Agent for
Eurus Estates 11, Ltd.
Date: Date: June 30, 1999
---------------------------- ---------------------------------
<PAGE> 3
EXHIBIT A
CROSSROADS SYSTEMS, INC. EXPANSION SPACE
Kaleido II, Suite II-420 & II-430
4,043 rentable square feet (3,294 usf)
[FLOOR PLAN]
Lessor TT
---------------
Lessee BRS
---------------
<PAGE> 4
EXHIBIT B: Acknowledgement of Lease
(TO BE SIGNED AT MOVE-IN)
The undersigned parties acknowledge that the lease described below is in full
force and effect and that Lessee has taken possession of the space.
Date of lease: June 17, 1999
-----------------------------------------------------------
Lessor: Eurus Estates II, Ltd.
------------------------------------------------------------------
Lessee: Crossroads Systems, Inc.
------------------------------------------------------------------
Guarantor, if any (not Lessee's name): N/A
-----------------------------------
Building name: Kaleido II
-----------------------------------------------------------
Suite No.: Suites 420 and 430
---------------------------------------------------------------
Building address: 9390 Research Blvd.
--------------------------------------------------------
City/County/State/Zip: Austin/Travis/Texas/78759
---------------------------------------------------
Legal description of property: See Exhibit B of Lease
-------------------------------------------
The commencement date, annual anniversary date, and ending date of the initial
lease term as defined in paragraph 4.1 of above lease are as follows:
Commencement date (month, day, year):
------------------------------------
Annual Anniversary date (month, day):
------------------------------------
Ending date (month, day, year): December 31, 2003
------------------------------------------
The parties acknowledge that the lease has not been amended or modified and
that this acknowledgment may be filed of record with the Texas Secretary of
State or the county where the building is located in order to record (1)
Lessee's possession rights to the leased premises, and (2) Lessor's contractual
landlord lien rights over all personal property therein and any security deposit
posted by Lessee. The entire lease is hereby affirmed and incorporated herein.
The lease will cease to be an encumbrance to Lessor's title if Lessor files an
affidavit of record, stating that Lessee no longer occupies the premises and
that Lessee's right of possession has been lawfully terminated.
<TABLE>
<S> <C>
LESSOR LESSEE
(TO BE SIGNED AT MOVE-IN) (TO BE SIGNED AT MOVE-IN)
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
- ----------------------------------------------- -----------------------------------------------
Printed name of company or firm (if applicable) Printed name of company or firm (if applicable)
TERRY THOMPSON BRIAN R. SMITH
- ----------------------------------------------- -----------------------------------------------
Printed name of person signing Printed name of person signing
- ----------------------------------------------- -----------------------------------------------
Signature Signature
EVP/CEO, KUCERA MANAGEMENT, INC.
AUTHORIZED MANAGEMENT AGENT FOR
EURUS ESTATES II, LTD. CEO
- ----------------------------------------------- -----------------------------------------------
Title of person signing (if applicable) Title of person signing (if applicable)
- ----------------------------------------------- -----------------------------------------------
Date signed Date signed
</TABLE>
<PAGE> 5
STATE OF TEXAS
COUNTY OF _________________
This instrument was acknowledged before me on ____________________________ by
______________________________ on behalf of the above stated LESSOR and in the
above stated capacity.
-------------------------------------------------
Notary Public for the State of Texas
Printed name of notary
---------------------------
My commission expires
----------------------------
STATE OF TEXAS
COUNTY OF _________________
This instrument was acknowledged before me on ____________________________ by
______________________________ on behalf of the above stated LESSEE and in the
above stated capacity.
-------------------------------------------------
Notary Public for the State of Texas
Printed name of notary
---------------------------
My commission expires
----------------------------
Lessor
-----
Lessee BRS
-----
<PAGE> 1
EXHIBIT 10.11
June 22, 1999
FIFTH SUPPLEMENT TO LEASE AGREEMENT
Re: Lease Agreement (the "Lease Agreement") dated February 28, 1997 by and
between, EURUS ESTATES II, LTD., as Lessor, and CROSSROADS SYSTEMS, INC., as
Lessee, and that certain
* First Supplement to Lease Agreement (the "First Supplement") dated October
6, 1997; and that certain
* Second Supplement to Lease Agreement (the "Second Supplement") dated
September 28, 1998; and that certain
* Third Supplement to Lease Agreement (the "Third Supplement") dated December
1, 1998; and that certain
* Fourth Supplement to Lease Agreement (the "Fourth Supplement") dated June
17, 1999
demising of 11,618 rentable square feet (9,467 usf) of space locally known as
Suites II-300 and II-350 and 5,709 rentable square feet (4,656 usf) of space
locally known as Suite II-450 and 4,043 rentable square feet (3,294 usf) of
space locally known as Suites II-420 and II-430, in the KALEIDO II office
building located at 9390 Research Boulevard, Austin, Travis County, Texas 78759.
The primary lease agreement, as amended by the above referenced Supplements,
shall hereinafter be referred to as the "Lease Agreement".
This Fifth Supplement to Lease Agreement entered into by and between EURUS
ESTATES II, LTD., hereinafter called "Lessor", and CROSSROADS SYSTEMS, INC.,
hereinafter called "Lessee", shall amend and modify the Lease Agreement as
follows:
1. LEASE EXPANSION. Commencing on or about August 1, 1999 and
continuing for a period of fifty-three (53) months to December 31,
2003, Lessee shall lease from Lessor 2,802 rentable square feet
(2,283 usf) of additional space on the fourth floor (the
"Expansion Space"), locally known as Suite II-400, as shown on the
attached Exhibit A. Lessee's total leased square footage shall,
therefore, adjust to 24,172 rentable square feet (19,700 usf).
2. EXPANSION SPACE BASE RENT. Commencing on or about August 1, 1999,
Lessee shall pay to Lessor base rent for the Expansion Space
according to the rent schedule below:
Lessor TT
----------
Lessee BRS
----------
<PAGE> 2
<TABLE>
<CAPTION>
Time Period Per Month Per Term Per SF Per Yr
-------------------- --------- ---------- -------------
<S> <C> <C> <C>
08/01/99 to 10/31/99 $4,831.12 $14,493.35 $20.69
11/01/99 to 10/31/00 $4,947.87 $59,374.38 $21.19
11/01/00 to 10/31/01 $5,064.62 $60,775.38 $21.69
11/01/01 to 10/31/02 $5,181.37 $62,176.38 $22.19
11/01/02 to 10/31/03 $5,298.12 $63,577.38 $22.69
11/01/03 to 12/31/03 $5,414.87 $10,829.73 $23.19
</TABLE>
3. TENANT FINISH OUT FOR EXPANSION SPACE. None. Lessee accepts premises in "As
Is" condition.
4. EXPENSE STOP. Commencing on or about August 1, 1999, Lessee's expense stop
shall adjust to $8.32 per square foot per year, which is the estimated operating
expenses for 1999.
5. COMMENCEMENT DATE. Lessor and Lessee acknowledge and agree that August 1,
1999 shall be the target Commencement Date, however the actual Commencement date
will occur when the Expansion Space is delivered to Lessee, see attached Exhibit
B.
6. RIGHT TO TERMINATE. Lessor and Lessee agree that Exhibit J, Special
Conditions paragraph 2 in the original Lease that allows Lessee to terminate the
Lease anytime after the thirty-six month of the Lease, the date of March 1, 2000
shall be amended to June 1, 2000.
Except as provided to the contrary herein, all the provisions of the Lease
Agreement shall be applied to the expansion space and all of the remaining
terms, covenants, and provisions of the Lease Agreement shall remain in full
force and effect and unmodified hereby. Each party hereby acknowledges that the
other is not in default under the Lease Agreement in any respect. Each signatory
hereto represents and warrants that he or she is authorized to execute this
document and that upon said execution by both parties, this document will
constitute the binding obligation of the party on behalf of whom such person has
signed, without the necessity of joinder of any other person or entity.
EXECUTED on the dates set forth below our respective signatures.
LESSOR: LESSEE:
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
By: /s/ TERRY THOMPSON By: /s/ BRIAN R. SMITH
--------------------------- ------------------------
Terry Thompson, EVP/CEO Brian R. Smith
Kucera Management, Inc. CEO
Authorized Managing Agent for
EURUS Estates II, Ltd.
Date: Date:
--------------------------- ------------------------
<PAGE> 3
EXHIBIT A
CROSSROADS SYSTEMS, INC. EXPANSION SPACE
Kaleido II, Suite II-400
2,802 rentable square feet (2,283 usf)
[FLOOR PLAN]
Lessor TT
---------------
Lessee BRS
---------------
<PAGE> 4
EXHIBIT B: Acknowledgement of Lease
(TO BE SIGNED AT MOVE-IN)
The undersigned parties acknowledge that the lease described below is in full
force and effect and that Lessee has taken possession of the space.
Date of lease: June 17, 1999
-----------------------------------------------------------
Lessor: Eurus Estates II, Ltd.
------------------------------------------------------------------
Lessee: Crossroads Systems, Inc.
------------------------------------------------------------------
Guarantor, if any (not Lessee's name): N/A
-----------------------------------
Building name: Kaleido II
-----------------------------------------------------------
Suite No.: Suite 400
---------------------------------------------------------------
Building address: 9390 Research Blvd.
--------------------------------------------------------
City/County/State/Zip: Austin/Travis/Texas/78759
---------------------------------------------------
Legal description of property: See Exhibit B of Lease
-------------------------------------------
The commencement date, annual anniversary date, and ending date of the initial
lease term as defined in paragraph 4.1 of above lease are as follows:
Commencement date (month, day, year):
------------------------------------
Annual Anniversary date (month, day):
------------------------------------
Ending date (month, day, year): December 31, 2003
------------------------------------------
The parties acknowledge that the lease has not been amended or modified and
that this acknowledgment may be filed of record with the Texas Secretary of
State or the county where the building is located in order to record (1)
Lessee's possession rights to the leased premises, and (2) Lessor's contractual
landlord lien rights over all personal property therein and any security deposit
posted by Lessee. The entire lease is hereby affirmed and incorporated herein.
The lease will cease to be an encumbrance to Lessor's title if Lessor files an
affidavit of record, stating that Lessee no longer occupies the premises and
that Lessee's right of possession has been lawfully terminated.
<TABLE>
<S> <C>
LESSOR LESSEE
(TO BE SIGNED AT MOVE-IN) (TO BE SIGNED AT MOVE-IN)
EURUS ESTATES II, LTD. CROSSROADS SYSTEMS, INC.
- ----------------------------------------------- -----------------------------------------------
Printed name of company or firm (if applicable) Printed name of company or firm (if applicable)
TERRY THOMPSON BRIAN R. SMITH
- ----------------------------------------------- -----------------------------------------------
Printed name of person signing Printed name of person signing
- ----------------------------------------------- -----------------------------------------------
Signature Signature
EVP/CEO, KUCERA MANAGEMENT, INC.
AUTHORIZED MANAGEMENT AGENT FOR
EURUS ESTATES II, LTD. CEO
- ----------------------------------------------- -----------------------------------------------
Title of person signing (if applicable) Title of person signing (if applicable)
- ----------------------------------------------- -----------------------------------------------
Date signed Date signed
</TABLE>
<PAGE> 5
STATE OF TEXAS
COUNTY OF _________________
This instrument was acknowledged before me on ____________________________ by
______________________________ on behalf of the above stated LESSOR and in the
above stated capacity.
-------------------------------------------------
Notary Public for the State of Texas
Printed name of notary
---------------------------
My commission expires
----------------------------
STATE OF TEXAS
COUNTY OF _________________
This instrument was acknowledged before me on ____________________________ by
______________________________ on behalf of the above stated LESSEE and in the
above stated capacity.
-------------------------------------------------
Notary Public for the State of Texas
Printed name of notary
---------------------------
My commission expires
----------------------------
Lessor
------------------------
Lessee
------------------------
<PAGE> 1
EXHIBIT 10.12
STOCK PLEDGE AGREEMENT
THIS STOCK PLEDGE AGREEMENT (this "Agreement") is made as of the ____
day of June, 1999 by and between Crossroads Holding Corporation, a Delaware
corporation (the "Corporation"), and _______________ ("Pledgor").
R E C I T A L S:
WHEREAS, in connection with the purchase from the Corporation of
__________ shares (the "Purchased Shares") of the Corporation's Common Stock
(the "Common Stock") on the date of this Agreement, Pledgor has issued that
certain Note Secured by Stock Pledge Agreement dated as of even date herewith
(the "Note") payable to the order of the Corporation in the principal amount of
$_______________, together with interest thereon.
WHEREAS, such Note is secured by the Purchased Shares and other
Collateral upon the terms set forth in this Agreement.
A G R E E M E N T:
NOW, THEREFORE, it is hereby agreed as follows:
1. Grant of Security Interest. Pledgor hereby grants the Corporation a
security interest in, and assigns, all of Pledgor's right, title and interest in
and to the following securities and other property (collectively, the
"Collateral"):
(a) the Purchased Shares delivered to and deposited with the
Corporation, together with a duly executed Assignment Separate from
Certificate, the form of which is attached as Annex A, all in accordance
with the provisions of Paragraph 3 below, as collateral for the Note;
(b) any and all new, additional or different securities or other
property subsequently distributed with respect to the Purchased Shares
which are to be delivered to and deposited with the Corporation pursuant
to the requirements of Paragraph 3 of this Agreement;
(c) any and all other property and money which is delivered to or
comes into the possession of the Corporation pursuant to the terms of this
Agreement; and
(d) the proceeds of any sale, exchange or disposition of the
property and securities described in subparagraphs (a), (b) or (c) above.
2. Warranties. Pledgor hereby warrants that Pledgor is the owner of the
Collateral and has the right to pledge the Collateral and that the Collateral is
free from all liens, adverse claims and other security interests (other than
those created hereby).
<PAGE> 2
3. Escrow.
(a) Deposit. Upon issuance, the certificates for the Purchased
Shares shall be deposited in escrow with the Corporation to be held in
accordance with the provisions of this Paragraph 3. Each deposited
certificate shall be accompanied by a duly executed Assignment Separate
from Certificate in the form attached as Annex A. The deposited
certificates, together with any other assets or securities from time to
time deposited with the Corporation pursuant to the requirements of this
Agreement, shall remain in escrow until such time or times as the
certificates (or other assets and securities) are to be released or
otherwise surrendered for cancellation in accordance with Paragraph 8.
Upon delivery of the certificates (or other assets and securities) to the
Corporation, Pledgor shall be issued a receipt acknowledging the number of
Purchased Shares (or other assets and securities) delivered in escrow.
(b) Recapitalization/Reorganization. Any new, additional or
different securities or other property (other than regular cash dividends)
which are to be delivered to and deposited with the Corporation pursuant
to the requirements of this Paragraph 3 of this Agreement shall be
immediately delivered to the Corporation to be held in escrow under this
Paragraph 3, but only to the extent the Purchased Shares are at the time
subject to the escrow requirements hereunder. All regular cash dividends
on the Purchased Shares (or other securities at the time held in escrow)
shall be paid directly to Pledgor and shall not be held in escrow.
(c) Duty to Deliver. Any new, additional or different securities or
other property (other than regular cash dividends) which may now or
hereafter become distributable with respect to the Collateral by reason of
(i) any stock split, stock dividend, recapitalization, combination of
shares, exchange of shares or other change affecting the Common Stock as a
class without the Corporation's receipt of consideration or (ii) any
merger, consolidation or other reorganization affecting the capital
structure of the Corporation shall, upon receipt by Pledgor be promptly
delivered to and deposited with the Corporation as part of the Collateral
hereunder. Any such securities shall be accompanied by one or more duly
executed Assignments Separate from Certificate as provided under this
Paragraph 3.
(d) Stockholder Rights. So long as there exists no Event of Default
under Paragraph 9 of this Agreement, Pledgor may exercise all stockholder
voting rights and be entitled to receive any and all regular cash
dividends paid on the Collateral and all proxy statements and other
stockholder materials pertaining to the Collateral. If Pledgor is in
default hereunder or under the Note, the Corporation through its Board of
Directors shall be entitled to vote the Purchased Shares (or other
Collateral) as Pledgor's proxy.
4. Payment of Taxes and Other Charges. Pledgor shall pay, prior to the
delinquency date, all taxes, liens, assessments and other charges against the
Collateral. In the event of Pledgor's failure to do so, the Corporation in its
discretion may pay any or all of such taxes and other charges without contesting
the validity or legality thereof. The payments so made shall become part of the
indebtedness secured hereunder and until paid shall bear interest at the minimum
per annum rate as set forth in the Note.
2
<PAGE> 3
5. Rights and Powers of Corporation. The Corporation may, without
obligation to do so, exercise at any time and from time to time one or more of
the following rights and powers with respect to any or all of the Collateral:
(a) subject to the applicable limitations of Paragraph 8, accept in
its discretion other property of Pledgor in exchange for all or part of
the Collateral and release Collateral to Pledgor to the extent necessary
to effect such exchange, and in such event the other property received in
the exchange shall become part of the Collateral hereunder;
(b) perform such acts as are necessary to preserve and protect the
Collateral and the rights, powers and remedies granted with respect to
such Collateral by this Agreement; and
(c) transfer record ownership of the Collateral to the Corporation
or its nominee and receive, endorse and give receipt for, or collect by
legal proceedings or otherwise, dividends or other distributions made or
paid with respect to the Collateral, provided and only if there exists at
the time an outstanding Event of Default under Paragraph 9 of this
Agreement. Any cash sums that the Corporation may so receive shall be
applied to the payment of the Note and any other indebtedness secured
hereunder, in such order of application as the Corporation deems
appropriate. Any remaining cash shall be paid over to Pledgor.
Any action by the Corporation pursuant to the provisions of this
Paragraph 5 may be taken without notice to Pledgor. Expenses reasonably incurred
in connection with such action shall be payable by Pledgor and form part of the
indebtedness secured hereunder as provided in Paragraph 11.
6. Care of Collateral. The Corporation shall exercise reasonable care
in the custody and preservation of the Collateral. However, the Corporation
shall have no obligation to (a) initiate any action with respect to, or
otherwise inform Pledgor of, any conversion, call, exchange right, preemptive
right, subscription right, purchase offer or other right or privilege relating
to or affecting the Collateral, (b) preserve the rights of Pledgor against
adverse claims or protect the Collateral against the possibility of a decline in
market value or (c) take any action with respect to the Collateral requested by
Pledgor unless the request is made in writing and the Corporation determines
that the requested action will not unreasonably jeopardize the value of the
Collateral as security for the Note and other indebtedness secured hereunder.
Subject to the limitations of Paragraph 8, the Corporation may at any
time release and deliver all or part of the Collateral to Pledgor, and the
receipt thereof by Pledgor shall constitute a complete and full acquittance for
the Collateral so released and delivered. The Corporation shall accordingly be
discharged from any further liability or responsibility for the Collateral, and
the released Collateral shall no longer be subject to the provisions of this
Agreement.
7. Transfer of Collateral. In connection with the transfer or
assignment of the Note (whether by negotiation, discount or otherwise), the
Corporation may transfer all or any
3
<PAGE> 4
part of the Collateral, and the transferee shall thereupon succeed to all the
rights, powers and remedies granted the Corporation hereunder with respect to
the Collateral so transferred. Upon such transfer, the Corporation shall be
fully discharged from all liability and responsibility for the transferred
Collateral.
8. Release of Collateral. Provided all indebtedness secured hereunder
shall at the time have been paid in full and there does not otherwise exist any
Event of Default under Paragraph 9, the Purchased Shares, together with any
additional Collateral which may hereafter be pledged and deposited hereunder,
shall be released from pledge and returned to Pledgor in accordance with the
following provisions:
(a) Upon payment or repayment of principal under the Note, together
with payment of all accrued interest to date, one or more of the Purchased
Shares held as Collateral hereunder shall (subject to the applicable limitations
of Paragraphs 8(c) and 8(e) below) be released to Pledgor within 30 days after
such prepayment. The number of the shares to be so released shall be equal to
the number obtained by multiplying (i) the total number of Purchased Shares held
under this Agreement at the time of the payment or prepayment, by (ii) a
fraction, the numerator of which shall be the amount of the principal paid or
prepaid and the denominator of which shall be the unpaid principal balance of
the Note immediately prior to such payment or prepayment. In no event, however,
shall any fractional shares be released.
(b) Any additional Collateral which may hereafter be pledged and
deposited with the Corporation (pursuant to the requirements of Paragraph 3(c))
with respect to the Purchased Shares shall be released at the same time the
particular Purchased Shares to which the additional Collateral relates are to be
released in accordance with the applicable provisions of Paragraph 8(a).
(c) Under no circumstances, however, shall any Purchased Shares or
any other Collateral be released if previously applied to the payment of any
indebtedness secured hereunder. In addition, in no event shall any Purchased
Shares or other Collateral be released pursuant to the provisions of Paragraph
8(a) or 8(b) if, and to the extent, the fair market value of the Common Stock
and all other Collateral which would otherwise remain in pledge hereunder after
such release were effected would be less than the unpaid principal under the
Note.
(d) For all valuation purposes under this Agreement, the fair market
value per share of Common Stock on any relevant date shall be determined in
accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, the fair market value shall be the closing selling price
per share of Common Stock on the date in question, as such prices are
reported by the National Association of Securities Dealers on its Nasdaq
system or any successor system. If there is no reported closing selling
price for the Common Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of fair market value.
4
<PAGE> 5
(ii) If the Common Stock is at the time listed on the American
Stock Exchange or the New York Stock Exchange, then the fair market value
shall be the closing selling price per share of Common Stock on the date
in question on the securities exchange serving as the primary market for
the Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no reported sale of Common
Stock on such exchange on the date in question, then the fair market value
shall be the closing selling price on the exchange on the last preceding
date for which such quotation exists.
(iii) If the Common Stock is at the time neither listed on any
securities exchange nor traded on the Nasdaq National Market, the fair
market value shall be determined by the Corporation's Board of Directors
after taking into account such factors as the Board shall deem
appropriate.
(e) In the event the Collateral becomes in whole or in part
comprised of "margin securities" within the meaning of Section 207.2(i) of
Regulation G of the Federal Reserve Board, then no Collateral shall thereafter
be substituted for any Collateral under the provisions of Paragraph 5(a) or be
released under Paragraph 8(a) or (b), unless there is compliance with each of
the following additional requirements:
(i) The substitution or release must not increase the amount by
which the indebtedness secured hereunder at the time of such substitution
or release exceeds the maximum loan value (as defined below) of the
Collateral immediately prior to such substitution or release.
(ii) The substitution or release must not cause the amount of
indebtedness secured hereunder at the time of such substitution or release
to exceed the maximum loan value of the Collateral remaining after such
substitution or release is effected.
(iii) For purposes of this Paragraph 8(e), the maximum loan
value of each item of Collateral shall be determined on the day the
substitution or release is to be effected and shall, in the case of the
shares of Common Stock and any additional Collateral (other than margin
securities), equal the good faith loan value thereof (as defined in
Section 207.2(e)(1) of Regulation G) and shall, in the case of all margin
securities (other than the Common Stock), equal fifty percent (50%) of the
current market value of such securities.
9. Events of Default. The occurrence of one or more of the following
events shall constitute an event of default under this Agreement (each an "Event
of Default"):
(a) the failure of Pledgor to pay when due under the Note, any
installment of principal or accrued interest;
(b) the occurrence of the insolvency of the Pledgor, the commission
of any act of bankruptcy by the Pledgor, the execution by the Pledgor of
a general assignment for the benefit of creditors, the filing by or
against the Pledgor of any petition
5
<PAGE> 6
in bankruptcy or any petition for relief under the provisions of the
federal bankruptcy act or any other state or federal law for the relief of
debtors and the continuation of such petition without dismissal for a
period of 30 days or more, the appointment of a receiver or trustee to
take possession of any property or assets of the Pledgor;
(c) the failure of Pledgor to perform any obligation imposed upon
Pledgor by reason of this Agreement, which failure continues for a period
of ten days after notice thereof or which by its nature cannot be cured;
(d) the breach of any warranty of Pledgor contained in this
Agreement; or
(e) the failure of Pledgor to perform any obligation imposed upon
Pledgor by reason of the Mutual Release dated effective as of December 31,
1998 by and between Pledgor and the Corporation or the breach of any terms
contained therein.
Upon the occurrence of any such Event of Default, the Corporation may,
at its election, declare the Note and all other indebtedness secured hereunder
to become immediately due and payable and may exercise any or all of the rights
and remedies granted to a secured party under the provisions of the Texas
Business and Commerce Code (as now or hereafter in effect), including (without
limitation) the power to dispose of the Collateral by public or private sale or
to accept the Collateral in full payment of the Note and all other indebtedness
secured hereunder.
Any proceeds realized from the disposition of the Collateral pursuant
to the foregoing power of sale shall be applied first to the payment of expenses
incurred by the Corporation in connection with the disposition, then to the
payment of the Note and finally to any other indebtedness secured hereunder. Any
surplus proceeds shall be paid over to Pledgor. However, in the event such
proceeds prove insufficient to satisfy all obligations of Pledgor under the
Note, then Pledgor shall remain personally liable for the resulting deficiency.
10. Other Remedies. The rights, powers and remedies granted to the
Corporation pursuant to the provisions of this Agreement shall be in addition to
all rights, powers and remedies granted to the Corporation under any statute or
rule of law. Any forbearance, failure or delay by the Corporation in exercising
any right, power or remedy under this Agreement shall not be deemed to be a
waiver of such right, power or remedy. Any single or partial exercise of any
right, power or remedy under this Agreement shall not preclude the further
exercise thereof, and every right, power and remedy of the Corporation under
this Agreement shall continue in full force and effect unless such right, power
or remedy is specifically waived by an instrument executed by the Corporation.
11. Costs and Expenses. All costs and expenses (including reasonable
attorneys fees) incurred by the Corporation in the exercise or enforcement of
any right, power or remedy granted it under this Agreement shall become part of
the indebtedness secured hereunder and shall constitute a personal liability of
Pledgor payable immediately upon demand and bearing interest until paid at the
minimum per annum rate, compounded semi-annually, required to avoid the
imputation of interest income to the Corporation and compensation income to
Pledgor under the Federal tax laws.
6
<PAGE> 7
12. Applicable Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Texas without resort to that State's
conflict-of-laws rules.
13. Successors. This Agreement shall be binding upon the Corporation
and its successors and assigns and upon Pledgor and the executors, heirs and
legatees of Pledgor's estate and the Pledgor's successors and assigns. Pledgor
may not assign his rights or obligations under this Agreement without the
Corporation's consent.
14. Severability. If any provision of this Agreement is held to be
invalid under applicable law, then such provision shall be ineffective only to
the extent of such invalidity, and neither the remainder of such provision nor
any other provisions of this Agreement shall be affected thereby.
15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. Amendments; No Waivers. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), only
with the written consent of the Corporation and the Pledgor. The failure of the
Corporation in any instance to exercise any right hereunder shall not constitute
a waiver of any other rights that may subsequently arise under the provisions of
this Agreement, the Note or any other agreement between the Corporation and
Pledgor. No waiver of any breach or condition of this Agreement shall be deemed
to be a waiver of any other or subsequent breach or condition, whether of like
or different nature. Any amendment or waiver effected in accordance with this
Paragraph 16 shall be binding upon the Pledgor and the Corporation.
17. Entire Agreement. This Agreement and the Note constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof and supersedes any and all prior agreements relating
to the subject matter hereof.
[Signature Page Follows]
7
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been executed by Pledgor and the
Corporation effective as of the date first set forth above.
PLEDGOR:
By:
-----------------------------------------
Name:
---------------------------------------
CROSSROADS HOLDING CORPORATION
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
<PAGE> 9
ANNEX A
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, ____________________ hereby assigns and transfers
unto Crossroads Holding Corporation, a Delaware corporation (the "Corporation"),
______________ shares of the Common Stock of the Corporation, standing in its
name on the books of the Corporation represented by Certificate No. ____
herewith, and does hereby constitute and appoint _______________________, with
full power of substitution and resubstitution in the premises, to transfer said
stock on the books of the Corporation.
Dated: _______________.
By:
-----------------------------------------
Name:
---------------------------------------
Address:
------------------------------------
------------------------------------
INSTRUCTION: Please do not fill in any blanks other than the signature line.
Please sign exactly as you would like your name to appear on the issued stock
certificate.
<PAGE> 1
EXHIBIT 10.13
NOTE SECURED BY STOCK PLEDGE AGREEMENT
$_______________ Austin, Texas ____________, 1999
FOR VALUE RECEIVED, the undersigned Maker promises to pay to the order
of Crossroads Holding Corporation, a Delaware corporation (the "Corporation"),
the principal sum of $______________, together with interest from the date of
this Note Secured by Stock Pledge Agreement (this "Note") on the unpaid balance
from time to time outstanding hereunder. Such interest shall accrue from the
date of advancement on the unpaid balance at the rate of 7.0% per annum,
compounded semi-annually until maturity.
This Note is being executed in connection with and subject to the
terms of the Stock Pledge Agreement dated as of even date herewith (the "Stock
Pledge Agreement"). Capitalized terms used but not defined herein shall have
the respective meanings assigned to them in the Stock Pledge Agreement.
All payments hereunder shall be made in lawful tender of the United
States. Such payment shall be credited first to any accrued and unpaid
interest, and the remainder shall be applied to principal. Prepayment of
principal, together with all accrued and unpaid interest, may be made at any
time without penalty.
The entire unpaid principal sum of this Note, together with all
accrued and unpaid interest, shall mature and immediately become due and
payable in one lump sum on ____________, 2003; provided, however, that the
entire principal sum of this Note shall mature and immediately become due and
payable upon the occurrence of an Event of Default.
All past due principal and accrued interest on this Note shall bear
interest from maturity until paid at the lesser of (i) the rate of 12% per
annum or (ii) the highest rate for which Maker may legally contract under
applicable law.
This Note is full recourse to Maker. Payment of this Note is secured
by the Stock Pledge Agreement covering certain shares of the Common Stock of
the Corporation held of record by Maker. Maker, however, shall remain liable
for payment of this Note, and assets of Maker, in addition to the Collateral
under the Stock Pledge Agreement, may be applied to the satisfaction of Maker's
obligations hereunder. If action is instituted to collect this Note, Maker
promises to pay all costs and expenses (including reasonable attorney fees)
incurred in connection with such action.
This Note shall be construed in accordance with the laws of the State
of Texas without giving effect to any otherwise applicable conflict-of-law
rules.
This Note and the Stock Pledge Agreement constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof and supersedes any and all prior agreements
relating to the subject matter hereof and thereof.
<PAGE> 2
IN WITNESS WHEREOF, the undersigned Maker has executed this Note to be
effective as of the date first set forth above.
MAKER:
By:
----------------------------------
Name:
--------------------------------
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated August 16, 1999 relating to the financial statements of
Crossroads Systems, Inc. and Subsidiary, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Austin, Texas
August 18, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1999
<PERIOD-START> NOV-01-1997 NOV-01-1998
<PERIOD-END> OCT-31-1998 JUL-31-1999
<CASH> 1,695 6,492
<SECURITIES> 2,239 0
<RECEIVABLES> 906 2,641
<ALLOWANCES> 14 59
<INVENTORY> 896 2,447
<CURRENT-ASSETS> 5,966 12,085
<PP&E> 968 1,816
<DEPRECIATION> 692 1,334
<TOTAL-ASSETS> 7,187 14,140
<CURRENT-LIABILITIES> 1,505 5,865
<BONDS> 0 0
13,184 18,441
0 0
<COMMON> 6 8
<OTHER-SE> (8,099) (11,110)
<TOTAL-LIABILITY-AND-EQUITY> 7,187 14,140
<SALES> 2,930 11,728
<TOTAL-REVENUES> 3,209 11,793
<CGS> 1,861 6,965
<TOTAL-COSTS> 1,861 6,965
<OTHER-EXPENSES> 6,784 8,563
<LOSS-PROVISION> 6 45
<INTEREST-EXPENSE> 65 76
<INCOME-PRETAX> (5,354) (3,645)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (5,354) 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (5,354) (3,645)
<EPS-BASIC> (.87) (.52)
<EPS-DILUTED> (.87) (.52)
</TABLE>
