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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 13, 1999
REGISTRATION NO. 333-85505
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CROSSROADS SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
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<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)
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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)
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Copies to:
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<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 AMY M. SANDERS
301 CONGRESS AVENUE, SUITE 1200 GRAY CARY WARE & FREIDENRICH LLP
AUSTIN, TEXAS 78701 100 CONGRESS AVENUE, SUITE 1440
TELEPHONE: (512) 477-5495 AUSTIN, TEXAS 78701
FACSIMILE: (512) 477-5813 TELEPHONE: (512) 457-7000
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. [ ]
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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.
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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 OCTOBER 13, 1999
PROSPECTUS
3,500,000 SHARES
[CROSSROADS LOGO]
COMMON STOCK
This is the initial public offering of shares of common stock of Crossroads
Systems, Inc. Crossroads expects that the public offering price will be between
$11.00 and $13.00 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 9.
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.
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<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 two selling stockholders up
to an additional 525,000 shares of common stock at the public offering price,
less the underwriting discounts and commissions, to cover over-allotments. For
information regarding the selling stockholders, please see the section entitled
"Principal and Selling Stockholders" on page 61.
The underwriters expect to deliver the shares in New York, New York on
, 1999.
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SG COWEN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
, 1999
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[INSIDE FRONT COVER GRAPHICS:
The graphic depicts a schematic diagram of a Fibre Channel storage area
network, or SAN. At the top of the diagram is the caption "The Crossroads
Solution" and the following paragraph:
Crossroads' storage routers connect servers and storage systems in a
storage area network, enabling rapid, seamless communication across that
network. Our storage routers serve as an interconnect between a storage area
network (SAN) and network servers and storage devices. With Crossroads storage
routers, organizations are able to more effectively and efficiently store,
manage and ensure the integrity and availability of their data.
The title above the Fibre Channel SAN is "Fibre Channel Storage Area
Network." At the top of the diagram is a "Hub/Switch" which is connected via
Fibre Channel to three Crossroads storage routers, which are in turn connected
to "Network Servers." On the left of the diagram, one storage router is
connected via Small Computer System Interface, or SCSI, to a "SCSI Disk Storage
System." In the center of the diagram, the storage router is connected via SCSI
to two "Network Servers." On the right of the diagram, the storage router is
connected via SCSI to a "Tape Library." The four Network Servers in the center
of the diagram are connected through an "Ethernet" connection to five "Network
End Users" depicted as computer terminals.
Below the diagram are three explanatory paragraphs, from left to right as
follows:
- - LEVERAGE EXISTING INVESTMENTS. Many organizations' network servers and storage
systems are connected via the Small Computer System Interface (SCSI). SCSI
devices are not compatible with the Fibre Channel protocol used in storage area
networks. Our storage routers enable the connection of SCSI-based storage
systems within a storage area network.
- - ENHANCED STORAGE PERFORMANCE. By allowing storage systems to be accessible to
all servers on the network, our storage routers reduce local area network
congestion and enable networks to utilize their storage resources more
effectively.
- - FASTER DATA BACKUP. Our storage routers enable data backup processes to be
completed more rapidly over a SAN without slowing the local area network's
regular data processing activity.]
<PAGE> 4
TABLE OF CONTENTS
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<CAPTION>
PAGE
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Prospectus Summary....................... 5
Risk Factors............................. 9
Note Regarding Forward-Looking
Statements............................. 19
Use of Proceeds.......................... 20
Dividend Policy.......................... 20
Capitalization........................... 21
Dilution................................. 22
Selected Consolidated Financial Data..... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
PAGE
---
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Business................................. 34
Management............................... 48
Certain Transactions..................... 58
Principal and Selling Stockholders....... 61
Description of Capital Stock............. 63
Shares Eligible for Future Sale.......... 66
Underwriting............................. 68
Legal Matters............................ 70
Experts.................................. 70
Where You Can Find Additional Information
About Crossroads....................... 70
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
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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.
<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,
based on our market share of storage routers shipped. A storage router is a
piece of computer equipment that is installed between other computer devices to
enable them to exchange data with each other even though these devices use
different, incompatible rules and conventions, or computer protocols, to
transfer data. Without the storage router, these devices would be unable to
communicate with each other. The need for storage routers has emerged in recent
years due to significant changes in the way that many organizations are storing
data.
Dramatic growth in the amount of data that must be stored, combined with
the need for faster, more reliable and more efficient data access and data
management capabilities, have led many organizations to seek an improved way of
storing, accessing and managing data. In traditional computer networks, each
storage device is connected to only one server, and therefore can be accessed
only by that server. The computer protocol used to connect and transfer data
between the server and storage device is called the small computer system
interface, or SCSI. As more data must be stored and retrieved, organizations
increasingly are finding that this one-to-one, or point-to-point, connection is
not sufficiently fast, efficient and reliable to support growing demands for
data. In addition, in most organizations today, data backup -- or creating a
duplicate copy of data to protect it from corruption or loss -- is accomplished
by moving large volumes of stored data from a dedicated storage device over the
primary computer network to a backup storage device. Since the primary computer
network also is responsible for conducting day-to-day computer operations, this
added data movement results in substantial congestion, slowing day-to-day
computer operations.
To address these problems, organizations have recently begun to install
storage area networks, or SANs, which are computer networks dedicated to data
storage. A storage area network uses a different, higher performance computer
protocol, known as Fibre Channel, to transfer data. A storage area network also
removes the one-to-one connection between servers and storage devices, and
instead, allows many servers to connect to and share access with many storage
devices. The "many-to-many" connection enabled by the storage area network,
combined with the Fibre Channel protocol, permits faster, more efficient, more
reliable and more manageable data transfer processes. Furthermore, the storage
area network has the potential to enable data backup to be accomplished over it
instead of over the primary computer network, thus substantially reducing
congestion on the primary computer network and allowing much more efficient
day-to-day operations.
As storage area networks are relatively new, most storage devices in the
market continue to be sold with the small computer system interface.
Additionally, most organizations have made significant investments in storage
devices and servers that use the small computer system interface. Thus, in order
for devices of the storage area network that use Fibre Channel to function with
storage devices and servers that use the small computer system interface,
storage routers, such as those sold by Crossroads, must be installed between
these devices. In particular, storage routers are essential to shifting data
backup processes from the primary computer network to the storage area network
since most data backup storage devices use the small computer system interface
and can only connect to the storage area network through a storage router. As
new computer protocols are introduced in the future, storage routers will be
increasingly essential to enable rapid, seamless communication among servers,
storage devices and storage area network devices that use 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 effect their backup processes over the storage area
network rather than over the primary computer network. As
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a result, the primary computer network has greater availability to perform
day-to-day operations. In addition, by using the Fibre Channel protocol, our
products allow organizations to store the same data at multiple locations over
distances of up to 10 kilometers so that data can be restored from a
remote site when a primary storage device fails or is damaged.
- Providing Broad, Verified Interoperability. Our storage routers are
designed to function together, or interoperate, with all commercially
available Fibre Channel devices. We have tested and verified this
interoperability in over 2,500 different configurations of storage area
networks.
- Increasing Scalability and Implementation Flexibility. Our storage
routers are designed to operate in any SAN computing environment and are
capable of scaling to accommodate the growing needs of organizations to
support more users and use more devices and applications within their
storage area networks, and to transfer data over longer distances than
was possible in point-to-point architectures.
- 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 Device Investments. Our storage
routers enable an organization's continued use of its large installed
base of servers and storage devices that rely on the small computer
system interface within a storage area network. They also 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 customer relationships with
manufacturers of servers and storage systems and by extending the
interoperability of our products with other components of storage area networks.
We also plan to leverage our significant technology expertise to remain at the
forefront of the storage area networking market and develop routing solutions
for emerging market opportunities. For example, we are currently developing
routing products that incorporate emerging protocols, including the recently
announced System I/O. Furthermore, we intend to continue building relationships
with leading storage management software vendors to ensure that our products
work together with their products to effectively move, store and manage data. We
believe that our storage routers represent a critical component of storage area
networks and will increase in importance in the ongoing evolution of storage
area networks.
To date, we have sold approximately 6,000 storage routers to manufacturers
of servers and storage systems, primarily to major manufacturers of servers and
storage systems. These manufacturers sell our storage routers to end-user
organizations as a key component of the storage area networks that these
organizations have purchased to improve the flow of data in their computer
systems. Customers that accounted for more than ten percent of our revenues in
our fiscal year ended October 31, 1998 and the nine month fiscal period ended
July 31, 1999 were ADIC, Compaq, Hewlett-Packard and StorageTek. We have also
recently begun to sell our products to companies that distribute, resell or
integrate our products as part of a complete storage area network solution. We
contract with third parties to manufacture our storage routers and, to date, one
contract manufacturer has manufactured a significant portion of our products.
Our principal executive offices are located at 9390 Research Boulevard,
Suite II-300, Austin, Texas 78759. Our telephone number is (512) 349-0300.
6
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THE OFFERING
Common stock we are offering............. 3,500,000 shares
Common stock to be outstanding after this
offering................................. 25,382,926 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 3,500,000 shares. The underwriters have a 30-day
option to purchase up to 525,000 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 state 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.
---------------------
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.
---------------------
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.
7
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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 1,298 944 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)
Net loss attributable to common stock.......... (212) (2,751) (5,550) (3,953) (3,892)
Basic and diluted net loss per share........... $(0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
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........................................ $ (0.32) $ (0.19)
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;
- 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 as if
such conversion had occurred on July 31, 1999; and
- on a pro forma as adjusted basis at July 31, 1999 to additionally reflect
net proceeds from the sale of 3,500,000 shares of common stock offered
hereby at an assumed initial public offering price of $12.00 per share.
<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,492 $18,492 $56,684
Working capital............................................. 6,220 18,220 56,412
Total assets................................................ 14,140 26,140 64,332
Long-term debt, net of current portion...................... 936 936 936
Redeemable convertible preferred stock...................... 18,942 -- --
Total stockholders' equity (deficit)........................ (11,603) 19,339 57,531
</TABLE>
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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.
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 $11.9 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. However, we use our forecasted revenue to establish our expense
budget. Most of our expenses are fixed in the short term or incurred in advance
of anticipated revenue. As a result, 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.
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.
A number of factors may particularly contribute to fluctuations in our
revenue and operating results, including:
- the timing of orders from, and product integration by, our customers,
particularly our original equipment manufacturer, or OEM, customers, and
the tendency of these customers to change their order requirements
frequently with little or no advance notice to us;
- 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;
- 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; and
- the rate at which new markets emerge for products we are currently
developing.
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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, the widespread adoption of SANs for use in
organizations' computing systems is critical to our future success. Most of the
organizations that potentially may purchase our products from our customers have
invested substantial resources in their existing computing and data storage
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, the
ability of the different components used in a SAN to function effectively, or
interoperate, with each other when placed in a computing system has not yet been
achieved on a widespread basis. 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;
- 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 50% 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, these
new products or enhancements may not achieve market acceptance which could
reduce our revenue.
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;
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- our customer service and support capabilities and responsiveness; 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. We rely on OEMs as a
primary distribution channel as they are able to sell our products to a large
number of end-user organizations, which enables us to achieve broad market
penetration, with limited sales, marketing and customer service and support
resources from us. 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.
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 ability
to grow our business.
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 TAPE STORAGE SYSTEMS THAT INCORPORATE FIBER
CHANNEL INTERFACES INTO THEIR PRODUCTS.
In traditional computer networks, system backup is accomplished by
transferring data from applications and databases over the servers used in the
network to tape drives or other media where the data is safely stored. Tape
storage devices generally rely on a SCSI connection to interface with the
network in receiving and transmitting data. Our routers enable these SCSI-based
storage devices to interface with the Fibre Channel-based components of the SAN.
Because our routers allow communication between SCSI storage devices and a Fibre
Channel SAN, organizations are able to effect their backup processes over the
SAN rather than through the computer network, enabling the servers of the
network to remain available for other computing purposes. We currently derive
the majority of our revenue from sales of storage routers that are used to
connect SCSI-based tape storage systems with SANs. The introduction of tape
storage systems that incorporate Fibre Channel interfaces would enable tape
storage devices to communicate directly with SANs, without using storage
routers. We are aware that a number of manufacturers of storage systems,
including several of our current customers, are developing tape storage systems
with embedded Fibre Channel interfaces, with products expected to be introduced
to market in the near future. If these or other manufacturers are successful in
introducing Fibre Channel-based storage systems, demand for our storage router
products would be materially reduced and our revenue would decline.
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<PAGE> 13
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 bottlenecks that
have emerged between the storage systems and the servers within a computing
system. 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, demand for our
products that are currently in development would suffer, resulting in less
revenue for these products than we currently anticipate.
WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE MANUFACTURE
PRODUCTS IN ADVANCE OF BINDING COMMITMENTS FROM OUR CUSTOMERS TO PURCHASE OUR
PRODUCTS.
In order to assure availability of our products for some of our largest OEM
customers, we manufacture products in advance of purchase orders from these
customers based on forecasts provided by them. 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.
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.
To date, we have relied on a third-party manufacturer, XeTel Corporation,
to manufacture substantially all of our products on a purchase order basis. We
do not have a long-term supply contract with XeTel and, therefore, XeTel is not
obligated to manufacture products for us for any specific period, or in any
specific quantity, except as may be provided in a particular purchase order.
Although we believe that other providers of manufacturing services can
adequately address our needs, we expect that it would take approximately three
months to transition the performance of these services from XeTel to a new
manufacturer. We generally place orders for products with XeTel 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 XeTel to meet our customers' delivery requirements, or we may
accumulate
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<PAGE> 14
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. XeTel 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.
OUR PLANS TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS TO MARKET REQUIRES
COORDINATION ACROSS OUR SUPPLIERS AND MANUFACTURERS, WHICH EXPOSES US TO RISKS
OF DELAY OR POOR EXECUTION FROM A VARIETY OF SOURCES.
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 component supplier or contract manufacturer and
commencing volume production can be expensive and time consuming. If we are
required to change or choose to change suppliers, 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.
We are in the process of transitioning our final assembly and product test
operations in-house. Our contract manufacturer previously performed 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.
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 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
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<PAGE> 15
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.
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. 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.
WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS.
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.
WE HAVE LICENSED OUR 4200 STORAGE ROUTER TECHNOLOGY TO A STOCKHOLDER THAT IS
ALSO A KEY CUSTOMER, WHICH MAY ENABLE THIS CUSTOMER TO COMPETE WITH US.
We have licensed our 4200 storage router technology to Hewlett-Packard.
Hewlett-Packard is a stockholder of our company and a key customer. While
Hewlett-Packard has not introduced to market any products competitive to ours
that use the licensed technology, it could potentially do so in the future.
Because Hewlett-Packard has vastly greater resources and distribution
capabilities than Crossroads, it could establish market acceptance in a
relatively short time frame for any competitive products that it may introduce,
which, in turn, would reduce demand for our products from Hewlett-Packard and
could reduce demand for our products from other customers.
WE EXPECT UNIT PRICES OF OUR PRODUCTS TO DECREASE OVER TIME, AND IF WE CANNOT
INCREASE OUR SALES VOLUMES OUR REVENUE WILL DECLINE.
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
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<PAGE> 16
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.
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. 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, our products are
deployed within SANs from a variety of vendors. Therefore, 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.
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. In particular, due to the relatively early stage of our
business, we believe that our future success is highly dependent on Brian R.
Smith, our co-founder, chief executive officer and chairman of the board, to
provide continuity in the execution of our growth plans. We do not have
employment contracts with any of our key personnel. 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 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 in
2000 in order to 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 ability to effectively manage our operations may be
compromised.
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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 their end-user customers 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 invalidate our proprietary rights.
Any litigation, regardless of its outcome, would likely be time consuming and
expensive to resolve and would divert management's 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.
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<PAGE> 18
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. 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.
OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY
CUSTOMERS IN OUR MARKET.
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.
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.
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.
Although in "Use of Proceeds" we have specified some ways in which we
initially intend to use a portion of the proceeds of this offering, 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.
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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 75% 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 the State 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.
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; and
- departures of key personnel.
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.
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OF OUR TOTAL OUTSTANDING SHARES, 22,163,175, OR 86%, ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.
After this offering, we will have outstanding 25,663,175 shares of common
stock based on the number of shares outstanding at September 15, 1999. This
includes the 3,500,000 shares we are selling in this offering, which may be
resold in the public market immediately. The remaining 22,163,175 shares will
become available for resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF SHARES SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
- ---------------- ------------------ ------------------------------------------------------
<C> <C> <S>
3,500,000 14% Immediately (except to the extent purchased by our
affiliates).
18,286,574 71% 180 days after the date of this prospectus due to an
agreement these stockholders have with the underwriters.
However, the underwriters can waive this restriction and
allow these stockholders to sell their shares at any time
without prior notice.
3,876,601 15% Between 181 and 365 days after the date of this prospectus
due to the requirements of the federal securities laws.
</TABLE>
As restrictions on resale end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them. For more detailed information, see "Shares
Eligible for Future Sale" on page 66.
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, assuming an initial public
offering price of $12.00 per share, if you purchase common stock in this
offering, you will incur immediate dilution of approximately $9.73 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.
---------------------
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," "continue" and other similar words. 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.
19
<PAGE> 21
USE OF PROCEEDS
Assuming an initial public offering price of $12.00 per share, we will
receive approximately $38.2 million from our sale of 3,500,000 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 $2.8 million in net
proceeds and selling stockholders will receive an aggregate of $3.1 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 under market conditions that we
believe are favorable, facilitate future access by us to public equity markets
and provide us with increased visibility in our markets. As of the date of this
prospectus, we have internally forecasted the particular uses for the net
proceeds to be received upon completion of this offering. However, we currently
have no formal plan for the use of the expected offering proceeds, nor have we
sought the advice of or received reports from any of our professional advisors
regarding the use of the offering proceeds. We currently estimate that the net
proceeds of the offering will be used as follows:
- 12% for capital expenditures (including the purchase of a new enterprise
resource planning system; leasehold improvements; additional 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);
- 33% for expansion of our marketing and distribution activities;
- 39% for various product development initiatives; and
- 16% for working capital and other general corporate purposes.
Notwithstanding the estimates set forth above, our management will have
significant flexibility in applying the net proceeds of this offering. For
example, 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. Pending
any such uses of the proceeds of this offering, 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.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization at July 31, 1999:
- on an actual basis (giving effect to the 3-for-2 split of our common
stock effected as of August 12, 1999);
- 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 3,500,000 shares of common stock offered
hereby at an assumed initial public offering price of $12.00 per share.
You should read the following table in conjunction with our consolidated
financial statements and the notes to those statements which are included in
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 $ 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.......... 18,942 -- --
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, 25,382,926 shares issued and outstanding,
pro forma as adjusted.................................. 8 22 25
Additional paid-in capital.................................. 5,107 36,035 74,224
Deferred stock-based compensation........................... (4,389) (4,389) (4,389)
Notes receivable from stockholders.......................... (447) (447) (447)
Accumulated deficit......................................... (11,880) (11,880) (11,880)
Treasury stock.............................................. (2) (2) (2)
-------- -------- --------
Total stockholders' equity (deficit)................. (11,603) 19,339 57,531
-------- -------- --------
Total capitalization.............................. $ 8,275 $ 20,275 $ 58,467
======== ======== ========
</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 additional shares of common stock reserved for issuance under
our stock option plan.
21
<PAGE> 23
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 3,500,000 shares of common stock in this offering at an
assumed initial public offering price of $12.00 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 $57.5 million, or $2.27 per share. This amount represents an
immediate increase in pro forma net tangible book value to our existing
stockholders of $1.39 per share and an immediate dilution to new investors of
$9.73 per share. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
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............................. 1.39
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.27
------
Dilution per share to new investors......................... $ 9.73
======
</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
$60.1 million, or $2.34 per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $1.46 per share
and an immediate dilution to new investors of $9.66 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 $12.00 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 86.2% $30,731,000 42.3% $ 1.40
New investors............................. 3,500,000 13.8 42,000,000 57.7 12.00
---------- ----- ----------- -----
Total........................... 25,382,926 100.0% $72,731,000 100.0%
========== ===== =========== =====
</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.
22
<PAGE> 24
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, 1998 and July 31, 1999 and the consolidated statement of
operations data for the years ended October 31, 1996, 1997, 1998 and for the
nine-month period ended July 31, 1999 have been derived from audited
consolidated financial statements included in this prospectus. The consolidated
balance sheet data at October 31, 1995 and 1996 and 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 statement of operations data for
the nine months ended July 31, 1998 is derived from unaudited consolidated
financial statements included in this prospectus. 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 1,911 1,053 6,965
------- ------- ------- ------- -------- -------
Gross profit................ 125 322 544 1,298 944 4,828
------- ------- ------- ------- -------- -------
Operating expenses:
Sales and marketing....... -- -- 641 2,461 1,886 2,791
Research and
development............. -- 291 1,329 2,336 1,550 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 6,734 4,861 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)
Accretion on redeemable
convertible preferred
stock..................... -- -- (58) (196) (141) (247)
------- ------- ------- ------- -------- -------
Net income (loss)
attributable to common
stock..................... $ 70 $ (212) $(2,751) $(5,550) $ (3,953) $(3,892)
======= ======= ======= ======= ======== =======
Basic and diluted net loss
per share................. $ (0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
======= ======= ======= ======== =======
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........ $ (0.32) $ (0.19)
======= =======
Shares used in computing pro
forma basic and diluted
net loss per share........ 17,088 20,605
======= =======
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------------
1995 1996 1997 1998 JULY 31, 1999
------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 31 $ -- $ 6,063 $ 3,934 $ 6,492
Working capital............................................. 99 (168) 5,757 4,461 6,220
Total assets................................................ 127 150 7,615 7,187 14,140
Long-term debt, net of current portion...................... 41 82 301 591 936
Redeemable convertible preferred stock...................... -- -- 9,277 13,438 18,942
Total stockholders' equity (deficit)........................ 85 (124) (2,875) (8,347) (11,603)
</TABLE>
23
<PAGE> 25
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,
based on our market share of storage routers shipped. Storage routers are
computer equipment that organizations use to connect servers and storage systems
together in a storage area network, or SAN. A SAN is a high speed computer
network that facilitates data transfers among servers and storage systems using
high performance data communications that follow the industry-accepted rules and
conventions, which are commonly referred to as computer protocols. By using our
storage routers to serve as the interconnect between SANs and the other devices
in a computer network, organizations are able to more effectively and
efficiently store, manage and ensure the integrity and availability of their
data.
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 6,000 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. While we
currently sell products to all of our OEM customers, we do not have contracts
with Compaq or with some of our other customers. Although none of our customers
is obligated to purchase minimum quantities of our products, we seek to enter
into contracts in order to provide a framework for our customer relationships.
Generally, our contracts require our customers to provide us with forecasts to
assist us in our planning and ordering process. They also specify payment terms,
allocate liability for potential third party claims and provide for other terms
governing the legal rights of the parties.
In the past we have experienced fluctuation in the timing of orders from
our OEM customers, and we expect to continue to experience these fluctuations in
the future. These fluctuations have resulted from, among other things, OEM
customers placing 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.
24
<PAGE> 26
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 50% and 71% of our product
revenue in fiscal 1998 and in the nine month period ended July 31, 1999,
respectively. Moreover, although we negotiate the prices for our products on an
individual basis with each of our OEM customers, many of our current agreements
with our OEM customers include provisions that require reductions in the sales
price for our products over time. We believe that this practice is common within
our industry. To date, our agreements with OEM customers, including our largest
customers, provide for quarterly reductions in pricing on a product-by-product
basis ranging from 8% to 15% annually, with the actual discount determined
according to the volume potential expected from the customer, the OEM's customer
base, the credibility the OEM may bring to our solution, additional technology
the OEM may help us incorporate with our product and other Crossroads products
the OEM supports. Notwithstanding, the decreases in our average selling prices
of our older products has been offset by higher average selling prices for our
newer products, as well as sales to distributors, resellers and system
integrators where price decreases are not generally required. Nonetheless, we
could experience declines in our average unit selling prices for our products in
the future, especially if our newer products do not receive broad market
acceptance or if our efforts to increase sales to distributors, resellers and
system integrators are not successful. In addition, declines in our average
selling prices may be 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 $61,000. 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.
To date, we have outsourced substantially all of our manufacturing
requirements to XeTel Corporation, 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 incurred one-time charges
of $230,000 in moving and operating expenses, including our planned customer
qualification efforts, and $330,000 in purchased equipment and leasehold
improvements. Beginning in September 1999, we have incurred and expect to
continue to incur monthly charges of $90,000 related to rent, payroll and other
operating expenses. 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. We expect the total
cost of this transition to be less than $700,000. 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.
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
25
<PAGE> 27
$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 $11.9
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 our
taxable earnings history.
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 59.6 52.7 59.1
------ ------ ------ ------ ------
Gross margin.................................. 65.4 53.9 40.4 47.3 40.9
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing......................... -- 63.5 76.7 94.4 23.7
Research and development.................... 59.1 131.7 72.7 77.6 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............ 106.9 326.4 209.8 243.3 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.
26
<PAGE> 28
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 of $8.0 million and the introduction of our
4200 storage router product in June 1998 resulting in an increase in revenue of
$2.8 million. 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 561% from $1.1 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 of 4,600 units in
the 1999 period. Gross profit increased 411% from $944,000 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 47% 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 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 resulting in $300,000 of increased compensation expense and
increased commissions of $200,000 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 128% 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 resulting in
$700,000 of increased compensation expense and increased prototyping costs of
$700,000 related to the development of our 4200 product. As a percentage of
total revenue, research and development expenses decreased from 78% 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, but may fluctuate as a percentage of our total revenue, due to
the importance of research and development in developing our technologies and
expanding our product offerings.
27
<PAGE> 29
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 due to increased staffing resulting in
$200,000 of increased compensation expense and associated expenses of $100,000
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 of $2.5 million, in fiscal 1997, the introduction of our 4100 product
resulting in an increase of $500,000, 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 due to the license of a product design for $150,000
in that period.
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 311% 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 of
$1.4 million. Gross profit increased 69% from $322,000 in fiscal 1996 to
$544,000 in fiscal 1997, and 139% 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 40% 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
of $1.1 million and increased sales and marketing activities resulting in an
increase of $400,000. 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 76%
to $2.3 million in fiscal 1998. The increases primarily consisted of $500,000
for salaries and expenses from the hiring of additional research and development
personnel during fiscal 1997 and 1998 and product development and prototyping
costs of $400,000 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 73% in fiscal 1998. The decrease in fiscal 1998 was primarily
due to substantially higher revenue in that year.
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General and administrative. General and administrative expenses increased
463% from $235,000 in fiscal 1996 to $1.3 million in fiscal 1997, and 43% to
$1.9 million in fiscal 1998. The significant increase in general and
administrative expenses in fiscal 1997 was primarily due to the hiring of
administrative personnel resulting in increased compensation expense of $600,000
and associated expenses of $100,000, which were 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.
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............................... 249 321 483 858 1,807 2,029 3,129
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 293 264 386 355 1,413 1,477 1,938
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 543 589 753 576 770 853 1,168
Research and development.................... 455 506 589 786 838 990 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.............. 1,416 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............................... 46.0 54.9 55.6 70.7 56.1 57.9 61.8
------- ------- ------- ------- ------- ------- -------
Gross margin.................................. 54.0 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.................... 83.9 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.............. 261.2 273.0 212.6 154.5 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>
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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 fiscal quarter ended January
31, 1998 than in the fiscal 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 fiscal quarter. In the fiscal
quarters ended April 30 and July 31, 1998 and January 31, 1999, we received
significant other revenue primarily from the license to Hewlett-Packard of our
4200 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. The decrease in gross margin from 54.0% in the fiscal quarter ended
January 31, 1998 to 45.1% in the fiscal quarter ended April 30, 1998 was
primarily due to a favorable product mix of higher margin product sales in the
quarter ended January 31, 1998. In the fiscal quarter ended October 31, 1998 we
recorded a charge of $86,000 for excess and obsolete inventory related to
reserves against certain components in support of our 4400 product line. In
addition, our gross margins declined in the fiscal 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 have also experienced significant fluctuations in our operating
expenses. For example, our sales and marketing expenses increased in the fiscal
quarter ended July 31, 1998 because of costs incurred in closing a sales office
that quarter. Research and development expenses increased substantially in the
fiscal 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 fiscal 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, as amended and restated in September 1999, 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 $1.9 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 August 2000. 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.
Our bank credit facility requires that we comply with the following
financial covenants:
- a quick ratio of at least 1.50-to-1.00 ("quick ratio" being defined as
the ratio of our consolidated, unrestricted cash; cash equivalents; net
billed accounts receivable; and investments with maturities of fewer than
twelve months to our current liabilities);
- a debt-to-tangible net worth ratio of not more than 1.00-to-1.00; and
- a liquidity coverage-to-debt service ratio of not less than 1.50-to-1.00
("liquidity coverage" being defined as cash plus 80% of accounts
receivable eligible for borrowings).
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Additionally, the credit facility requires that we operate at a profit in each
fiscal quarter; however, we are allowed a loss which may not exceed $2.9 million
in each of the fiscal quarters ending October 31, 1999, January 31, 2000 and
April 30, 2000; $2.3 million in the fiscal quarter ending July 31, 2000; and
$1.5 million in the fiscal quarter ending October 31, 2000.
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 increased losses from operations, working capital required to
fund the expansion of our operations and increases in inventories and accounts
receivable.
During fiscal 1996, cash provided by financing activities was $108,000
compared to $9.5 million in fiscal 1997, $4.6 million in fiscal 1998 and $6.2
million in the nine months ended July 31, 1999. 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 used in investing activities was $124,000 compared
to $840,000 in fiscal 1997 and $3.2 million in fiscal 1998. During the nine
months ended July 31, 1999, cash provided by investing activities was $754,000.
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 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
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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 have requested, and have begun receiving, 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.
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.
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. We have
received more than 50 responses from third party suppliers indicating that they
are Year 2000 compliant. However, there are only eight suppliers who could pose
significant problems to us if there was a Year 2000 event to interrupt
deliveries. They are AMP Inc., Austin Foam, Hewlett-Packard, IBM, LSI Logic,
Sterling Commerce, Tenere Inc. and Tyrex Corporation. Four of these,
Hewlett-Packard, IBM, Sterling Commerce and Tyrex, have already responded with
letters of compliance. The others have indicated that they are conducting a Year
2000 compliance review. In any event, we cannot assure you that a court would
find any of these written assurances legally enforceable in the event they
proved to be inaccurate. 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 an independent
information technology consulting firm to assess our Year 2000 readiness and
identify areas where we may face Year 2000 compliance issues. This firm provided
to us in September 1999 a report regarding the status of our Year 2000
readiness. In conducting their analysis, the firm advised us that it assumed the
accuracy of Year 2000 compliance information which was available through
compliance databases, vendor Internet sites and vendor contacts was accurate,
and therefore did not perform any direct testing of our hardware or software.
However, their analysis did cover software packages found in our information
technology infrastructure. From a total of 196 different software packages, 48
were found to be compliant. 88 were compliant with issues or action required.
Issues or actions required were that either a software patch was required or a
later software release was needed to attain compliance. Resolution to those
actions is in process. 56 packages were not reviewed since they were either part
of another package or were not actually part of our information technology
infrastructure. For example, an employee could have downloaded a software
package from an external source for his or her own personal use. Four packages
still have not been tested by the third party software vendor.
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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 correct 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.
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BUSINESS
OVERVIEW
We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. Our storage routers serve
the critical function of enabling Fibre Channel storage area networks to connect
with many of an organization's other computer devices that use different
computer protocols. Specifically, when used in storage area networks our storage
routers decrease congestion in the transfer of data within a network, reduce the
time required to back up data, improve utilization of storage resources, and
preserve and enhance existing server and storage system investments.
To date, we have sold approximately 6,000 storage routers, primarily to
major manufacturers of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their storage area networks. We have also recently begun to sell our storage
routers through companies that distribute, resell or integrate our storage
routers as part of a complete SAN solution.
INDUSTRY BACKGROUND
Increasing Importance of Information Management
Information management has become a strategic imperative for many
organizations today. The broad deployment of widely dispersed 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 vast amounts of data. However, the dramatic growth in
the amount of data generated, stored, protected and accessed has created
increasingly serious information management challenges. Exacerbating these
challenges is the greater number and types of users who access this data, as
well as the proliferation of various types of software applications across many
different computer devices that use different protocols for the input and output
of data. Organizations therefore are seeking to 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 and Limitations of the Point-to-Point Storage
System Architecture
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 bottlenecks at the interconnection points where the input and output
of data occurs. These interconnect points are commonly referred to as the I/O.
These I/O bottlenecks cause large delays in the movement of data within a
network, significantly slowing down the network's day-to-day operations and
frustrating network users. The I/O bottleneck persists due, in large part, to
the limitations of the computer protocols that traditionally have been used to
transport data across the I/O.
One of the most commonly used I/O protocols is the small computer system
interface, or SCSI. While widely used, SCSI has inherent performance
limitations, including:
- the amount of data SCSI can transport at one time;
- the physical distances over which SCSI can operate;
- the limited number of storage devices SCSI can connect to a server;
- SCSI's inability to grow with and adapt to the requirements of growing
and changing computer networks;
- SCSI's lack of management capabilities; and
- SCSI's inability to connect more than one server to a storage device,
which restricts data accessibility.
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<PAGE> 36
For example, a SCSI connection enables data throughput of only 40 or 80
megabytes per second, can transmit data over no more than 25 meters, and can
support a maximum of only 15 devices. In addition, SCSI does not have any
inherent capability to manage storage systems or any devices attached to those
systems. As a result, already busy network servers also must perform these
tasks. Finally, a SCSI-connected device can only be accessed by a single server.
If the server becomes unavailable for any reason, data on its connected device
becomes inaccessible. Despite its limitations, SCSI currently is the most
prevalent interconnect, or I/O, protocol and is expected to remain an important
I/O protocol in the future.
Adding to the problems created by the I/O bottleneck is the so-called
"point-to-point" architecture used in the vast majority of enterprise computing
systems today. This architecture relies on a dedicated, point-to-point SCSI
connection between each server and only one storage device. In effect, each
server/storage pair becomes an island. To perform data backup -- making a copy
of data to protect it from loss or corruption -- data must be moved from a
storage system, through its attached server, over the primary computer network
(referred to as the local area network, or LAN), then through another server to
a backup storage system. The following graphic depicts, in simplified form, the
point-to-point architecture:
Graphic depicts a standard local area network
Because users can access information residing on a storage device only from
the server connected to that storage device, and because a significant amount of
data must be moved across the local area network, two bottlenecks occur. First,
the amount of data which can traverse the SCSI interconnect between the server
and the storage device at a given time is severely limited, the information
going to and coming from the storage device is more difficult to access and
manage, and the risk of data loss is increased. As the number of requests for
stored data from the server grows, congestion within the server increases and
server performance further decreases. Second, the LAN becomes congested, slowing
an organization's day-to-day operations. As a result, many organizations are
moving away from point-to-point storage system architectures to reduce I/O
bottlenecks and improve their overall information management.
Addressing the I/O Bottleneck with Fibre Channel Storage Area Networks
The higher performance Fibre Channel protocol 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 enable the interconnection of hundreds of different servers
and storage systems. As a result of these capabilities, Fibre Channel has
enabled the evolution of a new network storage architecture: the storage area
network, or SAN.
A storage area network, or SAN, is a high-speed computer network dedicated
to data storage that allows different types of storage devices, such as tape
libraries and disk arrays, to be shared by all end
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<PAGE> 37
users through network servers. Similar to the way in which traditional local and
wide area computer networks permit any end user on the network to access any
network server, a SAN creates a "pool" of data storage that can be shared by
multiple servers. Through various configurations similar to those used in
traditional computer networks, SANs can connect any server with any storage
system, and storage systems with each other. This any-to-any connectivity
enables large amounts of data to be shared and accessed among servers and
storage systems running different computer operating systems or software
applications.
Three key devices enable the interconnection of a SAN with other network
components, as well as the various components of the SAN with each other:
- The Storage Hub is a Fibre Channel-based device which connects Fibre
Channel servers to Fibre Channel storage devices via a single shared data
communication path. Leading suppliers of storage hubs include Gadzoox
Networks and Vixel.
- The Storage Switch is a Fibre Channel-based device which connects Fibre
Channel servers to Fibre Channel storage devices via multiple
communication paths. Leading suppliers of storage switches include Ancor
Communications, Brocade Communications and McDATA.
- The Storage Router is a device which, in effect, translates
communications across different computer protocols, including both SCSI
and Fibre Channel, in order to connect all of the various components of
the SAN, including servers, storage systems, storage hubs and storage
switches. By enabling data transport across multiple computer protocols,
storage routers facilitate seamless communication between the SAN and
attached SCSI-based servers and storage systems. As such, storage routers
enable both server-to-storage and storage-to-storage communication. We
are the leading supplier of storage routers based on the number of units
shipped, and believe that we were the first company to ship a storage
router.
The following graphic depicts a basic SAN in which storage devices and
servers are connected in their own network, enabling multiple servers to access
multiple storage devices. Storage routers are shown here enabling the connection
of an organization's existing SCSI disk and SCSI tape storage devices, as well
as an existing SCSI server, to the Fibre Channel SAN.
Graphic schematic diagram of a storage area network
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New Applications Enabled by Fibre Channel SANs
Fibre Channel SANs have enabled a number of important applications,
including:
- LAN-free Backup. Disruptions to a computer system can result in the loss
or corruption of data. Therefore, most organizations regularly perform
data backup by moving data from storage systems to separate or off-site
storage systems or data centers where the data can be safely stored.
Because data backup can account for a significant portion of the data
traffic over local area networks, it is often a major contributor to
bottlenecks at the input/output interconnect. As networks are
increasingly required to be available to users 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 due to
the growth of the amount of data being backed up. Unlike traditional
backup which entails the use of multiple servers to access each of their
storage devices, LAN-free backup uses the SAN to move data from a storage
system through one server then directly to a backup storage system. By
moving the data backup function from the LAN to the SAN, LAN-free backup
substantially reduces I/O bottlenecks.
- Server-free Backup. The development of server-free backup has the
potential to 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 internal data processing capacity. As a result, organizations
will no longer need to identify lengthy time periods, or "backup
windows," for disconnecting servers from the network in order to perform
backup.
- Shared Storage. In the traditional point-to-point storage architecture, a
significant portion of storage resources are underutilized because they
are accessible only by a single server which may not efficiently use the
resource. With SANs, multiple servers can access the same storage
devices, 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.
- Data Mirroring and Disaster Tolerance. SANs improve an organization's
ability to ensure the integrity of its data by facilitating data
replication, or mirroring, and enhanced disaster tolerance and recovery.
In mirroring, two copies of transaction data are created and maintained
on separate storage systems. This redundancy reduces the chance of data
loss or corruption. Because SANs enable very high data 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.
The Need for Storage Routers to Facilitate the Adoption of SANs and Emerging
I/O Protocols
As storage area networks are relatively new, most storage devices in the
market continue to be sold with the small computer system interface.
Additionally, most organizations have made significant investments in storage
devices and servers that use the small computer system interface. Thus, in order
to enable organizations to achieve the benefits of deploying a storage area
network, the SAN must be able to operate in conjunction with the different I/O
protocols employed by the devices which are connected to it or within it.
Because many organizations have made significant investments in computer
equipment which uses the small computer system interface protocol, organizations
are reluctant to replace these devices on a wholesale basis or to stop
purchasing them. As a result these organizations will require their Fibre
Channel-based SANs to communicate with SCSI-based devices.
Several other current and emerging I/O protocols also are expected to be
incorporated into commercial SAN products, servers and storage systems in the
future. These protocols include asynchronous transfer mode, which would support
the high-speed transmission of data between multiple SANs via networks operating
over large distances, otherwise known as wide area networks. Other current and
future I/O protocols under development are intended to reduce the incidence of
I/O bottlenecks.
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These include Next Generation I/O (NGIO) and Future I/O, as well as System I/O,
the recently announced combination of these two competing protocols. As new
protocols achieve commercial acceptance, storage routers will be increasingly
essential to connect these devices to the SAN, enabling seamless communication
among servers, storage devices and other SAN components that utilize different
computer protocols.
THE CROSSROADS SOLUTION
We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. Our storage routers enable
organizations to deploy SANs within their existing computing networks. Our
storage routers presently connect Fibre Channel SANs with SCSI servers and SCSI
storage systems and are fully interoperable with commercially available Fibre
Channel storage devices and equipment. Using our storage routers, organizations
can deploy and derive the benefits of SAN technology today, while preserving
their existing investments in SCSI-based computer equipment.
Incorporated into our storage routers is our proprietary storage routing
software that "intelligently" examines data traffic in the SAN to prioritize
transmission and minimize congestion in the flow of data. This software also
enables communication between different I/O protocols, supports rapid field
deployment of new storage area network configurations, enables sharing of
storage resources by multiple servers and can be adapted to new I/O protocols as
they emerge. Our proprietary software is combined with software management tools
and embedded in our storage routers. Our storage router hardware consists of
industry-standard microprocessors and industry-standard application specific
integrated circuits.
Our storage routers are purchased by end-user organizations of all sizes,
primarily to improve backup systems in their SANs. Our storage routers are in
use in the data centers of large, multi-national corporations, as well as in
smaller companies such as Crossroads, where we use two of our storage routers in
conjunction with our own storage area network for LAN-free backup and to connect
SCSI-based disk storage devices.
We believe that deploying our storage routers helps organizations improve
and reduce their total cost of information management by offering a number of
important benefits, including:
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. By allowing the
backup process to be accomplished across the SAN, rather than across the local
area network, our storage routers remove a common source of congestion within
the LAN. As a result, the primary computer network has greater availability to
perform day-to-day operations. LAN-free backup also 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
dispersed locations. In addition, we have software nearing completion which is
designed to enable server-free backup. By removing the server almost entirely
from the backup process, server-free backup will offer further significant
reductions in network server utilization. Finally, our storage routers support
the distance capabilities of Fibre Channel SANs, enabling long distance data
mirroring and the creation of redundant data sites to restore data when a
dedicated storage system fails or is damaged.
Providing Broad, Verified Interoperability
Our storage routers are designed to function together, or interoperate,
with all commercially available Fibre Channel storage hubs and storage switches,
as well as other SAN components, including storage devices, host bus adapters,
operating systems and storage management software. Our storage routers function
in over 2,500 different configurations of SANs, thus providing organizations
with flexibility in designing and changing their SANs. Furthermore, our storage
routers support concurrent transmissions of data utilizing multiple computer
protocols, including SCSI and the Internet Protocol. Our storage routers can be
deployed in SANs which connect servers running diverse operating systems,
including NetWare, Unix and Windows NT. Our storage routers have been tested and
verified through our Crossroads
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Verified-Storage Area Network (CV-SAN) program, which is now available through
our Web-based Configurator.
Increasing Scalability and Implementation Flexibility
Our storage routers are designed to operate in any SAN computing
environment and are designed to be able to adapt as organizations grow and
change their computer networks to address their increasing data storage and
information management needs. Our storage routers also are designed to work in
all Fibre Channel SAN configurations so that organizations can modify their
storage architecture to address their changing needs without changing their
storage routers. Organizations can incrementally add storage routers as backup
demands grow or as new storage devices are added to their networks. Our newest
line of storage routers can be configured to support data transmission over
copper or fiber optic lines.
Enhancing Storage Area Network Manageability
Our storage routers are designed with features that support an
organization's ability to conduct systems diagnostics and management, as well as
real-time application monitoring, from remote locations. In addition, the
proprietary software embedded in our storage routers enhances the ability of an
organization to manage 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
Our storage routers enable an organization's continued use of its large
installed base of servers and storage devices that rely on the small computer
system interface within a storage area network. 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 SANs, a process referred to
as server migration, our storage routers enable those SCSI servers to run
applications on a SAN. By allowing consolidation of storage resources in
centralized facilities, our solutions also reduce the need for organizations to
maintain a number of geographically dispersed and costly data storage centers
and enable them to more efficiently use their existing data storage capacity.
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 of
storage routers shipped, 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 storage
routers to address new and emerging applications. In order to accelerate the
interoperability of our storage routers, 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 routers and gain additional market share.
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Leverage and Expand Our Relationships with Leading OEM Customers
We believe that working with leading OEMs enables us to effectively
distribute our storage routers, anticipate the needs of enterprises, introduce
new products to meet those needs and target new markets. Since OEMs must expend
substantial resources to qualify our storage routers for inclusion in their SAN
solutions, 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, Exabyte, 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 software, hardware,
storage 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 will enable 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 that will incorporate emerging I/O technology.
We actively participate in the working groups that define and shape
emerging I/O standards, including the System I/O forum, the recently announced
successor to the NGIO Forum (whose members included Dell, Hitachi Data Systems,
Intel, NEC, Siemens and Sun Microsystems) and the Future I/O Alliance (whose
members included Adaptec, Cisco, Compaq, Hewlett-Packard, IBM and 3Com). In
addition to the System I/O forum, 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.
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 storage routers. 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 routers 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 storage routers
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
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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 storage routers. In addition, we have initiated an
out-bound marketing program directed at end-user organizations to build greater
awareness of the benefits of our storage routers. This is intended to generate
demand for distributors, resellers and system integrators selling our storage
routers.
PRODUCTS
Our storage routers are an integral component of SAN solutions and are
critical to enabling organizations to attain the benefits of these solutions
within their existing computer network infrastructures. 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 of our storage routers
is designed to support all forms of SAN architecture, including 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 August - 1 Fibre Channel port - Enables LAN-free backup and recovery
1997 - 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, and:
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 50% 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
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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.
OUR CUSTOMERS
To date, we have sold approximately 6,000 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, each of which has purchased at least $50,000 of our
products, and their branded Crossroads products:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CROSSROADS
OEM OEM-BRANDED PRODUCT PRODUCT
- ---------------------------------------------------------------------------------------
<S> <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 Router 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.
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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, each of which has sold
at least one of our products to an end-user organization:
<TABLE>
<CAPTION>
DISTRIBUTORS RESELLERS/SYSTEM INTEGRATORS
------------ ----------------------------
<S> <C>
Bell Microproducts Andataco
Cranel Bdata
Forefront Graphics Datalink
EIE Data Media Products-Japan
Tricom
</TABLE>
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 believe that 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 there.
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 our
proprietary software and hardware designs using industry standard components.
Our proprietary routing software intelligently examines data packet traffic to
prioritize transmission and minimize network congestion in the flow of
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I/O transactions between servers and storage systems. This software also manages
delays in data transmissions that result 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 computer
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 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 designed to be able 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 local and wide area network
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 the ability to develop new products
on a timely basis, verify interoperability, expand our product features, and
integrate 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
and Fibre Channel in open systems (e.g., NetWare, Windows NT and Unix) and IBM's
ESCON for mainframes. 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
and System I/O, the recently announced successor to both 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. 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. Upon completion of the merger of NGIO and Future I/O, we will
become a member of the System I/O Forum, the successor to both 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.
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MANUFACTURING
Our manufactured product contains printed circuit board assemblies which
consist of the electronics that control the function of our product. The printed
circuit board is assembled and tested by a contract manufacturer, who purchases
the required components to meet demand in accordance with our purchase orders
and six month forecast. During product final assembly and test, the printed
circuit board is assembled with the remaining components (power supply, cables,
enclosures, etc.) and tested to create the final product.
To date, substantially all of our manufacturing process other than final
assembly and test is outsourced to XeTel Corporation, a contract manufacturer.
XeTel 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. XeTel purchases the components for
our products based upon our specifications; however, we assume the inventory
risk and risk of loss for these components ordered on our behalf. In this
process, we determine the components that are incorporated into our products and
select the appropriate suppliers of the components. Recently, we have engaged
another contract manufacturer, Solectron, to make our 4x50 family of products.
We believe that this will enable us to reduce our reliance on XeTel.
During September 1999, we transferred much of the final assembly and test
portion of our product manufacturing process to our internal facilities. In
connection with this transition, which we expect to continue through the end of
fiscal 1999, 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 and/or XeTel currently purchase several key components used in the
manufacture of our products from single or limited sources. XeTel purchases the
components used in the printed circuit board assemblies whereas we purchase the
remaining components used during final assembly including the power supply, fan
and chassis materials. We have an obligation to XeTel for portions of excess
inventory arising from a sudden reduction in purchase orders by us to the extent
it differs from the six month forecast which we supply to XeTel. Our principal
single-source components include application specific integrated circuits, power
supplies, licensed software and chassis.
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. Our research and development
team works 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, "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
- System I/O routing: Technology development focused on multi-protocol I/O
routing products for System I/O connecting to SCSI, Fibre Channel and
asynchronous transfer mode.
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In developing our products, we recognize the importance of product
compatibility with existing and emerging I/O standards. In particular, Intel has
provided technical and consulting support to help us develop NGIO-enabled
versions of our storage routers, and will continue to provide technical and
consulting support for us in developing products based on the System I/O
standard. 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 $2.3 million in fiscal 1998 and
$3.5 million the nine months ended July 31, 1999. At July 31, 1999, we employed
24 software engineers and 16 hardware engineers.
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 some 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;
- 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
Hewlett-Packard, one of our OEM customers and a stockholder of our company.
While to date this OEM has not introduced competitive products based on this
technology, this 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.
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
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<PAGE> 48
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 issued 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, 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.
We have issued a license to Hewlett-Packard under which they may license
our 4200 storage router technology. This license allows Hewlett-Packard to
create and incorporate into their own products modifications and derivative
works of this licensed technology. This license expires in April 2001 but will
automatically renew for successive one year periods after that date unless it is
terminated by either party.
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.
EMPLOYEES
At July 31, 1999, we had 114 employees with 40 engaged in research and
development; 20 in manufacturing; 16 in sales; 18 in marketing and customer
support; and 20 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. We recently entered into a
lease for our new corporate headquarters facility, consisting of 63,548 square
feet in Austin, Texas, which will commence in February 2000. The lease for our
new facility expires in January 2006. We currently intend to terminate the lease
for our existing headquarters facility shortly after we move to our new
facility.
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.
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<PAGE> 49
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
Allen R. Sockwell............................ 39 Vice President of Human Resources
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 an 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
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<PAGE> 50
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.
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.
Allen R. Sockwell joined us as our Vice President of Human Resources in
September 1999. From October 1998 to August 1999, Mr. Sockwell served as Vice
President of Human Resources, and from February 1996 to October 1998 as Director
of Human Resources, at Compaq, where he managed human resources activities for
Compaq's global supply chain management and manufacturing operations. From June
1982 to February 1996, Mr. Sockwell was employed by IBM where he last served as
Manager of Human Resources for a semiconductor design and fabrication facility.
Mr. Sockwell holds a B.S. in general management from Purdue University.
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 a 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
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<PAGE> 51
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.
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 and employee directors will also be eligible to receive
option grants under the discretionary option grant program of the 1999 plan.
Under the 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
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<PAGE> 52
after the effective date of this offering, each non-employee board member who
continues to serve as a non-employee board member will automatically be granted
an option to purchase 5,000 shares of common stock, provided such individual has
served on the board for at least six months.
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. During the past year, the full board of
directors performed the functions generally performed by the compensation
committee of the board.
Mr. Wood, a member of our board of directors, is a general partner of two
investment funds and a special limited partner of one investment fund affiliated
with Austin Ventures which have invested in us. In September 1998, Austin
Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. purchased an aggregate of
250,000 shares of our Series C preferred stock at a price of $4.00 per share.
Mr. Wood is a general partner of AV Partners IV, L.P., the general partner of
each of Austin Ventures IV-A, L.P. and Austin Ventures IV-B, L.P. In August
1999, Austin Ventures VI, L.P. purchased 200,000 shares of our Series E
preferred stock at a price of $15.00 per share. Mr. Wood is a special limited
partner of AV Partners VI, L.P., the general partner of Austin Ventures VI, L.P.
Although the number of shares of Series C preferred stock and Series E preferred
stock outstanding was not affected by the 3-for-2 split of our common stock, as
a result of the stock split, each share of Series C preferred stock and Series E
preferred stock automatically adjusted and became convertible into 1.5 shares of
our common stock. Accordingly, the 250,000 shares of Series C preferred stock
and 200,000 shares of Series E preferred stock will automatically convert into
375,000 shares and 300,000 shares of our common stock, respectively, upon the
consummation of this offering, and the effective purchase price per share of the
common stock to be received upon such conversion will be $2.67 for the Series C
preferred stock and $10.00 for the Series E preferred stock.
Mr. Smith, our chief executive officer, is a member of our board of
directors which performed the functions generally performed by the compensation
committee of the board during the past year. However, Mr. Smith did not
participate in any discussions regarding his compensation.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our current certificate of incorporation, as well as the amended
certificate of incorporation, 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.
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<PAGE> 53
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. 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. The potential realizable
value is calculated based on the ten year term of the option at its time of
grant. It is calculated based on the assumption that the mid-point of our filing
range, $12.00 per share, appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our common
stock. The amounts reflected in the table may not necessarily be achieved.
We granted these options under our 1996 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. Except as otherwise noted, these options
are immediately exercisable, but we have the right to repurchase, at the
exercise price, any shares that have not vested at the time the optionee
terminates employment with us. The percentage of total options granted to our
employees in the last fiscal year is based on options to purchase an aggregate
of 1,273,500 shares of common stock granted during fiscal 1998. The following
table sets forth information concerning the individual grants of stock options
to each of our named executive officers in fiscal 1998.
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<PAGE> 54
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------- OF ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) IN FISCAL 1998(%) ($/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 4,301,639 10,901,198
Robert F. LiVolsi.... 187,500(3) 14.7 0.233 05/12/08 1,415,013 3,585,921
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 as 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. None 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 -- $6,709,190 --
Robert F. LiVolsi(3)...................... 187,500 -- 2,206,313 --
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
$12.00 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.
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
was adopted by our board of directors and is expected to be approved by our
stockholders prior to the commencement of this offering. The 1999 plan
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<PAGE> 55
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. 3,868,923 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 1,500,000 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 500,000 shares. In addition, no participant in the 1999
plan may be granted stock options, separately exercisable stock appreciation
rights or direct stock issuances for more than 500,000 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 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, 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.
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.
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<PAGE> 56
- 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 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
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<PAGE> 57
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 5,000 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
15,000-share automatic option grant will vest in a series of four successive
annual installments upon the optionee's completion of each year of board service
over the four-year period measured from the grant date. The shares subject to
each annual 5,000-share automatic grant will vest upon the optionee's completion
of one year of service 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.
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 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
September 30, 2009.
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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 granted under our 1996 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.
EMPLOYEE STOCK PURCHASE PLAN
Introduction. Our Employee Stock Purchase Plan was adopted by our board of
directors and is expected to be 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. 450,000 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 250,000 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 November 2001. The next offering period
will start on the first business day in December 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 June and December 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 May and November each
year. However, a participant may not purchase more than 750 shares on any one
semi-annual purchase date, and no more than 75,000 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 November 2009. The board may at any time amend, suspend
or discontinue the plan. However, certain amendments may require stockholder
approval.
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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.
Although the number of shares of Series A preferred stock outstanding was
not affected by the 3-for-2 split of our common stock, as a result of
this stock split, each share of Series A preferred stock automatically
adjusted and became convertible into 1.5 shares of our common stock.
Accordingly, the 3,500,000 shares of our Series A preferred stock will
automatically convert into 5,250,000 shares of our common stock upon the
consummation of this offering, and the effective purchase price per share
of common stock to be received upon such conversion will be $0.67.
- 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.
Although the number of shares of Series B preferred stock outstanding was
not affected by the 3-for-2 split of our common stock, as a result of
this stock split, each share of Series B preferred stock automatically
adjusted and became convertible into 1.5 shares of our common stock.
Accordingly, the 2,173,914 shares of our Series B preferred stock will
automatically convert into 3,260,871 shares of our common stock upon the
consummation of this offering, and the effective purchase price per share
of common stock to be received upon such conversion will be $1.53.
- 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. Although the
number of shares of Series C preferred stock outstanding was not affected
by the 3-for-2 split of our common stock, as a result of this stock
split, each share of Series C preferred stock automatically adjusted and
became convertible into 1.5 shares of our common stock. Accordingly, the
1,000,000 shares of our Series C preferred stock will automatically
convert into 1,500,000 shares of our common stock upon the consummation
of this offering, and the effective purchase price per share of common
stock to be received upon such conversion will be $2.67.
- 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. Although the number of shares of Series D preferred stock
outstanding was not affected by the 3-for-2 split of our common stock, as
a result of this stock split, each share of Series D preferred stock
automatically adjusted and became convertible into 1.5 shares of our
common stock. Accordingly, the 970,210 shares of our Series D preferred
stock will automatically convert into 1,455,315 shares of our common
stock upon the consummation of this offering, and the effective purchase
price per share of common stock to be received upon such conversion will
be $3.63.
- 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. Although the number of shares of Series E
preferred stock outstanding was not affected by the 3-for-2 split of our
common stock, as a result of this stock split, each share of Series E
preferred stock automatically adjusted and became convertible into
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<PAGE> 60
1.5 shares of our common stock. Accordingly, the 266,667 shares of our
Series E preferred stock will automatically convert into 400,001 shares
of our common stock upon the consummation of this offering, and the
effective purchase price per share of common stock to be received upon
such conversion will be $10.00.
The following table summarizes the shares of our preferred stock purchased
by our 5% stockholders since our inception and the number of shares of common
stock into which those shares of preferred stock will be converted upon the
consummation of this offering:
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SERIES A SERIES B SERIES C SERIES D SERIES E SHARES OF COMMON STOCK
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED ISSUABLE UPON CONVERSION
INVESTOR STOCK STOCK STOCK STOCK STOCK OF PREFERRED STOCK
- -------- --------- --------- --------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Funds Affiliated with Austin
Ventures..................... 3,500,000 434,783 250,000 -- 200,000 6,577,175
Advanced Digital Information
Corporation.................. -- 1,739,131 -- -- -- 2,608,697
Hewlett-Packard Company........ -- -- 750,000 52,779 -- 1,204,169
Intel Corporation.............. -- -- -- 917,431 66,667 1,476,147
</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 set forth the initial terms and conditions whereby ADIC
purchased 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 $275,000 in fiscal
1997, $800,000 in fiscal 1998, and $309,000 in the first nine months of fiscal
1999. In fiscal 1997, fiscal 1998 and the first nine months of fiscal 1999,
product sales to ADIC accounted for 27%, 25% and 2.6% of our total revenue,
respectively. This agreement with ADIC expired by its terms in August 1999 and
we have no current plans to enter into a new contract with ADIC. The pricing and
other terms of our relationship with ADIC have been determined through
arm's-length negotiation on terms that we believe are no more favorable than
those available to third parties generally.
Hewlett-Packard Company. In April 1998, we entered into a License Agreement
with Hewlett-Packard, one of our 5% stockholders. Pursuant to this agreement, we
granted Hewlett-Packard a worldwide, non-exclusive, non-transferable,
non-sublicenseable license under which Hewlett-Packard may license our 4200
storage router technology including the software and related hardware designs.
Under this license, Hewlett-Packard may incorporate this licensed technology
into their products and may distribute modifications and derivative works of the
licensed technology for use in Hewlett-Packard products, but may not directly
sell our 4200 storage router. We will continue to own the licensed technology
and Hewlett-Packard owns all rights to the derivative works they create.
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.
We recorded revenue from Hewlett-Packard in amounts of approximately
$100,000 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. These revenues consist of sales of our products to Hewlett-Packard
as well as royalties from the license we granted to Hewlett-Packard for our 4200
storage router technology. In addition, from time to time, we purchase certain
components for our products from Hewlett-Packard. The pricing and other terms of
our relationships with Hewlett-Packard have been determined through arms-length
negotiation on terms that we believe are no more favorable than those available
to third parties generally.
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Intel Corporation. Concurrently with our sale of Series D preferred stock
in which Intel 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 has provided technical and consulting support to help us
develop NGIO-enabled versions of our storage routers, and will continue to
provide technical and consulting support for us in developing products based on
the System I/O standard. Each party has agreed to assume full responsibility for
its own expenses associated with the 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 "Management -- Limitation of Liability and
Indemnification Matters" and "Description of Capital Stock -- Indemnification."
Loans to officers. In May 1999, we made loans to our officers 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, in September 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.
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<PAGE> 62
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 15, 1999, as adjusted to reflect
the sale of common stock offered by us and by two 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 22,163,175 shares, consisting of
8,563,327 shares of common stock outstanding as of September 15, 1999, and
13,599,848 shares issuable upon the conversion of the preferred stock.
Percentage of beneficial ownership after the offering is based on 25,663,175
shares, including the 3,500,000 shares to be sold in this offering.
Mr. Smith and Mr. Quisenberry may sell shares in connection with the
exercise of the over-allotment option. Mr. Smith may sell up to 200,000 shares
and Mr. Quisenberry may sell up to 75,000 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. To the extent the over-allotment
option is exercised for less than 275,000 shares, the shares to be sold will be
allocated pro rata between the selling stockholders according to the total
number of their shares subject to the over-allotment option. The post-offering
ownership percentages in the table below do not take into account any exercise
of the underwriters over-allotment option.
<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 21.5% 18.6%
James H. Moore............................................ 660,000 3.0 2.6
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 28.3 24.5
T. Dale Quisenberry....................................... 1,200,000 5.4 4.7
All directors and executive officers as a group (10
persons)............................................... 12,622,175 57.0% 49.2%
Other 5% Stockholders:
Advanced Digital Information Corporation.................. 2,608,697 11.8% 10.2%
Funds affiliated with Austin Ventures..................... 6,577,175 29.7 25.6
Hewlett-Packard Company................................... 1,204,169 5.5 4.7
Intel Corporation......................................... 1,476,147 6.7% 5.8%
</TABLE>
- ---------------
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.
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<PAGE> 63
Executive Officers and Directors. 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.
Mr. Wood is a general partner of AV Partners IV, L.P., and a 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., and Austin Ventures IV-B, 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., a general partner of Austin
Ventures VI, L.P., and as such does not have beneficial ownership of any
of the 300,000 shares owned by Austin Ventures VI, L.P. 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 in
March 1999.
Other 5% Stockholders. 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. These partnerships 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.
- Other 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.
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DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 175,000,000 shares of common stock, par value $.0001 per share, and
25,000,000 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 by reference
to our certificate of incorporation which will become effective upon the
consummation of this offering and our bylaws, forms of which have been filed as
exhibits to the registration statement of which this prospectus is a part.
COMMON STOCK
As of September 15, 1999, there were 8,563,327 shares of common stock
outstanding that were held of record by 73 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 September 15, 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
25,000,000 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 in 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.
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<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
64
<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 American Stock
Transfer & Trust Company, and its address is 40 Wall Street, New York, New York
10005.
NASDAQ NATIONAL MARKET LISTING
We have applied to list our stock on the Nasdaq National Market under the
trading symbol "CRDS."
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<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
25,663,175 shares of our common stock, based upon the number of shares
outstanding at September 15, 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>
3,500,000 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 180-day
lock-up agreements.
18,286,574 After 180 days from the date of
this prospectus, the 180-day
lock-up is released and these
shares are eligible for sale in
the public market under Rule 144
(subject, in some cases, to
volume limitations), Rule 144(k)
or Rule 701.
3,876,601 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 in the public
market under Rule 144. However,
1,455,316 of these shares will
become eligible for sale in the
public market within 14 days
after the expiration of the
lock-up.
</TABLE>
Lock-up agreements. All of our directors and officers and all of our
stockholders and option holders have signed or are otherwise subject to lock-up
agreements under which they have 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. SG Cowen Securities Corporation may, in its sole discretion, at any
time and without prior notice, release all or any portion of the shares subject
to the lock-up agreements.
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
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<PAGE> 68
our common stock then outstanding, which will equal approximately 255,882 shares
immediately after the offering, or (b) the average weekly trading volume of our
common stock on the Nasdaq National Market 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. As of September 15, 1999, options to purchase 1,618,480 shares
of common stock were outstanding under our 1996 plan. After this offering, we
intend to file a registration statement on Form S-8 under the Securities Act of
1933 covering shares of common stock reserved for issuance under our 1999 plan
and our employee stock purchase plan. Based on the number of options outstanding
and shares reserved for issuance under our 1999 stock incentive plan and our
employee stock purchase plan, the Form S-8 registration statement would cover
6,012,403 shares. The Form S-8 registration statement will become effective
immediately upon filing, whereupon, subject to the satisfaction of applicable
exercisability periods, Rule 144 volume limitations applicable to affiliates and
the agreements with the underwriters referred to above, shares of common stock
to be issued upon exercise of outstanding options granted pursuant to our 1999
plan and shares of common stock issued pursuant to our employee stock purchase
plan (to the extent that such shares were not held by affiliates) will be
available for immediate resale in the public market.
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<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............................................. 3,500,000
==========
</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, Brian R. Smith and T. Dale Quisenberry have granted to the
underwriters an option to purchase up to an aggregate of 250,000, 200,000 and
75,000 additional shares of common stock, respectively, 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. In the event the
underwriters exercise only a portion of the over-allotment option, such shares
will be allocated first from the shares offered by Messrs. Smith and Quisenberry
on a pro rata basis (up to a total of 275,000 shares) and then by Crossroads. 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
23,781,655 shares (including 1,693,480 shares issuable pursuant to options, all
of which are exercisable within 60 days of October 1, 1999), based on the number
of shares of common stock outstanding as of September 15, 1999, have agreed with
the underwriters or are otherwise
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<PAGE> 70
subject to agreements which provide that for a period of 180 days following the
date of this prospectus, they will not dispose of or hedge any shares of common
stock or any securities convertible into or exchangeable for common stock. SG
Cowen Securities Corporation may, in its sole discretion, at any time without
prior notice, release all or any portion of the shares from the restrictions in
any such agreement to which SG Cowen Securities Corporation is a party.
The underwriters have reserved for sale, at the initial public offering
price, up to 175,000 shares of our common stock for some of our vendors,
customers and other people and entities with whom we maintain business
relationships who have expressed an interest in purchasing common stock in the
offering. The number of shares available for sale to the general public will be
reduced to the extent these persons purchase the reserved shares. Any reserved
shares not purchased will be offered by the underwriters to the general public
on the same terms as the other shares.
In August 1999, Dain Rauscher Wessels Investors LLC, an affiliate of Dain
Rauscher Wessels, acquired 16,667 shares of Crossroads' Series E preferred stock
at a price of $15.00 per share for an aggregate purchase price of $250,000. Upon
the consummation of this offering, these shares will be converted into 25,000
shares of common stock. In addition, in August 1999 certain individuals
associated with Morgan Keegan & Company, Inc. who have performed services in
connection with this offering and a family trust of one of these individuals
acquired an aggregate of 16,667 shares of Crossroads' Series E preferred stock
at a price of $15.00 per share for an aggregate purchase price of $250,000. Upon
the consummation of this offering, these shares will be converted into 25,000
shares of common stock. We did not split our shares of Series E preferred stock
in our recent 3-for-2 stock split of our common stock; however, the shares
automatically adjusted and became convertible into 1.5 shares of our common
stock upon the effectiveness of this split. As a consequence, the effective
purchase price per share of common stock to be received upon such conversion
will be $10.00.
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 $900,000.
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<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. Brobeck, Phleger & Harrison
LLP and certain attorneys and investment funds affiliated with Brobeck, Phleger
& Harrison LLP beneficially own shares of our Series E preferred stock which
upon consummation of this offering will convert 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
The financial statements as of October 31, 1997, 1998 and July 31, 1999 and
for each of the three years in the period ended October 31, 1998 and for the
nine months ended July 31, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said 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.
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<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 (unaudited) and 1999...... 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...... 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 (unaudited) and 1999...... 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 at October 31, 1997, 1998 and July 31,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 1998 and for the nine months ended
July 31, 1999 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
September 17, 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 $ 18,492
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 24,085
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 $ 26,140
======= ======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................. $ 636 $ 875 $ 3,851 $ 3,851
Accrued expenses.................................. 98 138 1,191 1,191
Deferred revenue.................................. 7 -- 61 61
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............. 9,277 13,438 18,942 --
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........................ -- 72 5,107 36,035
Deferred stock-based compensation................. -- (188) (4,389) (4,389)
Notes receivable from stockholders................ -- -- (447) (447)
Accumulated deficit............................... (2,881) (8,235) (11,880) (11,880)
Treasury stock at cost (22,500 shares at October
31, 1998 and July 31, 1999).................... -- (2) (2) (2)
------- ------- -------- --------
Total stockholders' (deficit) equity...... (2,875) (8,347) (11,603) 19,339
------- ------- -------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders'
(deficit) equity........................ $ 7,615 $ 7,187 $ 14,140 $ 26,140
======= ======= ======== ========
</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 1,911 1,053 6,965
--------- --------- ---------- --------- ----------
Gross profit....................... 322 544 1,298 944 4,828
--------- --------- ---------- --------- ----------
Operating expenses:
Sales and marketing.............. -- 641 2,461 1,886 2,791
Research and development......... 291 1,329 2,336 1,550 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 6,734 4,861 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)
Accretion on redeemable convertible
preferred stock.................. -- (58) (196) (141) (247)
--------- --------- ---------- --------- ----------
Net loss attributable to common
stock............................ $ (212) $ (2,751) $ (5,550) $ (3,953) $ (3,892)
========= ========= ========== ========= ==========
Basic and diluted net loss per
share............................ $ (0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
========= ========= ========== ========= ==========
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................... $ (0.32) $ (0.19)
========== ==========
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) --
Accretion on redeemable
convertible preferred
stock..................... (12) (46)
Net loss.................... -- -- -- -- -- (2,693) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1997... 6,000,000 6 -- -- -- (2,881) --
Issuance of common stock.... 378,468 -- 39 -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- -- (2)
Stock-based compensation.... -- -- 229 (188) -- -- --
Accretion on redeemable
convertible preferred
stock..................... (196)
Net loss.................... -- -- -- -- -- (5,354) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1998... 6,378,468 6 72 (188) -- (8,235) (2)
Issuance of common stock.... 1,904,610 2 547 -- (447) -- --
Stock-based compensation.... -- -- 4,735 (4,201) -- -- --
Accretion on redeemable
convertible preferred
stock..................... -- -- (247) -- -- -- --
Net loss.................... -- -- -- -- -- (3,645) --
--------- -- ------ ------- ----- ---------- ----
Balance at July 31, 1999...... 8,283,078 $8 $5,107 $(4,389) $(447) $ (11,880) $ (2)
========= == ====== ======= ===== ========== ====
<CAPTION>
TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balance at November 1, 1995... $ 88
Net loss.................... (212)
--------
Balance at October 31, 1996... (124)
Accretion on redeemable
convertible preferred
stock..................... (58)
Net loss.................... (2,693)
--------
Balance at October 31, 1997... (2,875)
Issuance of common stock.... 39
Purchase of treasury
stock..................... (2)
Stock-based compensation.... 41
Accretion on redeemable
convertible preferred
stock..................... (196)
Net loss.................... (5,354)
--------
Balance at October 31, 1998... (8,347)
Issuance of common stock.... 102
Stock-based compensation.... 534
Accretion on redeemable
convertible preferred
stock..................... (247)
Net loss.................... (3,645)
--------
Balance at July 31, 1999...... $(11,603)
========
</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) $(3,812) $(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) (509) (1,551)
Prepaids and other assets............. -- (248) (130) (114) (477)
Accounts payable...................... 114 523 239 (128) 2,976
Accrued expenses...................... 27 71 40 38 1,053
Deferred revenue...................... 4 3 (7) (7) 61
----- ------- ------- ------- -------
Net cash used in operating
activities....................... (15) (2,640) (5,816) (4,385) (2,133)
----- ------- ------- ------- -------
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 -- 14
Note receivable from related party......... -- (90) -- -- --
----- ------- ------- ------- -------
Net cash (used in) provided by
investing activities............. (124) (840) (3,165) (640) 754
----- ------- ------- ------- -------
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 routers 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.
Interim Financial Information
The accompanying interim consolidated statements of operations and cash
flows for the nine months ended July 31, 1998 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. The data
disclosed in these notes to the consolidated financial statements for the nine
months ended July 31, 1998 are unaudited.
The audited 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.
Unaudited Pro Forma Information
The unaudited 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:
<TABLE>
<S> <C>
(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 $12,000 in August 1999, and subsequent
conversion into common stock, as if such sale and conversion
had occurred as of July 31, 1999.
</TABLE>
Although the number of shares of each series of the Company's preferred
stock was not affected by the three-for-two stock split (See Note 13), as a
result of this stock split, each share of the preferred stock automatically
adjusted and became convertible into 1.5 shares of the Company's common stock.
F-7
<PAGE> 79
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
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
F-8
<PAGE> 80
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
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
or acceptance clauses, 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. Revenue from customers who have acceptance
clauses are not recognized until all acceptance criteria are satisfied.
The Company provides for the estimated cost to repair or replace products
under warranty and technical support costs 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.
F-9
<PAGE> 81
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 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>
F-10
<PAGE> 82
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
3. INVENTORIES:
Inventories consists of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
------------ JULY 31,
1997 1998 1999
---- ---- --------
<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
----- ------ --------
<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). Outstanding
borrowings under the equipment line were $780 and $902 at October 31, 1998 and
July 31, 1999, respectively, and are due in monthly installments through
December 2002. The last draw date under the line of credit arrangement and the
equipment line is in December 1999.
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.
F-11
<PAGE> 83
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 violations were waived under the Company's credit arrangements in a
letter to the Company dated July 27, 1999.
The scheduled maturities of the Company's outstanding debt at July 31, 1999
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999..................................................... $ 170
2000..................................................... 687
2001..................................................... 543
2002..................................................... 271
2003..................................................... 27
------
$1,698
======
</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 July 31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999..................................................... $ 404
2000..................................................... 529
2001..................................................... 530
2002..................................................... 451
2003..................................................... 297
2004..................................................... 93
------
$2,304
======
</TABLE>
If the Company reduces or cancels production orders with its third party
contract manufacturer, the Company may be required to reimburse its contract
manufacturer for materials purchased on its behalf.
F-12
<PAGE> 84
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Following is a summary of redeemable convertible preferred stock issued by
the Company at July 31, 1999:
<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
Series D.......................................... 1,070,210 970,210 5,257
--------- --------- -------
8,614,898 8,264,898 $18,441
========= ========= =======
</TABLE>
The carrying value of the redeemable convertible preferred stock represents
the proceeds from the sale of the stock net of issuance costs of $125 plus
accretion. Accretion of the carrying value of the redeemable, convertible
preferred stock to its estimated mandatory redemption amount is calculated using
the effective interest method.
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 $12,000, net of issuance costs of $25.
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
F-13
<PAGE> 85
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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
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.
F-14
<PAGE> 86
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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
--------- -------- --------- -------- --------- -------- ---------- --------
<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>
At October 31, 1998 and July 31, 1999 the Company had the right to
repurchase 75,000 and 825,200 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
------ ------- ------- -----------
<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>
F-15
<PAGE> 87
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 5.27%; 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.
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. These options were issued pursuant to the Plan
and are reflected in the disclosures above. The Company granted 112,500 and
7,500 options to directors and non-employees for consulting services in fiscal
1997 and 1998 at a weighted average exercise price of $0.14 and $0.23,
respectively.
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
------- ------- -----------
<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
---- ------- ------- -------------
<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 $442,000 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.
Accretion on redeemable convertible preferred stock totaled $58, $196, and
$247 during fiscal year 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 AND STOCK SPLIT:
On August 12, 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.
14. SUBSEQUENT EVENTS:
1999 Employee Stock Purchase Plan
In September 1999, the Company's Board of Directors approved the adoption
of the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A
total of 450,000 shares of common stock have been reserved for issuance under
the Purchase Plan. The share reserve will automatically increase each calendar
year beginning in 2001 by an amount equal to 1% of the total number of
outstanding shares of our common stock on the last day of December in the prior
calendar year. The Purchase Plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock, as defined in the Purchase Plan.
1999 Stock Incentive Plan
In September 1999, the Board of Directors approved the Company's 1999 Stock
Incentive Plan (the "1999 Plan"). A total of 6,375,000 shares of common stock
have been reserved for issuance under the 1999 Plan. This share reserve includes
the number of shares carried over from the 1996 Stock Option/Stock Issuance
Plan. The share reserve will automatically increase each calendar year beginning
in 2001 by an amount equal to 2% of the total number of shares of our common
stock outstanding on the last day of December in the prior calendar year, but in
no event will the annual increase exceed 500,000. The 1999 Plan provides for:
(i) a discretionary option grant program under which eligible persons may be
F-18
<PAGE> 90
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
granted options to purchase shares of common stock; (ii) a salary investment
option grant program under which eligible employees may elect to have a portion
of their base salary invested each year in special options; (iii) a stock
issuance program under which eligible persons may be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus; (iv) an automatic option grant program under which eligible non-employee
board members will automatically receive options at periodic intervals to
purchase shares of common stock; and (v) a director fee option grant program
under which non-employee board members may elect to have all or part of their
annual retainer fee applied to a special option grant.
15. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT ACCOUNTANTS:
In September 1999, the Company extended its line of credit agreement to
August 2000 and increased the maximum amounts available under the line of credit
to $2,500 and the equipment line to $1,900. The amended and restated loan
agreement expires in August 2000.
F-19
<PAGE> 91
[INSIDE BACK COVER GRAPHIC:
The graphic consists of pictures of Crossroad's four storage routers. The title
of the diagram is "Crossroads Family of Storage Routers." Cascading from top
left to bottom right of the graphic to the bottom are pictures of the following:
- the Crossroads 4100 storage router;
- the Crossroads 4400 storage router;
- the Crossroads 4200 storage router; and
- the Crossroads 4250 storage router.
The Crossroads logo appears in the bottom left corner of the graphic.]
<PAGE> 92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[CROSSROADS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
SG COWEN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 93
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........................................ $ 14,547
NASD fee.................................................... 5,732
Nasdaq National Market listing fee.......................... 90,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 280,000
Blue sky fees and expenses.................................. 7,500
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 15,000
--------
Total............................................. $872,779
========
</TABLE>
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 8 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.
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
II-1
<PAGE> 94
reliance on Rule 701 or Section 4(2) promulgated thereunder. The following
common stock share amounts, the weighted average exercise price and the exercise
price per share of the shares of common stock issued under that 1996 Stock
Option/Stock Issuance Plan are adjusted to reflect Registrant's 3-for-2 common
stock split effective as of August 12, 1999. Although the number of shares of
preferred stock was not affected by this stock split, as a result of this stock
split each share of our preferred stock automatically adjusted and became
convertible into 1.5 shares of our common stock upon the consummation of this
offering.
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 4,000,000
shares of Series A Convertible Preferred Stock for $1.00 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 2,294,688 shares of Series B
Convertible Preferred Stock for $2.30 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 1,000,000 shares of Series
C Convertible Preferred Stock for $4.00 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 970,210 shares of Series D
Convertible Preferred Stock for $5.45 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 801,667 shares of Series E
Convertible Preferred Stock for $15.00 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 September 15, 1999, Registrant has issued and sold 2,585,828
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 $0.25.
II-2
<PAGE> 95
8. From time to time Registrant has granted options to purchase common
stock 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............................................ 152,445 1.33
August 1999.......................................... 158,700 10.00
September 1999....................................... 192,125 *
</TABLE>
- ---------------
*The exercise price per share will be the initial public offering price.
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 Sixth 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.
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 dated
August 17, 1999 by and between Registrant and Silicon
Valley Bank
10.15 -- Office Building Lease dated October 8, 1999 by and
between Registrant and Maplewood Associates, L.P.
10.16 -- CP4200 License Agreement dated April 15, 1998 by and
between Registrant and Hewlett-Packard Company
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
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.
+ Previously filed herewith.
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or the notes thereto.
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
II-4
<PAGE> 97
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-5
<PAGE> 98
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 October 13, 1999.
CROSSROADS SYSTEMS, INC.
By: /s/ BRIAN R. SMITH
----------------------------------
BRIAN R. SMITH
Chief Executive Officer and
Chairman of the Board
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>
* Chief Executive Officer and October 13, 1999
- ------------------------------------------------ Chairman of the Board (principal
BRIAN R. SMITH executive officer)
/s/ REAGAN Y. SAKAI Chief Financial Officer (principal October 13, 1999
- ------------------------------------------------ financial and accounting officer)
REAGAN Y. SAKAI
* Director October 13, 1999
- ------------------------------------------------
RICHARD D. EYESTONE
* Director October 13, 1999
- ------------------------------------------------
WO OVERSTREET
* Director October 13, 1999
- ------------------------------------------------
DAVID L. RIEGEL
* Director October 13, 1999
- ------------------------------------------------
WILLIAM P. WOOD
*By: /s/ REAGAN Y. SAKAI
------------------------------------------
REAGAN Y. SAKAI
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Crossroads Systems, Inc. and Subsidiary
Our audits of the financial statements referred to in our report dated
September 17, 1999 appearing in the prospectus also included audits of the
financial statement schedule listed in Item 16(b) of the Form S-1. In our
opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PricewaterhouseCoopers LLP
Austin, Texas
September 17, 1999
S-1
<PAGE> 100
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
PERIOD ENDED OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1996........................ $-- $ 8 $-- $ 8
Year ended October 31, 1997........................ $ 8 $ 6 $-- $14
Year ended October 31, 1998........................ $14 $45 $-- $59
Nine-Months Ended July 31, 1999.................... $59 $-- $-- $59
</TABLE>
S-2
<PAGE> 101
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 Sixth 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 dated
August 17, 1999 by and between Registrant and Silicon
Valley Bank
10.15 -- Office Building Lease dated October 8, 1999 by and
between Registrant and Maplewood Associates, L.P.
10.16 -- CP4200 License Agreement dated April 15, 1998 by and
between Registrant and Hewlett-Packard Company
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.
<PAGE> 102
** 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.
+ Previously filed.
<PAGE> 1
EXHIBIT 10.15
OFFICE BUILDING LEASE
THE STATE OF TEXAS
COUNTY OF TRAVIS
THIS LEASE, made and entered into the 8th day of October, 1999, by and
between MAPLEWOOD ASSOCIATES, L.P., a Texas Limited Partnership (hereinafter
called "Landlord"), and CROSSROADS SYSTEMS, INC., a Texas corporation
(hereinafter called "Tenant");
W I T N E S S E T H:
1. DEFINITIONS. The following definitions shall apply whenever used in
this Lease:
(a) "Premises": Floors 2 and 3, having an Agreed Rentable Area of
63,548 square feet in the Complex, as shown and designated on the floor
plan attached hereto as Exhibit A and made a part hereof. Landlord has
provided to Tenant prior to the execution of this Lease the
measurements of the Premises as determined by Landlord's architect, and
Landlord and Tenant agree that the Premises contain 63,548 square feet.
(b) "Commencement Date": February 1, 2000, unless adjusted in
accordance with the provisions of Paragraph 3 hereof.
(c) "Lease Term": A period of seventy two (72) months, commencing on
the Commencement Date and ending on January 31, 2006 (the "Expiration
Date"), unless adjusted in accordance with the provisions of Paragraph
3 hereof and further unless sooner terminated or extended as herein
provided.
(d) "Base Rental": The applicable annual rental for the Premises shown
below; subject, however, to adjustments in accordance with the
provisions of Paragraph 6 hereof:
<TABLE>
<CAPTION>
RENTAL PERIOD MONTHLY BASE RENTAL TOTAL BASE RENTAL PER YEAR
--------------------------- --------------------------- ----------------------------
<S> <C> <C>
2/1/00 - 1/31/03 $92,674.17 $1,112,090.04
--------------------------- --------------------------- ----------------------------
2/1/03 - 1/31/06 $97,969.83 $1,175,638.00
=========================== =========================== ============================
</TABLE>
(e) "Security Deposit": See Exhibit I.
(f) "The Percentage": 68.1%, being the Agreed Rentable Area of the
Premises divided by the Agreed Rentable Area of the Building, expressed
as a percentage; provided, that in the event that the amount of space
leased by Tenant shall increase or decrease subsequent to the date of
this Lease, the Percentage shall be appropriately adjusted by Landlord.
-1-
<PAGE> 2
(g) "Permitted Use": General office purposes, provided that Tenant may
include laboratory and research and development activities normally
conducted with respect to the development of prototypes for computer
storage routers, a compact electronic device consuming power roughly
equivalent to a 100 watt light bulb and non-destructive testing of such
routers with an array of computer equipment including servers, disk
drives and tape libraries, provided (i) that such laboratory and
research and development activities do not disturb or annoy other
tenants or occupants in the Building; (ii) that Tenant will be solely
responsible for any costs associated with electrical, HVAC and other
requirements in excess of those for normal office use, and for costs of
restoration of the Premises to return the laboratory portion of the
Premises to normal office building condition upon the expiration or
earlier termination of this Lease; and (iii) that Tenant complies in
all respects with applicable zoning and land use regulations and all
other applicable laws in the conduct of any such activities.
(h) "Building": The Building(s) constructed on the Land, located at
8300 North MoPac Expressway, Austin, Texas 78731.
(i) "Land": That certain tract of land in Travis County, Texas,
described on Exhibit B attached hereto and made a part hereof.
(j) "Complex": being the Land, the office building totaling 93,312
rentable square feet, the parking garage and all other structures,
improvements, fixtures and appurtenances now or hereafter placed,
constructed or erected on or appurtenant to the Land.
(k) "Common Areas": Those areas of the Complex which are provided and
maintained for the common use and benefit of Landlord and tenants of
the Complex generally, together with the agents, employees, patrons,
guests, licensees and invitees of Landlord and such tenants, including,
without limitation, all parking areas, enclosed or otherwise, streets,
sidewalks and landscaped areas located within the Complex.
(l) "Work Letter": That Work Letter attached to this Lease as an
exhibit (see Paragraph 55 hereof) setting forth Landlord and Tenant's
respective obligations to make certain improvements to the Premises. If
Landlord and Tenant have not agreed that certain improvements will be
made to the Premises by attaching a Work Letter as an exhibit to this
Lease, then Tenant agrees to accept the Premises in its "as-is"
condition for all purposes as set forth in Paragraph 8 hereof.
(m) "Basic Costs": Any and all costs and expenses which Landlord shall
incur, pay or become obligated to pay in connection with owning,
operating, maintaining, repairing and managing the Complex as a
first-class office complex, as determined in accordance with generally
accepted accounting principles consistently applied, including but not
limited to the following:
(i) All accrued real estate taxes and annual installments of special
assessments
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<PAGE> 3
levied against the Complex and any and all taxes, charges, levies or
assessments (including interest thereon, unless such interest is charged as
a result of Landlord's payment of such taxes after their due date) which
may be levied, charged or assessed against or on the Complex in lieu
thereof or in addition thereto, together with any and all costs of
protesting and reducing taxes and legal fees incident therewith.
(ii) All wages, salaries and related expenses of all employees engaged
in the operation, maintenance and security of the Complex, to the extent
that such wages, salaries and expenses are fairly and properly allocated to
the Complex, and the costs of an office in the Complex. The wages and
salaries of management personnel above the level of property manager shall
not be included in the Basic Costs.
(iii) All costs of supplies and materials used in the operation and
maintenance of the Complex.
(iv) Cost of all utilities, including, without limitation, water,
electricity, heating, lighting, air conditioning and ventilating, together
with all costs, charges and expenses incurred by Landlord in connection
with the change of any company providing utility services, including
without limitation, maintenance, repair and service costs associated
therewith, but excluding utility costs separately billed to specific
tenants in the Complex.
(v) The costs of maintenance and service agreements for the Complex
and the equipment therein, including, without limitation, alarm service,
window cleaning and elevator maintenance and management fees; provided,
however, that the management fee will not exceed five percent (5%) of the
Base Rent to be paid by tenants in the Complex .
(vi) Accounting costs, including the costs of an annual audit, if any,
by Certified Public Accountants.
(vii) The costs of all insurance, including but not limited to fire,
casualty, liability and rental abatement insurance applicable to the
Complex and Landlord's personal property used in connection therewith.
(viii) The cost of all repairs, replacements and general maintenance
(except as specifically excluded below).
(ix) Any and all common area maintenance costs relating to public
areas of the Complex, including sidewalks, atriums, skyways, landscaping
and service areas.
(x) The amortized cost of capital improvements or repairs made to the
Complex which are primarily for the purpose of reducing Basic Costs
(provided that such amortized costs actually reduce the Basic Costs) or
otherwise for improving the operating efficiency of the Complex (whether or
not Basic Costs are actually reduced). Landlord will be solely responsible
for the cost of any capital improvements or repairs to the common areas of
the
-3-
<PAGE> 4
Complex, which will extend the life of the Complex or which are required to
comply with any law, rule or regulation of any governmental authority
applicable to the Complex (exclusive of the Premises), and such costs will
not be part of the Basic Costs to be paid by Tenant. Tenant will be solely
responsible for the cost of any capital improvements or repairs to the
Premises which will extend the life of the Premises or which are required
to comply with any law, rule or regulation of any governmental authority
applicable to the Premises.
Specifically excluded from the definition of "Basic Costs" are expenses
for capital improvements made to the Complex (except as provided above);
expenses for repair, replacements and general maintenance paid by proceeds of
insurance or by Tenant or other third parties and alterations attributable
solely to tenants of the Building other than Tenant; expenses for repair of
latent defects in the Complex; interest, amortization or other payments on loans
to Landlord whether secured or unsecured; depreciation of the Complex; leasing
commissions; legal expenses (except as otherwise expressly provided herein); and
income, excess profits or franchise taxes or other such taxes imposed on or
measured by the income of Landlord from the operation of the Complex.
(a) "Lease Year": Any period during the Lease Term, or any renewals or
extensions thereof, of one calendar year commencing January 1 and ending on the
next following December 31; and the term "First Lease Year" shall mean the
calendar year commencing on the January 1 immediately preceding the Commencement
Date and ending on the December 31 next following.
2. DEMISE. Landlord, in consideration of the rent to be paid and the
covenants and agreements to be performed by Tenant, as herein set forth, does
hereby LEASE, DEMISE and LET unto Tenant and Tenant accepts the Premises for the
Lease Term. Notwithstanding the preceding sentence, Tenant will be bound by all
of the provisions of this Lease, except for the payment of rent, from the date
of the first use or occupancy of the Premises by Tenant or Tenant's agents or
representatives for any purpose prior to the Commencement Date. Tenant agrees
and acknowledges that the Premises (whether consisting of less than one floor or
consisting of one or more full floors within the Complex) do not include, and
Landlord hereby expressly reserves for its use, any and all mechanical,
electrical, telephone and similar rooms, janitor closets, elevator, pipe, and
other vertical shafts and ducts, flues, stairwells, any area above the
acoustical ceiling, and any other areas not specifically shown on Exhibit A as
being part of the Premises; provided, however, that Tenant shall have reasonable
access to and use of such areas with Landlord's prior consent, which consent
shall not be unreasonably withheld, as may be necessary to provide utility and
telecommunication services to the Premises. The Premises are leased by Landlord
to Tenant and are accepted and are to be used and possessed by Tenant upon and
subject to all of the terms, provisions, covenants, agreements and conditions
contained in this Lease, including without limitation the terms, provisions,
covenants, agreements and conditions contained in each exhibit, rider and
addendum attached hereto. The agreed rentable area of the Premises is hereby
stipulated to be the "Agreed Rentable Area" of the Premises set forth in Item
1(a) of the Definitions. The agreed rentable area of the Complex is hereby
stipulated to be the "Agreed Rentable Area" of the Complex set forth in Item
1(j) of the Definitions.
-4-
<PAGE> 5
3. COMMENCEMENT OF RENT. If for any reason the improvements to the
Premises required by the Work Letter ("Tenant's Improvements") are not
Substantially Complete (as defined in the Work Letter) within two (2) business
days prior to the Commencement Date, this Lease and the obligations of Tenant
hereunder shall nonetheless continue in full force and effect and the same shall
not be construed in anywise to extend the Lease Term; provided, however, if
Tenant's Improvements are not Substantially Complete for any reason other than
Tenant Delay (as provided in the Work Letter), the Commencement Date shall be
adjusted forward to the date that is two (2) business days after the Tenant's
Improvements are Substantially Complete and the rent herein provided shall not
commence until such adjusted Commencement Date and the Expiration Date
referenced in Paragraph 1(c) shall be adjusted forward by the same number of
days as is the Commencement Date, so that the Lease Term shall be as set forth
in Paragraph 1(c). If the Commencement Date occurs on a day other than the first
day of a calendar month, then the Term of this Lease shall be extended such that
it shall continue for the number of full calendar months set forth in Paragraph
1(c) plus the first partial calendar month following the Commencement Date.
However, in the event that Tenant's Improvements are not Substantially Complete
for any reason other than Tenant Delay or force majeure by March 15, 2000, then
as Tenant's sole and exclusive remedy, Tenant shall receive one (1) day of rent
abatement for each day of such delay after March 15, 2000. If Tenant's
Improvements are not Substantially Complete by April 1, 2000 for any reason
other than Tenant Delay or force majeure, then Tenant shall have the option to
terminate this Lease by giving Landlord written notice of such termination on or
before April 10, 2000, in which event any funds previously paid by Tenant to
Landlord will be refunded to Tenant and any letter of credit delivered to
Landlord will be returned to Tenant. In the event that Tenant's Improvements are
not substantially complete by the Commencement Date due to Tenant Delay or force
majeure, the Commencement Date shall be adjourned until substantial completion
occurs.
4. USE AND OCCUPANCY.
(a) General. Tenant agrees that the Premises shall be used and occupied
by Tenant as and for the Permitted Use and for no other purpose. Tenant agrees
to use and maintain the Premises in a clean, careful, safe and proper manner and
to comply with all laws, ordinances, orders, rules and regulations of all
governmental bodies (state, federal and municipal) applicable to the Premises or
Tenant's use or occupancy thereof. Tenant will not in any manner deface or
injure the Complex or any part thereof or overload the floors of the Premises.
Tenant agrees to pay for any damage to the Premises or to any other part of the
Complex caused by Tenant or any of its agents, employees, licensees, or invitees
within thirty (30) days of receipt of an invoice therefor; provided that
Tenant's responsibility for repair of such damage that is covered by insurance
will not exceed the amount of applicable deductibles therefor, and is otherwise
subject to the provisions of Paragraph 21 hereof. Tenant agrees not to use or
allow or permit the Premises to be used for any purpose prohibited by any law of
the United States or of the State of Texas or by any ordinance of Austin, Texas,
and Tenant agrees not to commit waste or suffer or permit waste to be committed
or to allow or permit any nuisance on or in the Premises. Tenant will not use
the Premises for lodging or sleeping purposes or for any illegal purposes.
Tenant
-5-
<PAGE> 6
shall not at any time sell, purchase or give away, or permit, except with
Landlord's prior written approval, the sale, purchase or gift of food,
beverages, cigars, cigarettes or other smoking materials in any form by or to
any of Tenant's agents or employees or any other parties on the Premises. Tenant
shall not do any cooking or other preparation of food or operate a restaurant on
the Premises (provided that Tenant may operate ordinary and customary break
rooms and kitchenettes in the Premises, at locations approved by Landlord, and
allow Tenant's employees to warm and cook meals in those areas), or cause or
permit any cooking odors or any other unusual or objectionable odors to emanate
from the Premises. Tenant may also maintain vending machines in the Premises in
such kitchenettes and break rooms with Landlord's approval, which approval will
not be unreasonably withheld. Tenant will conduct its business and occupy the
Premises and will control its agents, employees, licensees and invitees in such
a manner so as not to create any nuisance or disturb any of the other tenants in
the Complex or Landlord in its management of the Complex and so as not to injure
the reputation of the Complex. Tenant shall not use the Premises or allow or
permit same to be used in any way or for any purpose that Landlord may
reasonably deem to be extra hazardous or which will increase the rate of fire or
other insurance for the Complex or its contents or in respect of the operation
of the Complex or which may render the Complex uninsurable at normal rates by
responsible insurance carriers authorized to do business in the State of Texas
or which may render void or voidable any insurance on the Complex. Tenant shall
promptly correct any violation of any governmental law, rule or regulation
relating to the Premises. Tenant shall comply with any direction of any
governmental authority having jurisdiction which imposes any duty upon Tenant or
Landlord with respect to the Premises or the occupancy or use thereof. Tenant
shall not erect, place or allow to be placed any sign, advertising matter,
stand, booth, or showcase in or upon the doorsteps, vestibules, halls,
corridors, doors, outside walls, outside windows, or pavement of the Complex or
the Land (except for lettering and signage as allowed by Paragraph 10 of this
Lease) without the prior written consent of Landlord.
(b) Hazardous Materials. Tenant shall not incorporate into, or use or
otherwise place or dispose of at, the Premises, the Building or any other
portion of the Complex any hazardous or toxic materials, except for use and
storage of cleaning and office supplies used in the ordinary course of Tenant's
business and then only if (i) such materials are in small quantities, properly
labeled and contained, (ii) such materials are handled and disposed of in
accordance with the highest accepted industry standards for safety, storage, use
and disposal, (iii) notice of and a copy of the current material safety data
sheet (to the extent required by applicable law) is provided to Landlord for
each such hazardous or toxic material and (iv) such materials are used,
transported, stored, handled and disposed of in accordance with all applicable
governmental laws, rules and regulations. Landlord shall have the right to
periodically inspect, take samples for testing and otherwise investigate the
Premises for the presence of hazardous or toxic materials. For purposes of this
Lease, hazardous or toxic materials shall mean asbestos containing materials and
all other materials, substances, wastes and chemicals classified as hazardous or
toxic substances, materials, wastes or chemicals under then-current applicable
governmental laws, rules or regulations or that are subject to any right-to-know
laws or requirements. If Tenant or its employees, agents or contractors shall
ever violate the provisions of this paragraph or otherwise contaminate the
Premises or any other portion of the Complex, then, at Landlord's option, (i)
-6-
<PAGE> 7
Tenant shall clean-up, remove and dispose of the material causing the violation,
in compliance with all applicable governmental standards, laws, rules and
regulations and then prevalent industry practice and standards and shall repair
any damage to the Premises or Complex within such period of time as may be
reasonable under the circumstances after written notice by Landlord, or (ii)
Tenant shall reimburse Landlord for all costs and expenses in connection with
Landlord's clean-up, removal and disposal of the material causing the violation.
If Landlord elects for Tenant to perform such cleanup, Tenant shall notify
Landlord of its method, time and procedure for any clean-up or removal and
Landlord shall have the right to require reasonable changes in such method, time
or procedure or to require the same to be done after normal business hours.
Tenant's obligations under this paragraph shall survive the termination of this
Lease.
(c) Disability Acts. From and after the Commencement Date, Tenant shall
be obligated to see that the Premises comply with all existing requirements of
and regulations issued under the provisions of Tex. Rev. Civ. Stat. Ann. art.
9102 and the provisions of the Americans With Disabilities Act of 1990, 42
U.S.C. Sections 12101-12213, as amended (hereinafter collectively called the
"Disability Acts") for each of the following: (i) alterations or improvements to
any portion of the Premises performed after the Commencement Date; (ii)
obligations or complaints arising under or out of Title I of the Americans With
Disabilities Act or Tenant's employer-employee obligations; (iii) obligations or
complaints arising under or out of the conduct or operations of Tenant's
business, including any obligations or requirements for barrier removal to
customers or invitees as a commercial facility or as a public accommodation (as
defined in the Disability Acts); and (iv) any change in the nature of Tenant's
business, or its employees, or financial net worth, or Tenant's business
operations that triggers an obligation under the Disability Acts.
5. BASE RENTAL. Tenant agrees to pay to Landlord in currency of the
United States of America, without any setoff or deduction whatsoever, the Base
Rental and the Percentage of Basic Costs, as provided in paragraph 6, and all
other sums (whether or not expressly designated as rent) required to be paid to
Landlord by Tenant hereunder, including without limitation any sums payable to
Landlord under any exhibit, rider or addendum attached hereto (all of which
shall constitute rent and are sometimes herein collectively referred to as
"rent"). The Base Rental, together with any estimate of Percentage of Basic
Costs pursuant to Paragraph 6 hereof then in effect, shall be due and payable in
advance in monthly installments, which monthly installments shall commence on
the Commencement Date and shall continue on the first day of each calendar month
thereafter during the Lease Term. Tenant hereby agrees to pay such Base Rental
and the Percentage of Basic Costs to Landlord at Landlord's address provided
herein (or such other address as may be designated by Landlord in writing from
time to time) monthly, in advance, and without demand. If the Commencement Date
occurs on a day other than the first day of a calendar month or the Lease Term
ends on a day other than the last day of a calendar month, then the installments
of Base Rental and any estimate of Percentage of Basic Costs for such month or
months shall be prorated, based on the number of days in such
-7-
<PAGE> 8
month. The first installment of Base Rental, whether for a full calendar month
or a portion thereof, shall be paid contemporaneously with the Commencement Date
of this Lease.
6. TENANT'S PERCENTAGE OF BASIC COSTS.
(a) Tenant agrees to pay to Landlord, as additional rent, the
Percentage of Basic Costs, to be paid as provided in Paragraph 5 above and in
this Paragraph 6.
(b) The Percentage of Basic Costs for the remainder of the first
calendar year (whether full or partial) and for each subsequent calendar year of
the Lease Term will be estimated by Landlord, and notice of such estimated
amounts will be given to Tenant at least thirty (30) days prior to the
Commencement Date or the beginning of each calendar year, as the case may be.
For the partial calendar year, if any, after the Commencement Date, Tenant will
pay to Landlord each month, at the same time the monthly installment of Base
Rental is due, an amount equal to the estimated Percentage of Basic Costs for
the remainder of such calendar year divided by the number of months remaining in
such year. For each full calendar year of the Lease Term, Tenant will pay to
Landlord each month, at the same time the monthly installment of Base Rental is
due, an amount equal to one-twelfth (1/12) of the estimated Percentage of Basic
Costs due for such calendar year. If the expiration of the Lease Term does not
occur on December 31, for the partial calendar year preceding the expiration
date, Tenant will pay to Landlord, each month, at the same time the monthly
installment of Base Rental is due, an amount equal to the amount of the
estimated Percentage of Basic Costs for such partial calendar year divided by
the number of full calendar months of such partial calendar year.
(c) At any time and from time to time during the Lease Term, Landlord
will have the right, by notice to Tenant, to change the monthly amount then
payable by Tenant for the estimated Percentage of Basic Costs to reflect more
accurately, in the reasonable judgment of Landlord, the actual Percentage of
Basic Costs for the then current calendar year. Tenant will begin paying the
revised estimated amount together with the next monthly payment of Base Rental
due at least fifteen (15) days after receipt by Tenant of Landlord's notice.
(d) On or before April 1 of each calendar year, Landlord will prepare
and deliver to Tenant a statement setting forth the calculation of the actual
Percentage of Basic Costs for the previous calendar year. Within thirty (30)
days after receipt of the statement of the actual Percentage of Basic Costs,
Tenant will pay to Landlord, or Landlord will credit against the next rental or
other payment or payments due from Tenant, as the case may be, the difference
between the actual Percentage of Basic Costs for the preceding calendar year and
the estimated Percentage of Basic Costs paid by Tenant during such year. Tenant
shall have the right to audit Landlord's books and records relating to the
computation of Basic Costs on the conditions that (a) any such audit shall take
place at the offices of Landlord during normal business hours and upon two
business days' prior notice; (b) such audit shall not take place more often than
once in any twelve (12) month period; (c) such audit shall be conducted only by
a Certified Public Accountant firm; and (d) the results of such audit shall be
kept confidential by Tenant. In the event such audit reveals that actual Basic
Costs in any calendar year were overstated by more than five percent
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(5%), Landlord shall pay the reasonable cost of the audit up to but not
exceeding $2,500. In the event that the Basic Costs are so found to be
understated or overstated, the parties will promptly make the appropriate
adjustments.
(e) If the Lease Term will expire or this Lease has been terminated
prior to a final determination of the actual Percentage of Basic Costs, the
amount of adjustment between the estimated Percentage and the actual Percentage
of Basic Costs payable for the preceding calendar year and/or the final partial
calendar year of the Lease Term will be estimated by Landlord based upon the
best data available to Landlord at the time of the estimate. Prior to the
expiration date of the Lease Term, or as soon as possible after an earlier
termination date, an adjustment will be made between Landlord and Tenant. The
obligations set forth in the preceding sentence will survive the expiration date
of the Lease Term or earlier termination of this Lease.
(f) In the event the Complex is not fully occupied during any calendar
year during the Lease Term, a reasonable adjustment shall be made by Landlord in
computing the Basic Costs for such calendar year in order that such Basic Costs
shall be computed as though the Complex had been fully occupied during such
calendar year.
(g) If Tenant believes that the tax appraisal for the Land, the
Building or the Complex is excessive, Tenant may request that Landlord protest
such appraisal; provided, however, that Landlord shall not be required to
undertake such protest if Landlord determines in its good faith judgment that
such protest would be detrimental to the Complex. Section 41.413 of the Texas
Property Tax Code may give Tenant the right to protest before the appropriate
appraisal review board a determination of the appraised value of the Building,
the Land and/or the Complex if Landlord does not so protest and requires
Landlord to deliver to Tenant a notice of any determination of the appraised
value of the Building, the Land and/or the Complex. Tenant acknowledges that the
Complex and the Land upon which it is located is a multi-tenant facility, that
any filing of a protest of appraised value by Tenant will give the appraisal
district discretion to increase or decrease the appraised value, that an
increase in the appraised value will affect Landlord and the other tenants of
the Complex, and that an increase in the appraised value may increase the taxes
not only for the year in question but for future years; potentially beyond
expiration of the Lease Term. Accordingly, to the extent permitted by applicable
law, Tenant hereby waives the provisions of '41.413 of the Texas Property Tax
Code (or any successor thereto). In the alternative, if '41.413 of the Texas
Property Tax Code cannot be waived, Tenant agrees not to protest any valuation
unless Tenant notifies Landlord in writing of Tenant's intent so to protest and
Landlord fails to protest the valuation within sixty (60) days after Landlord
receives Tenant's written notice. If Tenant files a protest without giving the
written notice required by the preceding sentence, such filing shall be an event
of default under this Lease without the necessity of any notice from Landlord,
regardless of the provisions of Paragraph 26(a) of this Lease. Furthermore, if
Tenant exercises the right of protest granted by '41.413 of the Texas Property
Tax Code, Tenant shall be solely responsible for, and shall pay, all costs of
such protest. If as a result of any protest filed by Tenant, the appraised value
of the Building, the Land and/or the Complex is increased by the appraisal
board, Tenant shall be solely responsible for, and shall pay upon demand by
Landlord, all taxes (not only the Percentage thereof) assessed
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against the Building, the Land and/or the Complex in excess of the taxes which
would have been payable in the absence of the protest. Tenant shall continue to
pay such excess taxes until the determination of appraised value of the
Building, the Land and/or the Complex is changed by the appraisal review board,
regardless of whether the increased taxes are incurred during the Lease Term or
thereafter. Landlord agrees, upon request by Tenant, to provide to Tenant a copy
of the determination of appraised value for any year. The payment obligations of
Tenant under this Paragraph 6(g) shall survive the expiration or other
termination of this Lease.
7. SERVICES TO BE FURNISHED BY LANDLORD.
(a) So long as Tenant is not in default under this Lease, Landlord
agrees to furnish the following services to the Premises:
(i) Hot and cold water at those points of supply provided for
general use of other tenants in the Complex, central heat and air
conditioning in season, at such temperatures and in such amounts as are
considered by Landlord to be standard or as required by governmental
authority; provided, however, heating and air conditioning service at
times other than for standard building hours for HVAC service (which
are 7:00 a.m. to 7:00 p.m. on Mondays through Fridays and 8:00 a.m. to
1:00 p.m. on Saturdays, exclusive of normal business holidays) shall be
delivered at Tenant's expense through an on-demand telephone dial-in
mechanism installed by Landlord. Tenant shall pay for such additional
service at the current cost of $20.00/hour/zone, subject to adjustment
by Landlord from time to time; provided, however, that adjustments to
this price will be based on Landlord's actual costs, without markup for
profit. Landlord confirms that each wing of each floor is a separate
"zone". Further, Tenant understands that the variable air volume boxes
are distributed as follows:
Interior 1:1,200/1,700 RSF
Exterior 1:600/800 RSF
Corners 1:260 RSF
Prior to the execution of this Lease, Landlord has provided Tenant with
a copy of the Building's design criteria and specifications for the
heating and air conditioning system, a copy of which is attached hereto
as Exhibit J and made a part hereof, and Landlord agrees, subject to
governmental regulation, force majeure, and alterations to the Premises
by Tenant without Landlord's prior consent, to maintain the Building's
heating and air conditioning system equipment (not including heating or
cooling units which serve only the Premises) so that indoor air
temperatures will ordinarily be within the ranges set forth in the
design specifications for the Building's heating and air conditioning
system; provided, however, that Tenant will be responsible for the
costs of providing increased heating, cooling or ventilation made
necessary by Tenant's use or manner of use of the Premises in excess of
that indicated on the Construction Plans approved by Landlord and
Tenant in connection with the initial build-out of the Tenant's
Improvements.
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(ii) Janitor service, five times weekly, exclusive of normal
business holidays; provided, however, if Tenant's floor covering or
other improvements require special treatment, Tenant shall pay the
additional cleaning cost attributable thereto as additional rent upon
presentation of a statement therefor by Landlord.
(iii) Subject to the provisions of Paragraph 13, facilities to
provide all electrical current required by Tenant in its use and
occupancy of the Premises. Landlord has installed three (3) four (4")
inch conduits from the street to the building, one of which is
currently used by Southwestern Bell. With Landlord's prior approval,
which will not be unreasonably withheld, Tenant's telecommunications
providers may access a portion of unused conduit in connection with the
installation of additional telecommunications lines to the Premises,
and Landlord agrees to make available the capacity of one (1) full
conduit for use by Tenant's telecommunications providers.
(iv) Elevator Service.
(v) Card-key controlled access (or other similar access
control device or mechanism as Landlord may from time to time elect to
provide) intended to limit the general public's access to the Building
during other than "Normal Business Hours" for the Complex (which are
7:00 a.m. to 7:00 p.m. on Mondays through Fridays and 8:00 a.m. to 1:00
p.m. on Saturdays, exclusive of normal business holidays). The Building
and Premises access system shall operate off of one access card, and
card readers shall be installed in the elevators and the stairwells of
the Building. Landlord, however, shall have no liability to Tenant, its
employees, agents, invitees or licensees for any loss, damage or injury
of any kind or nature caused by or as a result of the presence of any
unauthorized person in the Premises, the Building or the Complex,
including without limitation any loss, damage or injury due to theft,
burglary or other criminal conduct by any person (REGARDLESS OF WHETHER
ANY SUCH LOSS, DAMAGE OR INJURY IS CAUSED BY OR ARISES OUT OF
LANDLORD'S NEGLIGENCE OR THE NEGLIGENCE OF ANY OFFICER, EMPLOYEE OR
AGENT OF LANDLORD OR ANY STRICT LIABILITY), nor shall Landlord be
required to insure against any such loss, damage or injury. Tenant
shall cooperate fully in Landlord's efforts to maintain security in the
Building and Complex and shall follow all rules and regulations
promulgated by Landlord with respect thereto.
(b) The failure by Landlord to any extent to furnish or the
interruption or termination of the services described in Paragraphs 7(a)(i) or
7(a)(iii) above, in whole or in part, or the interruption or termination of such
services as a result of the failure of the equipment or machinery used in the
provision of such services to function properly resulting from causes other than
the gross negligence or intentional misconduct of Landlord, shall not render
Landlord liable to Tenant or any other person in any respect, nor be construed
as an eviction of Tenant, nor work an abatement of rent, nor relieve Tenant from
the obligation to fulfill any covenant or agreement hereof; provided, however,
that in such event, Basic Rent shall abate if the interruption or termination of
services renders the Premises untenantable, and Tenant does not occupy the
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<PAGE> 12
Premises or affected portion thereof, for the conduct of its business for a
period of more than five (5) consecutive business days. If the interruption or
termination of services results from the gross negligence or intentional
misconduct of Landlord and the interruption or termination of services renders
the Premises untenantable as aforesaid, Base Rent shall abate from the date that
the interruption or termination occurs. Landlord agrees to use diligent efforts
to restore any services that are interrupted.
(c) Except as otherwise expressly provided herein, Landlord shall not
be required to make any repairs to the Premises.
(d) If permitted by applicable law, Landlord shall have the right at
any time and from time to time during the Lease Term to contract (i) from any
utility provider currently providing services to the Complex or (ii) from a
different company or companies providing any utility service (each such company
shall hereinafter be referred to as an "Alternative Service Provider"). Tenant
shall cooperate with Landlord, the current utility provider and the Alternative
Service Provider at all times and, as reasonably necessary, shall allow
Landlord, the current utility provider and any Alternative Service Provider
reasonable access to the Building's and/or the Complex's electric lines,
feeders, risers, wiring and any other machinery within the Premises.
(e) Landlord shall construct at its sole expense the additional parking
deck. In addition to the Base Rent to be paid by Tenant as shown in Paragraph 1
hereof, Tenant agrees to pay as additional Base Rent $1.25 per square foot of
Agreed Rentable Area of the Premises per year during the primary Lease term.
During any renewal term of this Lease, the additional parking deck and covered
parking ratios will be factors to be considered in determining the Renewal
Rental Rate. The deck construction shall be complete prior to the Commencement
Date of this Lease; provided, however, that if the additional parking deck is
not substantially completed by the Commencement Date of the Lease, the
additional Basic Rent hereunder shall not be payable by Tenant until such time
as the additional parking deck is substantially complete, and provided further
that Tenant agrees that such failure by Landlord to substantially complete the
additional parking deck does not constitute a default inder this Lease so long
as Landlord makes available for Tenant's use a total of 328 parking spaces, and
Landlord proceeds diligently to complete the additional parking deck. Based upon
the existing parking ratios and the construction of the deck, Tenant shall have
328 total parking spaces. In the event that Tenant does not have access to 328
parking spaces, Landlord and Tenant agree to implement a plan to assure Tenant
access to a total of 328 parking spaces. Landlord agrees to provide
approximately twenty (20) visitor designated spaces for the use of building
visitors. Approximately fifteen (15) of these shall be designated for Tenant's
visitors and shall be part of Tenant's allocation.
(f) Simultaneously with Lease execution, Tenant has provided to
Landlord $125,000 (the "Advance Payment") as advance payment for the costs of
Tenant Improvements that may exceed the Finish Allowance. In the event that the
costs of Tenant Improvements does not exceed the Finish Allowance or if the
excess amount is less than $125,000, the unused amount of the Advance Payment
(not to exceed $125,000) will be refunded to Tenant. If Tenant does not take
possession of the Premises for any reason, the Advance Payment, or any balance
thereof,
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<PAGE> 13
will be retained by Landlord; provided, however, that if such failure is due to
Landlord's default, or if Landlord does not substantially complete the Tenant
Improvements on or before April 1, 2000, then Landlord shall promptly return the
$125,000 Advance Payment to Tenant.
8. IMPROVEMENTS TO BE MADE BY LANDLORD AND ACCEPTANCE OF PREMISES.
Tenant acknowledges that at such time as the Premises have been constructed (see
the Work Letter attached hereto as Exhibit D and made a part hereof), Tenant
will inspect the Premises and the Complex, and that Tenant's taking possession
of the Premises shall evidence Tenant's acceptance of the Premises (including
the suitability of the Premises for the Permitted Use), the Building and the
Complex in "as is, with all faults" condition for all purposes subject to
Landlord's completion of agreed punchlist items. Landlord will construct or
cause to be constructed Tenant's Improvements (as defined in the Work Letter) to
the Premises in accordance with the terms of the Work Letter and will use
reasonable efforts to Substantially Complete (as defined in the Work Letter)
Tenant's Improvements by the Commencement Date. If Tenant's Improvements are not
Substantially Complete (and approved for occupancy pending issuance of the
Certificate of Occupancy by the City of Austin) by the Commencement Date for any
reason whatsoever, Tenant's sole remedy shall be an adjustment of the
Commencement Date as provided in Paragraph 3 hereof. However, if the Tenant
Improvements are not Substantially Complete (and approved for occupancy pending
issuance of the Certificate of Occupancy by the City of Austin) by April 1, 2000
for any reason other than Tenant Delay or force majeure, Tenant may terminate
this Lease by giving Landlord written notice thereof by April 10, 2000, and any
funds or letter of credit (including the $125,000 payment referred to in
Paragraph 7(f) hereinabove) previously paid or delivered to Landlord will be
refunded or returned to tenant as Tenant's sole remedy. The Premises shall be
delivered to Tenant upon Substantial Completion of Tenant's Improvements (and
approved for occupancy pending issuance of the Certificate of Occupancy by the
City of Austin) and Landlord and Tenant will execute the Acceptance of Premises
Memorandum (herein so called) attached hereto as Exhibit F (see Paragraph 55).
If Tenant occupies the Premises or any portion thereof without executing an
Acceptance of Premises Memorandum, Tenant shall be deemed to have accepted the
Premises for all purposes and Substantial Completion shall be deemed to have
occurred on the earlier to occur of (i) actual occupancy or (ii) the
Commencement Date set forth in Paragraph 1(b) hereof. Except as otherwise
provided in the Work Letter, all installations and improvements now or hereafter
placed on the Premises shall be for Tenant's account and at Tenant's cost. The
taking of possession of the Premises by Tenant shall be conclusive evidence
that, except as may be set forth in the Acceptance of Premises Memorandum (and
the punchlist items referred to therein), Tenant accepts the Premises the
Building and the Complex and each and every part and appurtenance thereof as
being in a good and satisfactory condition and waives any defects in the
Premises and its appurtenances and in all other parts of the Building, the
Complex and the appurtenances thereto, other than latent defects that cannot be
discovered by Tenant as of the Commencement Date. Notwithstanding the foregoing
provisions to the contrary, in the event that Landlord obtains a temporary
certificate of occupancy, Landlord will pursue diligently the issuance of a
final certificate of occupancy by the City of Austin.
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9. ALTERATIONS AND ADDITIONS.
(a) All alterations, additions and improvements to the Premises (herein
collectively called the "Leasehold Improvements"), by Landlord or Tenant shall
become a part of the Premises and the Building and shall be owned by and be the
property of Landlord, at the time same are placed in or upon the Premises
without compensation to Tenant. Tenant shall not, without the prior written
consent of Landlord (which consent Landlord may withhold in its sole
discretion), make any changes, modifications, alterations, additions or
improvements (other than Tenant's Improvements under the Work Letter) to, or
install any equipment or machinery (other than office equipment and unattached
personal property) on, the Premises (all such changes, modifications,
alterations, additions, improvements (other than Tenant's Improvements under the
Work Letter) are herein collectively referred to as "Installations") if any such
Installations would (i) affect any structural or load bearing portions of the
Complex, (ii) result in a material increase of electrical usage above the normal
type and amount of electrical current to be provided by Landlord, (iii) result
in a significant increase in Tenant's usage of heating or air conditioning, (iv)
significantly impact mechanical, electrical or plumbing systems in the Premises
or the Complex, (v) affect areas of the Premises which can be viewed from Common
Areas, (vi) require greater or more difficult cleaning work (e.g., kitchens,
reproduction rooms and interior glass partitions), (vii) adversely affect
Landlord's ability to deliver services to other tenants of the Complex or (viii)
violate any provision of this Lease (all of the foregoing hereinafter called
"Structural Installations"). As to Installations not covered by the preceding
sentence (hereinafter called "Non-Structural Installations"), Tenant will not
perform same without the prior written consent of Landlord, which consent shall
not be unreasonably withheld or delayed. All Installations shall be at Tenant's
sole cost and expense. Without in any way limiting Landlord's consent rights,
Landlord shall not be required to give its consent until (a) Landlord approves
the contractor or person making such Installations and approves such
contractor's insurance coverage to be provided in connection with the work, (b)
Landlord approves final and complete plans and specifications for the work and
(c) the appropriate governmental agency, if any, has approved the plans and
specifications for such work. All work performed by Tenant or its contractor
relating to the Installations shall conform to applicable governmental laws,
rules and regulations, including, without limitation, the Disability Acts. Upon
completion of the Installations, Tenant shall deliver to Landlord "as built"
plans. If Landlord performs such Installations, Tenant shall pay Landlord, as
additional rent, the cost thereof plus five percent (5%) as reimbursement for
Landlord's overhead. Each payment shall be made to Landlord within ten (10) days
after receipt of an invoice from Landlord. All Non-Structural Installations
shall be removed at the termination of this Lease, as provided in Paragraph 11
unless Landlord agrees in writing at the time of their installation that they do
not have to be removed upon the termination of this Lease. Structural
Installations shall be removed at the termination of this Lease, as provided in
Paragraph 11, except where approved by Landlord without the requirement that
such Installations be removed upon termination of this Lease, which requirement
will be made by Landlord, if at all, within ten (10) business days of the time
Tenant provides Landlord with written notice and plans for the requested
Structural Installation; provided, however, that Tenant shall upon the
expiration or earlier termination of this Lease, restore to condition consistent
with
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<PAGE> 15
normal office use any portions of the Premises that had been used for laboratory
use as contemplated in Section 1(g) hereinabove. Tenant shall indemnify and hold
Landlord harmless from and reimburse Landlord for and with respect to, any and
all costs, expenses (including reasonable attorneys' fees), demands, claims,
causes of action and liens, arising from or in connection with any Installations
performed by or on behalf of Tenant, EVEN IF THE SAME IS CAUSED BY THE
NEGLIGENCE OR OTHER TORTIOUS CONDUCT OF LANDLORD OR LANDLORD IS STRICTLY LIABLE
FOR SUCH COSTS, EXPENSES OR CLAIMS. All Installations performed by or on behalf
of Tenant will be performed diligently and in a first-class workmanlike manner
and in compliance with all applicable laws, ordinances, regulations and rules of
any public authority having jurisdiction over the Complex and/or Tenant's and
Landlord's insurance carriers. Landlord will have the right, but not the
obligation, to inspect periodically the work on the Premises and may require
changes in the method or quality of the work. Any approval by Landlord (or
Landlord's architect and/or engineers) of any of Tenant's contractors or
Tenant's drawings, plans or specifications which are prepared in connection with
any construction of improvements (including without limitation, Tenant's
Improvements) in the Premises shall not in any way be construed as or constitute
a representation or warranty of Landlord as to the abilities of the contractor
or the adequacy or sufficiency of such drawings, plans or specifications or the
improvements to which they relate, for any use, purpose or condition.
Notwithstanding anything in this Lease to the contrary, Tenant may make minor,
non-structural alterations, additions and improvements (that do not
significantly affect the Building's mechanical, electrical, HVAC or plumbing
systems) to the Premises in the normal course of Tenant's business that cost
less than Five Thousand Dollars ($5,000.00) without having to obtain Landlord's
prior approval of those alterations, additions or improvements, but with prior
notice to Landlord.
Landlord hereby reserves the right and at all times shall have the right to
repair, change, redecorate, alter, improve, modify, renovate, enclose or make
additions to any part of the Complex (including, without limitation, structural
elements and load bearing elements within the Premises) and to enclose and/or
change the arrangement and/or location of driveways or parking areas or
landscaping or other Common Areas of the Complex, all without being held guilty
of an actual or constructive eviction of Tenant or breach of the implied
warranty of suitability and without an abatement of rent (the "Reserved Right").
Without in any way limiting the generality of the foregoing, Landlord's Reserved
Right shall include, but not be limited to the right to do any of the following:
(i) erect and construct scaffolding, pipe, conduit and other structures on and
within and outside of the Premises where reasonably required by the nature of
the changes, alterations, improvements, modifications, renovations and/or
additions being performed, (ii) perform within and outside of the Premises all
work and other activities associated with such changes, alterations,
improvements, modifications, renovations and/or additions being performed, (iii)
repair, change, renovate, remodel, alter, improve, modify or make additions to
the arrangement, appearance, location and/or size of entrances or passageways,
doors and doorways, corridors, elevators, elevator lobbies, stairs, toilets or
other Common Areas, (iv) temporarily close any Common Area and/or temporarily
suspend Complex services and facilities in connection with any repairs, changes,
alterations, modifications, renovations or additions to
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<PAGE> 16
any part of the Complex, (v) repair, change, alter or improve plumbing, pipes
and conduits located in the Complex, including without limitation, those located
within the Premises, and (vi) repair, change, modify, alter, improve, renovate
or make additions to the Complex central heating, ventilation, air conditioning,
electrical, mechanical or plumbing systems. When exercising the Reserved Right,
Landlord will interfere with Tenant's use and occupancy of the Premises as
little as is reasonably practicable. All changes, alterations, improvements,
modifications, renovations and additions made by Landlord pursuant to the
Reserved Right shall be of comparable or better quality than the portion of the
Complex being changed, altered, improved, modified or renovated.
10. SIGNAGE AND GRAPHICS. Tenant shall have an exterior sign at a
prominent location on the third level of the Building on both the north and the
east side. At the commencement of the Lease Term, Landlord shall provide and
install, at Tenant's cost (subject to the Finish Allowance), signage in the
Building lobby to take advantage of the stair between the lobby and the second
floor. Any change to such signage requested by Tenant and approved by Landlord
shall be installed by Landlord at Tenant's sole cost. All such letters and
numerals shall be in the standard graphics for the Building and no others shall
be used or permitted on the Premises. Tenant's interior signs will be consistent
with the signs of other tenants in the Complex and Tenant's exterior signs will
be comparable to other first class, professional signs located along North MoPac
Expressway, Austin, Texas; provided that both interior and exterior signs will
be subject to Landlord's approval, which will not be unreasonably withheld.
Tenant agrees to comply with Landlord's signage guidelines. Tenant shall be
solely responsible for obtaining all required municipal approvals for such
signage, provided, however, that Landlord will cooperate with Tenant in applying
for and obtaining such permits (at no cost or expense to Landlord). Upon the
expiration or earlier termination of this Lease, Tenant shall at its sole
expense remove all of such signage and repair any damage resulting from the
installation or removal of such signage.
11. SURRENDER OF THE PREMISES BY TENANT. At the termination of this
Lease, whether caused by lapse of time or otherwise, Tenant shall at once
surrender possession of the Premises and deliver said Premises to Landlord in as
good repair and condition as at the commencement of Tenant's occupancy,
reasonable wear and tear and damage or destruction by fire or other casualty
excepted, and shall deliver to Landlord all keys to the Premises, and, if such
possession is not immediately surrendered, Landlord may forthwith enter upon and
take possession of the Premises and expel or remove Tenant and any other person
who may be occupying said Premises, or any part thereof, in compliance with
applicable legal procedures for such recovery of possession. Tenant shall, by
the expiration date or, if this Lease is earlier terminated, within seven (7)
days after the termination, remove from the Premises, at the sole expense of
Tenant, (i) all furniture, equipment, movable trade fixtures and other
personalty installed or placed in the Premises by or on behalf of Tenant
(hereinafter called "Tenant's Property") (unless Landlord is asserting its lien
rights therein), (ii) all Non-Structural Installations (unless Landlord agreed
in writing at the time of installation of the Non-Structural Installations that
they may remain on the Premises after the termination of the Lease), and (iii)
Structural
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Installations where removal has been required by Landlord pursuant to Paragraph
9 (provided, further, that in the case of any portions of the Premises that had
been used for laboratory purposes as contemplated in Section 1(g) hereinabove,
Tenant shall restore such portions of the Premises and mechanical, electrical,
plumbing and/or structural systems to conditions consistent with normal office
use. All such removals (and restoration, as applicable) shall be accomplished in
a good workmanlike manner so as not to damage the Premises or the primary
structure or structural qualities of the Building or the plumbing, electrical
lines or other utilities. If Tenant fails to deliver the Premises in the
condition aforesaid, then Landlord may restore the Premises to such condition at
Tenant's expense. All Tenant's Property required to be removed by this paragraph
not removed within the time period required hereunder shall be conclusively
presumed to have been abandoned by Tenant and Landlord may, at its option, take
over the possession of such property and either (i) declare same to be the
property of Landlord by written notice thereof to Tenant or (ii) at the sole
cost and expense of Tenant remove the same or any part thereof in any manner
that Landlord shall choose and store the same without incurring liability to
Tenant or any other person.
12. REPAIR AND MAINTENANCE BY TENANT.
(a) Tenant shall keep the Premises including all fixtures and carpet
therein in good and tenantable condition, normal wear and tear excepted, and
shall promptly make all necessary nonstructural repairs and replacements thereto
except those caused by fire or other casualty covered by insurance on the
Complex under policies naming Landlord as the insured, all at Tenant's sole
expense, under the supervision and with the approval of Landlord. Said repairs
and replacements shall be in quality and class equal to the original work.
Without diminishing such obligation of Tenant, if Tenant fails to make such
repairs and replacements within fifteen (15) days after the occurrence of the
damage or injury, Landlord may at its option make such repair and Tenant shall
pay Landlord for the cost thereof within thirty (30) days after receipt of an
invoice. In addition, Tenant shall pay the cost of repair and replacement due to
damage or injury (except those caused by fire or other casualty covered by
insurance on the Complex under policies naming Landlord as the insured) done to
the Complex (other than the Premises) or any part thereof by Tenant or Tenant's
agents, employees or invitees. Such amount shall be paid by Tenant to Landlord
within thirty (30) days of receipt of an invoice.
(b) Subject to Paragraphs 22, 23 and 24 of this Lease, Tenant shall
maintain and repair all supplemental HVAC units, data and phone cabling, and any
and all other installations and equipment installed in the Premises, above the
acoustical ceiling tiles of the Premises or elsewhere in the Building installed
by or on behalf of Tenant and which services only the Premises (such equipment
and installations collectively referred to as the "Tenant Service Equipment").
Tenant shall notify Landlord prior to performing any repair, maintenance or
replacement of the Tenant Service Equipment and the same shall be performed in
accordance with the standards and conditions applicable to maintenance, repairs
and replacements performed by Tenant pursuant to Paragraph 12(a). Landlord shall
have no liability for any repair, maintenance or replacement cost incurred in
connection with the Tenant Service Equipment. Unless otherwise agreed to by
Landlord in writing upon the installation of the Tenant Service
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Equipment, all Tenant Service Equipment shall become property of Landlord at the
expiration or earlier termination of the Lease; provided that, if requested by
Landlord, Tenant shall remove the Tenant Service Equipment on or before the
Expiration Date or, if this Lease is terminated earlier, within seven (7) days
after such termination. All removals shall be accomplished in accordance with
the standards for removals under Paragraph 11 hereof. Tenant shall indemnify and
hold Landlord harmless from, and reimburse Landlord for and with respect to, any
and all costs, expenses (including reasonable attorneys' fees), claims and
causes of action arising from or incurred by and/or asserted in connection with
the (i) maintenance, repair, replacement of the Tenant Service Equipment and
(ii) any damage or injury arising out of or resulting from or in connection with
the Tenant Service Equipment.
13. USE OF ELECTRICAL SERVICES AND TELECOMMUNICATIONS EQUIPMENT BY
TENANT. Tenant's use of electrical services furnished by Landlord shall be
subject to the following:
(a) Tenant's electrical equipment and overhead lighting shall be
restricted to that equipment and lighting which both individually and
collectively do not have an electrical design load greater than equipment and
lighting normally utilized in general office use and do not use electric current
in excess of the capacity of the feeders or lines to the Building or the risers
or wiring of the Building or Premises. Landlord and Tenant will consult with one
another during the preparation of the Construction Drawings (as defined in the
Work Letter attached as Exhibit D hereto) to ensure that Tenant's planned
improvements are within the electrical design load for the Building.
(b) If, in the exercise of reasonable judgment, Landlord should
determine that Tenant's consumption of electrical services exceeds normal
consumption for general office use, then Tenant shall remove such equipment
and/or lighting to achieve compliance within ten (10) days after receiving
notice from Landlord. Or upon receiving Landlord's prior written approval, such
equipment and/or lighting may remain in the Premises, subject to the following:
(i) Tenant shall pay for all costs of installation and
maintenance of submeters, wiring, air conditioning and other items
required by Landlord, in Landlord's reasonable discretion, to
accommodate Tenant's excess design loads and capacities.
(ii) Tenant shall pay to Landlord, within thirty (30) days of
receipt of an invoice, the cost of the excess demand and consumption of
electrical service at rates based upon Landlord's actual costs and
which shall be in accordance with any applicable laws.
(iii) Landlord may, at its option, upon not less than thirty
(30) days' prior written notice to Tenant, discontinue the availability
of such extraordinary utility service. If Landlord gives any such
notice, Tenant will contract directly with the public utility for the
supplying of such utility service to the Premises; in such event,
Landlord will
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cooperate with Tenant and the public utility to provide such access to
the Building and premises as is reasonably necessary to provide such
utility service.
(c) Landlord shall be responsible for all Building standard fluorescent
bulb and ballast replacements in the Premises, but Tenant shall pay to Landlord,
within thirty (30) days of receipt of an invoice, all costs incident thereto.
(d) In the event that Tenant wishes at anytime to utilize the services
of a telephone or telecommunications provider whose equipment is not then
servicing the Building, no such provider shall be permitted to install its lines
or other equipment within the Building without first securing the prior written
approval of Landlord, which approval shall not be unreasonably withheld and
shall include, without limitation, approval of the plans and specifications for
the installation of the lines and/or other equipment within the Building.
Landlord's approval shall not be deemed any kind of warranty or representation
by Landlord, including, without limitation, any warranty or representation as to
the suitability, competence, or financial strength of the provider. Without
limitation of the foregoing standard, unless all of the following conditions are
satisfied to Landlord's satisfaction, it shall be reasonable for Landlord to
refuse to give its approval: (i) Landlord shall incur no expense whatsoever with
respect to any aspect of the provider's provision of its services, including
without limitation, the costs of installation, materials and services; (ii)
prior to commencement of any work in or about the Building by the provider, the
provider shall supply Landlord with such written indemnities, insurance,
financial statements, and such other items as Landlord determines to be
necessary to protect its financial interests and the interests of the Building
relating to the proposed activities of the provider; (iii) the provider agrees
to abide by such rules and regulations, Building and other codes, job site rules
and such other requirements as are determined by Landlord to be necessary to
protect the interests of the Building, the tenants in the Building and Landlord;
(iv) Landlord determines that there is sufficient space in the Building for the
placement of all of the provider's equipment and materials; (v) the provider
agrees to abide by Landlord requirements, if any, that provider use existing
Building conduits and pipes or use Building contractors (or other contractors
approved by Landlord); (vi) Landlord receives from the provider such
compensation as is determined by Landlord to compensate it for space used in the
Building for the storage and maintenance of the provider's equipment, for the
fair market value of a provider's access to the Building, and the costs which
may reasonably be expected to be incurred by Landlord; (vii) the provider agrees
to deliver to Landlord detailed "as built" plans immediately after the
installation of the provider's equipment is complete; and (viii) all of the
foregoing matters are documented in a written license agreement between Landlord
and the provider, the form and content of which is reasonably satisfactory to
Landlord.
14. RULES AND REGULATIONS. Tenant and Tenant's agents, employees and
invitees will comply fully with all requirements of the Rules and Regulations
(as changed from time to time as hereinafter provided) which are attached hereto
as Exhibit C and made a part hereof as though fully set out herein. Landlord
shall at all times have the right to change such Rules and Regulations or to
promulgate other Rules and Regulations in such reasonable manner
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<PAGE> 20
as may be deemed advisable for the management, safety, care or cleanliness of
the Complex, and for preservation of good order therein; provided, however, that
such changes shall not become effective and a part of this Lease until a copy
thereof shall have been delivered to Tenant. Tenant shall further be responsible
for the compliance with such Rules and Regulations by the employees, servants,
agents, visitors and invitees of Tenant.
15. ENTRY BY LANDLORD. Tenant agrees to permit Landlord or its agents
or representatives, after twenty-four (24) hours written notice from Landlord
(except that in the event of emergency, no notice shall be required), to enter
into and upon any part of the Premises during ordinary business hours, or at
such other times as Landlord deems appropriate, to inspect the same, or to show
the Premises to prospective purchasers, tenants, mortgagees or insurers, or to
clean or make repairs, alterations or additions thereto (but without any
obligation to do so, except as expressly provided for herein) and Tenant shall
not be entitled to any abatement or reduction of rent by reason thereof.
Landlord and its employees, contractors and subcontractors will maintain the
confidentiality of all information within the Premises; provided, however, that
Tenant's exclusive remedy in the event of any breach of this confidentiality
provision shall be an action for injunction to prevent further dissemination of
any such information.
16. ASSIGNMENT AND SUBLETTING. (a) Tenant shall not, without the prior
written consent of Landlord, (i) assign or in any manner transfer this Lease or
any estate or interest therein, or (ii) permit any assignment of this Lease or
any estate or interest therein by operation of law, or (iii) sublet the Premises
or any part thereof, or (iv) grant any license, concession or other right of
occupancy of any portion of the Premises or (v) permit the use of the Premises
by any parties other than Tenant, its agents and employees; provided, however,
with respect to any proposed assignment of this Lease or subletting of the
Premises, Landlord agrees not to unreasonably withhold its consent so long as
Landlord does not elect to terminate this Lease pursuant to subparagraph (b)
below. Landlord shall be deemed to have reasonably withheld its consent to any
assignment or sublease if the refusal is based on (i) Landlord's determination
(in its sole discretion) that such assignee or subtenant does not have the
financial stability or is not of the character or quality of a tenant to whom
Landlord would generally lease space in the Complex, (ii) the fact that such
assignment or sublease is not in form and of substance reasonably satisfactory
to Landlord, (iii) such assignment or sublease conflicts in any manner with this
Lease, including, but not limited to, the Permitted Use, (iv) the proposed
assignee or subtenant is a tenant of the Complex or Landlord is negotiating with
the proposed assignee or subtenant to become a tenant of the Complex, (v) the
subtenant or assignee is a governmental entity or a medical office, (vi) the
subtenant's or assignee's primary business is prohibited by any non-compete
clause then affecting the Complex or (vii) the assignment or sublease would
cause Landlord to breach any covenants or contractual obligations to which the
Complex or Landlord is subject. Consent by Landlord to one or more assignments
or sublettings shall not operate as a waiver of Landlord's rights as to any
subsequent assignments and sublettings. Notwithstanding any assignment or
subletting, Tenant and any guarantor of Tenant's obligations under this Lease
shall at all times remain fully responsible and liable for the payment of the
rent herein specified and for compliance with all of Tenant's other obligations
under this Lease. To the extent the rentals or income derived from any sublease
or assignment exceed the
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rentals due hereunder, such excess rentals and income shall first be applied to
the costs incurred by Landlord to approve the sublease or assignment, and the
remainder will be shared equally between Landlord and Tenant. If an event of
default, as hereinafter defined, should occur while the Premises or any part
thereof are then assigned or sublet, Landlord, in addition to any other remedies
herein provided or provided by law, may at its option collect directly from such
assignee or sublessee all rents becoming due to Tenant under such assignment or
sublease and apply such rent against any sums due to Landlord by Tenant
hereunder and Tenant hereby authorizes and directs any such assignee or
sublessee to make such payments of rent directly to Landlord upon receipt of
notice from Landlord. No direct collection by Landlord from any such assignee or
sublessee shall be construed to constitute a novation or a release of Tenant or
any guarantor of Tenant from the further performance of its obligations
hereunder. Receipt by Landlord of rent from any assignee, sublessee or occupant
of the Premises shall not be deemed a waiver of the covenant in this Lease
contained against assignment and subletting or a release of Tenant under this
Lease. The receipt by Landlord to any such assignee or sublessee obligated to
make payments of rent shall be a full and complete release, discharge, and
acquittance to such assignee or sublessee to the extent of any such amount of
rent so paid to Landlord. Tenant shall not mortgage, pledge or otherwise
encumber its interest in this Lease or in the Premises.
(b) If Tenant requests Landlord's consent to an assignment of the Lease
or subletting of all or a part of the Premises, it shall submit to Landlord, in
writing, the name of the proposed assignee or subtenant, the proposed
commencement date of such assignment or subletting, the nature and character of
the business of the proposed assignee or subtenant and the proposed rates, terms
and other pertinent conditions of such assignment or subletting. Landlord shall
have the option (to be exercised within fifteen (15) days from the submission of
Tenant's written request) to (i) consent to such proposed assignment or
subletting, (ii) refuse to consent to such proposed assignment or subletting or
(iii) cancel this Lease (or the applicable portion thereof as to a partial
subletting) as of the commencement date stated in the above-mentioned notice of
subletting or assignment. If Landlord fails to notify Tenant of its election
within such fifteen (15) day period, Landlord shall be deemed to have given its
consent to such proposed assignment or subletting. If Landlord elects to cancel
this Lease as stated, then the Lease Term, and the tenancy and occupancy of the
Premises by Tenant thereunder, shall cease, terminate, expire, and come to an
end as if such cancellation date was the original termination date of this
Lease. If Landlord cancels this Lease with respect to less than the entire
Premises and the sublease space adjoins another portion of the Premises, Tenant
shall, at Tenant's sole cost and expense, construct and finish such demising
walls as are necessary to physically separate the Premises from the sublease
space, and if the sublease space is part of a floor which is fully included in
the Premises, then Landlord shall have the right, at Tenant's sole cost and
expense, to construct and finish in accordance with Building standards or to
cause Tenant to construct and finish in accordance with Building standards such
demising walls as are necessary (i) to construct a public corridor so as to
convert the floor to a multi-tenant floor and (ii) to convert the restrooms on
such floor (including access thereto) to restrooms which will serve the entire
floor, as opposed to only the Premises, and to make such revisions, if any, are
necessary, to properly light, heat, cool and ventilate the public corridor and
public restrooms.
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<PAGE> 22
(c) Landlord shall have the right to transfer, assign and convey, in
whole or in part, the Building and/or the Complex and any and all of its rights
under this Lease, and in the event Landlord assigns its rights under this Lease,
Landlord shall thereby be released from any further obligations hereunder with
respect to obligations arising after the date of such transfer or assignment,
and Tenant agrees to look solely to such successor in interest of the Landlord
for performance of such obligations.
17. MECHANIC'S LIENS. Tenant will not permit any mechanic's lien or
liens to be placed upon the Premises or any portion of the Complex during the
term hereof caused by or resulting from any work performed, materials furnished
or obligation incurred by or at the request of Tenant and nothing in this Lease
shall be deemed or construed in any way as constituting the consent or request
of Landlord, express or implied, by inference or otherwise, to any person for
the performance of any labor or the furnishing of any materials to the Premises,
or any part thereof, nor as giving Tenant any right, power or authority to
contract for or permit the rendering of any services or the furnishing of any
materials that would give rise to any mechanic's or other liens against the
interest of Landlord in the Premises or any portion of the Complex. In the event
any such lien is attached to the Premises or any portion of the Complex, Tenant
shall cause the same to be discharged of record within twenty (20) days after
the filing of same. If Tenant shall fail to discharge such mechanic's lien
within such period, then, in addition to any other right or remedy of Landlord,
Landlord may, but shall not be obligated to, discharge the same. Any amount paid
by Landlord for any of the aforesaid purposes and all reasonable legal and other
expenses of Landlord, including reasonable counsel fees, in defending any such
action or in procuring the discharge of such lien, with all disbursements in
connection therewith, shall be paid by Tenant to Landlord within thirty (30)
days of receipt of an invoice therefor.
18. PROPERTY AND LIABILITY INSURANCE. Landlord shall maintain fire and
extended coverage insurance on the Complex and the Premises (including the
Leasehold Improvements)in an amount of at least eighty percent (80%) of the
replacement value of the Building. Such insurance shall be maintained at the
expense of Landlord (as a part of the Basic Costs), and payments for losses
thereunder shall be made solely to Landlord or the mortgagees of Landlord as
their interests shall appear. Landlord shall also procure and maintain at the
expense of Landlord (but as a part of the Basic Costs) through the Lease Term
Commercial General Liability insurance against claims for bodily injury or death
and property damage occurring in or upon or resulting from the Complex, such
insurance to insure Landlord and its officers, employees and agent, to the limit
of not less than $3,000,000 (which may be a combination of liability and
umbrella liability coverage) in respect of any one accident or occurrence.
Tenant shall maintain at its expense, in an amount equal to full replacement
cost, fire and extended coverage insurance on all of Tenant's Property.
19. LIABILITY INSURANCE. Tenant shall, at its sole cost and expense,
procure and maintain through the Lease Term Commercial General Public Liability
insurance against claims for bodily injury or death and property damage
occurring in or upon or resulting from the Premises, such insurance to insure
both Tenant and, as an additional named insured, Landlord and its officers,
employees and agents, to be in standard form, to be issued by such insurance
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<PAGE> 23
company or companies as may have a Best's Insurance rating of A-IX or better,
and to afford immediate protection, to the limit of not less than $3,000,000 in
respect of any one accident or occurrence, and to the limit of not less than
$500,000 for property damage, with not more than $5,000 deductible. Such
Commercial General Public Liability insurance shall include Blanket Contractual
Liability coverage which insures contractual liability under the indemnification
of Landlord by Tenant set forth in this Lease (but such coverage or the amount
thereof shall in no way limit such indemnification). Tenant shall maintain with
respect to each policy or agreement evidencing such Commercial General Public
Liability insurance and each policy or agreement evidencing the insurance
required pursuant to Paragraph 18 above, such endorsements as may be required by
Landlord and shall at all times deliver and maintain with Landlord a duplicate
original or certified copy of such policies or a certificate with respect to
such insurance in form satisfactory to Landlord. Tenant shall obtain a written
obligation on the part of each insurance company to notify Landlord at least
fifteen (15) days prior to cancellation of such insurance. Such policies or duly
executed certificates of insurance relating thereto shall be delivered to
Landlord prior to Tenant's occupancy of the Premises and renewals thereof as
required shall be delivered to Landlord at least thirty (30) days prior to the
expiration of the respective policy terms. If Tenant fails to comply with the
foregoing requirements relating to insurance, Landlord may, following ten (10)
days written notice to Tenant, obtain such insurance and Tenant shall pay to
Landlord within thirty (30) days of receipt of an invoice the premium cost
thereof.
20. LIABILITY OF LANDLORD. Unless caused by Landlord's gross negligence
or willful misconduct, Landlord shall not be liable to Tenant or to Tenant's
employees, agents, licensees, or visitors, or to any other person whomsoever,
for any injury, loss or damage (REGARDLESS OF WHETHER SUCH INJURY, LOSS OR
DAMAGE IS CAUSED BY OR ARISES OUT OF LANDLORD'S NEGLIGENCE OR THE NEGLIGENCE OF
ANY EMPLOYEE OR AGENT OF LANDLORD OR ANY STRICT LIABILITY) to person or property
(i) due to the Complex or the Building or the Land or any part thereof becoming
out of repair or by defect in or failure of pipes or wiring, or by the backing
up of drains or by the bursting or leaking of pipes, faucets and plumbing
fixtures or by gas, water, steam, electricity or oil leaking, escaping or
flowing into the Premises, or (ii) that may be occasioned by or through the acts
or omissions of other tenants in the Complex or of any other persons whatsoever,
or (iii) that may be occasioned by theft, fire, act of God, public enemy,
injunction, riot, insurrection, war, court order, requisition or order of
governmental authority, or any other matter beyond the control of Landlord.
Tenant agrees that all of Tenant's Property shall be at the risk of Tenant only,
and that Landlord shall not be liable for any loss or damage thereto or theft
thereof (REGARDLESS OF WHETHER SUCH LOSS, DAMAGE OR THEFT IS CAUSED BY OR ARISES
OUT OF LANDLORD'S NEGLIGENCE OR THE NEGLIGENCE OF ANY EMPLOYEE OR AGENT OF
LANDLORD OR ANY STRICT LIABILITY), except where caused by the gross negligence
or willful misconduct of Landlord.
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21. INDEMNIFICATION.
(a) Subject to the exclusions set forth below in this Paragraph, Tenant
will indemnify and hold harmless Landlord, the property manager of the Complex
("Property Manager"), their respective officers, directors, and employees and
any other parties for whom Landlord and/or Property Manager are legally
responsible (each a "Landlord Indemnified Party") from, and shall reimburse each
Landlord Indemnified Party for and with respect to, any and all costs, expenses
(including, without limitation, reasonable attorneys fees), claims, demands,
actions, proceedings, judgments, hearings, damages, losses and liabilities
brought or asserted by or payable to any third party on account of personal
injury, death, property damage or any other form of injury or damage (each a
"Claim" and collectively the "Claims") arising out of or relating to (i) an
incident or event which occurred within or on the Premises, EVEN IF THE (X)
INCIDENT OR EVENT IS THE RESULT OF OR CAUSED BY THE NEGLIGENT ACTS OR OMISSIONS
OF ANY LANDLORD INDEMNIFIED PARTY OR (Y) THE LANDLORD INDEMNIFIED PARTY IS
STRICTLY LIABLE FOR ANY CLAIM ARISING FROM SUCH INCIDENT OR EVENT, (ii) the use
or occupancy of the Premises, EVEN IF (X) THE CLAIM IS THE RESULT OF OR CAUSED
BY THE NEGLIGENT ACTS OR OMISSIONS OF ANY LANDLORD INDEMNIFIED PARTY OR (Y) THE
LANDLORD INDEMNIFIED PARTY IS STRICTLY LIABLE FOR SUCH CLAIM, or (iii) any
breach of this Lease by Tenant which resulted in a Claim. The indemnification
and reimbursement obligations of Tenant under this subparagraph shall not apply
to a Claim (i) waived by Landlord under Paragraph 22 below or any other
provision of this Lease, or (ii) arising out of the gross negligence or
intentional misconduct of the Landlord Indemnified Party. If a third party files
a lawsuit or brings any other legal action asserting a Claim against a Landlord
Indemnified Party and that is covered by Tenant's indemnity, then Tenant, upon
notice from a Landlord Indemnified Party, shall resist and defend such Claim at
Tenant's expense through counsel reasonably satisfactory to the Landlord
Indemnified Party. Tenant's obligations under this Paragraph shall survive the
termination of this Lease.
Subject to the exclusions set forth below in this Paragraph, Landlord will
indemnify and hold harmless Tenant and its officers, directors, and employees
and any other parties for whom Tenant is legally responsible (each a "Tenant
Indemnified Party") from, and shall reimburse each Tenant Indemnified Party for
and with respect to, any and all Claims (as defined in subparagraph (a) above)
arising out of or relating to (i) an incident or event which occurred within or
on the Common Areas, EVEN IF THE (X) INCIDENT OR EVENT IS THE RESULT OF OR
CAUSED BY THE NEGLIGENT ACTS OR OMISSIONS OF ANY TENANT INDEMNIFIED PARTY OR (Y)
THE TENANT INDEMNIFIED PARTY IS STRICTLY LIABLE FOR ANY CLAIM ARISING FROM SUCH
INCIDENT OR EVENT, (ii) the use of the Common Areas, EVEN IF (X) THE CLAIM IS
THE RESULT OF OR CAUSED BY THE NEGLIGENT ACTS OR OMISSIONS OF ANY TENANT
INDEMNIFIED PARTY OR (Y) THE TENANT INDEMNIFIED PARTY IS STRICTLY LIABLE FOR
SUCH CLAIM, or (iii) any breach of this Lease by Landlord and which resulted in
a Claim. The indemnification and reimbursement obligations of Landlord under
this subparagraph shall not apply to a Claim (i) waived by Tenant under
Paragraph 22 below or any other provision of this Lease, or (ii) arising out of
the gross negligence or intentional misconduct of the Tenant
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<PAGE> 25
Indemnified Party. If a third party files a lawsuit or brings any other legal
action asserting a Claim against a Tenant Indemnified Party and that is covered
by Landlord's indemnity, then Landlord, upon notice from the Tenant Indemnified
Party, shall resist and defend such Claim at Landlord's expense through counsel
reasonably satisfactory to the Tenant Indemnified Party. Landlord's obligations
under this subparagraph shall survive the termination of this Lease.
22. WAIVER OF SUBROGATION. Notwithstanding any provision to the
contrary contained herein, each party hereto hereby waives any and every claim
which arises or may arise in its favor and against the other party hereto during
the Lease Term or any extension or renewal thereof for any and all loss of or
damage to any of its property (REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE IS
CAUSED BY THE FAULT, NEGLIGENCE OR OTHER TORTIOUS CONDUCT, ACTS OR OMISSIONS OF
LANDLORD OR TENANT OR THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR
INVITEES), which loss or damage would be covered by the fire and extended
coverage insurance policies required to be carried by such party by the terms of
this Lease. Said waivers shall be in addition to, and not in limitation or
derogation of, any other waiver or release contained in this Lease with respect
to any loss or damage to property of the parties hereto. Inasmuch as the above
mutual waivers will preclude the assignment of any aforesaid claim by way of
subrogation (or otherwise) to an insurance company (or an other person), each
party hereto hereby agrees immediately to give to each insurance company which
has issued to it policies of fire and extended coverage insurance written notice
of the terms of said mutual waivers, and to have said insurance policies
properly endorsed, if necessary, to prevent the invalidation of said insurance
coverages by reason of said waivers.
23. CASUALTY DAMAGE. If the Premises or any part thereof shall be
damaged by fire or other casualty, Tenant shall give prompt written notice
thereof to Landlord. In case the Building shall be so damaged by fire or other
casualty that substantial alteration or reconstruction of the Building shall, in
Landlord's sole opinion, be required (whether or not the Premises shall have
been damaged by such fire or other casualty) or in the event any mortgagee of
Landlord should require that the insurance proceeds payable as a result of said
fire or other casualty be applied in reduction of the mortgage debt or in the
event of any material uninsured loss to the Building, Landlord may, at its
option, terminate this Lease by notifying Tenant in writing of such termination
within forty-five (45) days after the date of such damage in which event the
rent hereunder shall be abated as of the date of such damage. If Landlord is not
entitled to or does not thus elect to terminate this Lease, Landlord shall
commence and proceed with reasonable diligence to restore the Building and the
Leased Premises (including Leasehold Improvements) to substantially the same
condition in which they were immediately prior to the happening of the casualty
but Landlord shall not in any event be required to incur costs or expense in
excess of the insurance proceeds actually received by Landlord as a result of
the casualty. In performing such work, Landlord shall not be responsible for
delays outside its control. If the Building and premises are not rebuilt so as
to allow Tenant to occupy the Premises and and conduct its business in the
Premises within two hundred forty (240) days after the date of the casualty,
then Tenant may terminate this Lease by written notice to Landlord within ten
(10) days after the expiration of such two hundred forty (240) day period. In no
event shall Landlord be required to
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rebuild, repair or replace any part of Tenant's Property. Landlord shall not be
liable for any inconvenience or annoyance to Tenant or injury to the business of
Tenant resulting in any way from such damage or the repair thereof. If the
Premises or any other portion of the Complex is damaged by fire or other
casualty resulting from the fault or negligence of Tenant or any of Tenant's
agents, employees or invitees, Tenant shall be liable to Landlord for the cost
of the repair and restoration of the Complex caused thereby to the extent such
cost and expense is not covered by or would not be covered by Landlord's
insurance proceeds. Any insurance which may be carried by Landlord or Tenant
against loss or damage to the Premises shall be for the sole benefit of the
party carrying such insurance and under its sole control.
24. CONDEMNATION. If the whole or substantially the whole of the
Building or the Premises should be taken for any public or quasi-public use, by
right of eminent domain or otherwise, or should be sold in lieu of condemnation,
then this Lease shall terminate as of the date when physical possession of the
Building or the Premises is taken by the condemning authority. If less than the
whole or substantially the whole of the Building or the Premises is thus taken
or sold, Landlord (whether or not the Premises are affected thereby) may
terminate this Lease by giving written notice thereof to Tenant, in which event
this Lease shall terminate as of the date when physical possession of such
portion of the Building or Premises is taken by the condemning authority. If
this Lease is not so terminated upon any such taking or sale, the Base Rental
payable hereunder shall be diminished by an equitable amount, and Landlord
shall, to the extent Landlord deems feasible, restore the Building and the
Premises (including the Leasehold improvements) to substantially their former
condition, but Landlord shall not in any event be required to spend for such
work an amount in excess of the amount received by Landlord as compensation or
damages (over and above amounts going to the mortgages of the property taken and
amounts expended in collecting said compensation or damages) for the part of the
Building or the Premises so taken. In performing such work, Landlord shall not
be responsible for delays outside its control. All amounts awarded to Landlord
upon a taking of any part or all of the Building or the Premises including any
award for the value of any unexpired Lease Term shall belong to Landlord and
Tenant shall not be entitled to and expressly waives all claim to any such
compensation. However, Tenant may make a request for a separate award to
compensate Tenant for its loss resulting from the condemnation, provided that
such award does not and would not reduce any award that may be payable to
Landlord.
25. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for all taxes
levied or assessed against Tenant's Property. If any such taxes for which Tenant
is liable are levied or assessed against Landlord or Landlord's property,
Landlord shall give Tenant written notice of such levy or assessment, and if
Landlord elects to pay the same or if the assessed value of Landlord's property
is increased by inclusion of personal property, furniture or fixtures placed by
Tenant in the Premises, and Landlord elects to pay the taxes based on such
increase, Tenant shall pay to Landlord within thirty (30) days of receipt of an
invoice that part of such taxes for which Tenant is liable hereunder.
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26. EVENTS OF DEFAULT/REMEDIES.
(a) Events of Default. The following events shall be deemed to be
events of default by Tenant under this Lease: (i) Tenant shall fail to pay any
installment of the rent hereby reserved when due, and shall not cure such
failure within ten (10) days after written notice thereof to Tenant (but
Landlord shall not be required to give such notice more than two (2) times in
any twelve (12) month period); (ii) Tenant shall fail to comply with any term,
provision or covenant of this Lease, other than the payment of rent and the
events described in subparts (iii) and (iv) following, and shall not cure such
failure within thirty (30) days after written notice thereof to Tenant, but if
the cure cannot be completed within thirty (30) days, then Tenant shall not be
in default if Tenant promptly commences the cure within the initial thirty (30)
day period and thereafter diligently and continuously pursues the cure to
completion; (iii) the failure to maintain any insurance required hereunder, (iv)
an assignment of this Lease or a sublease of all or any portion of the Premises
without Landlord's consent, (v) the leasehold hereunder demised shall be taken
on execution or other process of law in any action against Tenant; (vi) Tenant
shall fail to promptly move into and take possession of the Premises when the
Premises are ready for occupancy or shall cease to do business in or abandon any
substantial portion of the Premises while the payment of rent is or becomes
delinquent ; (vii) Tenant becomes insolvent, or makes or a transfer in fraud of
creditors, or makes an assignment for the benefit of creditors, or admits in
writing its inability to pay its debts as they become due; (viii) Tenant is not
paying its debts as such debts become due; (ix) a receiver, trustee or custodian
is appointed for, or takes possession of, all or substantially all of the assets
of Tenant or any of the Premises, either in a proceeding brought by Tenant or in
a proceeding brought against Tenant and such appointment is not discharged or
such possession is not terminated within sixty (60) days after the effective
date thereof or Tenant consents to or acquiesces in such appointment or
possession; (x) Tenant files a petition for relief under the Federal Bankruptcy
Code, or any other present or future federal or state insolvency, bankruptcy or
similar law (all of the foregoing hereinafter collectively called "Applicable
Bankruptcy Law") or an involuntary petition for relief is filed against Tenant
under any applicable Bankruptcy Law and such petition is not dismissed within
sixty (60) days after the filing thereof, or an order for relief naming Tenant
is entered under any applicable Bankruptcy Law, or any composition,
rearrangement, extension, reorganization or other relief of debtors now or
hereafter existing is requested or consented to by Tenant; or (xi) any of the
events referred to in subheadings (vii), (viii), (ix) and (x) shall occur with
respect to any guarantor (hereinafter called "Guarantor") of the payment or
performance of any Tenant's obligations hereunder and shall not be remedied
within the time set forth in such subheadings.
(b) Remedies of Landlord. Upon the occurrence of any event of default
by Tenant under this Lease, Landlord, at its option, may, in addition to all
other rights and remedies provided herein or at law or in equity, exercise one
or more of the remedies set forth below.
(i) Termination of the Lease. Upon the occurrence of an event
of default by Tenant hereunder, Landlord may, without judicial process,
terminate this Lease by giving written notice thereof to Tenant
(whereupon all obligations and liabilities of Landlord hereunder shall
terminate) and, without further notice and without liability, repossess
the Premises. Landlord shall be entitled to recover all loss and damage
Landlord may suffer
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by reason of such termination, whether through inability to relet the
Premises on satisfactory terms or otherwise, including without
limitation, the following (without duplication of any element of
damages):
(A) accrued rent to the date of termination, plus
late charges thereon as provided in Paragraph 43 and interest
thereon at the rate established under Paragraph 43 from the
date due through the date paid or date of any judgment or
award by any court of competent jurisdiction, the unamortized
cost of Tenant's Improvements, brokers' fees and commissions,
attorneys' fees, moving allowances and any other costs
incurred by Landlord in connection with making or executing
this Lease, and the cost of recovering the Premises;
(B) the present value of the Rent (discounted at a
rate of interest equal to eight percent [8%] per annum [the
"Discount Rate"]) that would have accrued under this Lease for
the balance of the Lease Term but for such termination,
reduced by the present value of the reasonable fair market
rental value of the Premises for such balance of the Lease
Term discounted at the Discount Rate; and
(C) any other costs or amounts necessary to
compensate Landlord for its damages.
If such termination is caused by the failure to pay rent and/or the abandonment
of all or any substantial portion of the Premises, Landlord may elect, by
sending written notice thereof to Tenant, to receive liquidated damages in an
amount equal to the Base Rental payable hereunder for the month during which
this Lease is terminated times the lesser of (A) [twelve (12)] or (B) the number
of full calendar months remaining in the Lease Term at the time of such
termination. Such liquidated damages shall be in lieu of the payment of loss and
damage Landlord may suffer by reason of such termination as provided above but
which shall not be in lieu of or reduce in any way any amount (including accrued
rent) or damages due to breach of covenant (whether or not liquidated) payable
by Tenant to Landlord which accrued prior to the termination of this Lease.
Nothing contained in this Lease shall limit or prejudice the right of Landlord
to prove for and obtain in proceedings for bankruptcy or insolvency by reason of
the termination of this Lease, an amount equal to the maximum allowed by any
statute or rule of law in effect at the time when, and governing the proceedings
in which, the damages are to be proved, whether or not the amount be greater,
equal to, or less than the amount of the loss or damages referred to above.
(ii) Repossession and Re-Entry. Upon the occurrence of an
event of default by Tenant hereunder, Landlord may, in compliance with
applicable legal requirements, immediately terminate Tenant's right of
possession of the Premises (whereupon all obligations and liability of
Landlord hereunder shall terminate), but not terminate this Lease, and,
without notice, demand or liability, enter upon the Premises or any
part thereof, take absolute possession of the same, expel or remove
Tenant and any other person or entity who may be occupying the Premises
and change the locks. If Landlord
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terminates Tenant's possession of the Premises under this subparagraph
26(b)(ii), (A) Landlord shall have no obligation whatsoever to tender
to Tenant a key for new locks installed in the Premises, (B) Tenant
shall have no further right to possession of the Premises and (C)
Landlord shall use reasonable efforts to relet the Premises or any part
thereof on such terms as Landlord deems advisable, taking into account
the factors described in subparagraph 26(b)(vi). Any rent received by
Landlord from reletting the Premises or a part thereof shall be applied
first, to the payment of any indebtedness other than rent due hereunder
from Tenant to Landlord (in such order as Landlord shall designate),
second, to the payment of any cost of such reletting, including,
without limitation, refurbishing costs, reasonable attorneys' fees,
advertising costs, brokerage fees and leasing commissions and third, to
the payment of rent due and unpaid hereunder (in such order as Landlord
shall designate), and Tenant shall satisfy and pay to Landlord any
deficiency upon demand therefor from time to time. Landlord shall not
be responsible or liable for any failure to collect any rent due upon
any such reletting. No such re-entry or taking of possession of the
Premises by Landlord shall be construed as an election on Landlord's
part to terminate this Lease unless a written notice of such
termination is given to Tenant pursuant to subparagraph 26(b)(i) above.
If Landlord relets the Premises, either before or after the termination
of this Lease, all such rentals received from such lease shall be and
remain the exclusive property of Landlord and Tenant shall not be, at
any time, entitled to recover any such rental. Landlord may at any time
after a reletting elect to terminate this Lease.
(iii) Cure of Default. Landlord may, in compliance with
applicable legal requirements, enter upon the Premises, without having
any liability therefor and do whatever Tenant is obligated to do under
the terms of this Lease and Tenant agrees to reimburse Landlord within
five (5) days of receipt of an invoice for any expenses which Landlord
may incur in effecting compliance with Tenant's obligations under this
Lease, and TENANT FURTHER AGREES THAT LANDLORD SHALL NOT BE LIABLE FOR
ANY DAMAGES RESULTING TO TENANT FROM SUCH ACTION, INCLUDING DAMAGES
CAUSED BY THE NEGLIGENCE OF LANDLORD.
(iv) Continuing Obligations. No repossession of or re-entering
upon the Premises or any part thereof pursuant to subparagraph
26(b)(ii) or 26(b)(iii) above or otherwise and no reletting of the
Premises or any part thereof pursuant to subparagraph 26(b)(ii) above
shall relieve Tenant or any Guarantor of its liabilities and
obligations hereunder, all of which shall survive such repossession or
re-entering. In the event of any such repossession of or re-entering
upon the Premises or any part thereof by reason of the occurrence of a
default, Tenant will continue to pay to Landlord all rent required to
be paid by Tenant.
(v) Cumulative Remedies. No right or remedy herein conferred
upon or reserved to Landlord is intended to be exclusive of any other
right or remedy and each and every right and remedy shall be cumulative
and in addition to any other right or remedy given hereunder or now or
hereafter existing at law or in equity or by statute. In
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addition to the other remedies provided in this Lease, Landlord shall
be entitled, to the extent permitted by applicable law, to injunctive
relief in case of the violation, or attempted or threatened violation,
of any of the covenants, agreements, conditions or provisions of this
Lease, or to a decree compelling performance of any of the covenants,
agreements, conditions or provisions of this Lease, or to any other
remedy allowed to Landlord at law or in equity.
(vi) Mitigation of Damages. With respect to the provisions of
the laws of the State of Texas or of this Lease which require that
Landlord use reasonable efforts to relet the Premises, it is understood
and agreed that the following shall apply in determining whether such
efforts by Landlord to relet are reasonable:
(A) Landlord may elect to lease other available space
in the Complex, if any, before reletting the Premises;
(B) Landlord may elect to consent to the assignment
or sublease by an existing tenant of the Complex before
reletting the Premises;
(C) Landlord may decline to incur out-of-pocket costs
to relet the Premises, other than customary leasing
commissions and legal fees for the negotiation of a lease with
a new tenant;
(D) Landlord may decline to relet the Premises at
rental rates below then prevailing market rental rates;
(E) Landlord may decline to relet the Premises to a
prospective tenant if the nature of such prospective tenant's
business is not consistent with the tenant mix of the Building
or with any other tenant leases containing provisions against
the Landlord leasing space in the Building for certain uses;
(F) Landlord may decline to relet the Premises to a
prospective tenant, the nature of whose business may have an
adverse impact upon the manner in which the Building is
operated or with the high reputation of the Building even
though in each of said circumstances such prospective tenant
may have a good credit rating;
(G) Before reletting the Premises to a prospective
tenant, Landlord may require the prospective tenant to
demonstrate the same financial capacity that Landlord would
require as a condition to leasing other space in the Building
to the prospective tenant; and
(H) Listing the Premises with a broker or leasing
agent (including in-house leasing personnel) in a manner
consistent with subparagraphs (A) through
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(G) above shall constitute prima facie evidence of reasonable
efforts on the part of Landlord to relet the Premises.
27. QUIET ENJOYMENT. Provided that Tenant pays the rent and other sums
herein recited to be paid by Tenant and performs all of Tenant's covenants and
agreements herein contained, Tenant shall at all times during the Lease Term
peaceably and quietly enjoy the Premises without any disturbance from Landlord
or from any other person, subject to the terms, provisions, covenants,
agreements and conditions of this Lease and to the deeds of trust, mortgages and
other matters to which this Lease is subordinate and subject as herein set
forth.
28. HOLDING OVER. Should Tenant or any of its successors in interest
continue to hold the Premises after termination of this Lease, whether such
termination occurs by lapse of time or otherwise, such holding over shall
constitute and be construed as a tenancy at will only, subject, however, to all
of the terms, provisions, covenants and agreements on the part of Tenant
hereunder. Tenant or such other parties shall be subject to immediate eviction
and removal and Tenant or any such party shall pay Landlord as rent for the
period of such holdover an amount equal to one hundred fifty percent (150%) of
the monthly rent (including Base Rental and all other rental amounts) provided
herein at the time of such termination, prorated on a daily basis. No payments
of money by Tenant to Landlord after the termination of this Lease shall
reinstate, continue or extend the Lease Term and no extension of this Lease
after the termination hereof shall be valid unless and until the same shall be
reduced to writing and signed by both Landlord and Tenant. Tenant shall be
liable to Landlord for all damage which Landlord shall suffer by reason of any
holding over by Tenant and Tenant shall indemnify Landlord against all claims
made by any other tenant or prospective tenant against Landlord resulting from
delay by Landlord in delivering possession of the Premises to such other tenant
or prospective tenant.
29. SUBORDINATION. This Lease and all rights of Tenant hereunder are
subject and subordinate (i) to any mortgage or deed of trust, blanket or
otherwise, which does now or may hereafter affect the Building or Complex (and
which may also affect other property) and (ii) to any and all increases,
renewals, modifications, consolidations, replacements and extensions of any such
mortgage or deed of trust. This provision is hereby declared by Landlord and
Tenant to be self-operative and no further instrument shall be required to
effect such subordination of this Lease; provided, however, as a condition to
any such subordination, Landlord shall obtain from the lender or mortgagee its
standard form of non-disturbance agreement providing that Tenant's interest in
the Lease and rights in the Premises will not be disturbed as long as Tenant
performs all of Tenant's obligations under this Lease. Landlord's inability to
obtain such non-disturbance agreement shall not constitute a default under this
Lease, excuse Tenant from any obligation hereunder or otherwise affect the
validity of this Lease. Tenant shall, however, upon demand at any time or times
execute, acknowledge and deliver to Landlord any and all instruments and
certificates that may be reasonably necessary or proper to more effectively
subordinate this Lease and all rights of Tenant hereunder to any such mortgage
or deed of trust or to confirm or evidence such subordination, as long as
Landlord has obtained from the holder of the mortgage or deed of trust a
corresponding non-disturbance agreement in favor of Tenant as aforesaid. In the
event Tenant shall fail or neglect to execute, acknowledge and deliver any such
subordination
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<PAGE> 32
agreement or certificate, Landlord, in addition to any other remedies it may
have, may, as the agent and attorney in fact of Tenant, execute, acknowledge and
deliver the same and Tenant hereby irrevocably nominates, constitutes and
appoints Landlord Tenant's proper and legal agent and attorney in fact for such
purposes. Such power of attorney shall not be affected by subsequent disability
or incapacity of the principal. However, Landlord agrees not to execute any
subordination agreement as attorney in fact for Tenant unless Landlord has
obtained a corresponding non-disturbance agreement as aforesaid. Tenant
covenants and agrees, in the event any proceedings are brought for the
foreclosure of any such mortgage or if the Building or Complex is sold pursuant
to any such deed of trust, to attorn to the purchaser upon any such foreclosure
sale or trustee's sale if so requested by such purchaser and to recognize such
purchaser as the Landlord under this Lease as long as the purchaser recognizes
Tenant's rights under this Lease. Tenant agrees to execute and deliver at any
time and from time to time, upon the request of Landlord or of any holder(s) of
any of the indebtedness or other obligations secured by any of the mortgages or
deeds of trust referred to in this paragraph, any instrument or certificate
which, in the reasonable judgment of Landlord or of such holder(s), may be
necessary or appropriate in any such foreclosure proceeding or otherwise to
evidence such attornment as long as Landlord has requested a corresponding
non-disturbance agreement in favor of Tenant as aforesaid. This Lease and all
rights of Tenant hereunder are further subject and subordinate, to the extent
that the same relate to the Premises, (i) to all applicable ordinances of the
City of Austin, Texas, relating to easements, franchises and other interests or
rights upon, across or appurtenant to the Building or Complex or any of the
Land, and (ii) to all utility easements and agreements.
30. WAIVER OF LANDLORD'S LIEN. Landlord hereby waives its statutory
lien for rent as against Tenant's personal property in the Premises.
31. ATTORNEYS' FEES. In the event either party defaults in the
performance of any of the terms of this Lease and the other party employs an
attorney in connection therewith, the defaulting party agrees to pay the
prevailing party's reasonable attorneys' fees.
32. NO IMPLIED WAIVER. The failure of Landlord to insist at any time
upon the strict performance of any covenant or agreement herein, or to exercise
any option, right, power or remedy contained in this Lease shall not be
construed as a waiver or a relinquishment thereof for the future. No payment by
Tenant or receipt by Landlord of a lesser amount than the monthly installment of
rent due under this Lease shall be deemed to be other than on account of the
earliest rent due hereunder, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
in this Lease provided.
33. PERSONAL LIABILITY. Any and all covenants of Landlord contained in
this Lease shall be binding upon Landlord and its successors only with respect
to breaches occurring during its or their respective periods of ownership of the
Landlord's interest hereunder. The liability of Landlord to Tenant for any
default by Landlord under the terms of this Lease shall be
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limited to Landlord's interest in the Building, and Tenant agrees to look solely
to Landlord's interest in the Building for recovery of any judgment from
Landlord, it being intended that Landlord shall not be personally liable for any
judgment or deficiency. Notwithstanding anything to the contrary contained
herein, in no event shall Landlord be liable for special, consequential,
exemplary or punitive damages.
34. SECURITY DEPOSIT. In lieu of a cash Security Deposit Tenant shall
tender to Landlord the letter of credit described in Section 2(f) of the Work
Letter. If any portion of the letter of credit is funded to Landlord, landlord
shall hold and apply the funds as a Security Deposit without liability for
interest and as security for the performance by Tenant of Tenant's covenants and
obligations under this Lease, it being expressly understood that the Security
Deposit shall not be considered an advance payment of rental or a measure of
Landlord's damages in case of default by Tenant. Landlord may commingle the
Security Deposit with Landlord's other funds. Landlord may, from time to time,
without prejudice to any other remedy, use the Security Deposit to the extent
necessary to make good any arrearages of rent or to satisfy any other covenant
or obligation of Tenant hereunder. Following any such application of the
Security Deposit, Tenant shall immediately restore the Security Deposit to the
amount required in the Work Letter. If Tenant is not in default at the
termination of this Lease, the balance of any Security Deposit remaining after
any such application shall be returned by Landlord to Tenant. If Landlord
transfers its interest in the Premises during the Lease Term, Landlord may
assign the letter of credit or Security Deposit to the transferee and thereafter
shall have no further liability for the return of such letter of credit or
Security Deposit.
35. NOTICE. Any notice, request, demand or other communication required
or permitted hereunder shall be given in writing by (a) expedited delivery
service with proof of delivery, or (b) United States mail, postage prepaid,
registered or certified mail, return receipt requested, sent to the intended
addressee at the address shown on the signature page of this Lease, or to such
other address or to the attention of such other person as the addressee shall
have designated by written notice sent in accordance herewith. Any such notice,
request, demand or other communication shall be deemed to have been given as of
the date of first attempted delivery at the address and in the manner provided
herein.
36. ESTOPPEL CERTIFICATE. Tenant will, at any time and from time to
time, within not more than ten (10) days after receipt of a written request by
Landlord, execute, acknowledge and deliver to Landlord or such other persons as
Landlord may request a statement in written and recordable form, executed by
Tenant, certifying that this Lease is unmodified and in full effect (or, if
there have been modifications, that this Lease is in full effect as modified,
and setting forth such modifications) and the dates to which the rent has been
paid, containing such additional information as Landlord may reasonably request
and either stating that to the knowledge of the signer of such certificate no
default exists hereunder or specifying each such default of which the signer may
have knowledge; it being intended that any such statement by Tenant may be
relied upon by any prospective purchaser or mortgagee of the Complex.
37. INTENTIONALLY DELETED.
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<PAGE> 34
38. SEVERABILITY. Each and every covenant and agreement contained in
this Leaseis, and shall be construed to be, a separate and independent covenant
and agreement. If any term or provision of this Lease, or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term or
provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and enforceable to the fullest extent
permitted by law.
39. RECORDATION. Tenant agrees not to record this Lease, or any
memorandum hereof. In the event Landlord's mortgagee may so require, Tenant
agrees to execute a short form of this Lease for recordation.
40. GOVERNING LAW. This Lease and the rights and obligations of the
parties hereto shall be governed by and shall be interpreted, construed and
enforced in accordance with the laws of the State of Texas.
41. FORCE MAJEURE. Whenever a period of time is herein prescribed for
the taking of any action by either party hereunder, such party shall not be
liable or responsible for, and there shall be excluded from the computation of
such period of time, any delays due to strikes, riots, acts of God, shortages of
labor or materials, war, governmental laws, regulations or restrictions or any
other cause whatsoever beyond the control of such party; provided, however, this
paragraph shall not apply with respect to any monetary obligation of either
party.
42. TIME OF PERFORMANCE. Except as expressly otherwise herein provided,
with respect to all required acts of Tenant, time is of the essence of this
Lease.
43. LATE CHARGE AND INTEREST ON TENANT'S OBLIGATIONS. In the event
Tenant fails to make any payment due hereunder on or before ten (10) days after
the date such payment is due, to help defray the additional cost to Landlord for
processing such late payments, Tenant shall pay to Landlord on demand a late
charge in an amount equal to $25.00 and the failure to pay such amount within
ten (10) days after demand therefor shall be an additional event of default
hereunder. Any sum due from Tenant to Landlord under the terms of this Lease not
paid within ten (10) days from the date due shall bear interest from the date
due until paid by Tenant at the lesser of (i) the rate of eighteen percent (18%)
per annum, or (ii) the highest lawful rate.
44. COMMISSIONS. Landlord and Tenant acknowledge that the real estate
brokers involved in this transaction are Colliers Oxford Commercial (Mr. Mark
Grenier) (the "Landlord's Broker") and Commercial Industrial Properties Co./New
America International (the "Tenant's Brokers"). The Tenant's Brokers and the
Landlord's Broker are hereinafter referred to together as the "Brokers."
Landlord and Tenant hereby warrant and represent to one another that no other
broker, agent or finder other than the Brokers are involved in this transaction
or owed a commission in connection with the execution of this Lease other than
the Brokers. Landlord will
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pay the commission owed to the Brokers by separate written agreements. Landlord
and Tenant hereby indemnify and hold each other harmless against any loss,
claim, expense or liability with respect to any commissions or brokerage fees
claimed on account of the execution and/or renewal of this Lease due to any
action of the indemnifying party.
45. EFFECT OF DELIVERY OF THIS LEASE. Landlord has delivered a copy of
this Lease to Tenant for Tenant's review only, and the delivery hereof does not
constitute an offer to Tenant or option. This lease shall not be effective until
a copy executed by both Landlord and Tenant is delivered to and accepted by
Landlord.
46. CONSUMER RIGHTS. Landlord and Tenant each acknowledge, on its own
behalf and on behalf of its successors and assigns, that the Texas Deceptive
Trade Practices Consumer Protection Act, Subchapter E of Chapter 17 of the Texas
Business and Commerce Code (ADTPA"), is not applicable to this Lease.
Accordingly, the rights and remedies of Landlord and Tenant with respect to all
acts or practices of the other, past, present or future, in connection with this
Lease shall be governed by legal principles other than the DTPA. Landlord and
Tenant each hereby waives its rights under the DTPA, a law that gives consumers
special rights and protections. After consultation with an attorney of its own
selection, Landlord and Tenant, respectively, voluntarily consent to this
waiver.
47. BINDING EFFECT. All of the covenants, agreements, terms and
conditions to be observed and performed by the parties hereto shall be
applicable to and binding upon their respective heirs, personal representatives,
successors and, to the extent assignment is permitted hereunder, their
respective assigns.
48. PARAGRAPH HEADINGS. The paragraph headings contained in this Lease
are for convenience only and shall in no way enlarge or limit the scope or
meaning of the various and several paragraphs hereof.
49. ENTIRE AGREEMENT. This Lease sets forth the entire agreement
between the parties and no amendment or modification of this Lease shall be
binding or valid unless expressed in a writing executed by both parties hereto.
50. NO REPRESENTATIONS. Neither Landlord nor Landlord's agents have
made any representations or promises with respect to the Premises or the Complex
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this Lease.
51. JOINT AND SEVERAL LIABILITY. If there is more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several.
52. GENDER AND NUMBER. Words of any gender used in this Lease shall be
held and construed to include any other gender, and words in the singular number
shall be held to include the plural, unless the context otherwise requires.
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53. CHANGE OF BUILDING OR COMPLEX NAME. Landlord shall have the right,
exercisable without notice and without liability to Tenant, to change the name
and address of the Building or the Complex from time to time.
54. TAXPAYER IDENTIFICATION NUMBER. The Taxpayer Identification number
of Tenant is 74-2796860.
55. EXHIBITS. The following exhibits, riders and addenda are attached
to this Lease and made a part hereof for all purposes:
Exhibit A - Floor Plan of Premises
Exhibit B - Description of Land
Exhibit C - Building Rules and Regulations
Exhibit D - Work Letter
Exhibit E - Parking Agreement
Exhibit F - Acceptance of Premises Memorandum
Exhibit G - Renewal Option
Exhibit H - Right to Sublease or Assign to Affiliate
Exhibit I - Letter of Credit as Security Deposit
Exhibit I-1 - Form of Letter of Credit
Exhibit J - Building HVAC Design Criteria and Specifications
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease in
multiple original counterparts as of the day and year first above written.
LANDLORD:
MAPLEWOOD ASSOCIATES, L.P.,
A Texas Limited Partnership
By: Maplewood GP, Inc., its General Partner
By: /s/
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
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Landlord's Address:
Maplewood Associates, L.P.
c/o West World Management, Inc.
4 Manhattanville Road
Purchase, NY 10577
Attention: Charles Schouten, President
Fax No.: (914) 694-4642
TENANT:
CROSSROADS SYSTEMS, INC.
By: /s/
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Date:
-----------------------------------
Tenant's Address:
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
- ----------------------------------------
Attention:
Fax No.:
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<PAGE> 38
EXHIBIT A
FLOOR PLAN OF PREMISES
Office Park
Crossroads Systems, Inc.
Suite
63,548 RSF
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<PAGE> 39
EXHIBIT B
DESCRIPTION OF LAND
[To Follow]
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<PAGE> 40
EXHIBIT C
RULES AND REGULATIONS
1. Sidewalks, doorways, vestibules, halls, stairways and similar areas
shall not be obstructed by Tenant or its officers, agents, servants, and
employees, or used for any purpose other than ingress and egress to and from the
Premises and for going from one part of the Complex to another part of the
Complex. Tenant shall not enter nor permit its employees, agents, guests or
invitees to enter into areas of the Complex designated for the exclusive use of
Landlord or other tenants of the Complex.
2. Plumbing fixtures and appliances shall be used only for the purposes
for which designed and/or constructed, and no sweepings, rubbish, rags or other
unsuitable material shall be thrown or placed therein. Any stoppage or damage
resulting to any such fixtures or appliances from misuse on the part of Tenant
or Tenant's officers, agents, servants, and employees shall be paid by Tenant.
3. No signs, posters, advertisements, or notices shall be painted or
affixed to any interior or exterior glass of the Premises visible from Common
Areas or on any of the windows or doors or other part of the Building, except of
such color, size and style and in such places, as shall be first approved in
writing by the Building Manager. No nails, hooks or screws shall be driven into
or inserted in any part of the Building, except by Building maintenance
personnel.
4. Directories will be placed by Landlord, at Landlord's own expense,
in conspicuous places in the Building. No other directories shall be permitted.
5. Tenant shall not do anything, or permit anything to be done, in or
about the Building, or bring or keep anything therein, that will in any way
increase the possibility of fire or other casualty or obstruct or interfere with
the rights of, or otherwise injure or annoy, other tenants, or do anything in
conflict with the valid pertinent laws, rules or regulations of any governmental
authority. Except for portions of the Premises specifically designated by Tenant
and consented to in writing by Landlord in advance to be used for an employee
kitchen or lounge area, Tenant shall not cook, sell, purchase or permit the
preparation, sale or purchase of food on the Premises.
6. Smoking of cigarettes, pipes, cigars or other tobacco products is
prohibited in the Building, in the parking garage serving the Complex, in any
enclosed corridor in the Complex (whether inside or outside of the Building) and
in any area within fifty (50) feet of any Building entrance, parking garage
entrance or entrance to any such corridor. Smoking shall be allowed in any area
so designated by Landlord and in each tenant's leased premises to the extent
allowed by applicable law (including without limitation any ordinance of the
City of Austin).
7. Landlord reserves the right to prescribe and to approve the weight,
size and location of safes, book shelves and other heavy equipment, fixtures and
articles in and about the Premises and the Complex. Tenant shall not overload
any floors. If Landlord approves the presence of a heavy item for which
reinforcement of the floor or other precautionary measures are necessary,
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Tenant will bear the entire cost of such reinforcement or other precautionary
measures. If the services of a structural engineer are, in the judgment of
Landlord, necessary to determine the location for and/or precautionary measures
to be taken in connection with any heavy load, Landlord will engage such
engineer, but the fees and expenses of such engineer will be paid by Tenant upon
demand. All damage done to the Building by Tenant by the improper placing of
heavy items which overstress the floor will be repaired at the sole expense of
Tenant.
8. Tenant shall notify the Building Manager when safes or other
equipment are to be taken into or out of the Building. Moving of such items
shall be done under the supervision of the Building Manager, after receiving
written permission from him.
9. Corridor doors, when not in use, shall be kept closed.
10. All deliveries must be made via the service entrance and service
elevators during normal working hours as specified in the Lease. Prior approval
must be obtained from the Building Manager for any deliveries that must be
received after normal working hours. All deliveries of furniture and equipment
shall be made only during the time previously scheduled with, and in the manner
approved by, the Building Manager, execpt for routine deliveries of equipment
that is moved on hand trucks, so long as the type and volume of such deliveries
is not disruptive to other tenants. Any hand trucks, carryalls or similar
appliances used for the delivery or receipt of merchandise, supplies or
equipment shall be equipped with rubber tires, side guards and such other
safeguards as Landlord shall require.
11. Tenant shall cooperate with Building employees in keeping the
premises neat and clean. Tenant shall assist in preventing any hindrance of the
work of the janitor or cleaning personnel after 7:00 p.m. and agrees to provide
adequate waste and rubbish receptacles to facilitate cleaning services. Landlord
may permit entrance to the Premises by use of access cards controlled by
Landlord or its employees, contractors or service personnel for the purpose of
performing Landlord janitorial services.
12. Nothing shall be swept or thrown into the corridors, halls,
elevator shafts or stairways. No birds, animals or reptiles, or any other
creatures, shall be brought into or kept in or about the Building, except for
seeing eye dogs for sight impaired persons.
13. Tenant shall not use, suffer or permit the manufacture, sale or
distribution by gift or otherwise of any spirituous, fermented or intoxicating
liquors or any drugs within the Premises or the Complex; provided, however, that
Tenant may have occasional afternoon parties in the Premises and serve alcoholic
beverages at such parties so long as no other tenants or occupants of the
Building are annoyed or disturbed thereby and Tenant complies with all federal,
state and/or local laws relating thereto. Tenant will indemnify and hold
Landlord harmless from any and all loss, liability, damage and/or expense
arising out of or resulting from the presence and/or consumption of alcoholic
beverages at the Premises. Tenant will not use or keep in the Premises or the
Complex any kerosene, gasoline or other flammable, combustible or explosive
fluid, chemical or substance (except for office supplies as allowed in Paragraph
4 of the Lease).
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Tenant shall not bring or store firearms of any kind into the Complex. Tenant
shall not use the Premises or the Complex for the manufacture, distribution or
sale of any merchandise or other materials.
14. Should Tenant require telegraphic, telephonic, annunciator or any
other communication service, Landlord will direct the electricians and
installers where and how the wires are to be introduced into the Premises, and
none shall be introduced except as Landlord shall direct.
15. Tenant shall not make or permit any objectionable, disturbing,
unpleasant or improper noises or odors in the Building or otherwise interfere in
any way with other tenants or persons having business with them. Tenant agrees
to cooperate and assist Landlord in the prevention of canvassing, soliciting and
peddling within the Building or the Complex.
16. Tenant shall not sell lottery tickets or conduct any other form of
gambling from or within the Premises or any other part of the Complex.
17. No equipment of any kind shall be operated on the Premises that
could in any way annoy any other tenant in the Building without the prior
written consent of the Landlord.
18. Tenant shall not use or keep in the Building any illuminating
material unless it is battery powered, UL approved, or any inflammable or
explosive fluid or substance.
19. Landlord has the right to evacuate the Building in event of
emergency or catastrophe.
20. All electrical fixtures hung in the leased premises must be of
quality, type, design, bulb color, size and general appearance approved by
Landlord.
21. Tenant shall not install any solar screen material, window shades,
blinds, drapes, awnings, window ventilators, or other similar equipment and any
window treatment of any kind whatsoever, without Landlord's prior written
consent. Tenant will not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside the Premises. No awnings or other projections will be attached to the
outside walls and roof of the Building or the Complex without prior written
consent of Landlord. Landlord will control all internal lighting, signage,
furnishings and other materials that may be visible from the exterior of the
Building or Common Areas and shall have the right to change any unapproved item,
without notice to Tenant, at Tenant's expense.
22. Landlord will not be responsible for personal property, equipment,
money or jewelry lost or stolen from the Premises.
23. No water cooler or heating or air conditioning unit or system or
other apparatus shall be installed or used by Tenant without the prior written
consent of Landlord; provided, however,
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that Tenant may install a water purifier with Landlord's prior approval (not to
be unreasonably withheld) as to the location, installation and type thereof.
24. No bicycles, motorcycles or similar vehicles will be allowed in the
Building; but may be kept in the garage; provided, however, that Landlord shall
have no responsibility for any loss, liability or damage resulting therefrom.
Tenant may construct at Tenant's cost, and in an area in the Building's garage
approved by Landlord, a bike storage enclosure for use by Tenant's employees.
25. Tenant shall not change any locks or place additional locks upon
any doors without the prior written consent of Landlord. All necessary keys
shall be furnished by Landlord, and the same shall be surrendered upon
termination of this Lease, and Tenant shall then give Landlord or his agent an
explanation of the combination of all locks on the doors or vaults. Tenant shall
initially be given two (2) keys to its Premises by Landlord. No duplicates of
such keys shall be made by Tenant. . Tenant shall initially be given 150 access
card keys for the Premises at no cost to Tenant. Additional access cards and
keys will be obtained only from Landlord , at the cost of $20.00 each for access
cards and $3.50 each for keys.
26. Tenant will not locate furnishings or cabinets adjacent to
mechanical or electrical access panels or over air conditioning outlets so as to
prevent operating personnel from servicing such units as routine or emergency
access may require. Tenant shall pay any cost of moving such furnishings for
Landlord's access. The lighting and air conditioning equipment of the Building
will remain the exclusive charge of the Building designated personnel.
27. No portion of the Building or any leased premises shall be used for
the purpose of sleeping or lodging.
28. No vending machines or dispensing machines of any kind will be
placed in the Premises without Landlord's prior approval, which will not be
unreasonably withheld..
29. Prior written approval, which shall be at Landlord's sole
discretion, must be obtained for installation of window shades, blinds,
curtains, drapes, or any other window treatment of any kind whatsoever other
than the Building standard blinds installed as part of Tenant's Improvements. In
the event that Landlord finds it necessary to close or open blinds or other
window treatments during certain hours of the day for temperature control
purposes, Tenant shall cooperate by closing or opening its blinds or other
window treatments during such hours.
30. Intentionally Deleted.
31. Landlord reserves the right to exclude or expel from the Complex
any person who, in the reasonable judgment of Landlord, is intoxicated or under
the influence of liquor or drugs, or who will in any manner do any act in
violation of any of the rules or regulations of the Building.
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32. The requirements of Tenant under the Lease or otherwise with
respect to the Premises will be attended to only upon application at the
management office for the Building at the address provided by Landlord to Tenant
for such purpose. Employees of Landlord will not perform any work or do anything
outside of their regular duties unless under special instructions from Landlord,
and no employees will admit any person (Tenant or otherwise) to any office
without specific instructions from Landlord.
33. Tenant will not disturb, solicit or canvass any occupant of the
Building, nor will Tenant permit or cause others to do so, and Tenant will
cooperate to prevent same by others.
34. Landlord will have the right to prevent any persons entering or
leaving the Building unless provided with a key to the Premises to which such
person seeks entrance, and a pass in a form to be approved by Landlord and
provided at Tenant's expense. Any persons found in the Building at such times
without such keys or passes will be subject to the surveillance of the employees
and agents of Landlord. Landlord will be under no responsibility for failure to
enforce this rule.
35. Tenant will not, without the prior written consent of Landlord, use
the name or any photograph, drawing or other likeness of the Building or the
Complex for any purpose other than as the address of the business to be
conducted by Tenant in the Premises, nor will Tenant do or permit anything to be
done in connection with Tenant's business or advertising which, in the
reasonable judgment of Landlord, might mislead the public as to any apparent
connection or relationship between Landlord, the Building and/or the Complex and
Tenant.
36. Landlord reserves the right to rescind any of these rules and make
such other and further rules and regulations as in the judgment of Landlord
shall from time to time be needed for the safety, protection, care and
cleanliness of the Building and/or the Complex, the operation thereof, the
preservation of good order therein, and the protection and comfort of its
tenants, their agents, employees and invitees, which rules when made and notice
thereof given to a tenant shall be binding upon such tenant in like manner as if
originally herein prescribed. Landlord agrees not to enforce these rules and
regulations in a discriminatory manner. In the event of any conflict,
inconsistency, or other difference between the terms and provisions of these
Rules and Regulations, as now or hereafter in effect, and the terms and
provisions of any lease now or hereafter in effect between Landlord and Tenant,
the terms of the Lease shall control.
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EXHIBIT D
WORK LETTER
This Work Letter (this "Agreement") sets forth the agreement of
MAPLEWOOD ASSOCIATES, L.P. ("Landlord"), and CROSSROADS SYSTEMS, INC.
("Tenant"), in accordance with Paragraph 8 of that Office Building Lease (the
"Lease"), by and between Landlord and Tenant, dated October 8, 1999, regarding
certain improvements that are to be made to the Premises (as defined in the
Lease). Any capitalized term used but not defined herein shall have the meaning
assigned to it in the Lease. Landlord and Tenant mutually agree as follows:
1. Plans.
(a) Preparation of Plans. Tenant understands that Landlord has engaged
STG Partners architects and HCE engineers to provide all necessary architectural
and engineering services. Costs for these services shall be deducted from the
Tenant Improvement Allowance. If Tenant engages another architecture or
engineering firm then Tenant shall pay an additional fee for STC and MCE review.
Landlord's architect and engineer, at Tenant's expense, will prepare
construction plans (such construction plans, when approved, and all changes and
amendments thereto agreed to by Landlord and Tenant in writing, are herein
called the "Construction Plans") for all of Tenant's improvements to be
constructed in the Premises (all improvements required by the Construction Plans
are herein called "Tenant's Improvements"). Tenant shall promptly furnish to
Landlord, Landlord's architect and engineer and any other party involved in
preparation of the Construction Plans all information necessary such that
(following construction of Tenant's Improvements in accordance with the
Construction Plans) Tenant, the Premises and Tenant's Improvements will be in
compliance with the provisions of the Disability Acts. TENANT SHALL BE
RESPONSIBLE FOR AND SHALL INDEMNIFY AND HOLD HARMLESS LANDLORD FROM AND AGAINST
ANY AND ALL CLAIMS, LIABILITIES AND EXPENSES (INCLUDING, WITHOUT LIMITATION
REASONABLE ATTORNEYS' FEES AND EXPENSES) INCURRED BY OR ASSERTED AGAINST
LANDLORD BY REASON OF OR IN CONNECTION WITH ANY VIOLATION OF THE DISABILITY ACTS
ARISING FROM OR OUT OF (i) information or design and space plans furnished to
Landlord by Tenant (or the lack of complete and accurate information so
furnished) concerning Tenant's Improvements, (ii) Tenant's employer-employee
obligations, or (iii) after the Commencement Date, violations by Tenant and/or
Tenant's Improvements or the Premises not being in compliance with the
Disability Acts as the result of changes in regulations or law or
interpretations thereof not in effect on the Commencement Date. The foregoing
indemnity shall not include any claims, liabilities or expenses (including
reasonable attorneys' fees and expenses) arising out of the negligence, gross
negligence or willful misconduct of Landlord or Landlord's employees, agents or
contractors. Without limiting the foregoing, if Landlord constructs Tenant's
Improvements based on any special requirements or improvements required by
Tenant, or upon information furnished by Tenant that later proves to be
inaccurate or incomplete
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resulting in any violation of the Disability Acts, Tenant shall be solely liable
to correct such violations and to bring the improvements into compliance with
the Disability Acts as promptly as is practicable. Landlord and Tenant agree
that the cost of construction drawings for the additional parking deck are at
Landlord's sole expense and will not be charged against the Finish Allowance.
(b) Approval of Plans. Within ten (10) days after proposed construction
plans are delivered to Tenant, Tenant shall approve (which approval shall not be
unreasonably withheld) or disapprove same in writing and if disapproved, Tenant
shall provide Landlord and Landlord's architect and engineer and engineer
specific reasons for disapproval. The foregoing process shall continue until the
construction plans are approved by Tenant (which approval shall not be
unreasonably withheld); provided that, if Tenant fails to respond in any ten
(10) day period, Tenant shall be deemed to have approved the last submitted
construction plans. Landlord and tenant agree to diligently pursue completion of
the construction plans and will use commercially reasonable efforts to have
those construction plans completed by October 15, 1999, or as soon thereafter as
is practicable. All costs, including professional fees which are related to
review of Tenant's information and preparation of the Construction Plans, shall
be paid by Tenant to Landlord upon receipt by Tenant of an invoice for such
costs; provided that Tenant shall be entitled to apply the Finish Allowance to
the payment of such costs.
(c) Changes to Approved Plans. If any re-drawing or re-drafting of the
Construction Plans is necessitated after the Construction Plans have been
approved (including deemed approval), by Tenant's requested changes (all of
which shall be subject to Landlord's approval), the expense of any such
re-drawing or re-drafting required in connection therewith and the expense of
any work and improvements necessitated by such re-drawing or re-drafting will be
charged to Tenant.
(d) Coordination of Planners and Designers. If Tenant shall arrange for
interior design services, whether with Landlord's architect or engineer or any
other planner or designer, it shall be Tenant's responsibility to cause
necessary coordination of its agents' efforts with Landlord's agents to ensure
that no delays are caused to either the planning or construction of the Tenant's
Improvements.
2. Construction and Costs of Tenant's Improvements.
(a) Construction Obligation and Finish Allowance. Landlord agrees to
construct Tenant's Improvements, at Tenant's cost and expense; provided,
however, Landlord shall provide Tenant with an allowance up to $1,398,056 (the
"Finish Allowance"), which allowance shall be disbursed by Landlord, from time
to time, for payment of (in the following priority) (i) the contract sum
required to be paid to the general contractor engaged to construct Tenant's
Improvements including telcom wiring (the "Contract Sum"), (ii) the fees of the
preparer of the Construction Plans (excluding costs of plans for the additional
parking deck), and (iii) the Construction Management Fee of five percent (5%) of
construction "hard" costs which are the
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total costs paid to the general contractor (the foregoing costs are collectively
referred to as the "Permitted Costs"). Landlord shall have no obligation
whatsoever to fund any portion of the Finish Allowance for any cost other than
the Permitted Costs. Title to any equipment, appliances, furnishings or
personalty installed in the Premises and purchased with any portion of the
Finish Allowance shall pass to Landlord upon payment of the invoice cost thereof
and Tenant shall not remove any such equipment, appliances, furnishings or
personalty from the Premises without Landlord's express, prior written consent
or unless requested by Landlord in connection with the expiration or earlier
termination of the Lease. If the Permitted Costs exceed the Finish Allowance,
then Landlord will apply the $125,000 Advance Payment previously paid by Tenant
towards such excess costs, and Tenant will be responsible for further excess, if
any, not covered by the Advance Payment. If the Finish Allowance exceeds the
Permitted Costs, Landlord will retain such excess Finish Allowance and, provided
no event of default then exists beyond applicable cure periods provided for in
this Lease, the entire Advance Payment will be returned to Tenant.
(b) Excess Costs. If the sum of the Permitted Costs exceeds the Finish
Allowance, then Tenant shall pay all such excess costs ("Excess Costs"),
provided, however, Landlord will, prior to the commencement of construction of
Tenant's Improvements, advise Tenant of the Excess Costs, if any. Tenant shall
have three (3) business days from and after the receipt of such advice within
which to approve or disapprove the Excess Costs. If Tenant fails to disapprove
same by the expiration of the third such business day, then Tenant shall be
deemed to have approved the Excess Costs. If Tenant disapproves the Excess Costs
within such three (3) business day period, then Tenant shall either reduce the
scope of Tenant's Improvements such that there shall be no Excess Costs or, at
Tenant's option, Landlord shall obtain two (2) additional bids, provided that
each day beyond such three (3) business day period and until the rebid is
accepted by Tenant shall constitute a Tenant Delay hereunder. The foregoing
process shall continue until the Excess Costs, if any, are approved or deemed
approved by Tenant. Landlord and Tenant will diligently pursue the bidding
process and attempt to obtain a final approved bid no later than October ___,
1999.
(c) Approval of Construction Plans and Excess Costs. Landlord and
Tenant must approve (or be deemed to have approved) the Construction Plans and
the Excess Costs, if any for the construction of Tenant's Improvements in
writing prior to the commencement of construction. If Tenant fails to approve
the Construction Plans and/or the Excess Costs, if any, by _____________, ___,
Landlord shall have the right to terminate this Lease or, if Landlord does not
thus terminate this Lease, each day after such date that the Construction Plans
and/or the Excess Costs are not approved by Tenant shall constitute one day of
Tenant Delay.
(d) Liens Arising from Excess Costs. Tenant agrees to keep the Premises
and the Complex free from any liens arising out of nonpayment of Excess Costs.
In the event that any such lien is filed and Tenant, within ten (10) days
following such filing fails to cause same to be released of record by payment or
posting of a proper bond, Landlord shall have, in addition to all
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other remedies provided herein and by law, the right, but not the obligation, to
cause the same to be released by such means as it in its sole discretion deems
proper, including payment of or defense against the claim giving rise to such
lien. All sums paid by Landlord in connection therewith shall constitute rent
under the Lease and a demand obligation of Tenant to Landlord and such
obligation shall bear interest from the date of payment by Landlord until the
date paid by Tenant at the rate of interest specified in Paragraph 43 of this
Lease.
(e) Excess Costs Deposit. Landlord will use commercially reasonable
efforts to obtain three (3) bids for the construction of Tenant's Improvements.
Tenant may suggest to Landlord at least one of the general contractors to bid
the Tenant Improvements but the final decision as to the general contractor to
construct Tenant Improvements will be made by Landlord. Landlord will accept the
lowest bid subject to reviewing with Tenant the quality and experience level of
the contractors submitting the bids. Landlord shall have no obligation to
commence construction of Tenant's Improvements until Landlord shall have
received Tenant's payment in advance of any Excess Costs and any resulting delay
in substantially completing Tenant's Improvements shall constitute a Tenant
Delay. All sums due Landlord under this Paragraph 2.e. shall be considered rent
under the terms of the Lease and nonpayment shall constitute a default under the
Lease and entitle Landlord to any and all remedies specified in the Lease.
(f) Credit Enhancement. On the date of initiation of construction of
Tenant's Improvements, Tenant shall post a letter of credit with Landlord
meeting the requirements of Exhibit I. The letter of credit and the burn off
schedule shall be determined by the status of Tenant's initial public offering
("IPO"). If the IPO has occurred and Tenant has raised at least $35 million, the
schedule shall be as follows:
Initial Amount $1,000,000
End of Year 1 $ 650,000
End of Year 2 $ 500,000
End of Year 3 $ 250,000
End of Year 4 $ 100,000
End of Year 5 $ 100,000
End of Year 6 $ 100,000
If the IPO has not occurred, for whatever reason, the schedule shall be as
follows:
Initial Amount $2,000,000
End of Year 1 $1,500,000
End of Year 2 $1,000,000
End of Year 3 $ 500,000
End of Year 4 $ 250,000
End of Year 5 $ 100,000
End of Year 6 $ 100,000
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If the IPO occurs and the funding level achieved after the letter of credit is
posted, Tenant shall be able to reduce the letter of credit to the appropriate
level as if the IPO had occurred prior to the original posting of the letter of
credit.
3. Delays. Delays in the completion of construction of Tenant's
Improvements or in obtaining a certificate of occupancy, if required by the
applicable governmental authority prior to Tenant's occupancy of the Premises,
caused by Tenant, Tenant's Contractors (hereinafter defined) or any person, firm
or corporation employed by Tenant or Tenant's Contractors shall constitute
"Tenant Delays". Tenant Delays include, but are not limited to, delays resulting
from any of the following:
(a) Failure by Tenant or its agents, employees, consultants,
architects, engineers, planners, contractors or subcontractors or others
employed by Tenant to timely comply with the schedule of dates set forth in this
Work Letter;
(b) Tenant makes changes during construction of its Tenant's
Improvements and the changes result in the Tenant's Improvements being
Substantially Completed later than they would have been Substantially Completed
absent said changes;
(c) Tenant does not timely remit the Excess Costs as provided in
Paragraph 2(e);
(d) Landlord's inability to obtain, within a commercially reasonable
time, materials required for the Tenant's Improvements that have been specified
by Tenant;
(e) Landlord's inability to obtain a Building permit, certificate of
occupancy or other required governmental approval, inspection, license or
certificate or any necessary approval of any architectural control committee or
other association required under covenants, conditions or restrictions
applicable to the Complex and such inability is due to a particular requirement
of Tenant or Tenant's failure to cooperate in the approval process (including
Tenant's failure to agree in a timely manner to make changes to the Construction
Plans if and as required by such authorities); and
(f) Any other Tenant Delay specified in this Work Letter or in the
Lease.
If Tenant's Improvements are not Substantially Complete on the Commencement
Date, then each day of Tenant Delay shall constitute one day that the
Commencement Date will not be adjusted forward (toward the date of Substantial
Completion) as provided in Paragraph 3 of this Lease.
4. Substantial Completion and Punch List. The terms "Substantial
Completion" and "Substantially Complete," as applicable, shall mean when
Tenant's Improvements are sufficiently completed in accordance with the approved
Construction Plans so that Tenant can reasonably use the Premises for the
Permitted Use. When Landlord considers Tenant's Improvements to be Substantially
Complete, Landlord will notify Tenant and within five (5) business days
thereafter,
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Landlord's representative and Tenant's representative shall conduct a
walk-through of the Premises and identify any necessary touch-up work, repairs
and minor completion items as are necessary for final completion of Tenant's
Improvements. Neither Landlord's representative nor Tenant's representative
shall unreasonably withhold his agreement on punch list items. Landlord will use
reasonable efforts to cause the contractor to complete all punch list items
within thirty (30) days after agreement thereon.
5. Tenant's Contractors. If Tenant should desire to enter the Premises
or authorize its agent to do so prior to the Commencement Date of this Lease, to
perform approved work not requested of the Landlord, Landlord shall permit such
entry if:
(a) Tenant shall use only such contractors which Landlord shall approve
in its reasonable discretion and Landlord shall have approved the plans to be
utilized by Tenant, which approval will not be unreasonably withheld;
(b) Tenant, its contractors, workmen, mechanics, engineers, space
planners or such others as may enter the Premises (collectively, "Tenant's
Contractors"), work in harmony with and do not in any way disturb or interfere
with Landlord's space planners, architects, engineers, contractors, workmen,
mechanics or other agents or independent contractors in the performance of their
work (collectively, "Landlord's Contractors"), it being understood and agreed
that if entry of Tenant or Tenant's Contractors would cause, has caused or is
causing a material disturbance to Landlord or Landlord's Contractors, then
Landlord may, with notice, refuse admittance to Tenant or Tenant's Contractors
causing such disturbance; and
(c) Tenant, Tenant's Contractors and other agents shall provide
Landlord sufficient evidence that each is covered under such Worker's
Compensation, public liability and property damage insurance as Landlord may
reasonably request for its protection.
Landlord shall not be liable for any injury, loss or damage to any of Tenant's
installations or decorations made prior to the Commencement Date and not
installed by Landlord. Tenant shall indemnify and hold harmless Landlord and
Landlord's Contractors from and against any and all costs, expenses, claims,
liabilities and causes of action arising out of or in connection with work
performed in the Premises by or on behalf of Tenant (but excluding work
performed by Landlord or Landlord's Contractors). Landlord is not responsible
for the function and maintenance of Tenant's Improvements which are different
than Landlord's standard improvements at the Building or improvements,
equipment, cabinets or fixtures not installed by Landlord. Such entry by Tenant
and Tenant's Contractors pursuant to this Paragraph 5 shall be deemed to be
under all of the terms, covenants, provisions and conditions of the Lease except
the covenant to pay Rent.
6. Construction Representatives. Landlord's and Tenant's
representatives for coordination of construction and approval of change orders
will be as follows, provided that either party may change its representative
upon written notice to the other:
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LANDLORD'S REPRESENTATIVE:
NAME
---------------------------------------
ADDRESS
---------------------------------------
PHONE
---------------------------------------
TENANT'S REPRESENTATIVE:
NAME Mr. John J. Locy
ADDRESS 9390 Research Boulevard, Suite II-300
Austin, Texas 78759
PHONE (512) 794-2703
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EXHIBIT E
NON-RESERVED PARKING SPACES
BOTH SURFACE AND RESERVED GARAGE PARKING AGREEMENT
1. Parking Spaces. So long as the Lease of which this Parking Agreement
(this "Agreement") is a part shall remain in effect and Tenant leases 63,548
rentable square feet, Tenant or persons designated by Tenant shall have the
right, at no additional cost to Tenant, to use in the parking garage which is a
part of the Complex (the "Garage") on an unreserved and non-exclusive basis up
to three hundred twenty-eight ( 328) parking spaces during the Lease Term. To
the extent Landlord determines that additional parking spaces in the Garage are
available, Tenant shall have the right (but not the obligation) to rent
additional unreserved and non-exclusive parking spaces in the Garage at the rate
from time to time designated by Landlord as standard for the Complex. Each
capitalized term used but not defined herein shall have the meaning assigned to
it in the Lease.
2. Lost Parking Cards/Parking Sticker. There will be a replacement
charge payable by Tenant equal to the amount posted from time to time by
Landlord for loss of any magnetic parking card or parking sticker issued by
Landlord.
3. Parking Stickers and Cards. Parking stickers or any other device or
form of identification supplied by Landlord shall remain the property of
Landlord and shall not be transferable. Each parking sticker, parking card or
other device or form of identification shall entitle the parker to park only one
car at any given time in the Garage.
4. Failure or Inability to Provide Parking Space. If Landlord fails or
is unable to provide any parking space to Tenant in the Garage because of damage
or condemnation or because of needed repairs to the Garage or restriping within
the Garage, such failure or inability shall never be deemed to be a default by
Landlord as to permit Tenant to terminate the Lease, either in whole or in part,
and Landlord shall have no liability to Tenant or any other parker by reason of
such failure or inability to provide Tenant with such parking space. However,
Landlord will diligently pursue the repair of any damage to reduce the time that
required parking spaces are unavailable for Tenant's use, and will attempt to
minimize inconvenience to Tenant in completing such repair work.
5. Rules and Regulations. A condition of any parking shall be
compliance by the parker with Garage rules and regulations, including any
sticker or other identification system established by Landlord. Garage managers
or attendants are not authorized to make or allow any exceptions to these Rules
and Regulations. The following rules and regulations are in effect until notice
is given to Tenant of any change. Landlord reserves the right to modify and/or
adopt such other reasonable and generally applicable rules and regulations for
the Garage as it deems necessary for the operation of the Garage.
(a) Cars must be parked entirely within the stall lines painted on the
floor.
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(b) All directional signs and arrows must be observed.
(c) The speed limit shall not exceed five (5) miles per hour.
(d) Parking is prohibited in areas not striped for parking, aisles,
areas where "no parking" signs are posted, in cross hatched areas
and in such other areas as may be designated by Landlord or
Landlord's agent(s) including, but not limited to, areas designated
as "Visitor Parking" or reserved spaces. Any parking areas
designated as "Visitor Parking" or short term parking are for
visitors and other invitees of tenants of the Building and shall
not be used by any tenant or its officers or employees.
(e) Every parker is required to park and lock his own car. All
responsibility for damage to cars or persons or loss of personal
possessions is assumed by the parker.
(f) Spaces which are designated for small, intermediate or full-sized
cars shall be so used. No intermediate or full-size cars shall be
parked in parking spaces limited to compact cars. Landlord
expressly reserves the right to redesignate parking areas and to
modify the parking structure for other uses or to any extent.
(g) No cars shall be allowed to remain parked in the Garage overnight,
over weekends or while parker is on vacation except in such area(s)
as Landlord and tenant mutually agree.
(h) No cars or other vehicles may be advertised for sale or for lease
in any manner in the Garage; provided, however, that cars may
display a small sign on the inside glass of the rear windows of the
vehicles for such purpose.
6. Default under Parking Agreement. Landlord may refuse to permit any
person who violates the rules to park in the Garage. Any violation of the rules
shall subject the violating car to removal at the car owner's expense. No such
refusal or removal shall create any liability on Landlord or be deemed to
interfere with Tenant's right to quiet possession of the Premises.
Landlord reserves the right to designate specific areas and spaces
within which Tenant, Tenant's employees, agents, visitors and customers, may
park, and agrees to consult with Tenant in connection therewith prior to the
Commencement Date. Tenant shall not, however, be entitled to exclusive use of
such designated parking spaces (unless granted such right by Landlord in
writing) and Landlord may, in its reasonable discretion, reassign the location
of such parking spaces at any time. Landlord further reserves the right to
promulgate rules and regulations for the use of all parking areas at any time
during the term of this Lease. Notwithstanding any foregoing provision of this
Parking Agreement, Landlord shall have the right to designate any parking area
or space for the exclusive use of a tenant or other person or persons at a
monthly fee of $ -0- . All covered parking spaces or privileged parking spaces
(i.e., reserved or
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designated spaces) will be assigned on a prorata basis according to the rentable
area leased by the tenants in the Building. Tenant agrees that it will employ
its best efforts to prevent the use by Tenant's employees, agents, visitors and
customers of parking spaces allocated to other tenants.
Tenant shall not exceed the following parking ratio: one (1) parking
space per 194 rentable square feet. If in the reasonable opinion of Landlord
these parking ratios are being exceeded, Tenant shall immediately upon written
notice from Landlord correct the problem or be in default of the lease.
Overnight parking shall be restricted to Tenant's business vehicles parked in
Tenant's designated loading spaces in the truck court or loading area, unless
prior written approval is granted by Landlord. Vehicles parked in violation of
these provisions may be towed at vehicle owner's sole cost and expense.
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EXHIBIT F
ACCEPTANCE OF PREMISES MEMORANDUM
This Acceptance of Premises Memorandum is being executed pursuant to
that certain Office Building Lease (the "Lease") dated the _____ day of
______________, 19 , between MAPLEWOOD ASSOCIATES, L.P. ("Landlord"), and
CROSSROADS SYSTEMS, INC. ("Tenant"), pursuant to which Landlord leased to Tenant
and Tenant leased from Landlord certain space in the office Building known as
The Park, located at 8300 North MoPac Expressway, Austin, Texas 78731 (the
"Building"). Landlord and Tenant hereby agree that:
1. Except for the Punch List Items (as shown on the attached Punch
List), Landlord has fully completed the construction work required under the
terms of the Lease and the Work Letter attached thereto.
2. The Premises are tenantable, Landlord has no further obligation for
construction (except with respect to Punch List Items) and Tenant acknowledges
that the Premises and Tenant's Improvements are satisfactory in all respects,
except for the Punch List Items, and are suitable for the Permitted Use.
3. The Commencement Date of the Lease is the _____ day of
__________________, 1999. If the date set forth in Paragraph 1(b) of the Lease
is different than the date set forth in the preceding sentence, then Paragraph
1(b) of the Lease is hereby amended to be the Commencement Date set forth in the
preceding sentence.
4. The expiration date of the Lease is the _____ day of
_________________________, 2000. If the date set forth in Paragraph 1(c) of the
Lease is different than the date set forth in the preceding sentence, then
Paragraph 1(c) of the Lease is hereby amended to be the expiration date set
forth in the preceding sentence.
5. Landlord has obtained a Certificate of Occupancy covering the
Premises.
6. All capitalized terms not defined herein shall have the meaning
assigned to them in the Lease.
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Agreed and Executed this ___________ day of ________________________, 19___.
LANDLORD
MAPLEWOOD ASSOCIATES, L.P.
a Texas Limited Partnership
By: Maplewood GP, Inc., General Partner
By:
---------------------------------------
Name: Charles Schouten
Title: President
TENANT
CROSSROADS SYSTEM, INC.,
a Corporation
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
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EXHIBIT G
RENEWAL OPTION
1. If, and only if, on the Expiration Date of this Lease and the date
Tenant notifies Landlord of its intention to renew the Lease Term (as provided
in subsection (2) below), (i) Tenant is not in default under this Lease, (ii)
Tenant then occupies, and the Premises then consist of, at least all the
Premises existing on the Commencement Date and (iii) this Lease is in full force
and effect, then Tenant, but not any assignee or subtenant of Tenant, shall have
and may exercise an option to renew this Lease for one (1) additional term of
three (3) years (the "Renewal Term") upon the same terms and conditions
contained in this Lease with the exceptions that (i) this Lease shall not be
further available for renewal and (ii) the rental for the Renewal Term shall be
the current market rental rate then being achieved in comparable office
buildings in the suburban Austin, Texas market with comparable location, quality
of construction, ratio of covered parking, and other amenities (the "Renewal
Rental Rate").
2. If Tenant desires to renew this Lease pursuant to subsection (1)
above, Tenant must notify Landlord in writing of its intention to renew not less
than six (6) months nor more than nine (9) months prior to the Expiration Date.
Landlord shall, within sixty (60) days following receipt of such notice, notify
Tenant in writing of Landlord's determination of the Renewal Rental Rate and
Tenant shall, within the next thirty (30) days following receipt of Landlord's
determination of the Renewal Rental Rate, notify Landlord in writing of Tenant's
acceptance or rejection of Landlord's determination of the Renewal Rental Rate.
If Tenant timely notifies Landlord of Tenant's acceptance of Landlord's
determination of the Renewal Rental Rate, this Lease shall be extended as
provided herein and Landlord and Tenant shall enter into an amendment to this
Lease to reflect the extension of the Lease Term and changes in Base Rental in
accordance with this Exhibit. If (i) Tenant timely notifies Landlord in writing
of Tenant's rejection of Landlord's determination of the Renewal Rental Rate or
(ii) Tenant does not notify Landlord in writing of Tenant's acceptance or
rejection of Landlord's determination of the Renewal Rental Rate within such
thirty (30) day period, Landlord and Tenant will promptly attempt to agree on
the Renewal Rental Rate. The Renewal Rental Rate shall be the rate that is then
being achieved in comparable office buildings in the suburban Austin, Texas
market with comparable location, quality of construction, covered parking and
other amenities. If Landlord and Tenant cannot agree within fifteen (15) days of
Tenant's rejection in subclause (i) hereinabove or the expiration of the thirty
(30) day period referred to in subclause (ii) hereinabove, then Landlord and
tenant shall each select an independent real estate broker or appraiser (i.e., a
real estate broker or appraiser with no prior or existing contractual
relationship with either party) with experience in leasing office buildings in
the north central Austin area to determine the Renewal Rental Rate. If the
values determined by the brokers/appraisers are less than ten percent (10%)
apart, the average of the values determined by them shall be deemed the Renewal
Rental Rate for the Premises. If the brokers/appraisers do not agree, and if
their determinations are more than ten percent (10%) apart, then on or before
seventy-five (75) days prior to the commencement of the Renewal Term, the two
brokers/appraisers shall select a third
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independent broker/appraiser who will determine the Renewal Rental Rate for the
Premises. If the value determined by the third broker/appraiser is between the
values determined by the two prior broker/appraisers, the determination of the
third broker/appraiser will control. If the third broker/appraiser's
determination is not between the values determined by the two prior
broker/appraisers, then the value of the first two broker/appraisers closest to
the value of the third broker/appraiser will be the Renewal rental Rate for the
Premises. Each party shall pay the fees and expenses of its broker/appraiser,
and the fees and expenses of the third broker/appraiser shall be shared equally
between Landlord and Tenant.
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EXHIBIT H
RIGHT TO SUBLEASE OR ASSIGN TO AFFILIATE
Notwithstanding the prohibition against assignment and subleasing
contained in Paragraph 16 of the Lease, Tenant may, without the prior written
consent of Landlord, but only after giving Landlord at least thirty (30) days
prior written notice (which notice shall include the identity of the Affiliate
(hereinafter defined) and the relationship of the Affiliate to Tenant), sublet
the Premises or any part thereof to an Affiliate or assign this Lease to an
Affiliate or permit occupancy of any portion of the Premises by an Affiliate. If
Tenant is a partnership, the term "Affiliate" shall mean (i) any corporation
which, directly or indirectly, controls or is controlled by or is under common
control with the general partner of Tenant, (ii) any corporation not less than
fifty percent (50%) of whose outstanding stock shall, at the time be owned
directly or indirectly by Tenant's general partner or (iii) any partnership or
joint venture in which Tenant or the general partner of Tenant is a general
partner or joint venturer (with joint and several liability for all of the
partnership's or venture's obligations). If Tenant is a corporation or
individual, the term "Affiliate" shall mean (i) any corporation which, directly
or indirectly, controls or is controlled by or is under common control with
Tenant or (ii) any corporation not less than fifty percent (50%) of whose
outstanding stock shall, at the time, be owned directly or indirectly by Tenant
or Tenant's parent corporation. For purposes of this paragraph, "control" shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such corporation, whether through
the ownership of voting securities or by contract or otherwise and ownership of
the liabilities, losses, profits and tax benefits for such entity.
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EXHIBIT I
LETTER OF CREDIT AS SECURITY DEPOSIT
Tenant shall furnish Landlord the Security Deposit in the form of an
unconditional, renewable and irrevocable letter of credit (the "Letter of
Credit"), in the amount of the Security Deposit as specified in Section 1(e),
deposited with Landlord in the form attached hereto as Exhibit I-1 issued by
____________________ (the "Bank") in the favor of Landlord and having a maturity
date of the date which is one year after the date of this Lease. The Letter of
Credit shall be renewed each year until the expiration of the Lease Term. Tenant
agrees to provide Landlord, at least thirty (30) days prior to the expiration of
the then current Letter of Credit, either (i) a renewal Letter of Credit from
the Bank meeting the requirements of this Paragraph or (ii) a new Letter of
Credit from a bank approved in writing by Landlord and in a form substantially
the same as the form attached hereto as Exhibit I-1 (or such other form as is
approved in writing by Landlord). If Landlord does not so receive such renewal
Letter of Credit or new Letter of Credit, then Landlord may draw in full the
current Letter of Credit for cash which shall be the Security Deposit under this
Lease. The Letter of Credit shall provide that it may be drawn upon in full or
in part for cash by Landlord upon delivery to the issuer of the Letter of Credit
of the original of the Letter of Credit and a certification by Landlord that
Tenant has defaulted under this Lease and such default has remained uncured
beyond any and all applicable notice and cure periods specifically referenced in
this Lease. Upon each occurrence of an event of default that remains uncured
beyond all applicable notice and cure periods, Landlord may draw from the Bank
in cash the part of the Letter of Credit to pay past due rent or other payments
due Landlord under this Lease, and the cost of any other damage, injury, expense
or liability caused by such event of default without prejudice to any other
remedy provided herein or provided by law. If Landlord draws upon the Letter of
Credit, Tenant shall promptly restore the Letter of Credit to the amount
required under this Exhibit.
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EXHIBIT I-1
FORM OF LETTER OF CREDIT
Date:
-----------------------
Beneficiary: Accountee:
(or Assigns)
- -------------------- -------------------------------
c/o West World Management, Inc.
-------------------------------
4 Manhattanville Road
-------------------------------
Purchase, New York 10577
-------------------------------
Irrevocable Standby Letter of Credit #_______________
Issued by _____________________________ (Bank)
Beneficiary:
We hereby establish our Irrevocable Standby Letter of Credit in your
favor which is available by your drafts, drawn on _____________________________
(Bank) for a sum not exceeding $___________________.
We, ______________________________ (Bank), hereby agree with
Beneficiary that all drafts drawn under and in compliance with the terms of this
Letter of Credit will be duly honored, if drawn and presented for payment at
this office on or before the expiration date of this Letter of Credit. The
expiration date of this Letter of Credit is ________________, ____.
All drafts shall be accompanied by: 1) this original Letter of Credit;
2) a statement signed by an officer of Beneficiary that "Accountee has defaulted
under the Lease dated ____________________, 1999, by and between Beneficiary as
Landlord and Accountee as Tenant and such default has remained uncured beyond
any and all applicable notice and cure periods specifically referenced in said
Lease."
Multiple draws are permitted against this Letter of Credit. Multiple
draws are limited in aggregate to the maximum amount of this Letter of Credit
stated above.
Unless otherwise expressly stated, this documentary credit is subject
to the "Uniform Customs and Practice For Documentary Credits", as revised.
Sincerely,
Bank:
Name:
---------------------------
Title:
---------------------
Date:
---------------------
Accountee's Acknowledgment:
Accountee:
Name:
---------------------------
Title:
---------------------
Date:
---------------------
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EXHIBIT 10.16
HEWLETT-PACKARD SSD & CROSSROADS
CP4200 LICENSE AGREEMENT
This License Agreement ("Agreement") is made and entered into as of
April 15, 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 Hewlett-Packard
Company, a California corporation, acting by and through its division HP-SSD,
having a principal place of business at 700 71st Avenue, Greeley, Colorado
80634 ("HP").
WHEREAS, Crossroads is in the business of, among other things,
developing and licensing certain software and developing and licensing certain
related hardware designs;
WHEREAS, HP is in the business of, among other things, developing,
manufacturing and distributing tape and optical libraries;
WHEREAS, HP desires a license to certain of Crossroads' software and
related hardware designs for incorporation into certain of HP's board products
to be used in connection with HP's tape and optical libraries, and Crossroads
desires to grant HP such a license 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:
1. Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
a. "Hardware Designs" shall mean the hardware designs and
specifications set forth in Exhibit A attached hereto.
b. "HP" shall mean only the division of Hewlett-Packard known as
HP-SSD.
c. "HP Board" shall mean an HP router board that includes a
modification or a derivative work of the Software and/or Hardware Designs
created by or for HP under this Agreement.
d. "HP Modifications" shall mean all modifications to and
derivative works of the Licensed Materials created by or for HP pursuant to
this Agreement.
e. "Enhancements" are defined as those firmware changes and updates
that correct defects found in the firmware (bugs), provide additional
robustness, and conform to Fibre Channel specifications. Such enhancements are
made only in the context of continued compliance with the currently defined
hardware design described in Exhibit A.
f. "Derivative modifications" are defined as those changes made to
the Licensed Materials that constitute significant functional upgrades or
changes to firmware. In addition, changes to fundamental hardware elements such
as the microprocessor, the protocol chips or supporting hardware design, which
will constitute a change to firmware, are defined as derivative modifications.
Examples include, without limitation, changing Tachyon to TachLite, SCSI
protocol chip upgrades, making backplane enhancements, moving to 64-bit PCI,
and other such hardware changes that require firmware changes that are not
backward compatible.
g. "HP Product" shall mean an HP tape or optical library product
that incorporates an HP Board.
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<PAGE> 2
h. "Licensed Materials" shall mean both the Hardware Designs and
the Software.
i. "Proprietary Rights" shall mean all patent rights, copyrights,
trade secret rights, trademark rights and other similar intellectual property
rights.
j. "Software" shall mean Crossroads' CrossPoint 4200 Bridge/Router
software existing as of the Effective Date and described in Exhibit B attached
hereto, including the applicable documentation therefor provided by Crossroads
to HP hereunder.
2. License Grants.
a. Subject to all the terms and conditions of this Agreement,
Crossroads grants to HP, and only HP, under all Proprietary Rights of
Crossroads applicable to the Licensed Materials, a worldwide, non-exclusive,
non-transferable, non-sublicenseable (except as expressly set forth in Section
2.a.(iii) and 2.a.(iv) below) license only to:
(i) use, internally modify and prepare derivative works of the
Licensed Materials (only in object code form with respect to the Software) or
have modified or prepared on behalf of and for the benefit of HP solely for the
purposes set forth in Section 2.a.(ii) below and subject to Section 2.c. below;
(ii) reproduce, have reproduced, manufacture, have manufactured,
use and distribute modifications and derivative works of the Licensed Materials
(only in object code form with respect to the Software) created pursuant to
Section 2.a.(i) above, only as integrally incorporated into or with HP Boards
only for use in HP Products. HP shall not have the right to license, sell,
distribute or otherwise provide to any third party any HP Boards on a
stand-alone basis or for use in connection with a non-HP Product without
Crossroads' prior written consent; and
(iii) sublicense to third parties the reproduction and
manufacturing rights for HP Boards granted in Section 2.a.(ii) above; provided
that any such sublicense shall be pursuant to a sublicense agreement for
Crossroads' benefit that (A) does not provide such third party or allow such
third party access to any source code or source documentation relating to the
Software, (B) prohibits reverse engineering and (C) contains all the
restrictions and obligations imposed on HP hereunder except for the obligations
HP has to Crossroads under Section 4 below; and
(iv) sublicense the Software only to OEM licensees and end users,
only in object code form and only as incorporated into an HP Board for use in an
HP Product. HP agrees that each copy of the Software sublicensed to OEM
licensees and end users hereunder will only be distributed pursuant to OEM
license agreements and end user license agreements that are at least as
protective as those used by HP for its own proprietary software and that, in any
event, at a minimum (and for Crossroads' benefit), (A) provide that the Software
(and any copy) is licensed (and not sold) and that reverse engineering (by
disassembly, decompilation or otherwise) is prohibited and (B) disclaim all
warranties and exclude incidental and consequential damages with respect to
Crossroads and (C) contain terms and conditions at least as protective of the
Software, Crossroads and its Proprietary Rights as the terms and conditions of
this Agreement.
b. Upon HP's written request and payment to Crossroads of the
source code license fee specified in Exhibit C attached hereto, subject to the
terms and conditions of this Agreement, Crossroads shall grant to HP, and only
HP, under all Proprietary Rights of Crossroads applicable to the Software, a
worldwide, non-exclusive, non-transferable, non-sublicenseable license solely
to internally modify and prepare derivative works of the source code for the
Software solely for the purposes described in Section 2.a.(ii) above and
subject to Section 2.c. below.
c. The licenses granted by Crossroads to HP in this Section 2 do
not allow any sublicense, distribution or disclosure of source code or source
documentation relating to the Software to
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any third party in any circumstance or manner, and HP agrees that it will not
engage in any such sublicensing, disclosure or distribution.
d. HP grants to Crossroads, and only Crossroads, under all
Proprietary Rights of HP applicable to the HP Modifications, a worldwide,
non-exclusive, perpetual, irrevocable, nontransferable, royalty-free,
sublicenseable license to use, modify, prepare derivative works of, reproduce,
have reproduced, manufacture, have manufactured and distribute only those HP
Modifications that are not limited to an HP-specific application for use in
connection with any Crossroads products.
e. During the term of this Agreement, HP shall have the option to
upgrade the license granted to HP by Crossroads in Section 2.a(i) above to
include the source code form of the Software, which option may be exercised by
HP providing Crossroads with thirty (30) days' advance written notice and
paying to Crossroads the Source Code Upgrade Fee set forth in Exhibit C hereto.
3. Ownership.
a. As between the parties, Crossroads retains (i) all title to and,
except as expressly and unambiguously licensed to HP herein, all rights to the
Licensed Materials, all copies and derivative works thereof created by or for
Crossroads and all related documentation and materials, (ii) all of its service
marks, trademarks, trade names or any other designations (and notwithstanding
anything else herein, HP may not use any name, mark or designation used by
Crossroads except for use in advertising or marketing the HP Products in
accordance with the prior written approval of Crossroads) and (iii) all
Proprietary Rights in the Licensed Materials.
b. As between the parties and subject to Section 3.c. below, HP
shall own (i) all title to and, except as expressly and unambiguously licensed
to Crossroads herein, all rights to HP Modifications, (ii) all of its service
marks, trademarks, trade names or any other designations (and notwithstanding
anything else herein, Crossroads may not use any name, mark or designation used
by HP except in accordance with the prior written approval of HP) and (iii) all
Proprietary Rights in the HP Modifications.
c. With respect to inventions and works of authorship for which
employees or consultants of both parties are joint inventors or authors, each
party will equally and jointly own such inventions and works of authorship with
the right to unilaterally use or non-exclusively license such inventions and
works of authorship without accounting to the other party.
4. License Fees; Royalties; Payment.
a. In consideration of the licenses granted to HP hereunder, HP
agrees to pay Crossroads the applicable license fees specified in Exhibit C
attached hereto in accordance with the payment schedule set forth in Exhibit C.
b. In further consideration of the licenses granted to HP
hereunder, in addition to the license fees set forth in Section 4.a. above, HP
agrees to pay Crossroads royalties as specified in Exhibit C. All royalties due
hereunder shall be paid by HP to Crossroads on a calendar quarterly basis
within thirty (30) days after the end of each quarter. HP shall provide
Crossroads with quarterly written reports of the total number of copies of HP
Boards manufactured by or for HP. Such reports shall accompany the royalty
payments made to Crossroads hereunder. If HP Boards are manufactured by a party
other than HP ("Third Party Manufacturer"), HP shall include in such reports
the name of such Third Party Manufacturer and written certification from such
Third Party Manufacturer as to the number of HP Boards it manufactured during
the reported quarter.
c. HP shall be responsible for and pay all taxes (except
Crossroads' income taxes), duties and other governmental assessments. A late
fee shall be paid by HP to Crossroads on any amount not paid when due at a rate
of one and one-half percent (1.5%) per month on all unpaid amounts, or the
maximum rate permitted by law, whichever is less. All payments to be made by HP
to Crossroads
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under this Agreement shall be in U.S. dollars.
5. Books and Records; Audit. HP agrees to keep complete and accurate
books and records of its manufacture and sales of HP Boards, HP Products and
all other transactions relating to this Agreement. Crossroads shall have the
right (at its expense, upon reasonable prior notice and during HP's normal
business hours) to have an independent certified public accountant inspect and
audit the books and records of HP for the purpose of verifying any reports,
information or payments provided or due hereunder. All underpayments revealed
by such audit shall be paid to Crossroads within thirty (30) days of the audit
results. If such audit reveals an underpayment to Crossroads in excess of five
percent (5%), HP shall bear the expense of the audit. Crossroads may exercise
its right to audit hereunder no more than once per year.
6. Delivery; Acceptance; Training.
a. Crossroads will deliver to HP two (2) copies of the Licensed
Materials in accordance with the deliverable schedule specified in Exhibit D
attached hereto. Copies of the Software shall be delivered to HP by Crossroads
in object code form (unless HP has elected to obtain a source code license
under Section 2.b. above and has paid to Crossroads the source code license fee
set forth in Exhibit C, in which case the Software shall be delivered to HP in
both source code and object code forms).
b. HP may perform an acceptance test for the Software within thirty
(30) days following its receipt of the Software, for conformance to the
applicable specifications provided to HP by Crossroads hereunder. If, in
conducting such acceptance test during this thirty (30) day period, HP
discovers the Software does not materially conform to such specifications, HP
must provide Crossroads with immediate written notice of such discovery and
then further provide Crossroads, within fifteen (15) days following such
discovery, with sufficient written instructions, equipment, machines and
documentation ("Nonconformance Materials") to allow Crossroads to readily
reproduce the problems at its facility, Crossroads shall, at its cost, use
reasonable efforts to make corrections to the Software (including workarounds)
within thirty (30) days after receipt of the required Nonconformance Materials
(or such longer period as the parties mutually agree) so that the Software
materially conforms to such applicable specifications. The Licensed Materials
will be deemed accepted by HP upon the earliest of the following to occur: (i)
HP provides notice of acceptance, (ii) HP commences modification of any of the
Licensed Materials, (iii) thirty (30) days after delivering the Licensed
Materials to HP by Crossroads if HP has not provided written notice of
nonconformance within such thirty (30) day period or (iv) no material
nonconformance for which HP has provided the required Nonconformance Materials
remains.
c. Crossroads will provide, at no additional cost to HP, a total of
three (3) man days of training regarding the Licensed Materials for HP
personnel at Crossroads' facilities and at mutually agreeable times.
7. Maintenance and Support.
a. HP shall be responsible for providing first and second level
technical support for HP Modifications, HP Boards and HP Products to its
distributors, other customers (including, without limitation, OEM licensees)
and end-users.
b. Upon HP's payment of the maintenance fees specified in Exhibit C
in accordance with the payment schedule set forth in Exhibit C, Crossroads will
provide to HP maintenance services for the Licensed Materials as specified in
this Section 7.b. Crossroads shall provide third level technical maintenance
and support for the Licensed Materials only to HP for technical issues and
problems with the Licensed Materials that HP is unable to resolve on its own as
detailed in Exhibit E hereto. 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.
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<PAGE> 5
8. Manufacture of HP Boards by Crossroads. During the term of this
Agreement, HP may request Crossroads to manufacture HP Boards for HP's benefit.
Upon such request, HP and Crossroads agree to negotiate reasonably and in good
faith commercially reasonable terms and conditions (including, without
limitation, price) of a separate manufacturing agreement pursuant to which
Crossroads will manufacture HP Boards for HP's benefit. Neither party will be
bound by or deemed to have agreed to any manufacturing terms and conditions
unless and until both parties have mutually agreed upon and executed a separate
manufacturing agreement.
9. Crossroads Modifications to Licensed Materials. If, during the term
of this Agreement, Crossroads creates any "derivative" modifications to the
Licensed Materials and makes such modifications generally commercially
available ("Crossroads Modifications"), Crossroads shall offer to license such
Crossroads Modifications to HP on terms and conditions (including, without
limitation, price) to be negotiated in good faith and mutually agreed upon by
both parties in writing. Crossroads' modifications, which are deemed
"enhancements", will be routinely offered to HP at no additional charge.
10. Special Work Projects. During the term of this Agreement, HP may
request Crossroads to undertake special work project(s) relating to the
Licensed Materials. Upon such request, HP and Crossroads agree to discuss in
good faith Crossroads' ability to undertake such special work project, taking
into consideration, without limitation, Crossroads' existing obligations and
staffing allocation. Crossroads shall not be responsible or liable for
performing any special work projects unless and until the terms and conditions
relating thereto (including, without limitation, fees to be paid to Crossroads)
are mutually agreed upon by both parties in writing.
11. Future Collaborations. During the term of this Agreement, HP and
Crossroads intend to share with each other, subject to the confidentiality
obligations set forth in Section 16 below, product roadmaps and further intend
to work together on collaborative opportunities to enhance HP products and
Crossroads products.
12. Publicity; Agreement Disclosure. Except as required by law, all
public announcements regarding the existence or terms of this Agreement or HP
Products shall be coordinated as mutually agreed upon by Crossroads and HP. The
parties agree that the existence or terms of this Agreement may be disclosed as
necessary in connection with any merger, acquisition, public offering or
financing.
13. Copyright Notices; Product Names. HP agrees to include the
following Crossroads' copyright notice which appears on or in the Licensed
Materials, as may be reasonably revised by Crossroads from time to time, on any
documentation associated with any HP Product: "Copyright (c) [year] by
Crossroads Systems, Inc. All rights reserved". With respect to HP
Modifications, HP may place its own copyright notice for the HP Modification
portions, in addition to Crossroads' copyright notice. No other right or
license with respect to any trademark, trade name or other designation is
granted under this Agreement.
14. Term of Agreement. This Agreement shall commence on the Effective
Date and shall continue in effect for a period of three (3) years, unless and
until earlier terminated in accordance with Section 15 below, and will renew
automatically for additional one (1) year periods unless written notice is
given by one party to the other as to its not to renew this Agreement without
cause at least thirty (30) days prior to the end of the preceding term.
15. Termination.
a. Either party may terminate this Agreement if the other party
breaches any material term or provision of this Agreement and fails to cure
such breach within thirty (30) days of written notice describing the breach,
except that Crossroads may terminate this Agreement immediately in the event of
HP's breach of Section 2.c. above.
b. Upon any expiration or termination of this Agreement, all
licenses granted to HP hereunder and any sublicenses will immediately cease;
provided, however, that (i) end user sublicenses
5
<PAGE> 6
granted pursuant to this Agreement shall not be revoked by the termination of
this Agreement, (ii) unless termination is due to HP's material breach, HP may
continue to distribute HP Products in accordance with the terms of this
Agreement for bona fide orders placed by OEM licensees, end users or
distributors and accepted prior to the termination of this Agreement; provided
such HP Products are distributed pursuant to normal payment terms within
thirty (30) days after termination of this Agreement, and (iii) HP Products in
the possession of HP's distributors as of termination may be distributed in
accordance with the terms of this Agreement to meet bona fide orders placed by
OEM licensees, end users or distributors and accepted prior to termination;
provided such HP Products 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 HP's right to
continue distribution of HP Products as set forth above in this Section 15.b.,
HP will immediately return to Crossroads all Licensed Materials (in source code
and object code forms), master disks and documentation in its possession,
custody or control in whichever form held (including all copies or embodiments
thereof) and will cease using any trademarks, service marks and other
designations of Crossroads.
c. Termination is not the sole remedy under this Agreement and,
whether or not termination is effected, all other remedies will remain
available.
d. In addition to rights to payment, the following provisions shall
survive any expiration or termination of this Agreement: Sections 1, 3, 4.c, 5,
15.b, 15.d, 16, 19, 20, 22 and 23.
16. Confidentiality.
a. Each party agrees that all source code, inventions, algorithms,
designs, specifications, drawings, layouts, know-how and ideas it obtains from
the other and all other business, technical and financial information it
obtains from the other are the confidential property of the disclosing party if
identified as such at or before the time of disclosure ("Proprietary
Information"). The Software and all source code and source documentation
therefor and the Hardware Designs and all underlying inventions, algorithms,
know-how and ideas of all of the foregoing are hereby identified as Crossroads'
Proprietary Information. Except as expressly and unambiguously allowed herein,
the receiving party will hold in confidence and not use or disclose any
Proprietary Information of the disclosing party for a period of three (3) years
from the date of disclosure, and shall similarly bind its employees and
contractors in writing. For the purpose of clarification, the object code and
the end user documentation of the Software are Proprietary Information and the
three (3) year limit in the preceding sentence shall not apply to such
information. The receiving party shall not be obligated under this Section 16
with respect to information the receiving party can document:
(i) is or has become readily publicly available without
restriction through no fault of the receiving party or its employees or agents;
(ii) is received without restriction from a third party lawfully
in possession of such information and lawfully empowered to disclose such
information;
(iii) was rightfully in the possession of the receiving party
without restriction prior to its disclosure by the disclosing party; or
(iv) was independently developed without any access to the
Proprietary Information.
b. The exceptions to the confidentiality provisions of this
Agreement set forth in clauses (i), (ii) and (iii) above do not and should not
be interpreted to, confer any license or other rights to the receiving party
for any of the information referenced in such exceptions. Nothing herein shall
permit the receiving party to disclose or use, except as explicitly permitted
elsewhere in this Agreement, confidential information of the disclosing party
and then only on an "as-needed" basis for purposes of this Agreement.
6
<PAGE> 7
c. Upon any termination of this Agreement, each party will promptly
return or destroy any Proprietary Information of the other and any copies,
extracts and derivatives thereof, except as otherwise set forth in this
Agreement.
d. Each party acknowledges that its breach of this Section 16
would cause irreparable injury to the other for which monetary damages are not
an adequate remedy. Accordingly, a party will be entitled to injunctive relief
and other equitable remedies in the event of such a breach by the other.
17. Crossroads Warranties.
a. Crossroads warrants that the Software will conform substantially
to the specifications therefor provided to HP by Crossroads hereunder. HP's
sole remedy for breach of this warranty shall be its rights set forth under
Section 6(b).
b. Crossroads warrants that it has the right to grant the
corresponding rights and licenses to HP and to make the necessary disclosures
to HP under this Agreement.
c. CROSSROADS MAKES NO WARRANTIES TO ANY PERSON OR ENTITY WITH
RESPECT TO THE LICENSED MATERIALS (OTHER THAN THOSE SET FORTH ABOVE) OR ANY
DERIVATIVES THEREOF OR ANY SERVICES OR LICENSES AND DISCLAIMS ALL IMPLIED
WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.
18. HP Warranties.
a. HP warrants that the HP Modifications will conform substantially
to the specifications therefor provided to Crossroads by HP. Crossroads' sole
remedy for breach of this warranty shall be the same as HP's rights set forth
under Section 6(b).
b. HP warrants that it has the right to grant the corresponding
rights and licenses to Crossroads and to make the necessary disclosures to
Crossroads under this Agreement.
c. HP MAKES NO WARRANTIES TO ANY PERSON OR ENTITY WITH RESPECT TO
THE HP MODIFICATIONS (OTHER THAN THOSE SET FORTH ABOVE) OR LICENSES AND
DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING WITHOUT LIMITATION WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT.
19. Infringement Indemnification.
a. Crossroads shall indemnify and hold HP and its officers,
directors, agents and employees harmless from liability resulting from
infringement by the Licensed Materials of any United States, European Union,
Japanese, Chinese, Korean, Singaporean or Philippine patent, copyright or third
party trade secret, provided (a) Crossroads is promptly notified by HP of any
and all threats, claims and proceedings related thereto, (b) HP provides
Crossroads reasonable assistance in connection therewith and (c) Crossroads has
sole control over the defense and all negotiations for a 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 Licensed Materials or portions or components thereof (i) not
supplied by Crossroads, (ii) made in accordance to HP specifications or
requests if the alleged infringement relates to such specifications or
requests, (iii) which are modified after delivery by Crossroads, 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 HP continues allegedly
infringing activity after being notified thereof or after being informed of
modifications that would have avoided the alleged infringement. HP will
indemnify Crossroads and its officers, directors, agents and employees from all
damages, settlements, attorneys' fees and expenses (A) related to a claim of
infringement or misappropriation excluded from Crossroads'
7
<PAGE> 8
indemnity obligation by the immediately preceding sentence or (B) in connection
with HP's activities regarding the Licensed Materials, HP Modifications, HP
Board or HP Product; provided that (1) HP is promptly notified in writing of a
claim from a third party, (2) HP shall have the sole control of the defense
and/or settlement thereof, and (3) Crossroads furnishes to HP, at HP's request,
information reasonably available to Crossroads for such defense.
b. HP shall indemnify and hold Crossroads and its officers,
directors, agents and employees harmless from liability resulting from
infringement by the HP Modifications of any United States patent, United States
copyright or third party trade secret, provided (a) HP is promptly notified by
Crossroads of any and all threats, claims and proceedings related thereto, (b)
Crossroads provides HP reasonable assistance in connection therewith and (c) HP
has sole control over the defense and all negotiations for a settlement or
compromise; HP will not be responsible for any settlement it does not approve
in writing. The foregoing obligation of HP does not apply with respect to any
HP Modifications or portions or components thereof (i) not supplied by HP, (ii)
made in accordance to Crossroads' specifications or requests if the alleged
infringement relates to such specifications or requests, (iii) which are
modified after delivery by HP, 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 Crossroads continues allegedly infringing activity
after being notified thereof or after being informed of modifications that
would have avoided the alleged infringement. Crossroads will indemnify HP and
its officers, directors, agents and employees from all damages, settlements,
attorneys' fees and expenses (i) related to a claim of infringement or
misappropriation excluded from HP's indemnity obligation by the immediately
preceding sentence or (ii) in connection with Crossroads' activities regarding
the HP Modifications; provided that (1) Crossroads is promptly notified in
writing of a claim from a third party, (2) Crossroads shall have the sole
control of the defense and/or settlement thereof, and (3) HP furnishes to
Crossroads, at Crossroads' request, information reasonably available to HP for
such defense.
20. Limited Liability EXCEPT AS OTHERWISE PROVIDED BELOW AND
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY
SHALL BE LIABLE OR OBLIGATED UNDER ANY SECTION OF THIS AGREEMENT OR UNDER
CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (A)
FOR ANY AMOUNTS IN EXCESS OF THE GREATER OF EITHER (1) A MAXIMUM OF $1,500,000
OR (II) THE AGGREGATE OF THE LICENSE FEES AND ROYALTIES PAID TO IT (IN THE CASE
OF CROSSROADS) OR PAID OR OWED BY IT (IN THE CASE OF HP) HEREUNDER, OR (B) OR
ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES, LOST PROFITS (EXCEPT AMOUNTS PAYABLE
UNDER SECTION 3) OR LOST DATA OR (C) COST OF PROCUREMENT OF SUBSTITUTE GOODS,
TECHNOLOGY OR SERVICES. THE LIMITATIONS IN THIS SECTION 20 SHALL NOT APPLY TO
BREACHES OF SECTION 2.c, 16 or 23.e OR TO ACTIONS OF HP BEYOND THE SCOPE OF THE
LICENSE GRANT HEREUNDER.
21. Assignment. 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.
22. Notices. 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:
HP: Hewlett-Packard Company
Storage Systems Division
700 71st Avenue
Greeley, Colorado 80634
Attention: Daryl Stolte
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<PAGE> 9
Crossroads: Crossroads Systems, Inc.
100 Century Center, Suite 100
San Jose, California 95112
Attention: Barbara Bardach
23. General.
a. Upon execution by both parties, this Agreement shall constitute
the entire agreement between the parties with respect to the subject matter
hereof and supersedes all prior written and oral negotiations, agreements,
communications and understandings relating to the subject matter hereof. This
Agreement shall not be modified except by a written agreement dated subsequent
to the date of this Agreement and signed on behalf of HP and Crossroads by
their respective duly authorized representatives.
b. This Agreement shall be governed by and construed under the laws
of the State of California and the United States without regard to conflicts of
laws provisions thereof and without regard to the United Nations Convention on
Contracts for the International Sale of Goods.
c. The sole jurisdiction and venue for actions related to the
subject matter of this Agreement shall be the California state and U.S. federal
courts having within their jurisdiction Crossroads' principal place of business
in California. Both parties hereby consent to the jurisdiction of such courts
and agree that process may be served in the manner provided herein for giving
notices or otherwise as allowed by California state or U.S. federal law. If
either Crossroads or HP employs attorneys to enforce any rights arising out of
or relating to this Agreement, the prevailing party shall be entitled to
recover its reasonable attorneys' fees, costs and other expenses.
d. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any prior, concurrent or subsequent breach of the same
or any other provisions hereof, and no waiver shall be effective unless made in
writing and signed by an authorized representative of the waiving party.
e. 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 Licensed
Materials or related documentation 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).
f. If any provision of this Agreement shall be held by a court of
competent jurisdiction to be illegal, invalid 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.
g. The Section headings used in this Agreement and the attached
Exhibits are intended for convenience only and shall not be deemed to
interpret, supersede or modify any provisions.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above. All signed copies of this Agreement shall be deemed
originals.
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<PAGE> 10
CROSSROADS SYSTEMS, INC. HEWLETT-PACKARD COMPANY
By: /s/ BARBARA C. BARDACH By: /s/ TARA BUNCH
------------------------------------ -------------------------------
Barbara C. Bardach Tara Bunch
- --------------------------------------- ----------------------------------
Printed Name Printed Name
Vice President, Business Development R&D Manager
- -------------------------------------- ----------------------------------
Title Title
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EXHIBIT A
Hardware Designs
The Crossroads Systems CrossPoint 4200 product specification is the base design
for, and constitutes the hardware design referenced in the license agreement.
The product specification is supported by documentation provided by Crossroads
Systems, Inc. to Hewlett-Packard for the following part numbers:
Tacoma System Structure
Bare board p/n = AC94450
Board assembly p/n = AD90050
Nimbus PCI Card
Bare board p/n = AC94461
Board assembly p/n = AD90061
Tacoma is a follow-on product to the CP4100 Fibre Channel to SCSI Router. All
product features of Tacoma are identical to the CP4100 with the exception of the
SCSI Interface. Tacoma incorporates the Symbios Logic 53C876 Dual SCSI chip,
giving Tacoma 2 SCSI ports.
Tacoma is an embedded system that provides connectivity between Fibre Channel
devices and SCSI devices. The hardware subsystem is comprised of an embedded
80960 RISC controller, a programmable SCSI controller, a Fibre Channel
controller, an Ethernet (802.3) controller, and a serial port. The design of
Tacoma is optimized to support data flow between the Fibre Channel and SCSI
controllers, and support out of band connections via the Ethernet or serial
ports. The 80960 controller has its own program execution memory space to
achieve parallelism with the data flow between the Fibre Channel and SCSI
controllers.
The main controller of the system is an i960RP processor running VxWorks and
handles the necessary protocol conversions to transfer data between the Fibre
Channel and SCSI connections. The 80960RP processor contains an integrated JF
core, a PCI-PCI bridge, and a local 960 bus. The industry standard 16550 UART is
used for the serial port interface. The AM79C970A Ethernet controller provides a
bus master interface and supervises the Ethernet port.
The Tachyon controller chip provides all Fibre channel protocol support. The
Fibre Channel connector is GLM based. The supported GLM types are Copper, Short
Wave Optical, and Long Wave Optical. The RP memory design consists of 4Mbyte of
DRAM. The PCI memory controller design is implemented in an Altera FPGA. The PCI
memory consists of 4Mbyte of DRAM plus parity.
The SCSI interface is a Symbios Logic 53C876 SCSI controllers. The driver
circuitry is contained on the SCSI Interface Board (SIB), which allows the
Tacoma product to be configured with differential or single-ended interfaces by
populating the appropriate SCSI Interface Boards.
Nimbus is an evaluation platform for a GBIC interface design. The Nimbus
implementation is a PCI Fibre channel Host Bus Adapter using the Tachyon
controller and the Interphase TPI iChip. The Fibre Channel interface uses
serializer/deserializer circuitry to connect the Tachyon to an industry standard
GBIC interface.
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EXHIBIT A (cont'd)
Figure 1. Tacoma Architecture
[FLOW CHART]
Figure 2. Nimbus Architecture
[FLOW CHART]
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EXHIBIT B
Software
Crossroads Software shall constitute that firmware providing functionality as
described in the attached document CP4200 Product Specification, with extended
support for two SCSI busses as per Exhibit A. Specifically, this software
refers to the object files listed herein; with the specific exception of those
elements provided under license to Crossroads by third parties. These elements
excepted include VxWorks and associated elements.
Source files constitute the source files from which the object files/modules
are derived; specifically, the set of C source, Assembler source, and
associated Makefiles necessary to reasonably reproduce the object files
required to provide the functionality defined in the CP4200 Product
Specification.
<TABLE>
<CAPTION>
Object Modules:
<S> <C> <C> <C> <C> <C> <C>
01/31/98 03:05a 5,532 960rp.o 01/31/98 03:04a 56,783 vscsi.o
01/31/98 03:05a 1,838 asm.o 01/31/98 03:04a 20,506 vscsitgt.o
01/31/98 03:05a 1,308 boot.o 01/31/98 03:03a 1,208 bridutil.o
01/31/98 03:04a 8,306 coff.o 01/31/98 03:03a 6,550 icslib.o
01/31/98 03:05a 15,021 diag.o 01/31/98 03:03a 5,418 icssupt.o
01/31/98 03:05a 3,584 download.o 01/31/98 03:04a 166,945 util.o
01/31/98 03:05a 1,266 expand.o 01/31/98 03:04a 1,040 asm.o
01/31/98 03:05a 501 ibr.o 01/31/98 03:04a 44,920 async.o
01/31/98 03:05a 10,762 main.o 01/31/98 03:04a 45,802 asyncConfig.o
01/31/98 03:05a 21,206 mon.Z.o 01/31/98 03:04a 8,684 enet.o
01/31/98 03:05a 12,244 pattern.o 01/31/98 03:04a 8,612 if InPci.o
01/31/98 03:05a 5,750 pcnet.o 01/31/98 03:04a 2,185 drv.o
01/31/98 03:05a 4,640 sym.o 01/31/98 03:04a 10,112 ffDrv.o
01/31/98 03:05a 8,193 tach.o 01/31/98 03:04a 4,944 fcConfig.o
01/31/98 03:05a 3,092 uart.o 01/31/98 03:04a 2,454 fcname.o
01/31/98 03:05a 363,200 vxWorks.Z.o 01/31/98 03:04a 3,221 fcToScsi.o
01/31/98 03:04a 289,729 router.o 01/31/98 03:04a 3,700 mi.o
01/31/98 03:04a 124,511 bridge.o 01/31/98 03:04a 2,523 nportphys.o
01/31/98 03:04a 85,615 fc2lib.o 01/31/98 03:04a 2,468 npstats.o
01/31/98 03:04a 44,573 comlib.o 01/31/98 03:04a 3,247 scsiConfig.o
01/31/98 03:03a 3,586 fc2bls.o 01/31/98 03:04a 3,976 scsiPD.o
01/31/98 03:03a 1,932 fc2buf.o 01/31/98 03:04a 2,237 scsistats.o
01/31/98 03:03a 1,327 fc2defs.o 01/31/98 03:04a 3,243 scsitofc.o
01/31/98 03:03a 18,310 fc2els.o 01/31/98 03:04a 103,537 snmp.o
01/31/98 03:03a 1,647 fc2fc4.o 01/31/98 03:04a 1,843 snmplcmp.o
01/31/98 03:03a 3,673 fc2init.o 01/31/98 03:04a 4,103 snmplf.o
01/31/38 03:04a 3,393 fc2scsi.o 01/31/98 03:04a 6,029 snmploLib.o
01/31/98 03:04a 9,159 fc2seq.o 01/31/98 03:04a 10,752 snmplp.o
01/31/98 03:03a 8,224 fc2srvc.o 01/31/98 03:04a 50,054 snmpMib2.o
01/31/98 03:03a 11,702 tachinit.o 01/31/98 03:04a 2,771 snmpSnmp.o
01/31/98 03:03a 19,167 tachintr.o 01/31/98 03:04a 3,181 snmpSystem.o
01/31/98 03:03a 42,169 tachlib.o 01/31/98 03:04a 4,313 snmpTcp.o
01/31/98 03:03a 9,576 tachsend.o 01/31/98 03:04a 2,610 snmpUdp.o
01/31/98 03:03a 6,680 tachutil.o
</TABLE>
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EXHIBIT C
LICENSE FEES
Code and Hardware Fees
<TABLE>
<S> <C>
Binary Code $195,000
Source Code $395,000
Hardware Design $ 95,000
</TABLE>
Payment Schedule
<TABLE>
<S> <C>
1997 $ 95,000 PAID
1998 $ 100,000 PAID
1998 $ 50,000 PAID
1998 $ 45,000 due August 15th
--------------------------
$ 290,000
</TABLE>
Royalties (per CP4200 Board)
<TABLE>
<S> <C>
0-500 at $275
> 500 - 2000 at $240
> 2K - 5000 at $220
> 5000 at $175
</TABLE>
Payment Schedule
Quarterly (CALENDAR QUARTERS)
Maintenance Fees
<TABLE>
<S> <C>
Hardware: $20,000 annually, pre-paid
Software: $40,000 annually, pre-paid
</TABLE>
Payment Schedule
November 15th
14
<PAGE> 15
EXHIBIT D
Deliverables Schedule
This document is intended to describe HP's expectations as to the deliverables
from Crossroads concerning the Firmware License and Maintenance agreement for
the CrossPoint 4200. HP's primary objective is to ensure the proper
functionality and interfaces within the controller bridge firmware (CBFW) that
will allow HP to develop, debug and add value for HP's manufactured Fibre
Channel to SCSI Bridge/Router hardware via Value Added Software (VAS).
Firmware Deliverables
Documentation
HP requires the following deliverables of textual documentation as an
engineering reference specification for the firmware component:
o HP/Crossroads CP4200 Interface Specification Details scope and API's
of Crossroads Firmware
o CR External Reference Specification (ERS)
o Detailing configuration, functionality, and debug operations
o CBFW Project Schedule - detailing when functionality availability and
lifecycle of the f/w
o Test plan and quality metrics
Development Environment
HP expects documents and help getting the VxWorks/Tornado development & debug
underway, especially in terms of:
o Special compilers
o Boot source code - to aid in bringing up h/w
o Board support package knowledge
o Makefiles - for directory structure and build options, compile flags,
etc
o Documentation on tracing/logging tools
o Documentation on other debug tools
It is preferable that HP and Crossroads have as similar a development/debug
environment as possible to prevent build discrepancy problems as well as shared
debug tools and processes for finding problems.
Firmware Code Drop Process
HP expects the following from Crossroads regarding firmware code updates:
o Documentation regarding the release: Criteria/reason for release
o Functionality included, defects fixed, etc Any known problems with the
release
o Code has been run through agreed upon HP/Crossroads test suite
o Notification of code placement in the SSD account on the Crossroads
FTP site
To this end HP will need access to (or at least a report of) Crossroads' defect
list in order to make decisions about firmware upgrades, especially in a post MR
timeframe.
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<PAGE> 16
EXHIBIT D (cont'd)
Firmware Development Deliverables & Functionality
The Crossroads Firmware API will be jointly defined by HP and Crossroads. The
functionality of these APIs will be included as part of the licensed materials.
The schedule for delivery of this functionality will be jointly defined as well.
Hardware Deliverables
This section identifies HP's expectations as to the deliverables from Crossroads
concerning the Hardware License and Maintenance agreement for the CrossPoint
4200.
Printed Circuit Assembly(PCA)
CP4200 PCA requirements include:
o CP4200 PCA schematic drawings (OrCAD format).
o CP4200 PCA parts list with reference designators and manufacturing
part numbers.
o CP4200 PCA board blank drawing and interconnect artwork for each layer
(Gerber format).
o Nimbus PCA design information (GBIC board) including schematic, parts
list and artwork.
Programmable Logic
There are four programmable logic devices within the CP4200 design. One is an
Altera FPGA and three are small PAL chips. HP needs the following deliverables
in order to understand, duplicate and support the CP4200 design:
o FPGA design source written in AHDL.
o FPGA programming specification in the Altera programming format.
o FPGA simulation files for design validation to use with Altera FPGA
development tools.
o PAL design source for each of the three PALs written for the PALASM
tool.
o PAL programming files, one for each of the three PALs for use with a
DATAIO programmer.
o Master parts for FPGA and PALs.
Documentation
HP needs the following deliverables of textual documentation as an engineering
reference specification for the hardware component:
o Verrazano Statement of Design Requirements
o Verrazano Strategic Specification
o Varrazano HW Engineering Verification Plan
o Garner (Altera) static timing analysis
o Operational specifications to include power and cooling requirements
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EXHIBIT E
Maintenance and Support
1. First and Second Level Support. HP shall be responsible for providing first
and second level technical support for HP Modifications, HP Boards and HP
Products to its distributors, other customers (including, without limitation,
OEM licenses) and end-users.
2. Third Level Support. Crossroads shall provide third level technical
maintenance and support by phone during Crossroads' normal business hours for
the Licensed Materials only to HP for technical issues and problems with the
Licensed Materials that HP is unable to resolve on its own as detailed in this
Exhibit E. Emergency support by pager is available during all other hours at the
rate of $250 per hour (one-hour minimum). [NOTE: times moved here from other
sections]
3. Technical Contacts. 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. Maintenance and support by Crossroads
shall include, but not be limited to providing:
(a) defect corrections, workarounds and defect reports as more
particularly described below;
(b) on-site service in those instances where an HP Customer Engineer (CE)
has made a service visit and Crossroads and HP agree they have been
unable to correct the problem by telephone. Upon HP's request, travel
arrangements shall be made upon the next reasonably available
transportation;
(c) prompt communication and assistance to HP in the event Crossroads
determines a problem is related to HP Products.
(d) updates and instructions for implementation;
(e) a designated, knowledgeable support contact for providing technical
support.
4. Software Maintenance and Support
a. Crossroads shall provide warranty support which includes delivery to HP
of any revisions to the Licensed Software (binary) and documentation created no
later than Crossroads provides them to any of its other customers.
b. Crossroads shall provide HP with all modifications, updates, bug fixes,
and corrections to Licensed Software which Crossroads releases during the
warranty period and subsequent maintenance periods no later than it provides
them to any of its other customers. A technical specialist will return HP's
initial call within four (4) business hours during the Prime Shift. Crossroads
shall use its best efforts to provide bug fixes to HP on a discontinued version
of Licensed Software for 6 months after that version is discontinued.
c. If the cause of the problem is in the Crossroads' software, then
Crossroads shall use its best efforts to fix the problem and provide HP with an
update to the Licensed Software.
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EXHIBIT E (cont'd)
5. Hardware Maintenance and Support
a. Crossroads shall provide warranty support, which includes delivery to HP
of any revisions to the Licensed Hardware and documentation created no later
than Crossroads provides them to any of its other customers.
b. Crossroads shall provide HP with all modifications, updates, bug fixes,
and corrections to Licensed Hardware which Crossroads releases during the
warranty period and subsequent maintenance periods no later than it provides
them to any of its other customers. A technical specialist will return HP's
initial call within four (4) business hours during the Prime Shift. Crossroads
shall use its best efforts to provide bug fixes to HP on a discontinued version
of Licensed Software for 6 months after that version is discontinued.
c. If the cause of the problem is in the Crossroads' hardware, then
Crossroads shall use its best efforts to fix the problem and provide HP with an
update to the Licensed Hardware.
6. Defect Corrections. Crossroads agrees to provide support to HP or, at HP's
request, directly to end-user customers, to correct the following
classifications of defects in the time period specified:
a) Severity 1: Critical (8 hours) - Problem which prevents or seriously
impairs the performance of substantially all major functions by either
HP or a customer of HP.
b) Severity 2: Severe Impact (3 days) - Problem which prevents or
seriously impairs the performance of a major function by either HP or
a customer of HP.
c) Severity 3: Degraded Operation (2 weeks) - Problem which disables or
impairs the performance of a minor function.
d) Severity 4: Minor Impact (Next Release of within 12 months) - Problem
in a rarely used function or problem for which an easy and effective
work around is available. Correction is expected either in the next
release within 4-12 months after report of problem or within 12 months
if no release is available.
e) Severity 5: Negligible Impact (No time limit) - Documentation error or
problem not needed by either HP or customer of HP.
7. Defect Reports. Crossroads shall notify HP of the resolution of any defects
and provide HP with the necessary data, parts, equipment and/or software to
allow HP to distribute the solution to its customers. HP may periodically
provide Crossroads with available repair data or defect reports including field
failure rate data, inspection tests, and strife tests. Crossroads shall provide
to HP, in accordance with the schedule mutually established by HP, available
repair data from Crossroads' service facilities, as well as Crossroads'
associated engineering action plans.
8. Maintenance Fees. Upon HP-SSD's payment of the annual hardware and software
maintenance fees set forth in Exhibit C, Crossroads will provide to HP
maintenance services for the Licensed Materials as specified in this Exhibit E.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent of the use in this Registration Statement on Form S-1 of
our report dated September 17, 1999 relating to the consolidated financial
statements and financial statement schedule 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
October 13, 1999
