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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 27, 1999
REGISTRATION NO. 333-85505
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
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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DELAWARE 3577 74-2846643
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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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. 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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
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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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE REGISTRATION FEE
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Common stock, $0.001 par value.............................. $52,325,000(1) $14,547(2)
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(1) Includes 525,000 shares as to which the Registrant has granted the
Underwriters an option to cover over-allotments.
(2) $12,788 was previously paid on August 16, 1999.
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 SEPTEMBER 27, 1999
PROSPECTUS
3,500,000 SHARES
[CROSSROADS LOGO]
COMMON STOCK
This is an initial public offering of shares of common stock of Crossroads
Systems, Inc. Crossroads expects that the public offering price will be between
$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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PER SHARE TOTAL
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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, 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.]
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TABLE OF CONTENTS
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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
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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.
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[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]
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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. We sell our products
primarily to major manufacturers of servers and storage systems. These
manufacturers sell our storage routers to end-user organizations as a key
component of storage area networks. A storage area network, or SAN, is a high
speed computer network that facilitates the transfer of data among servers and
storage systems using high performance data communications that follow
industry-accepted rules and conventions, which are commonly referred to as
computer protocols. Fibre Channel is the accepted protocol for use in SANs.
Storage routers are computer equipment that connect servers and storage systems
in a SAN to enable rapid, seamless communication among devices that utilize
different protocols for the input/output, or I/O, of data within a computing
system.
By using our storage routers to serve as the input/output interconnect
between a SAN 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. Specifically, our storage routers decrease
congestion in the transfer of data within a network, reduce the time required to
back up data by storing it on tapes or similar media where it is less vulnerable
to system problems that can corrupt data, improve utilization of storage
resources and preserve and enhance existing server and storage system
investments.
Manufacturers of computer equipment, often referred to as original
equipment manufacturers or OEMs, that have purchased in excess of $50,000 of our
products include ADIC, ATL Products, Compaq, Dell, Exabyte, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, INRANGE, McDATA and StorageTek. To date,
we have sold approximately 6,000 storage routers to our OEM customers. We have
also recently begun to sell our products through companies that distribute,
resell, or integrate our products as part of a complete SAN solution. These
distributors, resellers and system integrators include Andataco, Bell
Microproducts, Cranel, Datalink and Pinacor, each of which has sold our products
to end-user organizations.
Information management has become a strategic imperative for many
organizations today. The challenges of managing information systems and data
have intensified in recent years due to increasing amounts of data used in
performing business processes, growth in the number of users accessing that data
and demand for data 24 hours-a-day, seven days-a-week, 365 days-a-year. These
challenges have become more pronounced because the rate of data transfer between
storage systems and network servers has failed to keep pace with the growth in
data storage capacity and microprocessor speeds. The result is an interconnect
bottleneck which impedes data access and can substantially diminish application
performance. The limitations of today's most widely deployed I/O protocol,
called the Small Computer System Interface, or SCSI, and today's most commonly
used storage architecture, the point-to-point architecture, contribute to this
interconnect bottleneck.
Fibre Channel was established as an American National Standards Institute
standard data transmission protocol in 1994 and has emerged as a means to
address many of the current limitations of information management. The Fibre
Channel protocol has been the key element in enabling the evolution of the SAN.
The storage router allows multiple I/O protocols, such as the SCSI and Fibre
Channel protocols, to coexist in a SAN today. This enables SANs to use the
existing data stored on SCSI devices, and therefore, is critical to the rapid
deployment and widespread adoption of SANs. As new computer protocols are
introduced in the future, storage routers will be increasingly essential to
enable rapid, seamless communication among servers, storage systems and SAN
devices that utilize diverse protocols.
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Our storage routers offer organizations a number of important benefits
today by:
- Facilitating Efficient Backup and Recovery. In traditional computer
networks, system backup is accomplished by transferring data from
applications and databases over the local area network to tape drives or
other media where the data is safely stored. This process consumes
valuable network resources to complete. Our storage routers enable
organizations to effect their backup processes over the SAN rather than
through the network. By using a SAN, the local area network has greater
availability to perform other business critical operations. In addition,
our products allow organizations to store the same data at more than one
location at distances of up to 10 kilometers so that they can restore
data from multiple sites 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. We have tested and verified this interoperability in
over 2,500 different configurations of SANs.
- Increasing Scalability and Implementation Flexibility. Our storage
routers are designed to operate in any computing environment and are
capable of scaling to address the growing needs of organizations to
support more users, use more devices and applications within their
systems and transfer data over longer distances than was possible in
traditional 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 System Investments. Our storage
routers enable an organization's continued use of its large installed
base of SCSI storage systems within a SAN. 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 relationships with manufacturers of
computer systems and components and by extending the interoperability of our
products with other components of the SAN. We also plan to leverage our
significant technology expertise to remain at the forefront of the SAN market
and develop routing solutions for emerging market opportunities. For example, we
are currently developing I/O routing products that incorporate emerging
protocols, including Next Generation I/O, or NGIO, and Future I/O, as well as
System I/O, the recently announced merger of NGIO and Future I/O into a single
standard. Furthermore, we intend to continue building relationships with leading
storage management software vendors, such as BMC Software, Computer Associates,
Legato Systems, Tivoli Systems and VERITAS Software, to ensure the integration
of their solutions with our storage routers for improved SAN management. We
believe our storage routers represent a critical component of SANs today and
will serve an important role in the ongoing evolution of SANs.
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.
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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.
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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.
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NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
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1996 1997 1998 1998 1999
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(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.............................. $ 160 $ 821 $ 2,930 $ 1,721 $11,728
Other revenue................................ 332 188 279 276 65
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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.
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JULY 31, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(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 52% and 71% of our product revenue. To reduce our
dependence on the 4100 product, we must successfully develop and introduce to
market new products and product enhancements in a timely manner. Even if we are
able to develop and commercially introduce new products and enhancements, 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.
We rely 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
supply products to 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 and Chief Executive Officer, 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
commencing in 2000, which will integrate manufacturing, resource planning and
financial accounting. We expect these changes to be disruptive, time-consuming
and expensive processes. If we are unsuccessful or experience delays in
effecting these changes, our 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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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 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, 22,088,175, 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 25,588,175 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 22,088,175 shares will
become available for resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
NUMBER OF SHARES/% OF
TOTAL SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
------------------------ ------------------------------------------------------
<S> <C>
3,500,000/14% Immediately (except to the extent purchased by our
affiliates).
18,211,574/71% 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. We currently do not
have any specific plans with regard to the proceeds from this offering, and
intend to use the net proceeds of this offering for general corporate purposes,
including capital expenditures, working capital and expansion of our research
and development and sales and marketing activities. 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 currently anticipate using at least a portion of the proceeds of
this offering to pay for these capital expenditures. In addition, we may use a
portion of the net proceeds to acquire businesses, products or technologies that
are complementary to our current or future business and product lines. Although
we are currently not subject to any agreement or letter of intent with respect
to potential acquisitions, we have from time to time engaged in acquisition
discussions with other parties. Our management will have significant flexibility
in applying the net proceeds of this offering. Pending such uses, we will invest
the net proceeds of this offering in short-term, investment grade,
interest-bearing instruments. Please see "Risk Factors -- 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 and
increase our stock price" for a discussion regarding the broad latitude we will
have with regard to the proceeds of this offering.
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.
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.
24
<PAGE> 26
Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our first
generation product -- the 4100 -- has accounted for 52% and 71% of our product
revenue in fiscal 1998 and in the nine month period ended July 31, 1999,
respectively. Moreover, many of our current agreements with our OEM customers
include provisions requiring reductions in the sales price for our storage
routers over time. As a result, we expect to experience declines in the average
unit selling prices for our products in the future. Such declines may be 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.
We currently outsource 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 hired additional personnel, purchased
the necessary equipment, planned customer qualification efforts and leased
additional facilities. We expect the total cost of this transition to be less
than $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. Please see "Risk Factors -- We are
transitioning the final assembly and test portion of our manufacturing process
to an in-house facility, which will increase our fixed costs and expose us to
increased inventory risks" for a discussion of risks associated with the
in-house performance of final assembly and testing for our products.
In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998 and the nine
months ended July 31, 1999 aggregating approximately $5.0 million. Deferred
compensation represents, for accounting purposes, the difference between the
deemed fair value of the common stock underlying these options and their
exercise price at the date of grant. The difference has been recorded as
deferred stock-based compensation and is being amortized over the vesting period
of the applicable options, generally four years. Of the total deferred
compensation amount, $575,000 has been amortized as of July 31, 1999. The
amortization of deferred compensation is recorded as an operating expense. We
currently expect to amortize the remaining amounts of deferred compensation as
of July 31, 1999 in the periods indicated:
<TABLE>
<S> <C>
August 1, 1999 to October 31, 1999.............. $ 700,000
November 1, 1999 to October 31, 2000............ 2,234,000
November 1, 2000 to October 31, 2001............ 950,000
November 1, 2001 to October 31, 2002............ 425,000
November 1, 2002 to July 31, 2003............... 80,000
----------
$4,389,000
==========
</TABLE>
We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $11.8
million at July 31, 1999. Moreover, we anticipate that we will continue to incur
net losses on both a quarterly and annual basis for the foreseeable
25
<PAGE> 27
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.
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, incremental sales to new OEM
customers of $1.7 million, and the introduction of our 4200 storage router
product in June 1998 resulting in an increase in revenue of $1.4 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
26
<PAGE> 28
$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 $3.5 million 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.
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.
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<PAGE> 29
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.
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 $800,000
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.
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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>
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 from the license of a product design. We do not expect
significant other revenue on a recurring basis.
Furthermore, we have experienced significant fluctuations in our gross
margin, due to a number of factors, including declines in average selling
prices. The decrease in gross margin from 54.0% in the fiscal
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<PAGE> 31
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 quarters ended April 30,
1998 and July 31, 1998, our gross margin was adversely affected by higher
royalties for licensed technology. In addition, in the fiscal quarter ended
October 31, 1998 we recorded a charge for excess and obsolete inventory related
to certain components for one of our products. In addition, our gross margins
declined in the 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).
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
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<PAGE> 32
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 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.
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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. Some of our
third-party suppliers have indicated that they are Year 2000 compliant. However,
others have indicated to us that they are in a Year 2000 compliance review
process. Therefore, at this time they are not in a position to provide us with
Year 2000 compliance assurance. 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
that Year 2000 compliance information which was available through compliance
databases, vendor Internet sites and vendor contacts was accurate, and
therefore, the consulting firm did not perform any direct testing of our
hardware or software. The project consisted of Year 2000 planning, inventory and
assessment of our inventory components, software, core business areas and
processes, and business impact analysis. The independent consulting firm
determined that we are subject to several potential Year 2000 issues, primarily
involving third parties such as purchasers and critical vendors. The Year 2000
report we were provided gives us a Year 2000 readiness plan, an inventory of
critical components of our business and has identified the systems and processes
that are critical to our business operations. None of the components reviewed
were identified as non-Year 2000 ready, which indicates that such components are
either Year 2000 compliant or can be made Year 2000 compliant through available
upgrades.
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.
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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. We sell our products
primarily to major manufacturers of servers and storage systems. These
manufacturers sell our storage routers to end-user organizations as a key
component of storage area networks. A storage area network, or SAN, is a high
speed computer network that facilitates the transfer of data among servers and
storage systems using high performance data communications that follow
industry-accepted rules and conventions, which are commonly referred to as
computer protocols. Fibre Channel is the accepted protocol for use in SANs.
Storage routers are computer equipment that connect servers and storage systems
in a SAN to enable rapid, seamless communication among devices that utilize
different protocols for the input/output, or I/O, of data within a computing
system.
By using our storage routers to serve as the input/output interconnect
between a SAN 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. Specifically, our storage routers decrease
congestion in the transfer of data within a network, reduce the time required to
back up data by storing it on tapes or similar media where it is less vulnerable
to system problems that can corrupt data, improve utilization of storage
resources and preserve and enhance existing server and storage system
investments.
Manufacturers of computer equipment, often referred to as original
equipment manufacturers or OEMs, that have purchased in excess of $50,000 of our
products include ADIC, ATL Products, Compaq, Dell, Exabyte, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, INRANGE, McDATA and StorageTek. To date,
we have sold approximately 6,000 storage routers to our OEM customers. We have
also recently begun to sell our products through companies that distribute,
resell, or integrate our products as part of a complete SAN solution. These
distributors, resellers and system integrators include Andataco, Bell
Microproducts, Cranel, Datalink and Pinacor, each of which has sold our products
to end-user organizations.
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 business critical data. The voluminous amount of data
generated, stored, protected and accessed has created increasingly serious
information management challenges. Moreover, the greater number and more diverse
types of users accessing data, as well as the proliferation of applications
across many different operating systems and interconnect protocols, have
exacerbated these challenges. Organizations must therefore implement processes
and systems that effectively and efficiently store, manage and ensure the
integrity and availability of data 24 hours-a-day, seven days-a-week, 365
days-a-year.
The Interconnect Bottleneck
While data storage capacity and microprocessor speeds have increased
dramatically, the speed at which information is transmitted from storage systems
to microprocessors has not increased nearly as rapidly. This imbalance has
resulted in an interconnect bottleneck, commonly referred to as the I/O
bottleneck. This bottleneck causes large delays in the efficient flow of data
within a network, impeding data access by clients and servers, diminishing
application performance and limiting the ability of the network to handle other
traffic. The I/O bottleneck persists due, in large part, to the limitations of
traditional interconnect protocols used to transport data and the point-to-point
storage system architectures that are used in the vast majority of enterprise
computing systems today.
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I/O bottlenecks generally occur across two data paths within a computing
system. The first is the data path between the microprocessor and the interface,
referred to as the I/O interface, that permits the server to communicate with
the external device attached to it. Today, this data path is a bus which shares
data transmission across multiple devices using the peripheral component
interface, or PCI, protocol. The second data path is between a server's I/O
interface and storage systems, which is typically interconnected by the small
computer system interface, or SCSI, protocol. Both PCI and SCSI have inherent
limitations in throughput, interconnect distances, scalability, manageability
and data accessibility. For example, a single SCSI bus enables data throughput
of only 40 or 80 megabytes per second, can transmit data over a maximum of 25
meters and can support a maximum of 15 devices. Despite these limitations, SCSI
currently is the most prevalent interconnect approach and is expected to remain
an important protocol for storage systems in the future.
The storage architecture most prevalent today relies on a dedicated
point-to-point SCSI connection between each server and a storage system attached
to the server. In effect, each pair becomes an island: each server must move
data to another server across the local area computer network, and only one
server can communicate the data requested by a requesting computer on the
network. The following graphic depicts the standard point-to-point architecture
of a local area network with "islands" of storage:
[Description of Graphic:
The graphic depicts a standard local area network, or LAN. Across the top
of the diagram are three "Storage Devices": a "Tape Storage" device and two
"Disk Storage" devices. These storage devices are connected via SCSJ connections
to three "Servers": a "Unit" server, a "Window NT" server and a "Netware"
server. These three servers are connected to a "Local Area Network" (depicted in
the form of a cloud), to which various "Network End Users (Clients)"
(represented by computer terminals) are attached.]
Because users can access information residing on a storage system only via
the dedicated server, data throughput is limited, the risk of data loss is
increased and information is more difficult to access and manage. Furthermore,
as the number of data requests received by the server and the number of
applications running on the server grow, I/O congestion within the server
increases and server performance decreases. As a result, many organizations are
changing their storage system architectures to address I/O bottlenecks and their
overall information management challenges.
Addressing the I/O Bottleneck with Fibre Channel Storage Area Networks
Fibre Channel has received broad recognition as a means to address many of
the current limitations and difficulties of information management. Fibre
Channel is an industry standard interconnect protocol developed in the early
1990s and approved by the American National Standards Institute in 1994. Fibre
Channel enables data throughput of more than 100 megabytes per second, can
transmit data over distances of up to 10 kilometers and can interconnect
hundreds of 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 SAN is a high-speed network dedicated to storage that allows different
types of storage devices, such as tape libraries and disk arrays, to be shared
by all end users through network servers. While SANs have only recently emerged
in open systems environments for Unix and Windows NT, SANs have been in place
for many years in mainframe systems using protocols such as IBM's ESCON. Similar
to the way in which local and wide area networks permit any end user on the
network to access any network server, a
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<PAGE> 37
SAN creates a pool of storage that can be shared by multiple servers. Through
various configurations similar to those used in traditional computer networks,
SANs can provide connectivity of any server with any storage system, and of
storage systems with each other, thereby enabling large amounts of data to be
shared regardless of the operating systems or applications. The following
describes the key interconnect components of the SAN:
- The Storage Hub is a Fibre Channel device which interconnects Fibre
Channel servers and storage systems via a single shared data
communication path. Accordingly, when a server and storage system are
communicating, no other communication can take place. This architecture
is known as an arbitrated loop. Leading suppliers of storage hubs include
Gadzoox Networks and Vixel.
- The Storage Switch is a Fibre Channel device which interconnects Fibre
Channel servers and storage systems via multiple communication paths.
Accordingly, multiple servers can communicate with multiple storage
systems simultaneously. This architecture is commonly known as a switched
fabric. Leading suppliers of storage switches include Ancor
Communications, Brocade Communications and McDATA.
- The Storage Router is a device which, in effect, translates
communications across multiple protocols, including both SCSI and Fibre
Channel, in order to interconnect servers, storage systems, hubs and
switches. By enabling data transport across multiple protocols, storage
routers facilitate seamless communication among the components of the
SAN. Storage routers enable point-to-point connections as well as
arbitrated loop (through hubs) and switched fabric (through switches)
connections. 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 provides a graphical depiction of a SAN in which storage and
servers are interconnected in their own network, enabling multiple servers to
access multiple storage devices. Storage routers are shown here attaching
existing SCSI disk, tape and optical storage to the SAN.
[DESCRIPTION OF GRAPHIC:
The graphic depicts a schematic diagram of a storage area network, or SAN.
Across the top of the diagram, two "Storage Devices" are shown: "Tape Storage"
and "Disk Storage." Each of these storage devices are connected via SCSI to two
"Storage Routers." These storage routers are connected to a "Fibre Channel SAN
with hubs/switches" (represented by a cloud) in the center of the diagram. The
SAN is connected to (i) three different servers running Unix, Windows NT and
Netware, respectively, (ii) "Fibre Channel Storage Devices," and (iii) via a
"Storage Router" via SCSI to a "SCSI Server." Each of the servers is in turn
connected to a "Local Area Network," to which various "Network End Users
(Clients)" are attached (represented by computer terminals).]
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<PAGE> 38
New Applications Enabled by Fibre Channel SANs
Key applications enabled by Fibre Channel SANs include the following:
- LAN-free Backup. Disruptions to a computer system can result in the loss
or corruption of data. Therefore, most organizations regularly move data
from storage systems to separate or off-site storage systems or data
centers where the data can be safely stored. This process is referred to
as information backup. Information backup is a major contributor to I/O
bottlenecks and can account for a significant portion of the data traffic
over local area networks, or LANs. As computing systems are increasingly
used on an around-the-clock basis, the available time during which data
backup can be performed has decreased, while the time required to perform
backup has increased. Unlike LAN-based backup involving multiple servers,
LAN-free backup moves individual server data directly to backup storage
systems across the SAN. By moving the data backup function from the LAN
to the SAN, LAN-free backup substantially reduces the I/O bottleneck in
today's networked computing systems.
- Server-free Backup. The development of server-free backup, also known as
third-party copy, will further extend the benefits of LAN-free backup by
virtually removing the server from the backup process. This application
will enable automated data movement between storage systems directly
across the SAN, allowing data backup while utilizing a very small
percentage of the server's capacity and internal I/O bandwidth. As a
result, organizations will no longer need to identify lengthy time
periods, or "backup windows," for taking servers off-line to perform
backup. Instead, servers can remain operational within the network during
backup, with application performance optimized for processor speed and
not encumbered by I/O limitations.
- Shared Storage. In today's point-to-point architecture, a significant
portion of storage resources are underutilized because they are dedicated
to a particular server which may not efficiently use the resource. With
SANs, multiple servers can share the same storage systems, enabling more
stored data to be available to more users, and reducing the need to add
more servers or storage devices to support greater storage requirements.
- Enhanced Data Integrity. SANs enhance data integrity by facilitating data
replication, or mirroring, and enhanced disaster tolerance and recovery.
In mirroring, two copies of all transaction data are created and
maintained on separate storage systems. Because SANs enable very high
data transmission rates and support transmission distances of up to 10
kilometers per Fibre Channel link, SANs enable mirroring across storage
systems that may be many kilometers apart from each other. These
capabilities also facilitate the creation and maintenance of offsite data
centers that support business recovery in the event data is lost at a
primary storage site due to a natural disaster or other disabling event.
The Need for Storage Routers to Facilitate the Adoption of SANs and Emerging
I/O Protocols
In order for organizations to effectively and efficiently deploy SANs in
today's computing environment, SANs must accommodate multiple, diverse I/O
protocols. Because many organizations will be reluctant to replace their
existing information technology investments on a wholesale basis or to stop
purchasing widely-available SCSI-compatible products, organizations will require
their Fibre Channel-based SANs to communicate with SCSI-based peripherals. This
suggests that organizations are more likely to seek solutions that will allow
them to attain the benefits of Fibre Channel technology today, while maximizing
investments in their installed base and future purchases of SCSI systems.
Several current and emerging I/O protocols are expected to be incorporated
into commercial SAN products. These protocols include asynchronous transfer mode
or ATM, which would support the high-speed transmission of data between multiple
SANs via wide area networks. In addition, several other current and future I/O
protocols under development are intended to address I/O bottlenecks. These
include Next Generation I/O (NGIO) and Future I/O, as well as the recently
announced System I/O which is expected to combine these two competing protocols
into a single protocol. As new protocols
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<PAGE> 39
achieve commercial acceptance, storage routers will be increasingly essential to
enable seamless communication among servers, storage systems and SAN devices
that utilize diverse protocols.
THE CROSSROADS SOLUTION
We are the leading provider of storage routing solutions for SANs. Our
storage routers interconnect Fibre Channel SANs with SCSI servers and SCSI
storage systems and are fully interoperable with commercially available Fibre
Channel storage hubs and storage switches. Our products incorporate proprietary
routing software that "intelligently" examines data traffic in the SAN to
prioritize transmission and minimize congestion in the flow of I/O transactions
between servers and storage systems. Our software provides critical
interoperability between diverse I/O protocols, supports rapid field deployment
of new configurations, enables sharing of storage resources by multiple servers
and can be adapted to new I/O protocols as they emerge. This proprietary
software is combined with software management tools and embedded in our system
hardware to form our storage routing solutions. Our system hardware consists of
industry-standard microprocessors, industry standard application specific
integrated circuits and our proprietary programmable logic. Our solutions enable
organizations to deploy SANs within their existing computing environments,
regardless of the operating systems and other protocols used in those
environments. Our solutions offer organizations the benefits of Fibre Channel
technology today, such as decreased network congestion and improved storage
scalability and manageability, while preserving existing server and storage
system investments. As a result, we believe our solutions help organizations
reduce their total cost of information management.
Our storage routers are purchased by end users 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 our own company, where we use two of our storage routers within a SAN
for LAN-free backup and disk storage attachment.
Our storage routers offer organizations a number of important benefits
today by:
Facilitating Efficient Backup and Recovery
Currently, our storage routers are used primarily to connect SCSI tape
storage systems to Fibre Channel SANs for LAN-free backup applications. By
allowing backup processes to be accomplished across the SAN, rather than across
the LAN, our storage routers enable the LAN to more effectively serve the needs
of end users in the network. LAN-free backup provides flexibility to conduct
backup at any time of day. This capability is increasingly important as users
demand network availability around the clock and from geographically dispersed
locations. In addition, we have software nearing completion which is designed to
enable server-free backup. Server-free backup will extend the benefits of our
LAN-free backup capability to offer further significant reductions in server
utilization. Finally, our storage routers support the distance capabilities of
Fibre Channel SANs, enabling long distance mirroring and the creation of
redundant data sites to restore data when a dedicated storage system fails or is
damaged by a natural disaster, debilitating computer virus or similar
catastrophic event.
Providing Broad, Verified Interoperability
Our storage routers are designed to interoperate with all commercially
available Fibre Channel storage hubs and storage switches, as well as other SAN
components, including storage systems, host bus adapters, operating systems and
storage management software. Our storage routers function in all Fibre Channel
configurations, providing organizations with flexibility in selecting their
storage architectures. Furthermore, our products support concurrent
transmissions of data utilizing multiple protocols, including SCSI and the
Internet Protocol. Our products can be deployed across diverse operating
systems, including NetWare, Unix and Windows NT. Our solutions have been tested
and verified in over 2,500 configurations through our Crossroads
Verified-Storage Area Network (CV-SAN) program, which is now available through
our Web-based Configurator.
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Increasing Scalability and Implementation Flexibility
Our storage routers are designed to operate in any computing environment
and are scalable to address the increasing needs of organizations for greater
throughput, broader connectivity and greater interconnect distance. Our products
also are designed to work in all Fibre Channel topologies so organizations can
initially deploy point-to-point or arbitrated loop solutions then move to
switched fabric solutions without changing their storage routers. Organizations
can incrementally add storage routers as backup demands grow or as new storage
devices are brought on-line. Our newest line of storage routers are configurable
to support transmission over copper or fiber optic lines, depending on the
distance requirements of the application.
Enhancing Manageability
Our storage routers serve as a platform for advanced storage management
functions. Our products support remote diagnostics and remote management as well
as real-time application monitoring. In addition, our software enhances
management of storage systems that are attached to the storage router by
translating network management protocols to storage management protocols. To
this end, we work closely with leading independent software vendors, such as BMC
Software, Computer Associates, Hewlett-Packard and Tivoli Systems, to ensure
that our storage routers can be managed through their network management
software products.
Leveraging Existing Server and Storage System Investments
Organizations have made large investments in SCSI servers and storage
systems used in traditional point-to-point architectures. In addition to
enabling organizations to preserve these existing investments, our storage
routers improve the functionality of those systems when operated in conjunction
with a SAN. For example, by connecting SCSI-only servers to Fibre Channel SANs,
which is referred to as server migration, our storage routers enable
organizations to deploy SAN applications, such as LAN-free backup and shared
storage systems, using those servers. By allowing consolidation of storage
resources in a centralized facility, our solutions also minimize the need for
costly distributed storage centers and enable more efficient use of existing
storage capacity.
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 products
to new and emerging platforms. In order to accelerate the interoperability of
our products, we developed the Crossroads Verified-Storage Area Network program.
We believe that CV-SAN differentiates our company by proactively ensuring the
interoperability of our products with other SAN components. Through our CV-SAN
initiative, we have tested and verified the interoperability of over 2,500
different SAN configurations using our storage routers. We intend to continue
leveraging our technology expertise to expand and improve our storage routing
solutions and gain additional market share.
Leverage and Expand Our Relationships with Leading OEM Customers
We believe that working with leading OEMs enables us to effectively
distribute our products, anticipate the needs of enterprises, introduce new
products to meet those needs and target new markets.
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<PAGE> 41
Since OEMs must expend substantial resources to qualify SAN solutions and ensure
interoperability, they tend to qualify only a few vendors for a particular
product. As a result, we believe that our success depends heavily on maintaining
and augmenting our OEM relationships. To date, we have cultivated customer
relationships with leading server and storage system OEMs, including ADIC, ATL
Products, Compaq, Dell, 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 embedded systems,
routing algorithms and existing and emerging I/O protocols to remain at the
forefront of the SAN market. We believe this expertise has enabled us to
establish our market leadership in our core market of storage routing. We intend
to extend our technological capabilities to emerging I/O routing market
opportunities. We are currently developing:
- a SAN-to-WAN router, which 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 both 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 I/O routing solutions.
To this end, we have developed relationships with leading software vendors,
including BMC Software, Computer Associates, Legato Systems, Tivoli Systems and
VERITAS Software. The focus of our strategic initiatives with these companies
has been to ensure the integration of our storage 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
products with their software.
Expand Distribution Channels
In addition to building upon our established OEM sales channel, we believe
that we can achieve additional growth by selling through distributors, resellers
and system integrators. To date, we have developed relationships with Andataco,
Bdata, Bell Microproducts, Cranel, Datalink, EIE Data Media Products-Japan,
Pinacor and Tricom. We intend to enter into additional agreements with
distributors, resellers and system integrators, both in the United States and
abroad, to increase our geographic coverage and address additional
opportunities. We regularly conduct sales training for prospective distributor,
reseller and system integrator customers to educate them in the sale of our
products. In addition, we have initiated an out-bound marketing program directed
at end-user organizations to build greater awareness of the benefits of our
products. This is intended to generate demand for distributors, resellers and
system integrators selling our products.
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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 storage router supports
point-to-point, arbitrated loop and switched fabric networks, provides
management capability through an Ethernet port, and supports full Simple Network
Management Protocol, or SNMP, and remote Web-based management.
Storage Router Products
The following table summarizes the key features and benefits of our
products:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIRST
PRODUCT SHIPMENT DEVICE
STORAGE ROUTER NAME TO OEM CONFIGURATION BENEFITS
<C> <C> <C> <S> <C>
- -----------------------------------------------------------------------------------------------------------------------
MID-RANGE 4100 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, plus:
GENERATION - 1 to 4 SCSI buses - Enable server-free backup
- 1 Ethernet management - Double the SCSI throughput via low voltage
port differential technology
- Provide enhanced software for storage management
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
* The first product we are offering in our 4x50 family is the 4250 storage
router. The 4250 is currently in evaluation with OEMs.
Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our 4100 product
has accounted for 52% and 71% of our product revenue in fiscal 1998 and in the
nine month period ended July 31, 1999, respectively.
Internal Product Testing and Verification through CV-SAN Program
Each of our storage routers undergoes an extensive testing and verification
process in our interoperability lab to assess its interoperability with the
various other components of the SAN, including storage systems, storage hubs,
storage switches, host bus adapters, operating systems and storage management
software from a wide variety of vendors. Through our Crossroads Verified-Storage
Area Network program, we have tested and verified the interoperability of
approximately 2,500 different SAN configurations utilizing our storage router
solutions. We have designed our Web-based Configurator to enable our customers
to access this interoperability data and dynamically configure interoperable
SANs. Our Configurator serves as a tool for our current and potential customers
to assist them in designing a SAN by determining which SAN components are
interoperable with other SAN components.
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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> <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.
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>
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SALES AND MARKETING
We base our sales and marketing strategy on an indirect sales model
executed through OEMs and distributors, resellers and system integrators. For
the past two years, our sales activity has focused principally on OEM adoption
through extensive OEM testing and product qualification. As the market for SAN
products matures, we believe that open market branded sales through
distributors, resellers and system integrators will represent an increasing
percentage of our total revenues. While we sell most of our products today
through OEMs, with an expanded sales channel, we will gain broader brand
awareness and a greater presence in the departmental and mid-sized business
markets where distributors, resellers and system integrators generally have a
strong presence and can influence product adoption choices.
We also anticipate expanding our international sales activities in the near
future. Currently, sales to international end users are handled through our OEM
customers. In the future, we plan to establish an office in Europe to support
and manage our customer relationships 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
embedded, proprietary software and hardware designs using industry standard
components and our proprietary programmable logic. Our proprietary routing
software intelligently examines data packet traffic to prioritize transmission
and minimize network congestion in the flow of I/O transactions between servers
and storage systems. This software also manages data latency that results from
variances in I/O speeds and provides accurate communication of transmission
status to connected devices. Our software provides critical interoperability
between diverse I/O protocols, supports rapid field deployment of new
configurations and features, enables sharing of storage resources by multiple
servers and can be adapted to new I/O protocols as they emerge. Additionally,
our software is easily configurable and can be quickly adapted to varying
customer requirements and computing environments. While our software
architecture serves as the foundation for our current products, it is also
scalable to accommodate several planned generations of new designs. Our hardware
is the "engine" that provides basic performance and functionality such as
operating speed, data movement, external device connectivity, network management
interfaces and the ability to operate in extreme environmental conditions of
temperature and humidity.
We possess a high level of multi-disciplinary expertise encompassing I/O
technologies, software design, operating systems, hardware and application
specific integrated circuit design, and LAN/WAN technologies, which we utilize
to design, develop, manufacture and deliver our products. We believe that our
combined expertise in each of these technologies provides us with a competitive
advantage in time-to-
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market, interoperability, product feature capability and integration of
additional I/O interfaces and functions.
I/O Technologies
We believe that our I/O routing expertise is a critical factor in our
ability to maintain our leadership position in storage routing. There are three
key I/O technologies in use today for open systems and mainframe systems: SCSI,
Fibre Channel and ESCON. We employ a large number of engineers and technologists
who have significant involvement in the evolution of these I/O technologies.
Based on their expertise and our overall capabilities, we believe that we
possess insight and understanding into the capabilities and limits of each new
technology and the requirements for I/O routing. We initially chose to build our
routers to interconnect SCSI and Fibre Channel technology, and we plan to evolve
this interconnectivity into additional interfaces over time. As new I/O
standards are developed, we expect to contribute to these developments and
leverage our software and technical expertise in developing additional I/O
routers. Such additional areas of focus include ATM, Gigabit Ethernet, TCP/IP,
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.
MANUFACTURING
Presently, 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. 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, whom we had used for all of
our contract manufacturing until recently.
We are in the process of transitioning the final assembly and test portion
of our product manufacturing process to our internal facilities. In connection
with this transition, we have hired additional employees, purchased the
necessary equipment, initiated customer qualification efforts and leased
additional facilities. We believe that bringing our final assembly and test
operations in-house will allow us to reduce our total per unit manufacturing
costs and provide us with greater flexibility to respond to
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<PAGE> 46
changes in customer demand. As the needs of our customers continue to evolve, we
plan to reassess our manufacturing requirements on a periodic basis and address
changes as we deem necessary.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single-source
components include application specific integrated circuits, power supplies,
licensed software and chassis. Please see "Risk Factors -- We depend on sole
source and limited source suppliers for certain key components, and if we are
unable to buy these components on a timely basis, our delayed ability to deliver
our products to our customers may result in reduced revenue and lost sales" for
a discussion of the risks associated with our procurement of components.
RESEARCH AND DEVELOPMENT
We believe that our research and development efforts are essential to our
ability to successfully deliver innovative products that address the needs of
our customers as the I/O routing market evolves. 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
- Server 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.
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;
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<PAGE> 47
- 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 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 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.
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<PAGE> 48
FACILITIES
Our corporate headquarters facility consists of approximately 24,000 square
feet in Austin, Texas. We lease our corporate headquarters facility pursuant to
a lease agreement that expires in December 2003. At this time, our needs have
exceeded the available space in our current location. We anticipate moving to a
larger headquarters facility in 2000. Although we believe a suitable facility
can be obtained to meet our future requirements, we cannot be certain that we
will be able to find such a facility on commercially reasonable terms.
Our final assembly and test facility of approximately 11,250 square feet is
also located in Austin, Texas. The lease on this facility expires in June 2004.
We also maintain sales offices, each with 400 square feet or less, in
Boston, Massachusetts; Boulder, Colorado; and San Diego, California.
LITIGATION
We are not party to any legal proceedings.
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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 E. 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 E. 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.
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.
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.
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<PAGE> 53
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, $12.00 per share, appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our common
stock. The amounts reflected in the table may not necessarily be achieved.
We granted these options under our 1996 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. Except as otherwise noted, these options
are immediately exercisable, but we have the right to repurchase, at the
exercise price, any shares that have not vested at the time the optionee
terminates employment with us. The percentage of total options granted to our
employees in the last fiscal year is based on options to purchase an aggregate
of 1,273,500 shares of common stock granted during fiscal 1998. The following
table sets forth information concerning the individual grants of stock options
to each of our named executive officers in fiscal 1998.
OPTION GRANTS IN FISCAL 1998
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------- OF ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) IN FISCAL 1998(%) ($/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.
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<PAGE> 54
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 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.
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<PAGE> 55
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.
- 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.
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<PAGE> 56
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 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
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<PAGE> 57
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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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.
CHANGE OF CONTROL ARRANGEMENTS
If we are acquired in a stockholder-approved transaction, whether by merger
or asset sale, then all of the outstanding options under our 1996 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.
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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,
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<PAGE> 60
each share of Series E preferred stock automatically adjusted and became
convertible into 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. Concurrently with our sale of Series C preferred
stock in which Hewlett-Packard became a 5% stockholder, we entered into a
Purchase and Licensing Agreement with Hewlett-Packard. Pursuant to this
agreement, Hewlett-Packard may license our 4200 storage router technology or
purchase any of our storage routers. We granted to Hewlett-Packard a
non-exclusive license to the software and related hardware designs associated
with our 4200 storage router. Under this license, Hewlett-Packard may
incorporate this licensed technology into their products but may not directly
sell our 4200 storage router. Additionally, the agreement sets forth the terms
by which Hewlett-Packard will test and qualify our new products, as well as
participate in our new product planning and development process. Pursuant to
these agreements, we recorded revenue from Hewlett-Packard in amounts of
approximately $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. 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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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 22,088,175 shares, consisting of
8,488,327 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 25,588,175
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.
<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 21.6% 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 28.4 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 57.1% 49.3%
Other 5% Stockholders:
Advanced Digital Information Corporation.................. 2,608,697 11.8% 10.2%
Funds affiliated with Austin Ventures..................... 6,577,175 30.0 25.7
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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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 8,488,327 shares of common stock
outstanding that were held of record by 72 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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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."
65
<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
25,588,175 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.
18,211,574 After 180 days from the date of
this prospectus, the 180-day
lock-up is released and these
shares are eligible for sale 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
66
<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 1,693,480 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.
67
<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
68
<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 and with an aggregate purchase price of $250,000
which, upon the consummation of this offering, will be convertible into 25,001
shares of common stock. In addition, in August 1999 certain individuals who have
performed services in connection with this offering and who are associated with
Morgan Keegan & Company, Inc. 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 and with an aggregate purchase price of $250,000
which, upon the consummation of this offering, will be convertible into 25,001
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.
69
<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 are
convertible into an aggregate of 7,500 shares of our common stock. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Gray Cary Ware & Freidenrich LLP, Austin, Texas.
EXPERTS
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.
70
<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:
(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.
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>
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>
F-12
<PAGE> 84
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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 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.
F-13
<PAGE> 85
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
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." From the top 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.................................................... 5,100
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............................................. $872,147
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") provides,
in effect, that any person made a party to any action by reason of the fact that
he is or was a director, officer, employee or agent of Registrant may and, in
certain cases, must be indemnified by Registrant against, in the case of a
non-derivative action, judgments, fines, amounts paid in settlement and
reasonable expenses (including attorneys' fees) incurred by him as a result of
such action, and in the case of a derivative action, against expenses (including
attorneys' fees), if in either type of action he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
Registrant. This indemnification does not apply, in a derivative action, to
matters as to which it is adjudged that the director, officer, employee or agent
is liable to Registrant, unless upon court order it is determined that, despite
such adjudication of liability, but in view of all the circumstances of the
case, he is fairly and reasonably entitled to indemnity for expenses, and, in a
non-derivative action, to any criminal proceeding in which such person had
reasonable cause to believe his conduct was unlawful.
Article V of our Fifth Amended and Restated Certificate of Incorporation,
as amended, provides that no director shall be liable to Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director to
the fullest extent permitted by the DGCL.
Reference is made to Section 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.
II-1
<PAGE> 94
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 31, 1996, Registrant has issued unregistered securities to a
limited number of people as described below. These issuances were deemed exempt
from registration under the Securities Act in reliance on Rule 701 or Section
4(2) promulgated thereunder. The following 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 2,510,828
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 by and
between Registrant and Silicon Valley Bank
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1+ -- Power of Attorney
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
Not included because the information required to be set forth therein is
not applicable or is shown in Registrant's Consolidated Financial Statements or
the related Notes.
ITEM 17. UNDERTAKINGS.
The undersigned hereby undertakes to provide to the underwriter at the
closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the DGCL, our Certificate of Incorporation or our Bylaws, the underwriting
agreement or otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers, or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered hereunder, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by it
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
We hereby undertake that:
1. For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 97
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 September 24, 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 September 24, 1999
- ------------------------------------------------ Chairman of the Board
BRIAN R. SMITH (principal executive officer)
/s/ REAGAN Y. SAKAI Chief Financial Officer September 24, 1999
- ------------------------------------------------ (principal
REAGAN Y. SAKAI financial and accounting
officer)
* Director September 24, 1999
- ------------------------------------------------
RICHARD D. EYESTONE
* Director September 24, 1999
- ------------------------------------------------
WO OVERSTREET
* Director September 24, 1999
- ------------------------------------------------
DAVID L. RIEGEL
* Director September 24, 1999
- ------------------------------------------------
WILLIAM P. WOOD
*By: /s/ REAGAN Y. SAKAI
------------------------------------------
REAGAN Y. SAKAI
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 98
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 by and
between Registrant and Silicon Valley Bank
23.1 -- Consent of PricewaterhouseCoopers LLP
23.2* -- Consent of Brobeck, Phleger & Harrison LLP. Reference is
made to Exhibit 5.1
24.1+ -- Power of Attorney (see page II-5)
27.1+ -- Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Application has been made to the Commission to seek confidential treatment
of certain provisions. Omitted material for which confidential treatment has
been requested has been filed separately with the Commission.
+ Previously filed.
<PAGE> 1
EXHIBIT 1.1
3,500,000 SHARES OF
CROSSROADS SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
, 1999
-------------
SG COWEN SECURITIES CORPORATION
DAIN RAUSCHER WESSELS, a division of
Dain Rauscher Incorporated
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the several Underwriters
c/o SG Cowen Securities Corporation
Financial Square
New York, New York 10005
Dear Sirs:
1. INTRODUCTORY. Crossroads Systems, Inc., a Delaware corporation (the
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), 3,500,000 shares of Common Stock, $0.001 par value (the
"Common Stock"), of the Company. The 3,500,000 shares so proposed to be sold is
hereinafter referred to as the "Firm Stock". The Company and the selling
stockholders listed in Schedule B hereto) (the "Selling Stockholders") also
propose to sell to the Underwriters, upon the terms and conditions set forth in
Section 3 hereof, up to an additional 525,000 shares of Common Stock (the
"Optional Stock"). The Firm Stock and the Optional Stock are hereinafter
collectively referred to as the "Stock". SG Cowen Securities Corporation ("SG
Cowen"), Dain Rauscher Wessels and Morgan Keegan & Company, Inc. are acting as
representatives of the several Underwriters and in such capacity are hereinafter
referred to as the "Representatives."
2. (I) REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS. The Company and each Selling Stockholder jointly and severally
represent and warrant to, and agree with, the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-85505) (the
"Initial Registration Statement") in respect of the Stock has been
filed with the Securities and Exchange Commission (the "Commission");
the Initial Registration Statement and any post-effective amendment
thereto, each in the form heretofore delivered to you, and, excluding
exhibits thereto, to you for each of the other Underwriters, have been
declared effective by the Commission in such form; other than a
registration statement, if any, increasing the size of the offering (a
"Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b)
under the Securities Act of 1933, as amended (the "Securities Act") and
the rules and regulations (the "Rules and Regulations") of the
Commission thereunder, which became effective upon filing, no other
document with respect to the Initial Registration Statement has
heretofore been filed or is required to be filed with the Commission;
no stop order suspending the effectiveness of the Initial Registration
Statement, any
<PAGE> 2
2
post-effective amendment thereto or the Rule 462(b) Registration
Statement, if any, has been issued and no proceeding for that purpose
has been initiated or threatened by the Commission (any preliminary
prospectus included in the Initial Registration Statement or filed with
the Commission pursuant to Rule 424(a) of the Rules and Regulations, is
hereinafter called a "Preliminary Prospectus"); the various parts of
the Initial Registration Statement and the Rule 462(b) Registration
Statement, if any, including all exhibits thereto and including the
information contained in the form of final prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act and deemed
by virtue of Rule 430A under the Securities Act to be part of the
Initial Registration Statement at the time it was declared effective,
each as amended at the time such part of the Initial Registration
Statement became effective or such part of the Rule 462(b) Registration
Statement, if any, became or hereafter becomes effective, are
hereinafter collectively called the "Registration Statements"; and such
final prospectus, in the form first filed pursuant to Rule 424(b) under
the Securities Act, is hereinafter called the "Prospectus." No document
has been or will be prepared or distributed in reliance on Rule 434
under the Securities Act. No order preventing or suspending the use of
any Preliminary Prospectus has been issued by the Commission.
(b) The Registration Statement conforms (and the Rule 462(b)
Registration Statement, if any, the Prospectus and any amendments or
supplements to either of the Registration Statements or the Prospectus,
when they become effective or are filed with the Commission, as the
case may be, will conform) in all material respects to the requirements
of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration
Statements and any amendment thereto) and as of the applicable filing
date (as to the Prospectus and any amendment or supplement thereto)
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the
foregoing representations and warranties shall not apply to information
contained in or omitted from the Registration Statements or the
Prospectus or any such amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the
Company through the Representatives by or on behalf of any Underwriter
specifically for inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section 15)
have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good
standing as foreign corporations in each jurisdiction in which their
respective ownership or lease of property or the conduct of their
respective businesses requires such qualification, and have all power
and authority necessary to own or hold their respective properties and
to conduct the businesses in which they are engaged, except where the
failure to so qualify or have such power or authority would not have,
singularly or in the aggregate, a material adverse effect on the
condition (financial or otherwise), results of operations, business or
prospects of the Company and its subsidiaries taken as a whole (a
"Material Adverse Effect"). The Company owns or controls, directly or
indirectly, only the following corporations, associations or other
entities: Crossroads Systems, Inc. (Texas), a Texas corporation.
(d) This Agreement has been duly authorized executed and delivered by
the Company.
(e) The Stock to be issued and sold by the Company to the Underwriters
hereunder has been duly and validly authorized and, when issued and
delivered against payment
<PAGE> 3
3
therefor as provided herein, will be duly and validly issued, fully
paid and nonassessable and free of any preemptive or similar rights and
will conform to the description thereof contained in the Prospectus.
(f) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus.
(g) All the outstanding shares of capital stock of each subsidiary of
the Company have been duly authorized and validly issued, are fully
paid and nonassessable and, except to the extent set forth in the
Prospectus, are owned by the Company directly or indirectly through one
or more wholly-owned subsidiaries, free and clear of any claim, lien,
encumbrance, security interest, restriction upon voting or transfer or
any other claim of any third party.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries is bound or to which
any of the property or assets of the Company or any of its subsidiaries
is subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties or
assets.
(i) Except for the registration of the Stock under the Securities Act
and such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution
of the Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company and the consummation of
the transactions contemplated hereby.
(j) To the Company's knowledge, PricewaterhouseCoopers LLP, who have
expressed their opinions on the audited financial statements and
related schedules included in the Registration Statements and the
Prospectus, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(k) The financial statements, together with the related notes and
schedules, included in the Prospectus and in each Registration
Statement fairly present the financial position and the results of
operations and changes in financial position of the Company and its
consolidated subsidiaries at the respective dates or for the respective
periods therein specified. Such statements and related notes and
schedules have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis except as may be
set forth in the Prospectus.
(l) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in
the Prospectus, any material loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
<PAGE> 4
4
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated in
the Prospectus; and, since such date, there has not been any change in
the capital stock or long-term debt of the Company or any of its
subsidiaries or any material adverse change, or any development
involving a prospective material adverse change, in or affecting the
business, general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries taken as a whole, otherwise than as set forth or
contemplated in the Prospectus.
(m) There is no legal or governmental proceeding pending to which the
Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject
which, singularly or in the aggregate, if determined adversely to the
Company or any of its subsidiaries, might have a Material Adverse
Effect or would prevent or adversely affect the ability of the Company
to perform its obligations under this Agreement; and to the best of the
Company's knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others.
(n) Neither the Company nor any of its subsidiaries is in violation of
its charter or by-laws, or, except for any violations or defaults
which, singularly or in the aggregate, would not have a Material
Adverse Effect, (i) is in default in any respect, and no event has
occurred which, with notice or lapse of time or both, would constitute
such a default, in the due performance or observance of any term,
covenant or condition contained in any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is a
party or by which it is bound or to which any of its property or assets
is subject or (ii) is in violation in any respect of any law,
ordinance, governmental rule, regulation or court decree to which it or
its property or assets may be subject.
(o) The Company and each of its subsidiaries possess all licenses,
certificates, authorizations and permits issued by, and have made all
declarations and filings with, the appropriate state, federal or
foreign regulatory agencies or bodies which are necessary for the
ownership of their respective properties or the conduct of their
respective businesses as described in the Prospectus except where any
failures to possess or make the same, singularly or in the aggregate,
would not have a Material Adverse Effect, and the Company has not
received notification of any revocation or modification of any such
license, authorization or permit and has no reason to believe that any
such license, certificate, authorization or permit will not be renewed.
(p) Neither the Company nor any of its subsidiaries is or, after giving
effect to the offering of the Stock and the application of the proceeds
thereof as described in the Prospectus, will become an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended and the rules and regulations of the Commission thereunder.
(q) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action
designed or intended to stabilize or manipulate the price of any
security of the Company, or which caused or resulted in, or which might
in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any security of the
Company.
(r) The Company and its subsidiaries own or possess the right to use
all patents, trademarks, trademark registrations, service marks,
service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets and rights currently employed by each of
<PAGE> 5
5
them to conduct their respective businesses as described in the
Prospectus, and the Company is not aware of any claim to the contrary
or any challenge by any other person to the rights of the Company and
its subsidiaries with respect to the foregoing. The Company's business
as now conducted and as proposed to be conducted does not and will not
infringe or conflict with any patents, trademarks, service marks, trade
names, copyrights, trade secrets, licenses or other intellectual
property or franchise right of any person. No claim has been made
against the Company alleging the infringement by the Company of any
patent, trademark, service mark, trade name, copyright, trade secret,
license in or other intellectual property right or franchise right of
any person.
(s) The Company and each of its subsidiaries have good and marketable
title in fee simple to, or have valid rights to lease or otherwise use,
all items of real or personal property which are material to the
business of the Company and its subsidiaries taken as a whole, in each
case free and clear of all liens, encumbrances, claims and defects
except as disclosed in the Prospectus or otherwise may result in a
Material Adverse Effect.
(t) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or, to the best of the Company's knowledge, is
imminent which might be expected to have a Material Adverse Effect. The
Company is not aware that any key employee or significant group of
employees of the Company or any subsidiary plans to terminate
employment with the Company or any such subsidiary.
(u) No "prohibited transaction" (as defined in Section 406 of the
Employee Retirement Income Security Act of 1974, as amended, including
the regulations and published interpretations thereunder ("ERISA"), or
Section 4975 of the Internal Revenue Code of 1986, as amended from time
to time (the "Code")) or "accumulated funding deficiency" (as defined
in Section 302 of ERISA) or any of the events set forth in Section
4043(b) of ERISA (other than events with respect to which the 30-day
notice requirement under Section 4043 of ERISA has been waived) has
occurred with respect to any employee benefit plan which could have a
Material Adverse Effect; each employee benefit plan is in compliance in
all material respects with applicable law, including ERISA and the
Code; the Company has not incurred and does not expect to incur
liability under Title IV of ERISA with respect to the termination of,
or withdrawal from, any "pension plan"; and each "pension plan" (as
defined in ERISA) for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which could cause the loss of such
qualification.
(v) There has been no storage, generation, transportation, handling,
treatment, disposal, discharge, emission, or other release of any kind
of toxic or other wastes or other hazardous substances by, due to, or
caused by the Company or any of its subsidiaries (or, to the best of
the Company's knowledge, any other entity for whose acts or omissions
the Company or any of its subsidiaries is or may be liable) upon any of
the property now or previously owned or leased by the Company or any of
its subsidiaries, in violation of any statute or any ordinance, rule,
regulation, order, judgment, decree or permit or which would, under any
statute or any ordinance, rule (including rule of common law),
regulation, order, judgment, decree or permit, give rise to any
liability, except for any violation or liability which would not have,
singularly or in the aggregate with all such violations and
liabilities, a Material Adverse Effect; there has been no disposal,
discharge, emission or other release of any kind onto such property or
into the environment surrounding such property of any toxic or other
wastes or other hazardous substances with respect
<PAGE> 6
6
to which the Company or any of its subsidiaries have knowledge, except
for any such disposal, discharge, emission, or other release of any
kind which would not have, singularly or in the aggregate with all such
discharges and other releases, a Material Adverse Effect.
(w) The Company and its subsidiaries each (i) have filed with all
necessary federal, state and foreign income and franchise tax returns,
(ii) have paid all federal, state, local and foreign taxes due and
payable for which it is liable, and (iii) do not have any tax
deficiency or claims outstanding or assessed or, to the best of the
Company's knowledge, proposed against it which could reasonably be
expected to have a Material Adverse Effect. Neither the Company nor any
of its subsidiaries is currently subject to any pending audit by any
taxing authority which could reasonably be expected to have a Material
Adverse Effect.
(x) The Company and each of its subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in
similar businesses in similar industries.
(y) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary and appropriate to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets
is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(z) The minute books of the Company and each of its subsidiaries have
been made available to the Underwriters and counsel for the
Underwriters, and such books (i) contain a complete summary of all
meetings and actions of the directors and stockholders of the Company
and each of its subsidiaries since the time of its respective
incorporation through the date of the latest meeting and action, and
(ii) accurately in all material respects reflect all transactions
referred to in such minutes.
(aa) There is no franchise, lease, contract, agreement or document
required by the Securities Act or by the Rules and Regulations to be
described in the Prospectus or to be filed as an exhibit to the
Registration Statements which is not described or filed therein as
required; and all descriptions of any such franchises, leases,
contracts, agreements or documents contained in the Registration
Statements are accurate and complete descriptions of such documents in
all material respects.
(bb) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is
required to be described in the Prospectus and which is not so
described.
(cc) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of
the filing or effectiveness of the Registration Statements or the
transactions contemplated by this agreement, except for persons and
entities who have expressly waived such right or who have been given
proper notice and have
<PAGE> 7
7
failed to exercise such right within the time or times required under
the terms and conditions of such right.
(dd) Neither the Company nor any of its subsidiaries own any "margin
securities" as that term is defined in Regulations G and U of the Board
of Governors of the Federal Reserve System (the "Federal Reserve
Board"), and none of the proceeds of the sale of the Stock will be
used, directly or indirectly, for the purpose of purchasing or carrying
any margin security, for the purpose of reducing or retiring any
indebtedness which was originally incurred to purchase or carry any
margin security or for any other purpose which might cause any of the
Securities to be considered a "purpose credit" within the meanings of
Regulation G, T, U or X of the Federal Reserve Board.
(ee) Neither the Company nor any of its subsidiaries is a party to any
contract, agreement or understanding with any person that would give
rise to a valid claim against the Company or the Underwriters for a
brokerage commission, finder's fee or like payment in connection with
the offering and sale of the Stock.
(ff) The Company has reviewed its operations and that of its
subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to
which the business or operations of the Company or any of its
subsidiaries will be affected by the Year 2000 Problem. As a result of
such review, the Company has no reason to believe, and does not
believe, that the Year 2000 Problem will have a Material Adverse
Effect. The "Year 2000 Problem" as used herein means any significant
risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval,
retransmission or other utilization of data or in the operation of
mechanical or electrical systems of any kind will not, in the case of
dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000.
(gg) The Stock has been approved for listing subject to notice of
issuance on the NASDAQ Stock Market's National Market.
(II) SEPARATE REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF THE
SELLING STOCKHOLDERS. Each Selling Stockholder, severally and not
jointly, represents and warrants to, and agrees with, the several
Underwriters that:
(a) Such Selling Stockholder has, and immediately prior to the Option
Closing Date (as defined in Section 4 hereof) the Selling Stockholder
will have good and valid title to the shares of Optional Stock to be
sold by the Selling Stockholder hereunder on such date, free and clear
of all liens, encumbrances, equities or claims; and upon delivery of
such shares and payment therefor pursuant hereto, good and valid title
to such shares, free and clear of all liens, encumbrances, equities or
claims, will pass to the several Underwriters.
(b) Such Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney, in substantially the form heretofore
delivered by the Representatives (the "Power of Attorney"), appointing,
Brian R. Smith and [Reagan Y. Sakai] and each of them, as
attorney-in-fact (the "Attorneys-in-fact") with authority to execute
and deliver this Agreement on behalf of such Selling Stockholder, to
authorize the delivery of the shares of Optional Stock to be sold by
such Selling Stockholder hereunder and otherwise to act on behalf of
such Selling Stockholder in connection with the transactions
contemplated by this Agreement.
<PAGE> 8
8
(c) Such Selling Stockholder has duly and irrevocably executed and
delivered a custody agreement, in substantially the form heretofore
delivered by the Representatives (the "Custody Agreement"), with
[insert name of custodian] as custodian (the "Custodian"), pursuant to
which certificates in negotiable form for the shares of Optional Stock
to be sold by such Selling Stockholder hereunder have been placed in
custody for delivery under this Agreement.
(d) Such Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody
Agreement; the execution, delivery and performance of this Agreement,
the Power of Attorney and the Custody Agreement by such Selling
Stockholder and the consummation by such Selling Stockholder of the
transactions contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which such Selling
Stockholder is a party or by which the Selling Stockholder is bound or
to which any of the property or assets of the Selling Stockholder is
subject, nor will such actions result in any violation of the
provisions of the partnership agreement (if such Selling Stockholder is
a partnership), charter or by-laws of the Selling Stockholder (if such
Selling Stockholder is a corporation) or any statute or any order, rule
or regulation of any court or governmental agency or body having
jurisdiction over the Selling Stockholder or the property or assets of
the Selling Stockholder; and, except for the registration of the Stock
under the Securities Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the Exchange
Act and applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the Power of
Attorney or the Custody Agreement by such Selling Stockholder and the
consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby.
(e) The Registration Statements do not, and the Prospectus and any
further amendments or supplements to the Registration Statements or the
Prospectus will not, as of the applicable effective date (as to the
Registration Statements and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading. The preceding
sentence applies only to the extent that any information contained in
or omitted from the Registration Statements or Prospectus was in
reliance upon and in conformity with written information furnished to
the Company by such Selling Stockholder specifically for inclusion
therein.
3. PURCHASE SALE AND DELIVERY OF OFFERED SECURITIES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to purchase
from the Company that number of shares of Firm Stock set forth opposite the name
of such Underwriter in Schedule A hereto.
The purchase price per share to be paid by the Underwriters to
the Company for the Stock will be $ per share (the "Purchase Price").
The Company will deliver the Firm Stock to the Representatives
for the respective accounts of the several Underwriters (in the form of
definitive certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or
prior to
<PAGE> 9
9
12:00 Noon, New York time, on the second full business day preceding the First
Closing Date (as defined below) against payment of the aggregate Purchase Price
therefor by wire transfer to an account at a bank acceptable to SG Cowen,
payable to the order of the Company, all at the offices of Brobeck Phleger &
Harrison LLP at 301 Congress Avenue, Suite 1200, Austin, Texas 78701. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligations of each Underwriter
hereunder. The time and date of the delivery and closing shall be at 10:00
A.M., New York time, on ___________ 1999, in accordance with Rule 15c6-1 of the
Exchange Act. The time and date of such payment and delivery are herein referred
to as the "First Closing Date". The First Closing Date and the location of
delivery of, and the form of payment for, the Firm Stock may be varied by
agreement between the Company and SG Cowen.
The Company shall make the certificates for the Stock
available to the Representatives for examination on behalf of the Underwriters
in New York, New York at least twenty-four hours prior to the First Closing
Date.
For the purpose of covering any over-allotments in connection
with the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Underwriters may purchase all or less than all of the Optional
Stock. The price per share to be paid for the Optional Stock shall be the
Purchase Price. The Company and Selling Stockholders agree, severally and not
jointly, to sell to the Underwriters the number of shares of Optional Stock
specified in the written notice by SG Cowen described below (but not to exceed
the number of Optional Shares set forth opposite such Selling Stockholder's name
on Schedule B) and the Underwriters agree, severally and not jointly, to
purchase such shares of Optional Stock for the account of each Underwriter in
the same proportion as the number of shares of Firm Stock set forth opposite
such Underwriter's name bears to the total number of shares of Firm Stock
(subject to adjustment by SG Cowen to eliminate fractions). The option granted
hereby may be exercised as to all or any part of the Optional Stock at any time,
and from time to time, not more than thirty (30) days subsequent to the date of
this Agreement. No Optional Stock shall be sold and delivered unless the Firm
Stock previously has been, or simultaneously is, sold and delivered. The right
to purchase the Optional Stock or any portion thereof may be surrendered and
terminated at any time upon notice by SG Cowen to the Company and Selling
Stockholders.
The option granted hereby may be exercised by written notice
being given to the Company and the Selling Stockholders by SG Cowen setting
forth the number of shares of the Optional Stock to be purchased by the
Underwriters and the date and time for delivery of and payment for the Optional
Stock. Each date and time for delivery of and payment for the Optional Stock
(which may be the First Closing Date, but not earlier) is herein called the
"Option Closing Date" and shall in no event be earlier than two (2) business
days nor later than five (5) business days after written notice is given. (The
Option Closing Date and the First Closing Date are herein called the "Closing
Dates".)
The Company and the Selling Stockholders will deliver the
Optional Stock to the Underwriters (in the form of definitive certificates,
issued in such names and in such denominations as the Representatives may direct
by notice in writing to the Company and the Selling Stockholders given at or
prior to 12:00 Noon, New York time, on the second full business day preceding
the Option Closing Date against payment of the aggregate Purchase Price therefor
in federal (same day) funds by certified or official bank check or checks or
wire transfer to an account at a bank acceptable to SG Cowen payable to the
order of the Company all at the offices of Brobeck Phleger & Harrison LLP. Time
shall be of the essence, and delivery at the time and place specified pursuant
to this Agreement is a further condition of the obligations of each Underwriter
hereunder. The Company and the Selling Stockholders shall make the certificates
for the Optional Stock available to the Representatives for examination on
behalf of the Underwriters in New
<PAGE> 10
10
York, New York not later than 10:00 A.M., New York Time, on the business day
preceding the Option Closing Date. The Option Closing Date and the location of
delivery of, and the form of payment for, the Optional Stock may be varied by
agreement among the Company, the Selling Stockholders and SG Cowen.
The several Underwriters propose to offer the Stock for sale
upon the terms and conditions set forth in the Prospectus.
4. (1) FURTHER AGREEMENTS OF THE COMPANY. The Company agrees with the several
Underwriters that:
(a) The Company will prepare the Rule 462(b) Registration Statement, if
necessary, in a form approved by the Representatives and file such Rule
462(b) Registration Statement with the Commission on the date hereof,
prepare the Prospectus in a form approved by the Representatives and
file such Prospectus pursuant to Rule 424(b) under the Securities Act
not later than the second business day following the execution and
delivery of this Agreement; make no further amendment or any
supplement to the Registration Statements or to the Prospectus to which
the Representatives shall reasonably object by notice to the Company
after a reasonable period to review; advise the Representatives,
promptly after it receives notice thereof, of the time when any
amendment to either Registration Statement has been filed or becomes
effective or any supplement to the Prospectus or any amended Prospectus
has been filed and to furnish the Representatives with copies thereof,
advise the Representatives, promptly after it receives notice thereof,
of the issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or
threatening of any proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the Registration
Statements or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, use promptly its best efforts to
obtain its withdrawal.
(b) If at any time prior to the expiration of nine months after the
effective date of the Initial Registration Statement when a prospectus
relating to the Stock is required to be delivered any event occurs as a
result of which the Prospectus as then amended or supplemented would
include any untrue statement of a material fact, or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the
Securities Act, the Company will promptly notify the Representatives
thereof and upon their request will prepare an amended or supplemented
Prospectus which will correct such statement or omission or effect such
compliance. The Company will furnish without charge to each Underwriter
and to any dealer in securities as many copies as the Representatives
may from time to time reasonably request of such amended or
supplemented Prospectus; and in case any Underwriter is required to
deliver a prospectus relating to the Stock nine months or more after
the effective date of the Initial Registration Statement, the Company
upon the request of the Representatives and at the expense of such
Underwriter will prepare promptly an amended or supplemented Prospectus
as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Securities Act.
(c) The Company will to furnish promptly to each of the Representatives
and to counsel for the Underwriters a signed copy of each of the
Registration Statements as originally
<PAGE> 11
11
filed with the Commission, and each amendment thereto filed with the
Commission, including all consents and exhibits filed therewith.
(d) The Company will deliver promptly to the Representatives in New
York City such number of the following documents as the Representatives
shall reasonably request: (i) conformed copies of the Registration
Statements as originally filed with the Commission and each amendment
thereto (in each case excluding exhibits), (ii) each Preliminary
Prospectus, and (iii) the Prospectus (not later than 10:00 A.M. New
York time, of the business day following the execution and delivery of
this Agreement) and any amended or supplemented Prospectus (not later
than 10:00 A.M., New York City time, on the business day following the
date of such amendment or supplement).
(e) The Company will make generally available to its stockholders as
soon as practicable, but in any event not later than eighteen months
after the effective date of the Registration Statement (as defined in
Rule 158(c) under the Securities Act), an earnings statement of the
Company and its subsidiaries (which need not be audited) complying with
Section 11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158).
(f) The Company will promptly take from time to time such actions as
the Representatives may reasonably request to qualify the Stock for
offering and sale under the securities or Blue Sky laws of such
jurisdictions as the Representatives may designate and to continue such
qualifications in effect for so long as required for the distribution
of the Stock; provided that the Company and its subsidiaries shall not
be obligated to qualify as foreign corporations in any jurisdiction in
which they are not so qualified or to file a general consent to service
of process in any jurisdiction;
(g) During the period of five years from the date hereof, the Company
will deliver to the Representatives and, upon request, to each of the
other Underwriters, (i) as soon as they are available, copies of all
reports or other communications furnished to stockholders and (ii) as
soon as they are available, copies of any reports and financial
statements furnished or filed with the Commission pursuant to the
Exchange Act or any national securities exchange or automatic quotation
system on which the Stock is listed or quoted.
(h) The Company will not directly or indirectly offer, sell, assign,
transfer, pledge, contract to sell, or otherwise dispose of any shares
of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock for a period of 180 days from the date of
the Prospectus without the prior written consent of SG Cowen other than
the Company's sale of the Stock hereunder and the issuance of shares
pursuant to employee benefit plans, stock option plans or other
employee compensation plans existing on the date hereof or pursuant to
currently outstanding options, warrants or rights. The Company will
cause each officer, director and stockholder listed in Schedule C to
furnish to the Representatives, prior to the First Closing Date, a
letter, substantially in the form of Exhibit I hereto, pursuant to
which each such person shall agree not to directly or indirectly offer,
sell, assign, transfer, pledge, contract to sell, or otherwise dispose
of any shares of Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days
from the date of the Prospectus, without the prior written consent of
SG Cowen.
<PAGE> 12
12
(i) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by, the
Commission in connection with the registration of the Stock under the
Securities Act.
(j) Prior to each of the Closing Dates the Company will furnish to the
Representatives, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the Company for
any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(k) Prior to each of the Closing Dates, the Company will not issue any
press release or other communication directly or indirectly or hold any
press conference with respect to the Company, its condition, financial
or otherwise, or earnings, business affairs or business prospects
(except for routine oral marketing communications in the ordinary
course of business and consistent with the past practices of the
Company and of which the Representatives are notified), without the
prior written consent of the Representatives, unless in the judgment of
the Company and its counsel, and after notification to the
Representatives, such press release or communication is required by law
or official mandate of the Nasdaq Stock Market.
(l) In connection with the offering of the Stock, until SG Cowen shall
have notified the Company of the completion of the resale of the Stock,
the Company will not, and will cause its affiliated purchasers (as
defined in Regulation M under the Exchange Act) not to, either alone or
with one or more other persons, bid for or purchase, for any account in
which it or any of its affiliated purchasers has a beneficial interest,
any Stock, or attempt to induce any person to purchase any Stock; and
not to, and to cause its affiliated purchasers not to, make bids or
purchase for the purpose of creating actual, or apparent, active
trading in or of raising the price of the Stock.
(m) The Company will not take any action prior to the Option Closing
Date which would require the Prospectus to be amended or supplemented
pursuant to Section 4(I)(b);
(n) The Company will apply the net proceeds from the sale of the Stock
as set forth in the Prospectus under the heading "Use of Proceeds".
(II) FURTHER AGREEMENTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder, severally and not jointly, agrees with the several
Underwriters that:
(a) They will not to directly or indirectly offer, sell, assign,
transfer, pledge, contract to sell, or otherwise dispose of any shares
of Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock other than (a) the sale of the Optional
Stock hereunder (b) as a bona fide gift or gifts provided that the
donee or donees thereof execute and agree to be bound by the terms of
the Lock-Up Agreement, or (c) as distributed to limited partners or
shareholders of the Selling Stockholder, provided that the distributes
thereof execute and agree to be bound by the terms of the Lock-Up
Agreement, for a period of 180 days from the date of the Prospectus,
without the prior written consent of SG Cowen.
(b) The shares of Stock represented by the certificates held in custody
under the Custody Agreement are for the benefit of and coupled with and
subject to the interests of the Underwriters and the other Selling
Stockholders, and that the arrangement for such custody and the
appointment of the Attorney-in-fact are irrevocable; that the
obligations of such Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the death or
<PAGE> 13
13
incapacity, liquidation or distribution of such Selling Stockholder, or
any other event, that if such Selling Stockholder should die or become
incapacitated or is liquidated or dissolved or any other event occurs,
before the delivery of the Stock hereunder, certificates for the Stock
to be sold by such Selling Stockholder shall be delivered on behalf of
such Selling Stockholder in accordance with the terms and conditions of
this Agreement and the Custody Agreement, and action taken by the
Attorneys-in-fact or any of them under the Power of Attorney shall be
as valid as if such death, incapacity, liquidation or dissolution or
other event had not occurred, whether or not the Custodian, the
Attorneys-in-fact or any of them shall have notice of such death,
incapacity, liquidation or dissolution or other event.
(c) They will deliver to SG Cowen on or prior to the First Closing Date
a properly completed and executed United States Treasury Department
Form W-8 (if the Selling Stockholder is a non-United States person) or
Form W-9 (if the Selling Stockholder is a United States person) or such
other applicable form or statement specified by Treasury Department
regulations in lieu thereof.
5. PAYMENT OF EXPENSE. The Company agrees with the Underwriter to pay (a) the
costs incident to the authorization, issuance, sale, preparation and delivery of
the Stock and any taxes payable in that connection; (b) the costs incident to
the Registration of the Stock under the Securities Act; (c) the costs incident
to the preparation, printing and distribution of the Registration Statement,
Preliminary Prospectus, Prospectus any amendments and exhibits thereto the costs
of printing, reproducing and distributing the Power of Attorney, the Custody
Agreement, the "Agreement Among Underwriters" between the Representatives and
the Underwriters, the Master Selected Dealers' Agreement, the Underwriters'
Questionnaire and this Agreement by mail, telex or other means of
communications; (d) the fees and expenses (including related fees and expenses
of counsel for the Underwriters) incurred in connection with filings made with
the National Association of Securities Dealers; (e) any applicable listing or
other fees; (f) the fees and expenses of qualifying the Stock under the
securities laws of the several jurisdictions as provided in Section 4[I](f) and
of preparing, printing and distributing Blue Sky Memoranda and Legal Investment
Surveys (including related fees and expenses of counsel to the Underwriters);
(g) all fees and expenses of the registrar and transfer agent of the Stock; and
(h) all other costs and expenses incident to the performance of the obligations
of the Company [and of the Selling Stockholder[s]] under this Agreement
(including, without limitation, the fees and expenses of the Company's counsel
and the Company's independent accountants); provided that, except as otherwise
provided in this Section 5 and in Section 10, the Underwriters shall pay their
own costs and expenses, including the fees and expenses of their counsel, any
transfer taxes on the Stock which they may sell and the expenses of advertising
any offering of the Stock made by the Underwriters.
Each Selling Stockholder will pay all fees and expenses incident to the
performance of such Selling Stockholder's obligations under this Agreement which
are not otherwise specifically provided for herein, including but not limited to
any fees and expenses of counsel for such Selling Stockholder, such Selling
Stockholder's pro rata share of fees and expenses of the Attorneys-in-fact and
the Custodian and all expenses and taxes incident to the sale and delivery of
the Stock to be sold by such Selling Stockholder to the Underwriters hereunder.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective obligations of the
several Underwriters hereunder are subject to the accuracy, when made and on
each of the Closing Dates (except as indicated below), of the representations
and warranties of the Company and the Selling Stockholders contained herein, to
the accuracy of the statements of the Company and the Selling Stockholders made
in any certificates pursuant to the provisions hereof, to the performance by the
<PAGE> 14
14
Company and the Selling Stockholders of their obligations hereunder, and to each
of the following additional terms and conditions:
(a) No stop order suspending the effectiveness of the Registration
Statements shall have been issued and no proceedings for that purpose
shall have been initiated or threatened by the Commission, and any
request for additional information on the part of the Commission (to be
included in the Registration Statements or the Prospectus or otherwise)
shall have been complied with to the reasonable satisfaction of the
Representatives. The Rule 462(b) Registration Statement, if any, and
the Prospectus shall have been timely filed with the Commission in
accordance with Section 4(l)(a).
(b) None of the Underwriters shall have discovered and disclosed to the
Company in writing on or prior to the Closing Date that the
Registration Statement or the Prospectus or any amendment or supplement
thereto contains an untrue statement of a fact which, in the opinion of
counsel for the Underwriters, is material or omits to state any fact
which, in the opinion of such counsel, is material and is required to
be stated therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement the Stock, the
Registration Statement and the Prospectus, and with respect to an
Option Closing Date, the Custody Agreement and Powers of Attorney and
all other legal matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all material
respects to counsel for the Underwriters, and the Company and the
Selling Stockholders shall have furnished to such counsel all documents
and information that they may reasonably request to enable them to pass
upon such matters.
(d) Brobeck, Phleger & Harrison LLP shall have furnished to the
Representatives such counsel's written opinion, as counsel to the
Company, addressed to the Underwriters and dated the Closing Date, in
form and substance reasonably satisfactory to the Representatives, to
the effect that:
(i) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in
good standing as foreign corporations in each jurisdiction in
which their respective ownership or lease of property or the
conduct of their respective businesses requires such
qualification, and have the corporate power and authority
necessary to own or hold their respective properties and to
conduct the businesses in which they are engaged as described
in the Registration Statements and Prospectus.
(ii) The Company has an authorized capitalization as set forth in
the Section Captioned "Description of Capital Stock" of the
Prospectus, and all of the issued shares of capital stock of
the Company, including the Stock being delivered on the
Closing Date, have been duly and validly authorized and
issued, conform to the description thereof contained in the
Section captioned "Description of Capital Stock" of the
Prospectus, and, to our knowledge, are fully paid and
non-assessable.
<PAGE> 15
15
(iii) All the outstanding shares of capital stock of each subsidiary
of the Company have been duly authorized and validly issued,
are, to our knowledge, fully paid and nonassessable and,
except to the extent set forth in the Prospectus, are owned by
the Company directly or indirectly through one or more
wholly-owned subsidiaries, free and clear of any claim, lien,
encumbrance, security interest, restriction upon voting or
transfer or any other claim of any third party.
(iv) There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of,
any shares of the Stock pursuant to the Company's charter or
by-laws or any agreement or other instrument known to such
counsel.
(v) This Agreement has been duly authorized, executed and
delivered by the Company.
(vi) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will
not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument that is an exhibit to the Registration
Statement known to such counsel after reasonable investigation
to which the Company or any of its subsidiaries is a party or
by which the Company or any of its subsidiaries is bound or to
which any of the properties or assets of the Company or any of
its subsidiaries is subject, nor will such actions result in
any violation of the Charter or by-laws of the Company or of
any of its subsidiaries or any statute, or any order, or
regulation (other than applicable state securities and blue
sky laws, as to which such counsel need not express art
opinion of any order or rule) of any court or governmental
agency or body or court having jurisdiction over the Company
or any of its subsidiaries or any of their properties or
assets.
(vii) Except for the registration of the Stock under the Securities
Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by
the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and
the consummation of the transactions contemplated hereby.
(viii) The description in the Registration Statement and Prospectus
of statutes, legal or governmental proceedings and contracts
and other documents are accurate in all material respects; and
to the best of such counsel's knowledge, there are no
statutes, legal or governmental proceedings, contracts or
other documents of a character required to be described in the
Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described
or filed as required.
(ix) To the best of such counsel's knowledge, neither the Company
nor any of its subsidiaries (i) is in violation of its charter
or by-laws, (ii) is in default, and
<PAGE> 16
16
no event has occurred, which, with notice or lapse of time or
both, would constitute a default, in the due performance or
observance of any term, covenant or condition contained in any
agreement or instrument to which it is a party or by which it
is bound or to which any of its properties or assets is
subject or (iii) is in violation of any law, ordinance,
governmental rule, regulation or court decree to which it or
its property or assets may be subject or has failed to obtain
any license, permit, certificate, franchise or other
governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business
except, in the case of clauses (ii) and (iii), for those
defaults, violations or failures which, either individually or
in the aggregate, would not have a Material Adverse Effect.
(x) To the best of such counsel's knowledge and other than as set
forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its
subsidiaries is a party or of which any property or asset of
the Company or any of its subsidiaries is the subject which,
singularly or in the aggregate, if determined adversely to
the Company or any of its subsidiaries, might have a Material
Adverse Effect or would prevent or adversely affect the
ability of the Company to perform its obligations under this
Agreement; and, to the best of such counsel's knowledge, no
such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(xi) The Registration Statement has become effective under the
Securities Act, the Rule 462(b) Registration Statement, if
any, was filed with the Commission on the date specified
therein, the Prospectus was filed with the Commission pursuant
to the subparagraph of Rule 424(b) of the Rules and
Regulations specified in such opinion on the date specified
therein and, to our knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued
and, to the knowledge of such counsel, no proceeding for that
purpose is pending before or contemplated by the Commission.
(xii) The Registration Statements, as of the respective effective
dates and the Prospectus, as of its date, and any further
amendments or supplements thereto, as of their respective
dates, made by the Company prior to the Closing Date (other
than the financial statements and other statistical data
contained therein, as to which such counsel need express no
opinion) complied as to form in all material respects with the
requirements of the Securities Act and the Rules and
Regulations; (other than the financial statements and related
schedules therein, as to which such counsel need express no
opinion), when they were filed with the Commission, complied
as to form in all material respects with the requirements of
the Exchange Act and the rules and regulations of the
Commission thereunder.
(xiii) To the best of such counsel's knowledge, no person or entity
has the right to require registration of shares of Common
Stock or other securities of the Company because of the filing
or effectiveness of the Registration Statements or otherwise,
except for persons and entities who have expressly waived such
right or who have been given proper notice and have failed to
exercise such right within the time or times required under
the terms and conditions of such right.
<PAGE> 17
17
(xiv) Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of the Investment
Company Act and the rules and regulations of the Commission
thereunder.
[Add clauses on other matters appropriate in the particular
case such as patents, title to property, regulatory issues
(e.g., if the issuer is a public utility, a bank, an insurance
company or a regulated carrier).]
Such counsel shall also have furnished to the Representatives
a written statement, addressed to the Underwriters and dated
the Closing Date, in form and substance satisfactory to the
Representatives, to the effect that (x) such counsel has acted
as counsel to the Company in connection with the preparation
of the Registration Statements (y) based on such counsel's
examination of the Registration Statements and such counsel's
investigations made in connection with the preparation of the
Registration Statements and "conferences with certain officers
and employees of and with auditors for and counsel to the
Company", such counsel has no reason to believe that the
Registration Statements, as of the respective effective dates,
contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or
necessary in order to make the statements therein not
misleading, or that the Prospectus contains any untrue
statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances
under which they were made, not misleading when they were
filed with the Commission; it being understood that such
counsel need express no opinion as to the financial statements
or other financial data contained in the Registration
Statement or the Prospectus.
The foregoing opinion and statement may be qualified by a
statement to the effect that such counsel has not independently verified the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus and takes no responsibility therefor
except to the extent set forth in the opinion described in clauses (viii) and
(ix) above.
(e) [insert the name of counsel to the Selling Stockholders] shall have
furnished to the Representatives such counsel's written opinion, as counsel to
the Selling Stockholders, addressed to the Underwriters and dated the Closing
Date, in form and substance reasonably satisfactory to the Representatives, to
the effect that:
(i) Each Selling Stockholder has full right, power and authority
to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of
this Agreement, the Power of Attorney and the Custody
Agreement by each Selling Stockholder and the consummation by
each Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or
constitute a default under, any statute, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which any Selling
Stockholder is a party or by which any Selling Stockholder is
bound or to which any of the property or assets of any Selling
Stockholder is subject, nor will such actions result in any
violation of
<PAGE> 18
18
any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over any Selling Stockholder or the property or
assets of any Selling Stockholder; and, except for the
registration of the Stock under the Securities Act and such
consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and
applicable state securities laws in connection with the
purchase and distribution of the Stock by the Underwriters, no
consent, approval, authorization or order of, or filing or
registration with, any such court or governmental agency or
body is required for the execution, delivery and performance
of this Agreement, the Power of Attorney or the Custody
Agreement by any Selling Stockholder and the consummation by
any Selling Stockholder of the transactions contemplated
hereby and thereby.
(ii) This Agreement has been duly executed and delivered by
or on behalf of each Selling Stockholder.
(iii) A Power-of-Attorney and a Custody Agreement have been duly
executed and delivered by each Selling Stockholder and
constitute valid and binding agreements of each Selling
Stockholder.
(iv) Upon payment for, and delivery of, the shares of Stock to be
sold by each Selling Stockholder under this Agreement in
accordance with the terms hereof, the Underwriters will
acquire good and valid title to such shares, free and clear of
all liens, encumbrances, equities or claims.
(f) The Representatives shall have received from Gray Cary Ware &
Freidenrich LLP counsel for the Underwriters, such opinion or opinions,
dated the Closing Date, with respect to such matters as the
Underwriters may reasonably require, and the Company [and the Selling
Stockholder[s]] shall have furnished to such counsel such documents as
they request for enabling them to pass upon such matters.
(g) At the time of the execution of this Agreement, the Representatives
shall have received from PricewaterhouseCoopers LLP a letter, addressed
to the Underwriters and dated such date, in form and substance
satisfactory to the Representatives (i) confirming that they are
independent certified public accountants with respect to the Company
and its subsidiaries within the meaning of the Securities Act and the
Rules and Regulations and (ii) stating the conclusions and findings of
such firm with respect to the financial statements and certain
financial information contained or incorporated by reference in the
Prospectus.
(h) On the Closing Date, the Representatives shall have received a
letter (the "bring-down letter") from PricewaterhouseCoopers LLP
addressed to the Underwriters and dated the Closing Date confirming, as
of the date of the bring-down letter (or, with respect to matters
involving changes or developments since the respective dates as of
which specified financial information is given in the Prospectus as of
a date not more than three business days prior to the date of the
bring-down letter), the conclusions and findings of such firm with
respect to the
<PAGE> 19
19
financial information and other matters covered by its letter delivered
to the Representatives concurrently with the execution of this
Agreement pursuant to Section 8(g).
(i) The Company shall have furnished to the Representatives a
certificate, dated the Closing Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating
that (i) such officers have carefully examined the Registration
Statements and the Prospectus and, in their opinion, the Registration
Statements as of their respective effective dates and the Prospectus,
as of each such effective date, did not include any untrue statement of
a material fact and did not omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading, (ii) since the effective date of the Initial Registration
Statement no event has occurred which should have been set forth in a
supplement or amendment to the Registration Statements or the
Prospectus, (iii) to the best of their knowledge after reasonable
investigation, as of the Closing Date, the representations and
warranties of the Company in this Agreement are true and correct and
the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied hereunder at or
prior to the Closing Date, and (iv) subsequent to the date of the most
recent financial statements [included or incorporated by reference] in
the Prospectus, there has been no material adverse change in the
financial position or results of operation of the Company and its
subsidiaries, or any change, or any development including a prospective
change, in or affecting the condition (financial or otherwise), results
of operations, business or prospects of the Company and its
subsidiaries taken as a whole, except as set forth in the Prospectus.
(j) [Each Selling Stockholder shall have furnished to the
Representatives on the Closing Date a certificate, dated the such date,
signed by, or on behalf of, the Selling Stockholder stating that the
representations, warranties and agreements of the Selling Stockholder
contained herein are true and correct as of the Closing Date and that
the Selling Stockholder has complied with all agreements contained
herein to be performed by the Selling Stockholder at or prior to the
Closing Date.]
(k) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus (i) any loss or interference with its
business from fire, explosion, flood or other calamity, whether or not
covered by insurance, or from any labor dispute or court or
governmental action, order or decree, otherwise than as set forth or
contemplated in the Prospectus (ii) since such date there shall not
have been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the business, general
affairs, management, financial position, stockholders' equity or
results of operations of the Company and its subsidiaries, otherwise
than as set forth or contemplated in the Prospectus, the effect of
which, in any such case described in clause (i) or (ii), is, in the
judgment of the Representatives, so material and adverse as to make it
impracticable or inadvisable to proceed with the sale or delivery of
the Stock on the terms and in the manner contemplated in the
Prospectus.
(l) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental
agency or body which would, as of the Closing Date, prevent the
issuance or sale of the Stock; and no injunction, restraining order or
order of any other nature by any federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance or sale of the Stock.
<PAGE> 20
20
(m) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange
or in the over-the-counter market, or trading in any securities of the
Company on any exchange or in the over-the-counter market, shall have
been suspended or minimum prices shall have been established on any
such exchange or such market by the Commission, by such exchange or by
any other regulatory body or governmental authority having
jurisdiction, (ii) a banking moratorium shall have been declared by
Federal or state authorities, (iii) the United States shall have become
engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a
declaration of a national emergency or war by the United States or (iv)
there shall have occurred such a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) as to make it, in the judgment of the Representatives,
impracticable or inadvisable to proceed with the sale or delivery of
the Stock on the terms and in the manner contemplated in the
Prospectus.
(n) The Nasdaq National Market System shall have approved the Stock for
listing, subject only to official notice of issuance and evidence of
satisfactory distribution.
(o) SG Cowen shall have received the written agreements, substantially
in the form of Exhibit I hereto, of the officers, directors and
stockholders of the Company listed in Schedule C to this Agreement.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
7. INSURANCE. The Selling Stockholder[s] will provide, not later than the First
Closing Date, a policy or undertaking of [insert name of insurance company], or
other insurers, in form satisfactory to the Representatives, indemnifying and
holding harmless in the aggregate amount of $[ ] each Underwriter Indemnified
Party (as defined below) in priority to any others insured against any losses,
claims, damages or liabilities, or expenses incurred in connection therewith,
joint or several, to which such Underwriter Indemnified Party may become subject
under the Securities Act or otherwise and which such Underwriter Indemnified
Party may become subject under the Securities Act or otherwise and which arise
out of the purchase, offering or sale by such Underwriter of the shares of Stock
sold by the Selling Stockholder[s]. Such insurance may provide for a deductible
amount not in excess of $[ ].]
8. INDEMNIFICATION AND CONTRIBUTION.
(a) For purposes of this Section 8, "Company" shall include the Company
and all subsidiaries thereof. The Company shall indemnify and hold
harmless each Underwriter, its officers, employees, representatives and
agents and each person, if any, who controls any Underwriter within the
meaning of the Securities Act (collectively, the "Underwriter
Indemnified Parties" and each, an "Underwriter Indemnified Party")
against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which that Underwriter Indemnified Party
may become subject, under the Securities Act or otherwise, insofar as
such loss, claim, damage, liability or action arises out of or is based
upon (i) any untrue statement or alleged untrue statement of a material
fact contained in the Preliminary Prospectus, the Registration
Statements or the Prospectus or in any amendment or supplement thereto
(ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statements or the Prospectus or in any
<PAGE> 21
21
amendment or supplement thereto a material fact required to be stated
therein or necessary to make the statements therein not misleading or
(iii) any act or failure to act, or any alleged act or failure to act,
by any Underwriter in connection with, or relating in any manner to,
the Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon matters covered by clause (i) or (ii)
above, (provided that the Company shall not be liable in the case of
any matter covered by this clause (iii) to the extent that it is
determined in a final judgement by a court of competent jurisdiction
that such loss, claim, damage, liability or action resulted directly
from any such act or failure to act undertaken or omitted to be taken
by such Underwriter through its gross negligence or willful misconduct)
and shall reimburse each Underwriter Indemnified Party promptly upon
demand for any legal or other expenses reasonably incurred by that
Underwriter Indemnified Party in connection with investigating or
preparing to defend or defending against or appearing as a third party
witness in connection with any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company shall not be liable in any such case to the extent that any
such loss, claim, damage, liability or action arises out of or is based
upon (i) an untrue statement or alleged untrue statement in or omission
or alleged omission from the Preliminary Prospectus, the Registration
Statements or the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to
the Company through the Representatives by or on behalf of any
Underwriter specifically for use therein, which information the parties
hereto agree is limited to the Underwriter's Information (as defined in
Section 17). This indemnity agreement is not exclusive and will be in
addition to any liability which the Company might otherwise have and
shall not limit any rights or remedies which may otherwise be available
at law or in equity to each Underwriter Indemnified Party.
(b) [The Selling Shareholder[s] [, jointly and severally] shall
indemnify and hold harmless each Underwriter Indemnified Party, against
any loss, claim, damage or liability, joint or several, or any action
in respect thereof, to which that Underwriter Indemnified may become
subject, under the Securities Act or otherwise, insofar as such loss,
claim, damage, liability or action arises out of or is based upon (i)
any untrue statement or alleged untrue statement of a material fact
contained in the Preliminary Prospectus, either of the Registration
Statements or the Prospectus or in any amendment or supplement thereto
or (ii) the omission or alleged omission to state in any Preliminary
Prospectus, either of the Registration Statements or the Prospectus or
in any amendment or supplement thereto a material fact required to be
stated therein or necessary to make the statements therein not
misleading and shall reimburse each Underwriter Indemnified Party
promptly upon demand for any legal or other expenses reasonably
incurred by that Underwriter Indemnified Party in connection with
investigating or preparing to defend or defending against or appearing
as a third party witness in connection with any such loss, claim,
damage, liability or action as such expenses are incurred; provided,
however, [if the Selling Shareholders have obtained an insurance policy
for the benefit of the underwriters - the liability of the Selling
Shareholders under this Section 8 shall be limited to the amount of
losses, claims, damages or liabilities which are not covered and paid
by the insurance referred to in Section 7 (whether by reason of being
within the deductible amount or for any other reason); provided,
further however, that the foregoing indemnification agreement with
respect to the Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such loss, claim,
damage or liability purchased Securities, or any officers, employees,
representatives, agents or controlling persons of such Underwriter, if
(i) a copy of the Prospectus (as then amended or supplemented) was
required by law to be delivered to such person at or prior to the
written confirmation of the sale of Securities to such person, (ii) a
copy of the Prospectus (as then amended or supplemented) was not sent
or given to such person by or on behalf of such
<PAGE> 22
22
Underwriter and such failure was not due to non-compliance by the
Company with Section 4[(I)](d), and (iii) the Prospectus (as so amended
or supplemented) would have cured the defect giving rise to such loss,
claim, damage or liability.] This indemnity agreement is not exclusive
and will be in addition to any liability which the Selling Shareholders
might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter
Indemnified Party.]
(c) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company its officers, employees, representatives and
agents, each of its directors and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively the
"Company Indemnified Parties" and each a "Company Indemnified Party")
[and the Selling Stockholder[s], their respective officers, employees,
representatives and agents and each person, if any, who controls the
Selling Stockholders within the meaning of the Securities Act
(collectively, the "Stockholder Indemnified Parties" and each a
"Stockholder Indemnified Party"),] against any loss, claim, damage or
liability, joint or several, or any action in respect thereof, to which
the Company Indemnified Parties [or the Selling Stockholder Indemnified
Parties] may become subject, under the Securities Act or otherwise,
insofar as such loss, claim, damage, liability or action arises out of
or is based upon (i) any untrue statement or alleged untrue statement
of a material fact contained in the Preliminary Prospectus, either of
the Registration Statements or the Prospectus or in any amendment or
supplement thereto or (ii) the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but in each case only to
the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically
for use therein, and shall reimburse the Company Indemnified Parties
[and the Selling Stockholder Indemnified Parties] for any legal or
other expenses reasonably incurred by such parties in connection with
investigating or preparing to defend or defending against or appearing
as third party witness in connection with any such loss, claim, damage,
liability or action as such expenses are incurred; provided that the
parties hereto hereby agree that such written information provided by
the Underwriters consists solely of the Underwriter's Information. This
indemnity agreement is not exclusive and will be in addition to any
liability which the Underwriters might otherwise have and shall not
limit any rights or remedies which may otherwise be available at law or
in equity to the Company Indemnified Parties and Selling Stockholder
Indemnified Parties.
(d) Promptly after receipt by an indemnified party under this Section 8
of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the claim or the commencement of that
action; provided, however, that the failure to notify the indemnifying
party shall not relieve it from any liability which it may have under
this Section 8 except to the extent it has been materially prejudiced
by such failure; and, provided, further, that the failure to notify the
indemnifying party shall not relieve it from any liability which it may
have to an indemnified party otherwise than under this Section 8. If
any such claim or action shall be brought against an indemnified party,
and it shall notify the indemnifying party thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that
it wishes, jointly with any other similarly notified indemnifying
party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not
be liable to the indemnified party under this Section 8 for any legal
or
<PAGE> 23
23
other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that any indemnified party shall have
the right to employ separate counsel in any such action and to
participate in the defense thereof but the fees and expenses of such
counsel shall be at the expense of such indemnified party unless (i)
the employment thereof has been specifically authorized by the
indemnifying party in writing, (ii) such indemnified party shall have
been advised by such counsel that there may be one or more legal
defenses available to it which are different from or additional to
those available to the indemnifying party and in the reasonable
judgment of such counsel it is advisable for such indemnified party to
employ separate counsel or (iii) the indemnifying party has failed to
assume the defense of such action and employ counsel reasonably
satisfactory to the indemnified party, in which case, if such
indemnified party notifies the indemnifying party in writing that it
elects to employ separate counsel at the expense of the indemnifying
party, the indemnifying party shall not have the right to assume the
defense of such action on behalf of such indemnified party, it being
understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially
similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances, be liable for the reasonable
fees and expenses of more than one separate firm of attorneys at any
time for all such indemnified parties, which firm shall be designated
in writing by SG Cowen, if the indemnified parties under this Section
8 consist of any Underwriter Indemnified Party, or by the Company if
the indemnified parties under this Section 8 consist of any Company
Indemnified Parties. Each indemnified party, as a condition of the
indemnity agreements contained in Sections 8(a), 8(b) [and 8(c)], shall
use all reasonable efforts to cooperate with the indemnifying party in
the defense of any such action or claim. Subject to the provisions of
Section 8(e) below, no indemnifying party shall be liable for any
settlement of any such action effected without its written consent
(which consent shall not be unreasonably withheld), but if settled with
its written consent or if there be a final judgment for the plaintiff
in any such action, the indemnifying party agrees to indemnify and
hold harmless any indemnified party from and against any loss or
liability by reason of such settlement or judgment.
(e) If at any time an indemnified party shall have requested that an
indemnifying party reimburse the indemnified party for fees and
expenses of counsel, such indemnifying party agrees that it shall be
liable for any settlement of the nature contemplated by this Section 8
effected without its written consent if (i) such settlement is entered
into more than 45 days after receipt by such indemnifying party of the
request for reimbursement, (ii) such indemnifying party shall have
received notice of the terms of such settlement at least 30 days prior
to such settlement being entered into and (iii) such indemnifying party
shall not have reimbursed such indemnified party in accordance with
such request prior to the date of such settlement.
(f) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
Section 8(a), 8(b) or 8(c), then each indemnifying party shall, in lieu
of indemnifying such indemnified party, contribute to the amount paid
or payable by such indemnified party as a result of such loss, claim,
damage or liability, or action in respect thereof, (i) in such
proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Stock or if
the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the
relative fault of the Company and the Selling Stockholders on the one
hand and the Underwriters on the other with respect to the statements
or omissions which resulted in such loss, claim, damage or liability,
or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the
<PAGE> 24
24
Company and the Selling Stockholders on the one hand and the
Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the
offering of the Stock purchased under this Agreement (before deducting
expenses) received by the Company and the Selling Stockholders bear to
the total underwriting discounts and commissions received by the
Underwriters with respect to the Stock purchased under this Agreement,
in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or the Underwriters on the other, the
intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such untrue statement
or omission; provided that the parties hereto agree that the written
information furnished to the Company through the Representatives by or
on behalf of the Underwriters for use in any Preliminary Prospectus,
the Registration Statements or the Prospectus consists solely of the
Underwriter's Information. The Company, the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if
contributions pursuant to this Section 8(f) were to be determined by
pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which
does not take into account the equitable considerations referred to
herein. The amount paid or payable by an indemnified party as a result
of the loss, claim, damage or liability, or action in respect thereof,
referred to above in this Section 8(f) shall be deemed to include, for
purposes of this Section 8(f), any legal or other expenses reasonably
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of
this Section 8(f), no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the
Stock underwritten by it and distributed to the public were offered to
the public less the amount of any damages which such Underwriter has
otherwise paid or become liable to pay by reason of any untrue or
alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution
from any person who was not guilty of such fraudulent
misrepresentation.
The Underwriters' obligations to contribute as provided in
this Section 8(f) are several in proportion to their respective underwriting
obligations and not joint.
9. TERMINATION. The obligations of the Underwriters hereunder may be terminated
by SG Cowen, in its absolute discretion by notice given to and received by the
Company prior to delivery of and payment for the Firm Stock if, prior to that
time, any of the events described in Sections 6(k) or 6(m) have occurred or if
the Underwriters shall decline to purchase the Stock for any reason permitted
under this Agreement.
10. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If (a) this Agreement shall have
been terminated pursuant to Section 9 or 11, (b) the Company [or any Selling
Stockholder] shall fail to tender the Stock for delivery to the Underwriters for
any reason permitted under this Agreement, or (c) the Underwriters shall decline
to purchase the Stock for any reason permitted under this Agreement the Company
[and the Selling Stockholder[s]] shall reimburse the Underwriters for the fees
and expenses of their counsel and for such other out-of-pocket expenses as shall
have been reasonably incurred by them in connection with this Agreement and the
proposed purchase of the Stock, and upon demand the Company [and the Selling
Stockholder[s]] shall pay the full amount thereof to the SG Cowen. If this
Agreement is terminated pursuant to Section 11 by reason of the default of one
or more Underwriters, [the Company
<PAGE> 25
25
shall not] [neither the Company nor [any] Selling Stockholder shall] be
obligated to reimburse any defaulting Underwriter on account of those expenses.
11. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder and
the aggregate number of shares which such defaulting Underwriter or Underwriters
agreed but failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter or Underwriters shall so default and the
aggregate number of shares with respect to which such default or defaults occur
is more than ten percent (10%) of the total number of shares underwritten and
arrangements satisfactory to the Representatives and the Company for the
purchase of such shares by other persons are not made within forty-eight (48)
hours after such default, this Agreement shall terminate.
If the remaining Underwriters or substituted Underwriters are
required hereby or agree to take up all or part of the shares of Stock of a
defaulting Underwriter or Underwriters as provided in this Section 11, (i) the
Company [and the Selling Stockholder[s]] shall have the right to postpone the
Closing Dates for a period of not more than five (5) full business days in order
that the Company [and the Selling Stockholder[s]] may effect whatever changes
may thereby be made necessary in the Registration Statement or the Prospectus,
or in any other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the respective numbers
of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company[, the Selling
Stockholder[s]] or the other Underwriters for damages occasioned by its default
hereunder. Any termination of this Agreement pursuant to this Section 11 shall
be without liability on the part of any non-defaulting Underwriter[, the Selling
Stockholder[s]] or the Company, except expenses to be paid or reimbursed
pursuant to Sections 5 and 10 and except the provisions of Section 8 shall not
terminate and shall remain in effect.
12. SUCCESSORS; PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall
inure to the benefit of and be binding upon the several Underwriters, the
Company and the Selling Stockholders and their respective successors. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person other than the persons mentioned in the preceding sentence any
legal or equitable right, remedy or claim under or in respect of this Agreement,
or any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person; except that the
representations, warranties, covenants, agreements and indemnities of the
Company and the Selling Stockholders contained in this Agreement shall also be
for the benefit of the Underwriter Indemnified Parties, and the indemnities of
the several Underwriters shall also be for the benefit of the Company
Indemnified Parties and the Selling Stockholder Indemnified Parties.
13. SURVIVAL OF INDEMNITIES, REPRESENTATIONS, WARRANTIES, ETC. The respective
indemnities, covenants, agreements, representations, warranties and other
statements of the Company the Selling Stockholders and the several Underwriters,
as set forth in this Agreement or made by them respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, the Selling Stockholders,
the Company or any person controlling any of them and shall survive delivery of
and payment for the Stock.
<PAGE> 26
26
14. NOTICES. All statements, requests, notices and agreements hereunder shall be
in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to SG Securities Corporation Attention:
[________] (Fax: 212-[278-5503]);
(b) if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to Crossroads Systems, Inc., 9390 Research
Boulevard, Suite II-300, Austin, Texas 78759, Attention: Brian R. Smith
(Fax: 512-349-0304);
(c) if to any Selling Stockholders, shall be delivered or sent by mail,
telex or facsimile transmission to such Selling Stockholder at the
address set forth on Schedule B hereto; provided, however, that any
notice to an Underwriter pursuant to Section 8 shall be delivered or
sent by mail, telex or facsimile transmission to such Underwriter at
its address set forth in its acceptance telex to the Representatives,
which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof.
15. DEFINITION OF CERTAIN TERMS. For purposes of this Agreement, (a) "business
day" means any day on which the New York Stock Exchange, Inc. is open for
trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules
and Regulations.
16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
17. UNDERWRITERS' INFORMATION. The parties hereto acknowledge and agree that,
for all purposes of this Agreement, the Underwriters' Information consists
solely of the following information in the Prospectus: (i) the last paragraph
on the front cover page concerning the terms of the offering by the
Underwriters; and (ii) the statements concerning the Underwriters contained in
the [To Come] under the heading "Underwriting."
18. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, you
will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by the Representatives, will be binding on all the
Underwriters; and any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all the Selling Stockholders.
19. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section,
paragraph or provision of this Agreement shall not affect the validity or
enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
20. GENERAL. This Agreement constitutes the entire agreement of the parties to
this Agreement and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings and negotiations with respect to the subject
matter hereof. In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any
<PAGE> 27
27
term of this Agreement may be waived, only by a writing signed by the Company,
the Selling Stockholders and the Representatives.
21. COUNTERPARTS. This Agreement may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument.
Any person executing and delivering this Agreement as
Attorney-in-fact for the Selling Stockholders represents by so doing that he has
been duly appointed as Attorney-in-fact by such Selling Stockholder pursuant to
a validly existing and binding Power of Attorney which authorizes such
Attorney-in-fact to take such action.
If the foregoing is in accordance with your understanding of
the agreement between the Company, the Selling Stockholders and the several
Underwriters, kindly indicate your acceptance in the space provided for that
purpose below.
Very truly yours,
CROSSROADS SYSTEMS INC.
By:
------------------------------------
Name:
Title:
[SELLING STOCKHOLDER[S] LISTED IN
SCHEDULE B]
By: [Attorney-in-fact]
By:
------------------------------------
[Attorney-in-fact]
Acting [on [his] [her] [their] own
behalf and] on behalf of the Selling
Stockholder[s] listed in Schedule B.]
<PAGE> 28
28
Accepted as of the date first above written:
SG COWEN SECURITIES CORPORATION
Acting on its own behalf
And as a Representative of several
Underwriters referred to in the
Foregoing Agreement.
By: SG COWEN SECURITIES CORPORATION
By:
---------------------------------------------
Name:
Title:
DAIN RAUSCHER WESSELS
Acting on its own behalf
And as a Representative of several
Underwriters referred to in the
Foregoing Agreement.
By: DAIN RAUSCHER WESSELS
By:
---------------------------------------------
Name:
Title:
MORGAN KEEGAN & COMPANY, INC.
Acting on its own behalf
And as a Representative of several
Underwriters referred to in the
Foregoing Agreement.
By: MORGAN KEEGAN & COMPANY, INC.
By:
---------------------------------------------
Name:
Title:
<PAGE> 29
29
SCHEDULE A
Number Number of
of Firm Optional
Shares Shares
to be to be
Name Purchased Purchased
- ---- --------- ----------
SG Cowen Securities Corporation
========= ==========
Total
========= ==========
<PAGE> 30
30
SCHEDULE B
Selling Stockholder[s] Number of Number of
- ---------------------- Firm Optional
Shares to Shares to
be Sold be Sold
--------- ---------
[Name and address]
========= =========
Total
========= =========
<PAGE> 31
31
SCHEDULE C
[list of stockholders subject to Section 4(h)]
<PAGE> 32
Exhibit I
[Form of Lock-Up Agreement]
[Date]
SG Cowen Securities Corporation
[Name of Co-Representatives]
As Representatives of the
several Underwriters
c/o SG Cowen Securities Corporation
Financial Square
New York, New York 10005
Re: [Company] ___________ Shares of Common Stock
Dear Sirs:
In order to induce SG Cowen Securities Corporation ("SG
Cowen") [and _____________ (together with SG Cowen,] the "Representatives"), to
enter in to a certain underwriting agreement with [Company], a ______________
corporation (the "Company"), with respect to the public offering of shares of
the Company's Common Stock, par value $_ per share ("Common Stock"), the
undersigned hereby agrees that for a period of [180] days following the date of
the final prospectus filed by the Company with the Securities and Exchange
Commission in connection with such public offering, the undersigned will not,
without the prior written consent of SG Cowen, directly or indirectly, offer,
sell, assign, transfer, pledge, contract to sell, or otherwise dispose of, any
shares of Common Stock (including, without limitation, Common Stock which may be
deemed to be beneficially owned by the undersigned in accordance with the rules
and regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares")) or securities convertible into or exercisable or exchangeable in
Common Stock.
Anything contained herein to the contrary notwithstanding, any
person to whom shares of Common Stock or Beneficially Owned Shares are
transferred from the undersigned shall be bound by the terms of this Agreement.
[In addition, the undersigned hereby waives, from the date
hereof until the expiration of the [one-year] period following the date of the
Company's final Prospectus, any and all rights, if any, to request or demand
registration pursuant to the Securities Act of any shares of Common Stock that
are registered in the name of the undersigned or that are Beneficially Owned
Shares. In order to enable the aforesaid Managing Director covenants to be
enforced, the undersigned hereby consents to the placing of legends and/or
stop-transfer orders with the transfer agent of the Common Stock with respect to
any shares of Common Stock or Beneficially Owned Shares.]
[Signatory]
By:
----------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 3.1
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CROSSROADS SYSTEMS, INC.
Crossroads Systems, Inc., a corporation organized and existing
under the Delaware General Corporation Law (the "DGCL") DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of this
corporation was filed with the Secretary of State of Delaware on September 26,
1996 under the name "Crossroads Holding Corporation."
SECOND: The Sixth Amended and Restated Certificate of
Incorporation of Crossroads Systems, Inc. in the form attached hereto as Annex A
has been duly adopted in accordance with the provisions of Sections 245 and 242
of the DGCL by the directors and stockholders of the Corporation.
THIRD: The Sixth Amended and Restated Certificate of Incorporation
so adopted reads in full as set forth in Annex A attached hereto and is hereby
incorporated herein by this reference.
IN WITNESS WHEREOF, Crossroads Systems, Inc. has caused this Sixth
Amended and Restated Certificate to be signed by its duly authorized and elected
President this ___ day of ___________, 1999.
CROSSROADS SYSTEMS, INC.
By:
---------------------------------------
James H. Moore
President
<PAGE> 2
ANNEX A
SIXTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CROSSROADS SYSTEMS, INC.
ARTICLE I
The name of this Corporation shall be Crossroads Systems, Inc.
(the "Corporation").
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, City of Wilmington, County of New
Castle, State of Delaware. The name of the registered agent at that address is
The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
ARTICLE IV
4.1 Prior to a Qualified Public Offering (as defined in Section B.8 of this
Section 4.1 of this Article IV hereof), the Corporation's capital stock shall be
comprised as set forth in this Section 4.1 as follows:
A. Classes of Stock. The Corporation is authorized to issue two classes of
capital stock to be designated, respectively, "Common Stock" and "Preferred
Stock." The total number of shares of capital stock authorized to be issued is
Sixty Million (60,000,000) shares. Forty-Nine Million (49,000,000) shares shall
be Common Stock, par value $0.001 per share, and Eleven Million (11,000,000)
shares shall be Preferred Stock, par value $0.001 per share, 4,000,000 of which
shall be designated as "Series A Convertible Preferred Stock" (the "Series A
Preferred Stock"), 2,294,688 of which shall be designated as "Series B
Convertible Preferred Stock" (the "Series B Preferred Stock"), 1,250,000 of
which shall be designated as "Series C Convertible Preferred Stock" (the "Series
C Preferred Stock"), 1,070,210 of which shall be designated as "Series D
Convertible Preferred Stock" (the "Series D Preferred Stock") and
1
<PAGE> 3
866,667 of which shall be designated as "Series E Convertible Preferred Stock"
(the "Series E Preferred Stock").
B. Rights, Preferences and Restrictions of Preferred Stock. Undesignated
Preferred Stock, if any, authorized under this Sixth Amended and Restated
Certificate of Incorporation of the Corporation (as the same may hereafter be
amended, the "Restated Certificate") may be issued from time to time in one or
more series. The Board of Directors is hereby authorized to fix or alter the
rights, preferences, privileges and restrictions granted to or imposed upon
additional series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, or of any of them. Subject to
compliance with applicable protective voting rights which have been or may be
granted to the Preferred Stock or series thereof in Certificates of Designation
or the Restated Certificate, as the same may hereafter be amended ("Protective
Provisions"), but notwithstanding any other rights of the Preferred Stock or any
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to any of those of any present or future class or series of Preferred
Stock or Common Stock. Subject to compliance with applicable Protective
Provisions, the Board of Directors is also authorized to increase or decrease
the number of shares of any series, prior or subsequent to the issue of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series. The respective rights, preferences, privileges and restrictions granted
to and imposed on the Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock are as
set forth below in this Division B of Article IV.
1. Dividend Provisions.
(a) The holders of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall be entitled to receive dividends, out of any assets
legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock or other securities
and rights convertible into or entitling the holder thereof to receive, directly
or indirectly, additional shares of Common Stock of the Corporation) on the
Common Stock of the Corporation, at the rate of $0.07, $0.16, $0.28, $0.38 and
$1.05 per share per annum, respectively, (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like after the
date upon which shares of Series E Preferred Stock were first issued (the
"Initial Series E Issue Date")), payable quarterly when, as and if declared by
the Board of Directors, except as provided in the following sentence. Until May
1, 2004 such dividends shall not be cumulative; from and after such date, such
dividends shall be cumulative and shall accrue on each share from May 1, 2004,
from day to day, whether not earned or declared. Any accumulation of dividends
on the Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock, the Series D Preferred Stock or the Series E Preferred Stock
shall not bear interest. Cumulative dividends with respect to each share of
Series A Preferred Stock, each share of Series B Preferred Stock, each share of
Series C Preferred Stock, each share of Series D Preferred Stock and each share
of Series E Preferred Stock which are accrued, payable and/or in
2
<PAGE> 4
arrears shall, upon conversion of such share to Common Stock, be convertible
into additional shares of Common Stock at the applicable Conversion Price (as
defined below) then in effect for such series of shares of Preferred Stock (with
any fractional share rounded to the nearest whole share, with 0.5 of a share
rounding to 1).
(b) Any dividend or distribution which is declared by the
Corporation and payable with assets of the Corporation other than cash shall be
governed by the provisions of Subsection 2(d)(ii) below.
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall be entitled to receive, prior
and in preference to any distribution of any of the assets of the Corporation to
the holders of Common Stock by reason of their ownership thereof, an amount per
share of each Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock then held
by them equal to the sum of (i) $1.00, $2.30, $4.00, $5.45 and $15.00,
respectively (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like), plus (ii) an amount equal to all
accrued, or declared but unpaid, dividends on such share of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock, as the case may be, held by such holder. If
upon the occurrence of such event, the assets and funds thus distributed among
the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock in
proportion to the relative liquidation preference each such holder is otherwise
entitled to receive.
(b) [Intentionally omitted.]
(c) After the distributions described in Subsection (a) above
have been paid, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of Common
Stock pro rata based on the number of shares of Common Stock held by each.
(d) (i) For purposes of this Section 2, a liquidation,
dissolution or winding up of the Corporation shall be deemed to be occasioned
by, or to include, (A) the acquisition of the Corporation by another entity by
means of any transaction or series of related transactions (including, without
limitation, any reorganization, merger or consolidation); or (B) a sale of all
or substantially all of the assets of the Corporation, including a sale of all
or substantially all of the assets of the Corporation's subsidiaries, if such
assets constitute substantially all of the assets of the Corporation and such
subsidiaries taken as a whole; unless the Corporation's stockholders of record
as constituted immediately prior to such acquisition or sale will, immediately
after such acquisition or sale (by virtue of securities issued as
3
<PAGE> 5
consideration for the Corporation's acquisition or sale or otherwise) hold at
least 50% of the voting power of the surviving or acquiring entity.
(ii) In any of such events, if the consideration received by
the Corporation is other than cash, its value will be deemed its fair market
value. Any securities to be delivered to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock, Series E Preferred Stock or Common Stock, as the case may be, shall be
valued as follows:
(A) If traded on a securities exchange or through the
Nasdaq National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty-day period
ending three (3) days prior to the closing;
(B) If actively traded over-the-counter, the value shall
be deemed to be the average of the closing bid or sale prices (whichever is
applicable) over the thirty-day period ending three (3) days prior to the
closing; and
(C) If there is no active public market, the value shall
be the fair market value thereof, as mutually determined by the Corporation and
the holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock.
(iii) In the event the requirements of this Subsection 2(d)
are not complied with, the Corporation shall forthwith either:
(A) Cause such closing to be postponed until such time
as the requirements of this Section 2 have been complied with; or
(B) Cancel such transaction, in which event the
respective rights, preferences and privileges of the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock shall revert to and be the same as
such rights, preferences and privileges existing immediately prior to the date
of the first notice referred to in Subsection 2(d)(iv) below.
(iv) The Corporation shall give each holder of record of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than ten
(10) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the Corporation's receipt of written consent of the holders of at least 75% of
the Series A Preferred Stock, Series B Preferred Stock, Series C
4
<PAGE> 6
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock entitled
to such notice rights or similar notice rights.
3. Redemption.
(a) (i) The holders of 67% of the aggregate number of shares
of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock then outstanding, at any
time after the seventh anniversary of the Initial Series E Issue date and upon
thirty (30) days prior written notice to the Corporation of such election (the
"Redemption Notice"), may require the Corporation to redeem (each a "Mandatory
Redemption") on the dates referenced below (each, a "Mandatory Redemption Date")
the number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
set forth opposite such Mandatory Redemption Date below at a price per share
equal to the Redemption Price (as defined in paragraph 3 (b)):
<TABLE>
<CAPTION>
MANDATORY REDEMPTION DATE NUMBER OF SHARES
------------------------- ----------------
<S> <C>
The date which is 30 days after One-half (1/2) of the shares of
the date of the Redemption Series A Preferred Stock, Series B
Notice (the "First Mandatory Preferred Stock, Series C Preferred
Redemption Date") Stock, Series D Preferred Stock
and Series E Preferred Stock then
outstanding
First Anniversary One-half (1/2) of the shares of
of the First Mandatory Series A Preferred Stock, Series B
Redemption Date Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock
and Series E Preferred Stock then
outstanding
Second Anniversary All remaining shares of Series A
of the First Mandatory Preferred Stock, Series B Preferred
Redemption Date Stock, Series C Preferred Stock,
Series D Preferred Stock and
Series E Preferred Stock then
outstanding
</TABLE>
Upon receipt of the Redemption Notice from the holders of at least sixty-seven
percent (67%) of the shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock then outstanding, the Corporation (and each holder of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock) will be obligated to redeem the number of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock specified above on
each Mandatory Redemption Date.
5
<PAGE> 7
(b) The holders of Series A Preferred Stock shall be entitled to
receive from the Corporation on a Mandatory Redemption Date an amount in cash
for each share of Series A Preferred Stock to be redeemed on such Mandatory
Redemption Date (the "Series A Redemption Price") equal to $1.00 (as adjusted to
reflect stock dividends, stock splits, combinations, recapitalizations or the
like), plus any accrued, or declared but unpaid, dividends on the Series A
Preferred Stock as of the First Mandatory Redemption Date. The holders of Series
B Preferred Stock shall be entitled to receive from the Corporation on a
Mandatory Redemption Date an amount in cash for each share of Series B Preferred
Stock to be redeemed on such Mandatory Redemption Date (the "Series B Redemption
Price") equal to $2.30 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like) plus any accrued, or declared but
unpaid, dividends on the Series B Preferred Stock as of the First Mandatory
Redemption Date. The holders of Series C Preferred Stock shall be entitled to
receive from the Corporation on a Mandatory Redemption Date an amount in cash
for each share of Series C Preferred Stock to be redeemed on such Mandatory
Redemption Date (the "Series C Redemption Price") equal to $4.00 (as adjusted to
reflect stock dividends, stock splits, combinations, recapitalizations or the
like) plus any accrued, or declared but unpaid, dividends on the Series C
Preferred Stock as of the First Mandatory Redemption Date. The holders of Series
D Preferred Stock shall be entitled to receive from the Corporation on a
Mandatory Redemption Date an amount in cash for each share of Series D Preferred
Stock to be redeemed on such Mandatory Redemption Date (the "Series D Redemption
Price") equal to $5.45 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like) plus any accrued, or declared but
unpaid, dividends on the Series D Preferred Stock as of the First Mandatory
Redemption Date. The holders of Series E Preferred Stock shall be entitled to
receive from the Corporation on a Mandatory Redemption Date an amount in cash
for each share of Series E Preferred Stock to be redeemed on such Mandatory
Redemption Date (the "Series E Redemption Price") equal to $15.00 (as adjusted
to reflect stock dividends, stock splits, combinations, recapitalizations or the
like) plus any accrued, or declared but unpaid, dividends on the Series E
Preferred Stock as of the First Mandatory Redemption Date. As used herein and in
Subsections (3)(c) and (3)(d) below, the term "Redemption Date" shall refer to
the date on which shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
are scheduled to be redeemed as provided in Subsection 3(a) and the term
"Redemption Price" shall refer to the Series A Redemption Price, the Series B
Redemption Price, the Series C Redemption Price, the Series D Redemption Price
and the Series E Redemption Price, as the case may be. At least fifteen (15) but
no more than thirty (30) days prior to the Redemption Date, written notice shall
be mailed, first class postage prepaid, to each holder of record (at the close
of business on the business day next preceding the day on which notice is given)
of the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock to be redeemed, at
the address last shown on the records of the Corporation for such holder,
notifying such holder of the redemption to be effected, specifying the number of
shares to be redeemed from such holder, the Redemption Date, the Redemption
Price, the place at which payment may be obtained and calling upon such holder
to surrender to the Corporation, in the manner and at the place designated, his,
her or its certificate or certificates representing the shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock to be redeemed (the "Company
Redemption Notice"). Except as provided in Subsection (3)(c), on or after the
Redemption Date, each holder of Series A Preferred Stock,
6
<PAGE> 8
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock to be redeemed shall surrender to the Corporation the
certificate or certificates representing such shares, in the manner and at the
place designated in the Company Redemption Notice, and thereupon the Redemption
Price of each such share shall be payable to the order of the person whose name
appears on such certificate or certificates as the owner thereof and each
surrendered certificate shall be cancelled. In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued representing the unredeemed shares.
(c) From and after the Redemption Date, unless there shall have
been a default in payment of the Redemption Price, all rights of the holders of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock designated for
redemption in the Company Redemption Notice as holders of such shares of Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock (except the right to receive the
applicable Redemption Price without interest upon surrender of their certificate
or certificates) shall cease with respect to such shares, and such shares shall
not thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. If the funds of the Corporation legally
available for redemption of shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock on any Redemption Date are insufficient to redeem the total
number of shares of Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock to be
redeemed on such date, those funds which are legally available will be used to
redeem the maximum possible number of such shares ratably among the holders of
such shares to be redeemed based upon their holdings of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock. The shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock, such funds will
immediately be used to redeem the balance of the shares which the Corporation
has become obliged to redeem on any Redemption Date but which it has not
redeemed.
(d) On or prior to each Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock designated for redemption in the Company Redemption Notice, and
not yet redeemed or converted, with a bank or trust corporation having aggregate
capital and surplus in excess of $100,000,000 as a trust fund for the benefit of
the respective holders of the shares designated for redemption and not yet
redeemed, with irrevocable instructions and authority to the bank or trust
corporation to publish the notice of redemption thereof and pay the applicable
Redemption Price for such shares to their respective holders on or after the
Redemption Date, upon receipt of notification from the Corporation that such
holder has surrendered his, her or its share certificate to the Corporation
pursuant to Subsection (3)(b) above. As of the date of such deposit (even if
prior to the Redemption Date), the deposit shall constitute full payment of the
shares to their holders. From
7
<PAGE> 9
and after the date of such deposit the shares so called for redemption shall be
redeemed and shall be deemed to be no longer outstanding, and the holders
thereof shall cease to be stockholders with respect to such shares and shall
have no rights with respect thereto, except the rights to receive from the bank
or trust corporation payment of the Redemption Price of the shares, without
interest, upon surrender of their certificates therefor and the right to convert
such shares as provided in Section 4 below. Such instructions shall also provide
that any monies deposited by the Corporation pursuant to this Subsection (3)(d)
for the redemption of shares thereafter converted into shares of the
Corporation's Common Stock pursuant to Section 4 below prior to the Redemption
Date shall be returned to the Corporation forthwith upon such conversion. The
balance of any monies deposited by the Corporation pursuant to this Subsection
(3)(d) remaining unclaimed at the expiration of two (2) years following the
final Redemption Date shall thereafter be returned to the Corporation upon its
request expressed in a resolution of its Board of Directors.
4. Conversion. The holders of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert.
(i) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series A Preferred
Stock, by dividing $1.00 plus any accrued, or declared but unpaid, dividends
with respect to the Series A Preferred Stock by the Series A Conversion Price in
effect on the date the certificate is surrendered for conversion. After giving
effect to the Corporation's 3-for-2 split of its Common Stock effected by means
of a dividend of 0.5 shares of Common Stock to each share of outstanding Common
Stock on August 12, 1999 (the "Stock Split") pursuant to Subsection 4(d) below,
the Conversion Price per share for the Series A Preferred Stock (the "Series A
Conversion Price") shall be $0.667; provided, however that such Series A
Conversion Price shall be subject to further adjustment as provided in the
previous sentence and as set forth in Subsection 4(d) below.
(ii) Each share of Series B Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series B Preferred
Stock, by dividing $2.30 plus any accrued, or declared but unpaid, dividends
with respect to the Series B Preferred Stock by the Series B Conversion Price in
effect on the date the certificate is surrendered for conversion. After giving
effect to the Stock Split pursuant to Subsection 4(d) below, the Conversion
Price per share for the Series B Preferred Stock (the "Series B Conversion
Price") shall be $1.533; provided, however, that such Series B Conversion Price
shall be subject to further adjustment as provided in the previous sentence and
as set forth in Subsection 4(d) below.
8
<PAGE> 10
(iii) Each share of Series C Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series C Preferred
Stock, by dividing $4.00 plus any accrued, or declared but unpaid, dividends
with respect to the Series C Preferred Stock by the Series C Conversion Price in
effect on the date the certificate is surrendered for conversion. After giving
effect to the Stock Split pursuant to Subsection 4(d) below, the Conversion
Price per share for the Series C Preferred Stock (the "Series C Conversion
Price") shall be $2.667; provided, however, that such Series C Conversion Price
shall be subject to further adjustment as provided in the previous sentence and
as set forth in Subsections 4(d) and 4(e) below.
(iv) Each share of Series D Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series D Preferred
Stock, by dividing $5.45 plus any accrued, or declared but unpaid, dividends
with respect to the Series D Preferred Stock by the Series D Conversion Price in
effect on the date the certificate is surrendered for conversion. After giving
effect to the Stock Split pursuant to Subsection 4(d) below, the Conversion
Price per share for the Series D Preferred Stock (the "Series D Conversion
Price") shall be $3.633; provided, however, that such Series D Conversion Price
shall be subject to further adjustment as provided in the previous sentence and
as set forth in Subsections 4(d) and 4(e) below.
(v) Each share of Series E Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined, with respect to each share of Series E Preferred
Stock, by dividing $15.00 plus any accrued, or declared but unpaid, dividends
with respect to the Series E Preferred Stock by the Series E Conversion Price in
effect on the date the certificate is surrendered for conversion. After giving
effect to the Stock Split pursuant to Subsection 4(d) below, the Conversion
Price per share for the Series E Preferred Stock (the "Series E Conversion
Price") shall be $10.00; provided, however, that such Series E Conversion Price
shall be subject to further adjustment as provided in the previous sentence and
as set forth in Subsections 4(d) and 4(e) below.
(b) Automatic Conversion. Each share of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective Series A Conversion
Price, Series B Conversion Price or Series C Conversion Price, respectively, at
the time in effect immediately upon the earlier of (i) except as provided below
in Subsection 4(c), the Corporation's sale of its Common Stock in a firm
commitment underwritten public offering pursuant to a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), the public
offering price per share of which is not less than $6.67 (which number gives
effect to the Stock Split) (as adjusted to reflect stock dividends, stock
splits, combinations, recapitalizations or the like subsequent to the Stock
Split) and with gross proceeds to the Corporation and selling stockholders
therein of at least $10,000,000 in the aggregate or (ii) the date specified by
written consent or agreement of
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<PAGE> 11
the holders of at least sixty-seven percent (67%) of the then outstanding shares
of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock voting together as a single class. Each share of Series D Preferred Stock
shall automatically be converted into shares of Common Stock at the then
effective Series D Conversion Price at the time in effect immediately upon the
earlier of (i) except as provided below in Subsection 4(c), the Corporation's
sale of its Common Stock in a firm commitment underwritten public offering
pursuant to a registration statement under the Securities Act, the public
offering price per share of which is not less than $6.67 (which number gives
effect to the Stock Split) (as adjusted to reflect stock dividends, stock
splits, combinations, recapitalizations or the like subsequent to the Stock
Split) and with gross proceeds to the Corporation and selling stockholders
therein of at least $10,000,000 in the aggregate or (ii) the date specified by
written consent or agreement of the holders of at least sixty-seven percent
(67%) of the then outstanding shares of Series D Preferred Stock voting together
as a single class. Each share of Series E Preferred Stock shall automatically be
converted into shares of Common Stock at the then effective Series E Conversion
Price at the time in effect immediately upon the earlier of (i) except as
provided below in Subsection 4(c), the Corporation's sale of its Common Stock in
a firm commitment underwritten public offering pursuant to a registration
statement under the Securities Act, the public offering price per share of which
is not less than $10.00 (which number gives effect to the Stock Split) (as
adjusted to reflect stock dividends, stock splits, combinations,
recapitalizations or the like subsequent to the Stock Split) and with gross
proceeds to the Corporation and selling stockholders therein of at least
$10,000,000 in the aggregate or (ii) the date specified by written consent or
agreement of the holders of at least sixty-seven percent (67%) of the then
outstanding shares of Series E Preferred Stock voting together as a single
class.
(c) Mechanics of Conversion. Before any holder of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock shall be entitled to convert the
same into shares of Common Stock pursuant to Subsection 4(a) above, such holder
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for such Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock, and shall give written notice to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to such
holder of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock, or to the nominee
or nominees of such holder, a certificate or certificates for the number of
shares of Common Stock to which such holder shall be entitled as aforesaid. Such
conversion shall be deemed to have been made immediately prior to the close of
business on the date of such surrender of the shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred
Stock or Series E Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act,
the conversion shall be conditioned upon the closing with the underwriters of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock upon conversion of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
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<PAGE> 12
Preferred Stock or Series E Preferred Stock shall not be deemed to have
converted such Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock until
immediately prior to the closing of such sale of securities.
(d) Proportional Conversion Price Adjustments of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock. In addition to the weighted
average anti-dilution adjustments with respect to the Series C Conversion Price,
Series D Conversion Price and Series E Conversion Price as provided in
Subsection 4(e) below, the Series A Conversion Price, Series B Conversion Price,
Series C Conversion Price, Series D Conversion Price and Series E Conversion
Price each shall be subject to proportional adjustments from time to time as
follows:
(i) In the event the Corporation should at any time or from
time to time after the Initial Series E Issue Date (other than the Stock Split,
which is already reflected herein) fix a record date for the effectuation of a
split or subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock entitled to receive a dividend or other
distribution payable in additional shares of Common Stock or other securities or
rights convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend
distribution, split or subdivision if no record date is fixed), the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price and Series E Conversion Price shall be appropriately decreased
so that the number of shares of Common Stock issuable on conversion of each
share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock shall be increased
in proportion to such increase of the aggregate of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.
(ii) If the number of shares of Common Stock outstanding at
any time after the Initial Series E Issue Date is decreased by a combination of
the outstanding shares of Common Stock, then, following the record date of such
combination, the Series A Conversion Price, Series B Conversion Price, Series C
Conversion Price, Series D Conversion Price and Series E Conversion Price shall
be appropriately increased so that the number of shares of Common Stock issuable
on conversion of each share of each such series shall be decreased in proportion
to such decrease in outstanding shares.
(e) Weighted Average Conversion Price Adjustments of Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock.
(i) In order to limit dilution of the conversion rights
granted under this Section 4, the Series C Conversion Price, Series D Conversion
Price and Series E Conversion Price also will be subject to adjustment from time
to time pursuant to this Subsection 4(e).
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<PAGE> 13
(ii) Except with respect to issuances set forth below in this
subparagraph (ii), and except as provided elsewhere in this Subsection 4(e), if
and whenever on or after the Initial Series E Issue Date, the Corporation issues
or sells, or is deemed to have issued or sold, any shares of its Preferred
Stock, including Preferred Stock Equivalents (as defined in Subsection 4(f)(i)
below), for consideration per share less than the Series C Conversion Price,
Series D Conversion Price or Series E Conversion Price in effect immediately
prior to the time of such issue or sale, then immediately upon such issue or
sale the Series C Conversion Price, Series D Conversion Price or Series E
Conversion Price, as the case may be will be reduced to the price (rounded to
the nearest whole cent) determined by multiplying the Series C Conversion Price,
Series D Conversion Price or Series E Conversion Price, as the case may be by a
fraction, the numerator of which shall be (a) the number of shares of Common
Stock outstanding plus the number of shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, the Series D Preferred Stock and the Series E Preferred Stock
(the "Common Stock Deemed Outstanding") immediately prior to such issue or sale,
plus (b) the number of shares of Preferred Stock which the aggregate
consideration received by the Corporation for the total number of additional
shares of Preferred Stock so issued or sold would purchase at the Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price, as the
case may be then in effect and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue or sale plus
the number of shares of Common Stock Deemed Outstanding plus the number of
additional shares of Preferred Stock so issued. For example, if after the
Initial Series E Issue Date, the Corporation issues 3,000,000 shares of
Preferred Stock for consideration per share of $6.67 and assuming 6,750,000
shares of Common Stock are outstanding and that there are 14,000,000 shares of
Common Stock Deemed Outstanding (for a total of 20,750,000) immediately prior to
such issuance, the initial Series E Conversion Price would be reduced to the
price determined by multiplying $10.00, the Series E Conversion Price then in
effect (and after having given effect to the Stock Split), by the following
fraction:
$6.67 x 3,000,000
-----------------
20,750,000 + $10.00
----------------------------
20,750,000 + 3,000,000
$20,010,000
-----------
= 20,750,000 + $10.00
-------------------------
23,750,000
= 20,750,000 + 2,001,000
-------------------------
23,750,000
= 22,751,000
----------
23,750,000
= 0.95794
resulting in an adjusted Series E Conversion Price of $9.5794 ($10.00 x
0.95794), and an adjusted Series E conversion rate of 1.0439 ($10.00/$9.5794).
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<PAGE> 14
No adjustment shall be made to the Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price, including Preferred Stock
Equivalents (as defined below), issued or issuable: (1) pursuant to a
transaction or event for which adjustment of the Series A Conversion Price,
Series B Conversion Price, Series C Conversion Price, Series D Conversion Price
or Series E Conversion Price is made pursuant to Subsection 4(d) above; (2)
pursuant to a bona fide business or asset acquisition; or (3) to a lender to the
Corporation under agreements approved by the Board of Directors at a duly
convened meeting or by unanimous written consent.
(f) Effect on Series C Conversion Price, Series D Conversion
Price and Series E Conversion Price of Certain Events. For purposes of
determining the adjusted Series C Conversion Price, Series D Conversion Price
and Series E Conversion Price under Section 4(e) above, the following will be
applicable:
(i) If the Corporation in any manner issues or grants any
rights, warrants or options to subscribe for or to purchase Preferred Stock or
securities convertible into or exchangeable for Preferred Stock (collectively,
"Preferred Stock Equivalents") and the price per share for which Preferred Stock
is issuable upon the exercise of, or upon conversion or exchange of, such
Preferred Stock Equivalent is less than the Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price, as the case may be, in effect
immediately prior to the time of the granting of such, then the total maximum
number of shares of Preferred Stock issuable upon the exercise of, or upon
conversion or exchange of, the total maximum amount of such will be deemed to be
outstanding and to have been issued and sold by the Corporation for such price
per share. For purposes of this paragraph (f)(i), the "price per share for which
Preferred Stock is issuable" will be determined by dividing (a) the total
amount, if any, received or receivable by the Corporation as consideration for
the granting of such, plus the minimum aggregate amount of additional
consideration payable to the Corporation upon exercise of, or conversion or
exchange of such Preferred Stock Equivalents, by (b) the total maximum number of
shares of Preferred Stock issuable upon the exercise of, or upon the conversion
or exchange of, all such Preferred Stock Equivalents. If such Preferred Stock
Equivalents by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, or decrease in the
number of shares of Preferred Stock issuable upon the exercise, conversion or
exchange thereof, then the Series C Conversion Price, Series D Conversion Price
or Series E Conversion Price, as the case may be, computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase or
decrease becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such Preferred Stock Equivalents or the rights of
conversion or exchange under such Preferred Stock Equivalents. Otherwise, no
further adjustment of the Series C Conversion Price, Series D Conversion Price
or Series E Conversion Price, as the case may be, will be made when Preferred
Stock is actually issued upon the exercise of, or the conversion or exchange of,
such Preferred Stock Equivalents.
(ii) If the purchase price provided for in any Preferred
Stock Equivalents, the additional consideration, if any, payable upon the
conversion or exchange of any Preferred Stock Equivalents, or the rate at which
any Preferred Stock Equivalents are convertible into or exchangeable for
Preferred Stock changes at any time, the Series C Conversion Price,
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<PAGE> 15
Series D Conversion Price or Series E Conversion Price, as the case may be, in
effect at the time of such change will be readjusted to the Series C Conversion
Price, Series D Conversion Price or Series E Conversion Price, as the case may
be, which would have been in effect at such time had such Preferred Stock
Equivalents still outstanding provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold.
(iii) Upon the expiration of, or the termination of any right
to convert or exchange, any Preferred Stock Equivalents without the exercise or
conversion or exchange of any such Preferred Stock Equivalents, the Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price, as the
case may be, then in effect hereunder will be adjusted to the Series C
Conversion Price, Series D Conversion Price or Series E Conversion Price, as the
case may be, which would have been in effect at the time of such expiration or
termination had such Preferred Stock Equivalents, to the extent outstanding
immediately prior to such expiration or termination, never been issued.
(iv) If any Preferred Stock or Preferred Stock Equivalents is
issued or sold or deemed to have been issued or sold for cash, the consideration
received therefor will be deemed to be the net amount received by the
Corporation therefor. In case any Preferred Stock or Preferred Stock Equivalents
are issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation will be the fair
market value, as determined by a majority of the Board of Directors (the "Fair
Market Value"), thereof as of the date of receipt.
(v) In case any Preferred Stock Equivalent is issued after
the Initial Series E Issue Date in connection with the issue or sale of other
securities of the Corporation, together comprising one integrated transaction in
which no specific consideration is allocated to such Preferred Stock Equivalent
by the parties thereto, the Preferred Stock Equivalent will be deemed to have
been issued for a consideration of $0.01.
(vi) If the Corporation takes a record of the holders of
Preferred Stock for the purpose of entitling them (a) to receive a dividend or
other distribution payable in Preferred Stock or Preferred Stock Equivalents or
(b) to subscribe for or purchase Preferred Stock or Preferred Stock Equivalents,
then such record date will be deemed to be the date of the issue or sale of the
shares of Preferred Stock deemed to have been issued or sold upon the
declaration of such dividend or upon the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be.
(g) Other Distributions. In the event the Corporation shall
declare a dividend or distribution payable in securities of other persons,
evidences of indebtedness issued by the Corporation or other persons, assets
(excluding cash dividends) or Common Stock Equivalents, then, in each such case,
the holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock shall be
entitled to a proportionate share of any such distribution as though they were
the holders of the number of shares of Common Stock of the Corporation into
which their shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, as the
case may be, are convertible as of the record date fixed for the
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<PAGE> 16
determination of the holders of Common Stock of the Corporation entitled to
receive such dividend or distribution.
(h) Recapitalizations. If at any time or from time to time after
the Initial Series E Issue Date, there shall be a recapitalization of the Common
Stock (other than a subdivision, combination or merger or sale of assets
transaction provided for elsewhere in this Section 4 or in Section 2 above)
provision shall be made so that the holders of the Series A Preferred Stock, the
holders of the Series B Preferred Stock, the holders of the Series C Preferred
Stock, the holders of the Series D Preferred Stock and the holders of Series E
Preferred Stock shall thereafter be entitled to receive upon conversion of their
shares of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock, as the case may
be, the number of shares of stock or other securities or property of the
Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock after the recapitalization to the
end that the provisions of this Section 4 (including adjustment of the Series A
Conversion Price, Series B Conversion Price, Series C Conversion Price, Series D
Conversion Price or Series E Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series E
Preferred Stock) shall be applicable after that event as nearly equivalent as
may be practicable.
(i) No Impairment. The Corporation will not, by amendment of this
Restated Certificate or through any reorganization, recapitalization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the Corporation,
but will at all times in good faith assist in the carrying out of all the
provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the Conversion Rights of the
holders of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock against
impairment.
(j) No Fractional Shares and Certificate as to Adjustments.
(i) No fractional shares shall be issued upon the conversion
of any share or shares of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock, and the number of shares of Common Stock to be issued shall be rounded to
the nearest whole share (with 0.5 being rounded up). Whether or not fractional
shares are issuable upon such conversion shall be determined on the basis of the
total number of shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
which the holder is at the time converting into Common Stock and the number of
shares of Common Stock issuable upon such aggregate conversion.
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<PAGE> 17
(ii) Upon the occurrence of each adjustment or readjustment
of the Series A Conversion Price, Series B Conversion Price, Series C Conversion
Price, Series D Conversion Price or Series E Conversion Price pursuant to this
Section 4, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of such Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock or Series E Preferred
Stock, as the case may be, a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock, Series D Preferred Stock or Series E Preferred Stock, furnish
or cause to be furnished to such holder a like certificate setting forth (A)
such adjustment and readjustment, (B) the Series A Conversion Price, Series B
Conversion Price, Series C Conversion Price, Series D Conversion Price or Series
E Conversion Price at the time in effect, and (C) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of a share of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series E
Preferred Stock, as the case may be.
(k) Notices of Record Date. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend (other than a cash dividend) or other distribution, any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class or
any other securities or property, or to receive any other right, the Corporation
shall mail to each holder of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
at least twenty (20) days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
(l) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
such number of its shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, the Corporation will take such corporate action as may, in the opinion of
its counsel, be necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for such purposes,
including, without limitation, engaging in best efforts to obtain the requisite
stockholder approval of any necessary amendment to this Restated Certificate.
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<PAGE> 18
(m) Notices. Any notice required by the provisions of this
Section 4 to be given to the holders of shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock shall be deemed given if deposited in the United States
mail, postage prepaid, and addressed to each holder of record at such holder's
address appearing on the books of the Corporation.
5. Voting Rights.
(a) The holder of each share of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock (i) shall have the right to one (1) vote for each share of
Common Stock into which such holder's shares of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series
E Preferred Stock could then be converted, with full voting rights and powers
equal to the voting rights and powers of the holders of Common Stock, except as
required by law or as expressly provided herein, including the Protective
Provisions in Section 6 below; (ii) shall be entitled, notwithstanding any
provision hereof, to notice of any stockholders' meeting in accordance with the
Bylaws of the Corporation; and (iii) shall be entitled to vote, together with
holders of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote. Fractional votes shall not, however, be
permitted and any fractional voting rights available on an as-converted basis
(after aggregating all shares into which shares of Preferred Stock held by each
holder could be converted) shall be rounded to the nearest whole number (with
0.5 being rounded upward).
(b) The holders of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock, voting together as a separate class, shall be entitled to elect one (1)
director; the holders of the Common Stock, voting together as a separate class,
shall be entitled to elect two (2) directors; and the holders of Series A
Preferred Stock, the holders of Series B Preferred Stock, the holders of Series
C Preferred Stock, the holders of Series D Preferred Stock, the holders of
Series E Preferred Stock and the holders of Common Stock, voting together as a
single class, shall be entitled to elect the remaining members of the Board, if
any.
6. Protective Provisions.
(a) So long as an aggregate of 250,000 shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock and/or Series E Preferred Stock are outstanding, the Corporation
shall not, without first obtaining the approval (by vote or written consent, as
permitted by law) of the holders of at least sixty-seven percent (67%) of the
then outstanding shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, Series D Preferred Stock and Series E Preferred Stock,
voting or acting, as the case may be, as a single class (unless a greater
percentage is required below):
(i) sell, convey or otherwise dispose of all or substantially
all of its property or business; liquidate, dissolve or wind up the
Corporation's business; or merge into or consolidate with any other Corporation
(other than a wholly-owned subsidiary corporation); or effect any transaction or
series of related transactions in which more than fifty percent (50%) of the
voting power of the Corporation is disposed of (a "Corporate Transaction"),
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<PAGE> 19
unless the Corporation's stockholders of record as constituted immediately prior
to such Corporate Transaction will, immediately after such Corporate
Transaction, hold at least fifty percent (50%) of the voting power of the
surviving or acquiring entity;
(ii) declare and distribute any cash dividends among the
holders of Common Stock, nor shall the Corporation purchase, redeem or acquire
any shares of Common Stock or pay funds into or set aside or make available a
sinking fund for the purchase, redemption or acquisition of shares of Common
Stock. After payment in full of such preferred dividends, approved as provided
above, any further payment of dividends shall be paid pro rata to the holders of
Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock and Series E Preferred Stock
(determined on an as-converted basis with respect to outstanding shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock); provided, however, the
foregoing restrictions shall not apply to the repurchase of shares of Common
Stock held by employees, officers, directors, consultants or other persons
performing services for the Corporation or any wholly owned subsidiary of the
Corporation (including, but not by way of limitation, distributors and sales
representatives) that are subject to restrictive agreements under which the
Corporation has the option to repurchase such shares upon the occurrence of
certain events, such as the proposed sale of such shares;
(iii) amend or modify any provision of the Restated
Certificate or Bylaws so as to affect adversely the rights, preferences or
privileges of the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, Series D Preferred Stock or Series E Preferred Stock;
(iv) increase, or otherwise take any action that would have
the effect of increasing, the authorized number of directors of the Corporation
to more than seven (7);
(v) increase or decrease (other than by redemption or
conversion) the total number of authorized shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock;
(vi) authorize or issue, or authorize or effect any
reclassification of, or obligate itself to issue, any equity security (other
than the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred
Stock, Series D Preferred Stock or Series E Preferred Stock), including any
other security convertible into or exercisable for any equity security, so as to
cause such security to have a preference over, or be on a parity with, the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock with respect to voting,
redemption, dividends or upon liquidation;
(vii) create any subsidiary of the Corporation, other than a
wholly owned subsidiary, or permit any wholly owned subsidiary of the
Corporation to issue or sell, except to the Corporation or any other wholly
owned subsidiary of the Corporation, any equity security, including any other
security convertible into or exercisable for any equity security, of such
subsidiary;
18
<PAGE> 20
(viii) authorize or issue, or obligate itself to issue, any
equity security, including any other security convertible into or exercisable
for any equity security, of the Corporation to any employee of the Corporation,
other than up to 2,500,000 shares of Common Stock, that may be reserved for
issuance or otherwise issued under any stock option or other plan or agreement
of the Corporation, including, but not limited to, the Corporation's 1996 Stock
Option/Stock Issuance Plan, together with options granted thereunder to purchase
such shares, and including any such increases to such stock option or other plan
or agreement that the Board of Directors may approve hereafter from time to
time; or
(ix) amend any of the provisions set forth in this Section 6,
which shall require the approval of the holders of seventy-five percent (75%) of
the then outstanding shares of Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock, Series D Preferred Stock and Series E Preferred
Stock voting or acting, as the case may be, as a single class.
(b) Except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by law, and in addition
to any other vote required by the Restated Certificate, so long as there are (v)
any shares of Series A Preferred Stock then outstanding, with respect to any
change made to the Series A Preferred Stock, (w) any shares of Series B
Preferred Stock then outstanding, with respect to any change made to the Series
B Preferred Stock pursuant to this Subsection 6(b), (x) any shares of Series C
Preferred Stock then outstanding, with respect to any change made to the Series
C Preferred Stock, (y) any shares of Series D Preferred Stock then outstanding,
with respect to any change made to the Series D Preferred Stock, or (z) any
shares of Series E Preferred Stock then outstanding, with respect to any change
made to the Series E Preferred Stock, the Corporation will not, without the
approval of the holders of a majority of the then outstanding shares of any
adversely affected series, voting separately as a series:
(i) amend this Restated Certificate to change or modify in an
adverse manner any of the rights, preferences or privileges of the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock or Series E Preferred Stock, as the case may be; or
(ii) amend this Restated Certificate to increase or decrease
(other than by redemption pursuant to Section 3 or conversion pursuant to
Section 4) the total number of authorized shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock, as the case may be.
19
<PAGE> 21
7. Status of Converted or Redeemed Stock. In the event any shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock or Series E Preferred Stock shall be converted pursuant
to Section 4 above, or in the event any shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or
Series E Preferred Stock shall be redeemed pursuant to Section 3 above, the
shares so converted or redeemed shall be cancelled and shall not be issuable by
the Corporation. The Restated Certificate shall be amended at such time or times
as the Corporation deems it reasonably practicable to effect the corresponding
reduction in the Corporation's authorized capital stock.
8. Qualified Public Offering. A "Qualified Public Offering" means any
underwritten offering by the Corporation of shares of Common Stock to the public
pursuant to an effective registration statement under the Securities Act of
1933, as amended, then in effect, or any comparable statement under any similar
federal statute then in force, in which (a) the aggregate cash proceeds to be
received by the Corporation and selling shareholders from such offering (without
deducting underwriting discounts, expenses and commissions) are at least
$10,000,000, and (b) the price per share paid by the public for such shares is
at least $10.00 (as appropriately adjusted for any stock split, stock dividends,
combinations, recapitalizations and the like subsequent to the Stock Split).
4.2 Effective as of a Qualified Public Offering (as defined in Section B.8
of Section 4.1 above), the Corporation's capital stock shall be comprised as
follows:
A. Authorized Shares. The aggregate number of shares that the Corporation
shall have authority to issue is 200,000,000, (a) 175,000,000 shares of which
shall be Common Stock, par value $0.001 per share, and (b) 25,000,000 of which
shall be Preferred Stock, par value $0.001 per share.
B. Common Stock. Each share of Common Stock shall have one vote on each
matter submitted to a vote of the stockholders of the Corporation. Subject to
the provisions of applicable law and the rights of the holders of the
outstanding shares of Preferred Stock, if any, the holders of shares of Common
Stock shall be entitled to receive, when and as declared by the Board of
Directors of the Corporation, out of the assets of the Corporation legally
available therefor, dividends or other distributions, whether payable in cash,
property or securities of the Corporation. The holders of shares of Common Stock
shall be entitled to receive, in proportion to the number of shares of Common
Stock held, the net assets of the Corporation upon dissolution after any
preferential amounts required to be paid or distributed to holders of
outstanding shares of Preferred Stock, if any, are so paid or distributed.
C. Preferred Stock.
1. Series. The Preferred Stock may be issued from time to time by the
Board of Directors as shares of one or more series. The description of shares of
each additional series of Preferred Stock, including any designations,
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and conditions of
redemption shall be as set forth in resolutions adopted by the Board of
Directors.
20
<PAGE> 22
2. Rights and Preferences. The Board of Directors is expressly
authorized, at any time, by adopting resolutions providing for the issuance of,
or providing for a change in the number of, shares of any particular series of
Preferred Stock and, if and to the extent from time to time required by law, by
filing certificates of amendment or designation which are effective without
stockholder action, to increase or decrease the number of shares included in
each series of Preferred Stock, but not below the number of shares then issued,
and to set in any one or more respects the designations, preferences, conversion
or other rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms and conditions of redemption relating to the shares of
each such series. The authority of the Board of Directors with respect to each
series of Preferred Stock shall include, but not be limited to, setting or
changing the following:
(a) the dividend rate, if any, on shares of such series, the
times of payment and the date from which dividends shall be accumulated, if
dividends are to be cumulative;
(b) whether the shares of such series shall be redeemable and, if
so, the redemption price and the terms and conditions of such redemption;
(c) the obligation, if any, of the Corporation to redeem shares
of such series pursuant to a sinking fund;
(d) whether shares of such series shall be convertible into, or
exchangeable for, shares of stock of any other class of classes and, if so, the
terms and conditions of such conversion or exchange, including the price or
prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any;
(e) whether the shares of such series shall have voting rights,
in addition to the voting rights provided by law, and, if so, the extent of such
voting rights;
(f) the rights of the shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation; and
(g) any other relative rights, powers, preferences,
qualifications, limitations or restrictions thereof relating to such series.
ARTICLE VI
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General Corporation Law
or (d) for any transaction from which the director derived any improper personal
benefit. If the Delaware General Corporation Law is amended after approval by
the stockholders of this Article to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law as so amended.
21
<PAGE> 23
ARTICLE VII
The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors. The number of directors
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws of the Corporation.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
Election of directors at an annual or special meeting of stockholders
need not be by written ballot unless the Bylaws of the Corporation shall so
provide.
ARTICLE X
A. At each annual meeting of stockholders, directors of the Corporation
shall be elected to hold office until the expiration of the term for which they
are elected, and until their successors have been duly elected and qualified. At
the first annual meeting of stockholders following the closing of the initial
public offering (the "First Public Company Annual Meeting") of the Corporation's
capital stock pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended (the "Initial Public Offering"), the
directors of the Corporation shall be divided into three classes as nearly equal
in size as is practicable, hereby designated as Class I, Class II and Class III.
The term of office of the initial Class I directors shall expire at the next
succeeding annual meeting of stockholders, the term of office of the initial
Class II directors shall expire at the second succeeding annual meeting of
stockholders and the term of office of the initial Class III directors shall
expire at the third succeeding annual meeting of stockholders. For the purposes
hereof, the initial Class I, Class II and Class III directors shall be those
directors designated and elected at the First Public Company Annual Meeting. At
each annual meeting after the First Public Company Annual Meeting, directors to
replace those of a Class whose terms expire at such annual meeting shall be
elected to hold office until the third succeeding annual meeting and until their
respective successors shall have been duly elected and qualified. If the number
of directors is hereafter changed, any newly created directorships or decrease
in directorships shall be so apportioned among the classes as to make all
classes as nearly equal in number as is practicable.
B. Vacancies occurring on the Board of Directors for any reason may be
filled by vote of a majority of the remaining members of the Board of Directors,
although less than a quorum, at a meeting of the Board of Directors. A person so
elected by the Board of Directors to fill a vacancy shall hold office until the
next succeeding annual meeting of
22
<PAGE> 24
stockholders of the Corporation and until his or her successor shall have been
duly elected and qualified.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
ARTICLE XII
Effective upon the closing of the Initial Public Offering, stockholders
of the Corporation may not take action by written consent in lieu of a meeting
but must take any actions at a duly called annual or special meeting.
ARTICLE XIII
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of the
capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation entitled
to vote shall be required to alter, amend or repeal Articles IX, XI or XII or
any provisions thereof.
ARTICLE XIV
The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred on
stockholders herein are granted subject to this reservation.
* * *
23
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
CROSSROADS SYSTEMS, INC.,
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I. Offices................................................................................................1
Section 1.1 Registered Office......................................................................1
Section 1.2 Other Offices..........................................................................1
ARTICLE II. Corporate Seal........................................................................................1
ARTICLE III. Stockholders' Meetings...............................................................................1
Section 3.1 Place of Meetings......................................................................1
Section 3.2 Annual Meeting.........................................................................2
Section 3.3 Special Meetings.......................................................................4
Section 3.4 Notice of Meetings.....................................................................4
Section 3.5 Quorum.................................................................................4
Section 3.6 Adjournment and Notice of Adjourned Meetings...........................................5
Section 3.7 Voting Rights..........................................................................5
Section 3.8 Joint Owners of Stock..................................................................5
Section 3.9 List of Stockholders...................................................................5
Section 3.10 No Action Without Meeting..............................................................6
Section 3.11 Organization...........................................................................6
ARTICLE IV. Directors.............................................................................................7
Section 4.1 Number and Term of Office; Classification..............................................7
Section 4.2 Powers.................................................................................7
Section 4.3 Vacancies..............................................................................7
Section 4.4 Resignation............................................................................8
Section 4.5 Removal................................................................................8
Section 4.6 Meetings...............................................................................8
Section 4.7 Quorum and Voting......................................................................9
Section 4.8 Action Without Meeting.................................................................9
Section 4.9 Fees and Compensation..................................................................9
Section 4.10 Committees............................................................................10
ARTICLE V. Officers..............................................................................................11
Section 5.1 Officers Designated...................................................................11
Section 5.2 Tenure and Duties of Officers.........................................................11
Section 5.3 Delegation of Authority...............................................................14
Section 5.4 Resignations..........................................................................14
Section 5.5 Removal...............................................................................14
ARTICLE VI. Execution of Corporate Instruments and Voting of Securities Owned by the Corporation.................14
Section 6.1 Execution of Corporate Instruments....................................................14
Section 6.2 Voting of Securities Owned by the Corporation.........................................15
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE VII. Shares of Stock.....................................................................................15
Section 7.1 Form and Execution of Certificates....................................................15
Section 7.2 Lost Certificates.....................................................................16
Section 7.3 Transfers.............................................................................16
Section 7.4 Fixing Record Dates...................................................................16
Section 7.5 Registered Stockholders...............................................................17
ARTICLE VIII. Other Securities of the Corporation................................................................17
Section 8.1 Execution of Other Securities.........................................................17
ARTICLE IX. Dividends............................................................................................18
Section 9.1 Declaration of Dividends..............................................................18
Section 9.2 Dividend Reserve......................................................................18
ARTICLE X. Fiscal Year...........................................................................................18
ARTICLE XI. Indemnification of Directors, Officers, Employees and Other Agents...................................18
Section 11.1 Directors and Executive Officers......................................................18
Section 11.2 Other Officers, Employees and Other Agents............................................19
Section 11.3 Good Faith............................................................................19
Section 11.4 Expenses..............................................................................19
Section 11.5 Enforcement...........................................................................20
Section 11.6 Non-Exclusivity of Rights.............................................................20
Section 11.7 Survival of Rights....................................................................20
Section 11.8 Insurance.............................................................................20
Section 11.9 Amendments............................................................................21
Section 11.10 Savings Clause........................................................................21
Section 11.11 Certain Definitions...................................................................21
ARTICLE XII. Notices.............................................................................................22
Section 12.1 Notice to Stockholders................................................................22
Section 12.2 Notice to Directors...................................................................22
Section 12.3 Address Unknown.......................................................................22
Section 12.4 Affidavit of Mailing..................................................................22
Section 12.5 Time Notices Deemed Given.............................................................22
Section 12.6 Failure to Receive Notice.............................................................22
Section 12.7 Notice to Person with Whom Communication Is Unlawful..................................22
Section 12.8 Notice to Person with Undeliverable Address...........................................23
ARTICLE XIII. Amendments.........................................................................................23
Section 13.1 Amendments............................................................................23
Section 13.2 Application of Bylaws.................................................................23
ARTICLE XIV. Loans to Officers...................................................................................24
</TABLE>
iii
<PAGE> 4
BYLAWS
OF
CROSSROADS SYSTEMS, INC.,
A DELAWARE CORPORATION
ARTICLE I.
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of the
corporation shall be the registered office named in the certificate of
incorporation of the corporation, or such other office as may be designated
from time to time by the Board of Directors in the manner provided by law.
SECTION 1.2 OTHER OFFICES. The corporation may have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation
may require. The books of the corporation may be kept (subject to any provision
contained in the Delaware General Corporation Law) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in these Bylaws.
ARTICLE II.
CORPORATE SEAL
The corporate seal shall consist of a die bearing the name of the
corporation. Said seal may be used by causing it, or a facsimile thereof, to be
impressed, affixed or reproduced.
ARTICLE III.
STOCKHOLDERS' MEETINGS
SECTION 3.1 PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the principal executive offices of the
corporation.
<PAGE> 5
SECTION 3.2 ANNUAL MEETING.
(a) The annual meeting of the stockholders of the corporation,
for the purpose of election of Directors and for such other business as may
lawfully come before it, shall be held on such date and at such time as may be
designated from time to time by the Board of Directors.
(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors; (B) otherwise properly brought before the
meeting by or at the direction of the Board of Directors; or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder
must have given timely notice thereof in writing to the Secretary of the
corporation. To be timely, a stockholder's notice must be delivered to or
mailed and received by the Secretary of the corporation not later than the
close of business on the one hundred twentieth (120th) day prior to the first
anniversary of the date of the proxy statement delivered to stockholders in
connection with the preceding year's annual meeting; provided, however, that if
either (i) the date of the annual meeting is advanced more than thirty (30)
days or delayed (other than as a result of adjournment) more than sixty (60)
days from such an anniversary date or (ii) no proxy statement was delivered to
stockholders in connection with the preceding year's annual meeting, notice by
the stockholder to be timely must be so delivered not earlier than the close of
business on the ninetieth (90th) day prior to such annual meeting and not later
than the close of business on the later of the sixtieth (60th) day prior to
such annual meeting or the close of business on the tenth (10th) day following
the day on which public announcement of the date of such meeting is first made
by the corporation. To be in proper form, a stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting:
(i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such
business at the annual meeting;
(ii) a representation that the stockholder is a holder of record
of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice or introduce
the business specified in the notice;
(iii) the name and address, as they appear on the corporation's
books, of the stockholder proposing such business;
(iv) the class and number of shares of the corporation which are
beneficially owned by the stockholder;
(v) any material interest of the stockholder in such business;
and
(vi) any other information that is required to be provided by
the stockholder pursuant to Regulation 14A under the Securities
Exchange Act of
2
<PAGE> 6
1934, as amended (the "Exchange Act"), in such stockholder's capacity
as a proponent of a stockholder proposal.
The chairman of the meeting shall determine whether any business
proposed to be transacted by the stockholders has been properly brought before
the meeting and, if any proposed business has not been properly brought before
the meeting, the chairman shall declare that such proposed business shall not be
presented for stockholder action at the meeting. For purposes of this Section
3.2, "public announcement" shall mean disclosure in a press release reported by
the Dow Jones News Service, Associated Press or comparable national news service
or in a document publicly filed by the corporation with the Securities and
Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act.
Notwithstanding any provision in this Section 3.2 to the contrary, requests for
inclusion of proposals in the corporation's proxy statement made pursuant to
Rule 14a-8 under the Exchange Act shall be deemed to have been delivered in a
timely manner if delivered in accordance with such Rule. Notwithstanding
compliance with the requirements of this Section 3.2, the chairman presiding at
any meeting of the stockholders may, in his sole discretion, refuse to allow a
stockholder or stockholder representative to present any proposal which the
corporation would not be required to include in a proxy statement under any rule
promulgated by the Securities and Exchange Commission.
(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of Directors at the meeting who complies with the notice procedures set
forth in this paragraph. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the corporation in accordance with the provisions of
paragraph (b) of this Section 3.2. Such stockholder's notice shall set forth (i)
as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a Director: (A) the name, age, business address and
residence address of such person; (B) the principal occupation or employment of
such person; (C) the class and number of shares of the corporation which are
beneficially owned by such person; (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder; and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of Directors, or is otherwise required in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
Director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section
3.2. At the request of the Board of Directors, any person nominated by a
stockholder for election as a Director shall furnish to the Secretary of the
corporation that information required to be set forth in the stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the corporation unless nominated in accordance
with the procedures set forth in this paragraph. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if the chairman should so determine, the chairman shall so declare
at the meeting, and the defective nomination shall be disregarded.
3
<PAGE> 7
SECTION 3.3 SPECIAL MEETINGS.
(a) Special meetings of the stockholders of the corporation may
only be called, for any purpose or purposes, by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of authorized
Directors (whether or not there exist any vacancies in previously authorized
directorships at the time any such resolution is presented to the Board of
Directors for adoption).
(b) No business may be transacted at such special meeting
otherwise than specified in the resolution calling for the meeting. The Board
of Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request other than any actions
effected prior to an Initial Public Offering (as defined below). Upon
determination of the time and place of the meeting, notice shall be given to
the stockholders entitled to vote, in accordance with the provisions of Section
3.4 of these Bylaws. If the notice is not given within sixty (60) days after
the receipt of the request, the person or persons requesting the meeting may
set the time and place of the meeting and give the notice. Nothing contained in
this paragraph (b) shall be construed as limiting, fixing or affecting the time
when a meeting of stockholders may be held.
SECTION 3.4 NOTICE OF MEETINGS. Except as otherwise provided by law or
the certificate of incorporation of the corporation, as the same may be amended
or restated from time to time and including any certificates of designation
thereunder (hereinafter, the "Certificate of Incorporation"), and for actions
effected prior to an Initial Public Offering (for which no notice need be
given) written notice of each meeting of stockholders shall be given not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting, such notice to specify the
place, date, time and purpose or purposes of the meeting. Notice of any meeting
of stockholders may be waived in writing, signed by the person entitled to
notice thereof, either before or after such meeting, and will be waived by any
stockholder by his attendance thereat in person or by proxy, except when the
stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Any stockholder so waiving notice
of such meeting shall be bound by the proceedings of any such meeting in all
respects as if due notice thereof had been given.
SECTION 3.5 QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in person or by duly authorized proxy, of the
holders of a majority of the outstanding shares of stock entitled to vote shall
constitute a quorum for the transaction of business. In the absence of a
quorum, any meeting of stockholders may be adjourned, from time to time, either
by the chairman of the meeting or by vote of the holders of a majority of the
shares represented thereat, but no other business shall be transacted at such
meeting. The stockholders present at a duly called or convened meeting, at
which a quorum is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of Incorporation
or these Bylaws, all actions taken by the holders of a majority of the votes
cast, excluding abstentions, at any meeting at which a quorum is present shall
be valid and binding upon the corporation; provided,
4
<PAGE> 8
however, that Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of Directors. Where a separate vote by a class or classes
is required, a majority of the outstanding shares of such class or classes,
present in person or represented by proxy, shall constitute a quorum entitled
to take action with respect to that vote on that matter and the affirmative
vote of the majority (plurality, in the case of the election of Directors) of
shares of such class or classes present in person or represented by proxy at
the meeting shall be the act of such class.
SECTION 3.6 ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the
shares casting votes, excluding abstentions. When a meeting is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the corporation may transact any business
which might have been transacted at the original meeting. If the adjournment is
for more than thirty (30) days or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
SECTION 3.7 VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the
stock records of the corporation on the record date, as provided in Section 7.5
of these Bylaws, shall be entitled to vote at any meeting of stockholders.
Every person entitled to vote or execute consents shall have the right to do so
either in person or by an agent or agents authorized by a written proxy
executed by such person or his duly authorized agent, which proxy shall be
filed with the Secretary at or before the meeting at which it is to be used. An
agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a
longer period. Elections of Directors need not be by written ballot, unless
otherwise provided in the Certificate of Incorporation.
SECTION 3.8 JOINT OWNERS OF STOCK. If shares or other securities
having voting power stand of record in the names of two (2) or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, tenants by the entirety, or otherwise, or if two (2) or more persons
have the same fiduciary relationship respecting the same shares, unless the
Secretary is given written notice to the contrary and is furnished with a copy
of the instrument or order appointing them or creating the relationship wherein
it is so provided, their acts with respect to voting shall have the following
effect: (a) if only one (1) votes, his act binds all; (b) if more than one (1)
votes, the act of the majority so voting binds all; or (c) if more than one (1)
votes, but the vote is evenly split on any particular matter, each faction may
vote the securities in question proportionally, or may apply to the Delaware
Court of Chancery for relief as provided in the Delaware General Corporation
Law, Section 217(b). If the instrument filed with the Secretary shows that any
such tenancy is held in unequal interests, a majority or even-split for the
purpose of clause (c) shall be a majority or even-split in interest.
SECTION 3.9 LIST OF STOCKHOLDERS. The Secretary shall prepare and
make, at least ten (10) days before every meeting of stockholders, a complete
list of the stockholders entitled to
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vote at said meeting, arranged in alphabetical order, showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not specified, at the place where the meeting is
to be held. The list shall be produced and kept at the time and place of
meeting during the whole time thereof and may be inspected by any stockholder
who is present.
SECTION 3.10 NO ACTION WITHOUT MEETING. Effective upon the closing of
the corporation's initial public offering of its capital stock pursuant to an
effective registration statement filed under the Securities Act of 1933, as
amended (the "Initial Public Offering"), the stockholders of the corporation
may not take action by written consent without a meeting and must take any
actions at a duly called annual or special meeting.
SECTION 3.11 ORGANIZATION.
(a) At every meeting of stockholders, unless another officer of
the corporation has been appointed by the Board of Directors, the Chairman of
the Board of Directors, or, if a Chairman has not been appointed, is absent, or
designates the next senior officer present to so act, the President, or, if the
President is absent, the most senior Vice President present, or, in the absence
of any such officer, a chairman of the meeting chosen by a majority in interest
of the stockholders entitled to vote, present in person or by proxy, shall act
as chairman. The Secretary, or, in his absence, an Assistant Secretary directed
to do so by the President, shall act as secretary of the meeting.
(b) The Board of Directors of the corporation shall be entitled
to make such rules or regulations for the conduct of meetings of stockholders
as it shall deem necessary, appropriate or convenient. Subject to such rules
and regulations of the Board of Directors, if any, the chairman of the meeting
shall have the right and authority to prescribe such rules, regulations and
procedures and to do all such acts as, in the judgment of such chairman, are
necessary, appropriate or convenient for the proper conduct of the meeting,
including, without limitation, establishing an agenda or order of business for
the meeting, rules and procedures for maintaining order at the meeting and the
safety of those present, limitations on participation in such meeting to
stockholders of record of the corporation and their duly authorized and
constituted proxies and such other persons as the chairman shall permit,
restrictions on entry to the meeting after the time fixed for the commencement
thereof, limitations on the time allotted to questions or comments by
participants and regulation of the opening and closing of the polls for
balloting on matters which are to be voted on by ballot. Unless and to the
extent determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
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ARTICLE IV.
DIRECTORS
SECTION 4.1 NUMBER AND TERM OF OFFICE; CLASSIFICATION.
(a) The number of directors which shall constitute the whole
Board of Directors shall be determined from time to time by the Board of
Directors (provided that no decrease in the number of directors which would
have the effect of shortening the term of an incumbent director may be made by
the Board of Directors), provided that the number of directors shall be not
less than one (1). At each annual meeting of stockholders, Directors of the
corporation shall be elected to hold office until the expiration of the term
for which they are elected, and until their successors have been duly elected
and qualified or until such Director's earlier death, resignation or due
removal; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the Delaware General Corporation Law. Directors need not be stockholders unless
so required by the Certificate of Incorporation. If, for any reason, the
Directors shall not have been elected at an annual meeting, they may be elected
as soon thereafter as convenient at a special meeting of the stockholders
called for that purpose in the manner provided in these Bylaws.
(b) At the first annual meeting of stockholders following the
closing of the Initial Public Offering (the "First Public Company Annual
Meeting"), the Directors of the corporation shall be divided into three classes
as nearly equal in size as is practicable, hereby designated Class I, Class II
and Class III. The initial Class I, Class II and Class III directors shall be
those directors designated and elected at the First Public Company Annual
Meeting. The term of office of the initial Class I directors shall expire at
the next succeeding annual meeting of stockholders, the term of office of the
initial Class II directors shall expire at the second succeeding annual meeting
of stockholders, and the term of office of the initial Class III directors
shall expire at the third succeeding annual meeting of stockholders. At each
annual meeting of stockholders following the First Public Company Annual
Meeting, Directors to replace those of the Class whose terms expire at such
annual meeting shall be elected to hold office until the third succeeding
annual meeting and until their respective successors shall have been duly
elected and qualified. If the number of directors is hereafter changed, any
newly created directorships or decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal in number
as is practicable.
SECTION 4.2 POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.
SECTION 4.3 VACANCIES. Vacancies occurring on the Board of Directors
may be filled by vote of a majority of the remaining members of the Board of
Directors, although less than a quorum. Each Director so elected shall hold
office for the unexpired portion of the term of the Director or newly created
directorship whose place shall be vacant and until his or her successor shall
have been duly elected and qualified or until such Director's earlier death,
resignation or due removal. A vacancy in the Board of Directors shall be deemed
to exist under this Section 4.3 in the case of (i) the death, removal or
resignation of any Director; (ii) an
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increase in the authorized number of Directors pursuant to Section 4.1(a)
above; or (iii) if the stockholders fail at any meeting of stockholders at
which Directors are to be elected (including any meeting referred to in Section
4.6 below) to elect the number of Directors then constituting the whole Board
of Directors.
SECTION 4.4 RESIGNATION. Any Director may resign at any time by
delivering his or her written resignation to the Secretary, such resignation to
specify whether it will be effective at a particular time, upon receipt by the
Secretary or at the pleasure of the Board of Directors. If no such
specification is made, it shall be deemed effective at the pleasure of the
Board of Directors. When one or more Directors shall resign from the Board of
Directors, effective at a future date, a majority of the Directors then in
office, including those who have so resigned, shall have power to fill such
vacancy or vacancies, the vote thereon to take effect when such resignation or
resignations shall become effective, and each Director so chosen shall hold
office for the unexpired portion of the term of the Director whose place shall
be vacated and until his successor shall have been duly elected and qualified.
SECTION 4.5 REMOVAL. At a special meeting of stockholders called for
such purpose and in the manner provided herein, subject to any limitations
imposed by law or the Certificate of Incorporation, the Board of Directors, or
any individual Director, may only be removed from office for cause, and a new
Director or Directors shall be elected by a vote of stockholders holding a
majority of the outstanding shares entitled to vote at an election of
Directors.
SECTION 4.6 MEETINGS.
(a) Annual Meetings. Unless the Board shall determine otherwise,
the annual meeting of the Board of Directors shall be held immediately before
or after the annual meeting of stockholders and at the place where such meeting
is held. No notice of an annual meeting of the Board of Directors shall be
necessary and such meeting shall be held for the purpose of electing officers
and transacting such other business as may lawfully come before it.
(b) Regular Meetings. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the principal
executive offices of the corporation. Unless otherwise restricted by the
Certificate of Incorporation, regular meetings of the Board of Directors may
also be held at any place within or without the State of Delaware which has
been designated by resolution of the Board of Directors or the written consent
of all directors.
(c) Special Meetings. Unless otherwise restricted by the
Certificate of Incorporation, and subject to the notice requirements contained
herein, special meetings of the Board of Directors may be held at any time and
place within or without the State of Delaware whenever called by the Chairman
of the Board, the President or any two of the Directors.
(d) Telephone Meetings. Any member of the Board of Directors, or
of any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear
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each other, and participation in a meeting by such means shall constitute
presence in person at such meeting.
(e) Notice of Meetings. Written notice of the time and place of
all special meetings of the Board of Directors shall be given at least one (1)
day before the date of the meeting. Such notice need not state the purpose or
purposes of such meeting, except as may otherwise be required by law or
provided for in the Certificate of Incorporation or these Bylaws. Notice of any
meeting may be waived in writing at any time before or after the meeting and
will be deemed waived by any Director by attendance thereat, except when the
Director attends the meeting solely for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
(f) Waiver of Notice. The transaction of all business at any
meeting of the Board of Directors, or any committee thereof, however called or
noticed, or wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present and if, either
before or after meeting, each of the Directors not present shall sign a written
waiver of notice, or a consent to holding such meeting, or an approval of the
minutes thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
SECTION 4.7 QUORUM AND VOTING.
(a) Unless the Certificate of Incorporation requires a greater
number and except with respect to indemnification questions arising under
Article XI hereof, for which a quorum shall be one-third of the exact number of
Directors fixed from time to time in accordance with Section 4.1 hereof, but
not less than one (1), a quorum of the Board of Directors shall consist of a
majority of the exact number of directors fixed from time to time in accordance
with Section 4.1 of these Bylaws, but not less than one (1); provided, however,
at any meeting whether a quorum be present or otherwise, a majority of the
Directors present may adjourn from time to time until the time fixed for the
next regular meeting of the Board of Directors, without notice other than by
announcement at the meeting.
(b) At each meeting of the Board of Directors at which a quorum
is present, all questions and business shall be determined by a vote of the
majority of the Directors present, unless a different vote is required by law,
the Certificate of Incorporation or these Bylaws.
SECTION 4.8 ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee
thereof may be taken without a meeting, if all members of the Board of
Directors or committee, as the case may be, consent thereto in writing, and
such writing or writings are filed with the minutes of proceedings of the Board
of Directors or committee.
SECTION 4.9 FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any
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meeting of a committee of the Board of Directors. Nothing herein contained
shall be construed to preclude any Director from serving the corporation in any
other capacity as an officer, agent, employee, or otherwise and receiving
compensation therefor.
SECTION 4.10 COMMITTEES.
(a) Executive Committee. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and specifically granted by
the Board of Directors, shall have, and may exercise when the Board of
Directors is not in session, all powers of the Board of Directors in the
management of the business and affairs of the corporation except such committee
shall not have the power or authority to amend the Certificate of
Incorporation, to adopt an agreement of merger or consolidation, to recommend
to the stockholders the sale, lease or exchange of all or substantially all of
the corporation's property and assets, to recommend to the stockholders of the
corporation a dissolution of the corporation or a revocation of a dissolution,
or to amend these Bylaws.
(b) Other Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as
may be prescribed by the resolution or resolutions creating such committees,
but in no event shall such committee have the powers denied to the Executive
Committee in these Bylaws.
(c) Term. Each member of a committee of the Board of Directors
shall serve a term on the committee coexistent with such member's term on the
Board of Directors. The Board of Directors, subject to the provisions of
paragraphs (a) and (b) of this Section 4.10 may at any time increase or
decrease the number of members of a committee or terminate the existence of a
committee. The membership of a committee member shall terminate on the date of
his or her death or voluntary resignation from the committee or from the Board
of Directors. The Board of Directors may at any time for any reason remove any
individual committee member and the Board of Directors may fill any committee
vacancy created by death, resignation, removal or increase in the number of
members of the committee. The Board of Directors may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.
(d) Meetings. Unless the Board of Directors shall otherwise
provide, regular meetings of the Executive Committee or any other committee
appointed pursuant to this Section 4.10 shall be held at such times and places
as are determined by the Board of Directors, or by any such committee, and when
notice thereof has been given to each member of such committee, no further
notice of such regular meetings need be given thereafter. Special meetings
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of any such committee may be held at any place which has been determined from
time to time by such committee, and may be called by any Director who is a
member of such committee, upon written notice to the members of such committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors. Notice of any special
meeting of any committee may be waived in writing at any time before or after
the meeting and will be waived by any Director by attendance thereat, except
when the Director attends such special meeting solely for the express purpose
of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. A majority of
the authorized number of members of any such committee shall constitute a
quorum for the transaction of business, and the act of a majority of those
present at any meeting at which a quorum is present shall be the act of such
committee.
(e) Organization. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. In the case of any
meeting, if there is no Chairman of the Board or if the Chairman is not
present, the Vice Chairman (if there be one) shall preside, or if there be no
Vice Chairman or if the Vice Chairman is not present, a chairman chosen by a
majority of the Directors present shall act as chairman of such meeting. The
Secretary of the corporation or, in the absence of the Secretary, any person
appointed by the Chairman shall act as secretary of the meeting.
ARTICLE V.
OFFICERS
SECTION 5.1 OFFICERS DESIGNATED. The officers of the corporation shall
include a President and a Secretary, and, if and when designated by the Board
of Directors, Chairman of the Board of Directors, one or more executive and
non-executive Vice Presidents (any one or more of which executive Vice
Presidents may be designated as Executive Vice President or Senior Vice
President or a similar title), and a Treasurer. The Board of Directors also
may, at its discretion, create additional officers and assign such duties to
those offices as it may deem appropriate from time to time, which offices may
include a Vice Chairman of the Board of Directors, a Chief Executive Officer, a
Chief Operating Officer, a Chief Financial Officer, one or more Assistant
Secretaries and Assistant Treasurers, and one or more other officers which may
be created at the discretion of the Board of Directors. Any one person may hold
any number of offices of the corporation at any one time unless specifically
prohibited therefrom by law. The salaries and other compensation of the
officers of the corporation shall be fixed by or in the manner designated by
the Board of Directors.
SECTION 5.2 TENURE AND DUTIES OF OFFICERS.
(a) General. All officers shall hold office at the pleasure of
the Board of Directors and until their successors shall have been duly elected
and qualified, unless sooner removed. Any officer elected or appointed by the
Board of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the
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vacancy may be filled by the Board of Directors. Except for the Chairman of the
Board and the Vice Chairman of the Board, no officer need be a director.
(b) Duties of Chairman of the Board of Directors. The Chairman of
the Board of Directors, when present, shall preside at all meetings of the
Board of Directors and, unless the Chairman has designated the next senior
officer to so preside, at all meetings of the stockholders. The Chairman of the
Board of Directors shall perform other duties commonly incident to such office
and shall also perform such other duties and have such other powers as the
Board of Directors shall designate from time to time.
(c) Powers and Duties of the Vice Chairman of the Board. The
Board of Directors may but is not required to assign areas of responsibility to
a Vice Chairman of the Board, and, in such event, and subject to the overall
direction of the Chairman of the Board and the Board of Directors, the Vice
Chairman of the Board shall be responsible for supervising the management of
the affairs of the corporation and its subsidiaries within the area or areas
assigned and shall monitor and review on behalf of the Board of Directors all
functions within such corresponding area or areas of the corporation and each
such subsidiary of the corporation. In the absence of the President, or in the
event of the President's inability or refusal to act, the Vice Chairman of the
Board shall perform the duties of the President, and when so acting shall have
all the powers of and be subject to all the restrictions upon the President.
Further, the Vice Chairman of the Board shall have such other powers and duties
as designated in accordance with these Bylaws and as from time to time may be
assigned to the Vice Chairman of the Board by the Board of Directors or the
Chairman of the Board.
(d) Duties of President. Unless the Board of Directors otherwise
determines (including by election of Chief Executive Officer) and subject to
the provisions of paragraph (e) below, the President shall be the chief
executive and chief operating officer of the corporation. Unless the Board of
Directors otherwise determines, he shall, in the absence of the Chairman of the
Board or Vice Chairman of the Board or if there be no Chairman of the Board or
Vice Chairman of the Board, preside at all meetings of the stockholders and
(should he be a director) of the Board of Directors. The President shall have
such other powers and duties as designated in accordance with these Bylaws and
as from time to time may be assigned to him by the Board of Directors.
(e) Duties of the Chief Executive and Chief Operating Officers.
Subject to the control of the Board of Directors, the chief executive officer
shall have general executive charge, management and control, of the properties,
business and operations of the corporation with all such powers as may be
reasonably incident to such responsibilities; and subject to the control of the
chief executive officer, the chief operating officer shall have general
operating charge, management and control, of the properties, business and
operations of the corporation with all such powers as may be reasonably
incident to such responsibilities.
(f) Duties of Vice Presidents. Vice Presidents, by virtue of
their appointment as such, shall not necessarily be deemed to be executive
officers of the corporation, such status as an executive officer only being
conferred if and to the extent such Vice President is placed in charge of a
principal business unit, division or function (e.g., sales, administration or
finance) or performs a policy-making function for the corporation (within the
meaning of Section 16 of the
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1934 Act and the rules and regulations promulgated thereunder). Each executive
Vice President shall at all times possess, and upon the authority of the
President or the chief executive officer any non-executive Vice President shall
from time to time possess, power to sign all certificates, contracts and other
instruments of the corporation, except as otherwise limited pursuant to Article
VI hereof or by the Chairman of the Board, the President, chief executive
officer or the Vice Chairman of the Board. The Vice Presidents shall perform
other duties commonly incident to their office and shall also perform such
other duties and have such other powers as the Board of Directors or the
President shall designate from time to time.
(g) Duties of Secretary. The Secretary shall keep the minutes of
all meetings of the Board of Directors, committees of the Board of Directors
and the stockholders, in books provided for that purpose; shall attend to the
giving and serving of all notices; may in the name of the corporation affix the
seal of the corporation to all contracts and attest the affixation of the seal
of the corporation thereto; may sign with the other appointed officers all
certificates for shares of capital stock of the corporation; and shall have
charge of the certificate books, transfer books and stock ledgers, and such
other books and papers as the Board of Directors may direct, all of which shall
at all reasonable times be open to inspection of any director upon application
at the office of the corporation during business hours. The Secretary shall
perform all other duties given in these Bylaws and other duties commonly
incident to such office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time. The
chief executive officer may direct any Assistant Secretary to assume and
perform the duties of the Secretary in the absence or disability of the
Secretary, and each Assistant Secretary shall perform other duties commonly
incident to such office and shall also perform such other duties and have such
other powers as the Board of Directors or the chief executive officer, shall
designate from time to time.
(h) Assistant Secretaries. Each Assistant Secretary shall have
the usual powers and duties pertaining to such offices, together with such
other powers and duties as designated in these Bylaws and as from time to time
may be assigned to an Assistant Secretary by the Board of Directors, the
Chairman of the Board, the President, the Vice Chairman of the Board, or the
Secretary. The Assistant Secretaries shall exercise the powers of the Secretary
during that officer's absence or inability or refusal to act.
(i) Duties of Treasurer.
(i) The Treasurer shall keep or cause to be kept the books of
account of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form and as
often as required by the Board of Directors, the Chairman of the Board, the
Vice Chairman of the Board, chief executive officer, if one be designated, the
Chief Financial Officer. The Treasurer, subject to the order of the Board of
Directors, shall have the custody of all funds and securities of the
corporation. The Treasurer shall perform other duties commonly incident to such
office and shall also perform such other duties and have such other powers as
the Board of Directors, the Chairman of the Board, the Vice Chairman of the
Board or the President shall designate from time to time.
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(ii) In absence of a designated Chief Financial Officer,
unless otherwise determined by the Board of Directors or chief executive
officer, the Treasurer shall serve as the chief financial officer subject to
control of the chief executive officer.
(iii) The Chief Financial Officer, if any be designated, may,
but need not serve as the Treasurer.
(j) Assistant Treasurers. Each Assistant Treasurer shall have the
usual powers and duties pertaining to such office, together with such other
powers and duties as designated in these Bylaws and as from time to time may be
assigned to each Assistant Treasurer by the Board of Directors, the Chairman of
the Board, the President, the Vice Chairman of the Board, or the Treasurer. The
Assistant Treasurers shall exercise the powers of the Treasurer during that
officer's absence or inability or refusal to act.
SECTION 5.3 DELEGATION OF AUTHORITY. For any reason that the Board of
Directors may deem sufficient, the Board of Directors may, except where
otherwise provided by statute, delegate the powers or duties of any officer to
any other person, and may authorize any officer to delegate specified duties of
such office to any other person. Any such delegation or authorization by the
Board shall be effected from time to time by resolution of the Board of
Directors.
SECTION 5.4 RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
SECTION 5.5 REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the vote or written consent of a
majority of the Directors in office at the time, or by any committee or
superior officers upon whom such power of removal may have been conferred by
the Board of Directors.
ARTICLE VI.
EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION
SECTION 6.1 EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory
officer or officers, or other person or persons, to execute on behalf of the
corporation any corporate instrument or document, or to sign on behalf of the
corporation the corporate name without limitation, or to enter into contracts
on behalf of the corporation, except where otherwise provided by law or these
Bylaws, and such execution or signature shall be binding upon the corporation.
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Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and
other evidences of indebtedness of the corporation, and other corporate
instruments or documents requiring the corporate seal, and certificates of
shares of stock owned by the corporation, shall be executed, signed or endorsed
by the Chairman of the Board of Directors, the President, Chief Executive
Officer or any executive Vice President and if any be designated, Chief
Financial Officer, Treasurer, Assistant Secretary or Assistant Treasurer, and
upon the authority conferred by the Board of Directors, President or Chief
Executive Officer, any non-executive Vice President, and by the Secretary. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
All checks and drafts drawn on banks or other depositaries on funds to
the credit of the corporation or in special accounts of the corporation shall
be signed by such person or persons as the Board of Directors shall authorize
so to do.
Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
SECTION 6.2 VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman or Vice Chairman of the Board of Directors, Chief Executive
Officer, the President, or any executive Vice President.
ARTICLE VII.
SHARES OF STOCK
SECTION 7.1 FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the
name of the corporation by the Chairman or Vice Chairman of the Board of
Directors, the Chief Executive Officer, the President or any executive Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, certifying the number of shares and the class or series
owned by him in the corporation. Where such certificate is countersigned by a
transfer agent other than the corporation or its employee, or by a registrar
other than the corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may
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be issued with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
SECTION 7.2 LOST CERTIFICATES. A new certificate or certificates shall
be issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 7.3 TRANSFERS.
(a) Transfers of record of shares of stock of the corporation
shall be made only on its books by the holders thereof, in person or by
attorney duly authorized and upon the surrender of a properly endorsed
certificate or certificates for a like number of shares. Upon surrender to the
corporation or a transfer agent of the corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books. The Board of Directors shall have the
power and authority to make all such other rules and regulations as they may
deem expedient concerning the issue, transfer and registration or the
replacement of certificates for shares of capital stock of the corporation.
(b) The corporation shall have power to enter into and perform
any agreement with any number of stockholders of any one or more classes of
stock of the corporation to restrict the transfer of shares of stock of the
corporation of any one or more classes owned by such stockholders in any manner
not prohibited by the Delaware General Corporation Law.
SECTION 7.4 FIXING RECORD DATES.
(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date
of such meeting. If no record date is fixed by the Board of Directors, the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
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(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty (60)
days prior to such action. If no record date is fixed by the Board of
Directors, the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION 7.5 REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VIII.
OTHER SECURITIES OF THE CORPORATION
SECTION 8.1 EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 7.1), may be signed by the Chairman or Vice Chairman of the
Board of Directors, the Chief Executive Officer, the President or any executive
Vice President, or such other person as may be authorized by the Board of
Directors, and the corporate seal impressed thereon or a facsimile of such seal
imprinted thereon and attested by the signature of the Secretary or an
Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided,
however, that where any such bond, debenture or other corporate security shall
be authenticated by the manual signature of a trustee under an indenture
pursuant to which such bond, debenture or other corporate security shall be
issued, the signatures of the persons signing and attesting the corporate seal
on such bond, debenture or other corporate security may be the imprinted
facsimile of the signatures of such persons. Interest coupons appertaining to
any such bond, debenture or other corporate security, authenticated by a
trustee as aforesaid, shall be signed by the Treasurer or an Assistant
Treasurer of the corporation or such other person as may be authorized by the
Board of Directors, or bear imprinted thereon the facsimile signature of such
person. In case any officer who shall have signed or attested any bond,
debenture or other corporate security, or whose facsimile signature shall
appear thereon or on any such interest coupon, shall have ceased to be such
officer before any bond, debenture or other corporate security so signed or
attested shall have been delivered, such bond, debenture or other corporate
security nevertheless may be adopted by the corporation and issued and
delivered as though the person who signed the same or whose facsimile signature
shall have been used thereon had not ceased to be such officer of the
corporation.
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ARTICLE IX.
DIVIDENDS
SECTION 9.1 DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to
law at any regular or special meeting. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Certificate of Incorporation.
SECTION 9.2 DIVIDEND RESERVE. Before payment of any dividend, there
may be set aside out of any funds of the corporation available for dividends
such sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the Board of Directors shall think
conducive to the interests of the corporation, and the Board of Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE X.
FISCAL YEAR
The fiscal year of the corporation shall end as of October 31st,
unless otherwise fixed by resolution of the Board of Directors.
ARTICLE XI.
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS
SECTION 11.1 DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its Directors and executive officers to the fullest extent not
prohibited by the Delaware General Corporation Law; provided, however, that the
corporation may limit the extent of such indemnification by individual
contracts with its Directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any Director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person or any proceeding by such person against the corporation or its
Directors, officers, employees or other agents unless (i) such indemnification
is expressly required to be made by law, (ii) the proceeding was authorized by
the Board of Directors of the corporation, or (iii) such indemnification is
provided by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the Delaware General Corporation Law.
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SECTION 11.2 OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have power to indemnify its other officers, employees and
other agents as set forth in the Delaware General Corporation Law.
SECTION 11.3 GOOD FAITH.
(a) For purposes of any determination under this Article XI, a
Director or executive officer shall be deemed to have acted in good faith and
in a manner such officer reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that such officer's
conduct was unlawful, if such officer's action is based on information,
opinions, reports and statements, including financial statements and other
financial data, in each case prepared or presented by:
(i) one or more officers or employees of the corporation whom
the Director or executive officer believed to be reliable
and competent in the matters presented;
(ii) counsel, independent accountants or other persons as to
matters which the Director or executive officer believed
to be within such person's professional competence; and
(iii) with respect to a Director, a committee of the Board upon
which such Director does not serve, as to matters within
such committee's designated authority, which committee the
Director believes to merit confidence; so long as, in each
case, the Director or executive officer acts without
knowledge that would cause such reliance to be
unwarranted.
(b) The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal proceeding, that such person had reasonable cause to believe that his
conduct was unlawful.
(c) The provisions of this Section 11.3 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth by the Delaware
General Corporation Law.
SECTION 11.4 EXPENSES. The corporation shall advance, prior to the
final disposition of any proceeding, promptly following request therefor, all
expenses incurred by any Director or executive officer in connection with such
proceeding upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it should be determined ultimately that such person is
not entitled to be indemnified under this Article XI or otherwise.
Notwithstanding the foregoing, unless otherwise determined pursuant to
Section 11.5 of this Article XI, no advance shall be made by the corporation if
a determination is reasonably and
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promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of Directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith
or in a manner that such person did not believe to be in or not opposed to the
best interests of the corporation.
SECTION 11.5 ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to Directors and
executive officers under this Article XI shall be deemed to be contractual
rights and be effective to the same extent and as if provided for in a contract
between the corporation and the Director or executive officer. Any right to
indemnification or advances granted by this Article XI to a Director or
executive officer shall be enforceable by or on behalf of the person holding
such right in any court of competent jurisdiction if (i) the claim for
indemnification or advances is denied, in whole or in part, or (ii) no
disposition of such claim is made within ninety (90) days of request therefor.
The claimant in such enforcement action, if successful in whole or in part,
also shall be entitled to be paid the expense of prosecuting his claim. The
corporation shall be entitled to raise as a defense to any such action that the
claimant has not met the standards of conduct that make it permissible under
the Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed. Neither the failure of the corporation
(including its Board of Directors, independent legal counsel or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because such person has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the
corporation (including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
SECTION 11.6 NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any
person by this Article XI shall not be exclusive of any other right which such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office. The
corporation is specifically authorized to enter into individual contracts with
any or all of its Directors, officers, employees or agents respecting
indemnification and advances, to the fullest extent not prohibited by the
Delaware General Corporation Law.
SECTION 11.7 SURVIVAL OF RIGHTS. The rights conferred on any person by
this Article XI shall continue as to a person who has ceased to be a Director,
officer, employee or other agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 11.8 INSURANCE. To the fullest extent permitted by the
Delaware General Corporation Law, the corporation, upon approval by the Board
of Directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this Article XI.
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SECTION 11.9 AMENDMENTS. Any repeal or modification of this Article XI
shall only be prospective and shall not affect the rights under this Article XI
in effect at the time of the alleged occurrence of any action or omission to
act that is the cause of any proceeding against any agent of the corporation.
SECTION 11.10 SAVINGS CLAUSE. If this Article XI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each Director and executive
officer to the full extent not prohibited by any applicable portion of this
Article XI that shall not have been invalidated, or by any other applicable
law.
SECTION 11.11 CERTAIN DEFINITIONS. For the purposes of this Article
XI, the following definitions shall apply:
(a) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony in,
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative.
(b) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees, fines,
amounts paid in settlement or judgment and any other costs and expenses of any
nature or kind incurred in connection with any proceeding.
(c) The term the "corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was
a director, officer, employee or agent of such constituent corporation, or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the
provisions of this Article XI with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if
its separate existence had continued.
(d) References to a "director," "officer," "employee," or "agent"
of the corporation shall include without limitation, situations where such
person is serving at the request of the corporation as a director, officer,
employee, trustee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
(e) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes assessed on
a person with respect to an employee benefit plan; and references to "serving
at the request of the corporation" shall include any service as a director,
officer, employee or agent of the corporation which imposes duties on, or
involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an
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employee benefit plan shall be deemed to have acted in a manner "not opposed to
the best interests of the corporation" as referred to in this Article XI.
ARTICLE XII.
NOTICES
SECTION 12.1 NOTICE TO STOCKHOLDERS. Unless the Certificate of
Incorporation requires otherwise, whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to such stockholder's last known post office address as shown by
the stock record of the corporation or its transfer agent.
SECTION 12.2 NOTICE TO DIRECTORS. Any notice required to be given to
any Director may be given by the method stated in Section 12.1, or by
facsimile, telex or telegram, except that such notice other than one which is
delivered personally shall be sent to such address as such Director shall have
filed in writing with the Secretary, or, in the absence of such filing, to the
last known post office address of such Director. It shall not be necessary that
the same method of giving notice be employed in respect of all Directors, but
one permissible method may be employed in respect of any one or more, and any
other permissible method or methods may be employed in respect of any other or
others.
SECTION 12.3 ADDRESS UNKNOWN. If no address of a stockholder or
Director be known, notice may be sent to the principal executive officer of the
corporation.
SECTION 12.4 AFFIDAVIT OF MAILING. An affidavit of mailing, executed
by a duly authorized and competent employee of the corporation or its transfer
agent appointed with respect to the class of stock affected, specifying the
name and address or the names and addresses of the stockholder or stockholders,
or Director or Directors, to whom any such notice or notices was or were given,
and the time and method of giving the same, shall be conclusive evidence of the
statements therein contained.
SECTION 12.5 TIME NOTICES DEEMED GIVEN. All notices given by mail, as
above provided, shall be deemed to have been given as at the time of mailing,
and all notices given by facsimile, telex or telegram shall be deemed to have
been given as of the sending time recorded at the time of transmission.
SECTION 12.6 FAILURE TO RECEIVE NOTICE. The period or limitation of
time within which any stockholder may exercise any option or right, or enjoy
any privilege or benefit, or be required to act, or within which any Director
may exercise any power or right, or enjoy any privilege, pursuant to any notice
sent such person in the manner above provided, shall not be affected or
extended in any manner by the failure of such stockholder or such Director to
receive such notice.
SECTION 12.7 NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL.
Whenever notice is required to be given, under any provision of law or of the
Certificate of
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Incorporation or Bylaws of the corporation, to any person with whom
communication is unlawful, the giving of such notice to such person shall not
be required and there shall be no duty to apply to any governmental authority
or agency for a license or permit to give such notice to such person. Any
action or meeting which shall be taken or held without notice to any such
person with whom communication is unlawful shall have the same force and effect
as if such notice had been duly given. In the event that the action taken by
the corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall state,
if such is the fact and if notice is required, that notice was given to all
persons entitled to receive notice except such persons with whom communication
is unlawful.
SECTION 12.8 NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever
notice is required to be given, under any provision of law or the Certificate
of Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings to such
person during the period between such two consecutive annual meetings, or (ii)
all, and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve-month period, have been mailed addressed
to such person at such person's address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as
if such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth such person's then current address,
the requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the filing
of a certificate under any provision of the Delaware General Corporation Law,
the certificate need not state that notice was not given to persons to whom
notice was not required to be given pursuant to this paragraph.
ARTICLE XIII.
AMENDMENTS
SECTION 13.1 AMENDMENTS. Except as otherwise provided in the
Certificate of Incorporation, these Bylaws may be altered, amended or repealed,
or new Bylaws may be adopted, by the holders of a majority of the outstanding
voting shares or by the Board of Directors, when such power is conferred upon
the Board of Directors by the Certificate of Incorporation, at any regular
meeting of the stockholders or of the Board of Directors or at any special
meeting of the stockholders or of the Board of Directors if notice of such
alteration, amendment, repeal or adoption of new Bylaws be contained in the
notice of such special meeting. If the power to adopt, amend or repeal Bylaws
is conferred upon the Board of Directors by the Certificate of Incorporation,
it shall not divest or limit the power of the stockholders to adopt, amend or
repeal Bylaws.
SECTION 13.2 APPLICATION OF BYLAWS. In the event that any provisions
of these Bylaws is or may be in conflict with any law of the United States, of
the state of incorporation of the corporation or of any other governmental body
or power having jurisdiction over this corporation, or over the subject matter
to which such provision of these Bylaws applies, or may apply, such provision
of these Bylaws shall be inoperative to the extent only that the operation
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thereof unavoidably conflicts with such law, and shall in all other respects be
in full force and effect.
ARTICLE XIV.
LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiaries, including any officer or employee who is a Director of the
corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board
of Directors shall approve, including, without limitation, a pledge of shares
of stock of the corporation. Nothing in this Bylaw shall be deemed to deny,
limit or restrict the powers of guaranty or warranty of the corporation at
common law or under statute.
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EXHIBIT 10.2
CROSSROADS SYSTEMS, INC.
1999 STOCK INCENTIVE PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. PURPOSE OF THE PLAN
This 1999 Stock Incentive Plan is intended to promote the
interests of Crossroads Systems, Inc., a Delaware corporation, by providing
eligible persons with the opportunity to acquire a proprietary interest, or
otherwise increase their proprietary interest, in the Corporation as an
incentive for them to remain in the service of the Corporation.
Capitalized terms shall have the meanings assigned to such terms
in the attached Appendix.
II. STRUCTURE OF THE PLAN
A. The Plan shall be divided into five separate equity programs:
(i) the Discretionary Option Grant Program under which
eligible persons may, at the discretion of the Plan Administrator, be
granted options to purchase shares of Common Stock,
(ii) the 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) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such
shares or as a bonus for services rendered the Corporation (or any
Parent or Subsidiary),
(iv) the Automatic Option Grant Program under which eligible
non-employee Board members shall automatically receive options at
periodic intervals to purchase shares of Common Stock; and
(v) the Director Fee Option Grant Program under which
non-employee Board members may elect to have all or any portion of
their annual retainer fee otherwise payable in cash applied to a
special option grant.
<PAGE> 2
B. The provisions of Articles One and Seven shall apply to all
equity programs under the Plan and shall govern the interests of all persons
under the Plan.
III. ADMINISTRATION OF THE PLAN
A. Prior to the Section 12 Registration Date, the Discretionary
Option Grant and Stock Issuance Programs shall be administered by the Board
unless otherwise determined by the Board. Beginning with the Section 12
Registration Date, the following provisions shall govern the administration of
the Plan:
(i) The Board shall have the authority to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to
Section 16 Insiders but may delegate such authority in whole or in part
to the Primary Committee.
(ii) Administration of the Discretionary Option Grant and
Stock Issuance Programs with respect to all other persons eligible to
participate in those programs may, at the Board's discretion, be vested
in the Primary Committee or a Secondary Committee, or the Board may
retain the power to administer those programs with respect to all such
persons.
(iii) Administration of the Automatic Option Grant Program
shall be self-executing in accordance with the terms of that program.
B. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan, have full power and authority
subject to the provisions of the Plan:
(i) to establish such rules as it may deem appropriate for
proper administration of the Plan, to make all factual determinations,
to construe and interpret the provisions of the Plan and the awards
thereunder and to resolve any and all ambiguities thereunder;
(ii) to determine, with respect to awards made under the
Discretionary Option Grant and Stock Issuance Programs, which eligible
persons are to receive such awards, the time or times when such awards
are to be made, the number of shares to be covered by each such award,
the vesting schedule (if any) applicable to the award, the status of a
granted option as either an Incentive Option or a Non-Statutory Option
and the maximum term for which the option is to remain outstanding;
(iii) to amend, modify or cancel any outstanding award with
the consent of the holder or accelerate the vesting of such award; and
(iv) to take such other discretionary actions as permitted
pursuant to the terms of the applicable program.
2.
<PAGE> 3
Decisions of each Plan Administrator within the scope of its administrative
functions under the Plan shall be final and binding on all parties.
C. Members of the Primary Committee or any Secondary Committee
shall serve for such period of time as the Board may determine and may be
removed by the Board at any time. The Board may also at any time terminate the
functions of any Secondary Committee and reassume all powers and authority
previously delegated to such committee.
D. Service on the Primary Committee or the Secondary Committee
shall constitute service as a Board member, and members of each such committee
shall accordingly be entitled to full indemnification and reimbursement as Board
members for their service on such committee. No member of the Primary Committee
or the Secondary Committee shall be liable for any act or omission made in good
faith with respect to the Plan or any options or stock issuances under the Plan.
IV. ELIGIBILITY
A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:
(i) Employees,
(ii) non-employee members of the Board or the board of
directors of any Parent or Subsidiary, and
(iii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).
B. Only Employees who are Section 16 Insiders or other highly
compensated individuals shall be eligible to participate in the Salary
Investment Option Grant Program.
C. Only non-employee Board members shall be eligible to
participate in the Automatic Option Grant and Director Fee Option Grant
Programs.
V. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
initially reserved for issuance over the term of the Plan shall not exceed Three
Million Eight Hundred Sixty-Eight Thousand Nine Hundred Twenty Three (3,868,923)
shares. Such authorized share reserve consists of (i) the number of shares which
remain available for issuance, as of the Section 12 Registration Date, under the
Predecessor Plan, including the shares subject to the outstanding options to be
incorporated into the Plan and the additional shares which would otherwise be
available for future grant (estimated to be 2,368,923 shares), plus (ii) an
increase of One Million Five
3.
<PAGE> 4
Hundred Thousand (1,500,000) shares authorized by the Board subject to
stockholder approval prior to the Section 12 Registration Date.
B. The number of shares of Common Stock available for issuance
under the Plan shall automatically increase on the first trading day of each
calendar year during the term of the Plan, beginning with the 2001 calendar
year, by an amount equal to two percent (2%) of the shares of Common Stock
outstanding on the last trading day of the immediately preceding calendar year,
but in no event shall such annual increase exceed Five Hundred Thousand
(500,000) shares.
C. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than Five Hundred Thousand (500,000) shares of Common Stock in the
aggregate per calendar year, beginning with the 1999 calendar year.
D. Shares of Common Stock subject to outstanding options
(including options incorporated into this Plan from the Predecessor Plan) shall
be available for subsequent issuance under the Plan to the extent those options
expire, terminate or are cancelled for any reason prior to exercise in full.
Unvested shares issued under the Plan and subsequently repurchased by the
Corporation, at the original exercise or issue price paid per share, pursuant to
the Corporation's repurchase rights under the Plan shall be added back to the
number of shares of Common Stock reserved for issuance under the Plan and shall
accordingly be available for reissuance through one or more subsequent options
or direct stock issuances under the Plan. However, should the exercise price of
an option under the Plan be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance. Shares of Common Stock
underlying one or more stock appreciation rights exercised under the Plan shall
not be available for subsequent issuance.
E. If any change is made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities by which the share
reserve is to increase each calendar year pursuant to the automatic share
increase provisions of the Plan, (iii) the number and/or class of securities for
which any one person may be granted options, separately exercisable stock
appreciation rights and direct stock issuances under the Plan per calendar year,
(iv) the number and/or class of securities for which grants are subsequently to
be made under the Automatic Option Grant Program to new and continuing
non-employee Board members, (v) the number and/or class of securities and the
exercise price per share in effect under each outstanding option under the Plan
and (vi) the number and/or class of securities and
4.
<PAGE> 5
price per share in effect under each outstanding option incorporated into this
Plan from the Predecessor Plan. Such adjustments to the outstanding options are
to be effected in a manner which shall preclude the enlargement or dilution of
rights and benefits under such options. The adjustments determined by the Plan
Administrator shall be final, binding and conclusive.
5.
<PAGE> 6
ARTICLE TWO
DISCRETIONARY OPTION GRANT PROGRAM
I. OPTION TERMS
Each option shall be evidenced by one or more documents in the
form approved by the Plan Administrator; provided, however, that each such
document shall comply with the terms specified below. Each document evidencing
an Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.
A. EXERCISE PRICE.
1. The exercise price per share shall be fixed by the Plan
Administrator at the time of the option grant and may be less than, equal to or
greater than the Fair Market Value per share of Common Stock on the option grant
date.
2. The exercise price shall become immediately due upon
exercise of the option and shall, subject to the provisions of Section II of
Article Seven and the documents evidencing the option, be payable in one or more
of the following forms:
(i) in cash or check made payable to the Corporation;
(ii) shares of Common Stock held for the requisite period
necessary to avoid a charge to the Corporation's earnings for financial
reporting purposes and valued at Fair Market Value on the Exercise
Date, or
(iii) to the extent the option is exercised for vested
shares, through a special sale and remittance procedure pursuant to
which the Optionee shall concurrently provide irrevocable instructions
to (a) a Corporation-approved brokerage firm to effect the immediate
sale of the purchased shares and remit to the Corporation, out of the
sale proceeds available on the settlement date, sufficient funds to
cover the aggregate exercise price payable for the purchased shares
plus all applicable Federal, state and local income and employment
taxes required to be withheld by the Corporation by reason of such
exercise and (b) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete
the sale.
Except to the extent such sale and remittance procedure is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable
at such time or times, during such period and for such number of shares as shall
be determined by the Plan Administrator and set forth in the documents
evidencing the option. However, no option shall have a term in excess of ten
(10) years measured from the option grant date.
6.
<PAGE> 7
C. CESSATION OF SERVICE.
1. The following provisions shall govern the exercise of any
options outstanding at the time of the Optionee's cessation of Service or death:
(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan
Administrator and set forth in the documents evidencing the option, but
no such option shall be exercisable after the expiration of the option
term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or
her Beneficiary.
(iii) During the applicable post-Service exercise period,
the option may not be exercised in the aggregate for more than the
number of vested shares for which the option is exercisable on the date
of the Optionee's cessation of Service. Upon the expiration of the
applicable exercise period or (if earlier) upon the expiration of the
option term, the option shall terminate and cease to be outstanding for
any vested shares for which the option has not been exercised. However,
the option shall, immediately upon the Optionee's cessation of Service,
terminate and cease to be outstanding to the extent the option is not
otherwise at that time exercisable for vested shares.
(iv) Should the Optionee's Service be terminated for
Misconduct or should the Optionee engage in Misconduct while his or her
options are outstanding, then all such options shall terminate
immediately and cease to be outstanding.
2. The Plan Administrator shall have complete discretion,
exercisable either at the time an option is granted or at any time while the
option remains outstanding:
(i) to extend the period of time for which the option is to
remain exercisable following the Optionee's cessation of Service to
such period of time as the Plan Administrator shall deem appropriate,
but in no event beyond the expiration of the option term, and/or
(ii) to permit the option to be exercised, during the
applicable post-Service exercise period, for one or more additional
installments in which the Optionee would have vested had the Optionee
continued in Service.
D. STOCKHOLDER RIGHTS. The holder of an option shall have no
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.
7.
<PAGE> 8
E. REPURCHASE RIGHTS. The Plan Administrator shall have the
discretion to grant options which are exercisable for unvested shares of Common
Stock. Should the Optionee cease Service while holding such unvested shares, the
Corporation shall have the right to repurchase, at the exercise price paid per
share, any or all of those unvested shares. The terms upon which such repurchase
right shall be exercisable (including the period and procedure for exercise and
the appropriate vesting schedule for the purchased shares) shall be established
by the Plan Administrator and set forth in the document evidencing such
repurchase right.
F. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, Incentive Options shall be exercisable only by the Optionee and shall
not be assignable or transferable other than by will or by the laws of descent
and distribution following the Optionee's death. Non-Statutory Options shall be
subject to the same restrictions, except that a Non-Statutory Option may, to the
extent permitted by the Plan Administrator, be assigned in whole or in part
during the Optionee's lifetime (i) as a gift to one or more members of the
Optionee's immediate family, to a trust in which Optionee and/or one or more
such family members hold more than fifty percent (50%) of the beneficial
interest or to an entity in which more than fifty percent (50%) of the voting
interests are owned by one or more such family members or (ii) pursuant to a
domestic relations order. The terms applicable to the assigned portion shall be
the same as those in effect for the option immediately prior to such assignment
and shall be set forth in such documents issued to the assignee as the Plan
Administrator may deem appropriate.
II. INCENTIVE OPTIONS
The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options when
issued under the Plan shall not be subject to the terms of this Section II.
A. ELIGIBILITY. Incentive Options may only be granted to
Employees.
B. EXERCISE PRICE. The exercise price per share shall not be less
than one hundred percent (100%) of the Fair Market Value per share of Common
Stock on the option grant date.
C. DOLLAR LIMITATION. The aggregate Fair Market Value of the
shares of Common Stock (determined as of the respective date or dates of grant)
for which one or more options granted to any Employee under the Plan (or any
other option plan of the Corporation or any Parent or Subsidiary) may for the
first time become exercisable as Incentive Options during any one calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the first time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.
D. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred
8.
<PAGE> 9
ten percent (110%) of the Fair Market Value per share of Common Stock on the
option grant date, and the option term shall not exceed five (5) years measured
from the option grant date.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. Each option outstanding at the time of a Change in Control but
not otherwise fully-vested shall automatically accelerate so that each such
option shall, immediately prior to the effective date of the Change in Control,
become exercisable for all of the shares of Common Stock at the time subject to
that option and may be exercised for any or all of those shares as fully-vested
shares of Common Stock. However, an outstanding option shall not so accelerate
if and to the extent: (i) such option is, in connection with the Change in
Control, assumed or otherwise continued in full force and effect by the
successor corporation (or parent thereof) pursuant to the terms of the Change in
Control, (ii) such option is replaced with a cash incentive program of the
successor corporation which preserves the spread existing at the time of the
Change in Control on the shares of Common Stock for which the option is not
otherwise at that time exercisable and provides for subsequent payout in
accordance with the same vesting schedule applicable to those option shares or
(iii) the acceleration of such option is subject to other limitations imposed by
the Plan Administrator at the time of the option grant. Each option outstanding
at the time of the Change in Control shall terminate as provided in Section
III.C. of this Article Two.
B. All outstanding repurchase rights shall also terminate
automatically, and the shares of Common Stock subject to those terminated rights
shall immediately vest in full, in the event of any Change in Control, except to
the extent: (i) those repurchase rights are assigned to the successor
corporation (or parent thereof) or otherwise continue in full force and effect
pursuant to the terms of the Change in Control or (ii) such accelerated vesting
is precluded by other limitations imposed by the Plan Administrator at the time
the repurchase right is issued.
C. Immediately following the consummation of the Change in
Control, all outstanding options shall terminate and cease to be outstanding,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise expressly continued in full force and effect pursuant to the terms of
the Change in Control.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted, immediately after such Change in
Control, to apply to the number and class of securities which would have been
issuable to the Optionee in consummation of such Change in Control had the
option been exercised immediately prior to such Change in Control. Appropriate
adjustments to reflect such Change in Control shall also be made to (i) the
exercise price payable per share under each outstanding option, provided the
aggregate exercise price payable for such securities shall remain the same, (ii)
the maximum number and/or class of securities available for issuance over the
remaining term of the Plan and (iii) the maximum number and/or class of
securities for which any one person may be granted options, separately
exercisable stock appreciation rights and direct stock issuances under the Plan
per calendar year.
E. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Change in Control,
whether or not those
9.
<PAGE> 10
options are assumed or otherwise continued in full force and effect pursuant to
the terms of the Change in Control. Any such option shall accordingly become
exercisable, immediately prior to the effective date of such Change in Control,
for all of the shares of Common Stock at the time subject to that option and may
be exercised for any or all of those shares as fully-vested shares of Common
Stock. In addition, the Plan Administrator may at any time provide that one or
more of the Corporation's repurchase rights shall not be assignable in
connection with such Change in Control and shall terminate upon the consummation
of such Change in Control.
F. The Plan Administrator may at any time provide that one or more
options will automatically accelerate upon an Involuntary Termination of the
Optionee's Service within a designated period (not to exceed eighteen (18)
months) following the effective date of any Change in Control in which those
options do not otherwise accelerate. Any options so accelerated shall remain
exercisable for fully-vested shares until the earlier of (i) the expiration of
the option term or (ii) the expiration of the one (1) year period measured from
the effective date of the Involuntary Termination. In addition, the Plan
Administrator may at any time provide that one or more of the Corporation's
repurchase rights shall immediately terminate upon such Involuntary Termination.
G. The Plan Administrator may at any time provide that one or more
options will automatically accelerate in connection with a Hostile Take-Over.
Any such option shall become exercisable, immediately prior to the effective
date of such Hostile Take-Over, for all of the shares of Common Stock at the
time subject to that option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. In addition, the Plan Administrator may
at any time provide that one or more of the Corporation's repurchase rights
shall terminate automatically upon the consummation of such Hostile Take-Over.
Alternatively, the Plan Administrator may condition such automatic acceleration
and termination upon an Involuntary Termination of the Optionee's Service within
a designated period (not to exceed eighteen (18) months) following the effective
date of such Hostile Take-Over. Each option so accelerated shall remain
exercisable for fully-vested shares until the expiration or sooner termination
of the option term.
H. The portion of any Incentive Option accelerated in connection
with a Change in Control or Hostile Take Over shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
($100,000) limitation is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated portion of such option shall be exercisable as a
Non-Statutory Option under the Federal tax laws.
IV. STOCK APPRECIATION RIGHTS
The Plan Administrator may, subject to such conditions as it may
determine, grant to selected Optionees stock appreciation rights which will
allow the holders of those rights to elect between the exercise of the
underlying option for shares of Common Stock and the surrender of that option in
exchange for a distribution from the Corporation in an amount equal to the
excess of (a) the Option Surrender Value of the number of shares for which the
option is surrendered over (b) the aggregate exercise price payable for such
shares. The distribution may be made in shares of Common Stock valued at Fair
Market Value on the option surrender date, in
10.
<PAGE> 11
cash, or partly in shares and partly in cash, as the Plan Administrator shall in
its sole discretion deem appropriate.
11.
<PAGE> 12
ARTICLE THREE
SALARY INVESTMENT OPTION GRANT PROGRAM
I. OPTION GRANTS
The Primary Committee may implement the Salary Investment Option
Grant Program for one or more calendar years beginning after the Underwriting
Date and select the Section 16 Insiders and other highly compensated Employees
eligible to participate in the Salary Investment Option Grant Program for each
such calendar year. Each selected individual who elects to participate in the
Salary Investment Option Grant Program must, prior to the start of each calendar
year of participation, file with the Plan Administrator (or its designate) an
irrevocable authorization directing the Corporation to reduce his or her base
salary for that calendar year by an amount not less than Five Thousand Dollars
($5,000.00) nor more than Fifty Thousand Dollars ($50,000.00). The Primary
Committee shall have complete discretion to determine whether to approve the
filed authorization in whole or in part. To the extent the Primary Committee
approves the authorization, the individual who filed that authorization shall be
granted an option under the Salary Investment Grant Program on the first trading
day in January for the calendar year for which the salary reduction is to be in
effect.
II. OPTION TERMS
Each option shall be a Non-Statutory Option evidenced by one or
more documents in the form approved by the Plan Administrator; provided,
however, that each such document shall comply with the terms specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
12.
<PAGE> 13
A is the dollar amount of the approved reduction in
the Optionee's base salary for the calendar year, and
B is the Fair Market Value per share of Common Stock
on the option grant date.
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each calendar month of Service in the calendar
year for which the salary reduction is in effect. Each option shall have a
maximum term of ten (10) years measured from the option grant date.
D. CESSATION OF SERVICE. Each option outstanding at the time of
the Optionee's cessation of Service shall remain exercisable, for any or all of
the shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the option term or (ii) the
expiration of the three (3)-year period following the Optionee's cessation of
Service. To the extent the option is held by the Optionee at the time of his or
her death, the option may be exercised by his or her Beneficiary. However, the
option shall, immediately upon the Optionee's cessation of Service, terminate
and cease to remain outstanding with respect to any and all shares of Common
Stock for which the option is not otherwise at that time exercisable.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over
while the Optionee remains in Service, each outstanding option shall
automatically accelerate so that each such option shall, immediately prior to
the effective date of the Change in Control or Hostile Take-Over, become fully
exercisable with respect to the total number of shares of Common Stock at the
time subject to such option and may be exercised for any or all of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding options. The Optionee shall in return be entitled to a
cash distribution from the Corporation in an amount equal to the excess of (i)
the Option Surrender Value of the shares of Common Stock at
13.
<PAGE> 14
the time subject to each surrendered option (whether or not the Optionee is
otherwise at the time vested in those shares) over (ii) the aggregate exercise
price payable for such shares. Such cash distribution shall be paid within five
(5) days following the surrender of the option to the Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under the Salary
Investment Option Grant Program shall be the same as the terms in effect for
options made under the Discretionary Option Grant Program.
14.
<PAGE> 15
ARTICLE FOUR
STOCK ISSUANCE PROGRAM
I. STOCK ISSUANCE TERMS
Shares of Common Stock may be issued under the Stock Issuance
Program through direct and immediate issuances without any intervening options.
Shares of Common Stock may also be issued under the Stock Issuance Program
pursuant to share right awards which entitle the recipients to receive those
shares upon the attainment of designated performance goals or Service
requirements. Each such award shall be evidenced by one or more documents which
comply with the terms specified below.
A. PURCHASE PRICE.
1. The purchase price per share of Common Stock subject to
direct issuance shall be fixed by the Plan Administrator and may be less than,
equal to or greater than the Fair Market Value per share of Common Stock on the
issue date.
2. Subject to the provisions of Section II of Article Seven,
shares of Common Stock may be issued under the Stock Issuance Program for any of
the following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:
(i) cash or check made payable to the Corporation, or
(ii) past services rendered to the Corporation (or any
Parent or Subsidiary).
B. VESTING/ISSUANCE PROVISIONS.
1. The Plan Administrator may issue shares of Common Stock
which are fully and immediately vested upon issuance or which are to vest in one
or more installments over the Participant's period of Service or upon attainment
of specified performance objectives. Alternatively, the Plan Administrator may
issue share right awards which shall entitle the recipient to receive a
specified number of vested shares of Common Stock upon the attainment of one or
more performance goals or Service requirements established by the Plan
Administrator.
2. Any new, substituted or additional securities or other
property (including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to his or her unvested
shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.
15.
<PAGE> 16
3. The Participant shall have full stockholder rights with
respect to the issued shares of Common Stock, whether or not the Participant's
interest in those shares is vested. Accordingly, the Participant shall have the
right to vote such shares and to receive any regular cash dividends paid on such
shares.
4. Should the Participant cease to remain in Service while
holding one or more unvested shares of Common Stock, or should the performance
objectives not be attained with respect to one or more such unvested shares of
Common Stock, then those shares shall be immediately surrendered to the
Corporation for cancellation, and the Participant shall have no further
stockholder rights with respect to those shares. To the extent the surrendered
shares were previously issued to the Participant for consideration paid in cash
or cash equivalent (including the Participant's purchase-money indebtedness),
the Corporation shall repay to the Participant the cash consideration paid for
the surrendered shares and shall cancel the unpaid principal balance of any
outstanding purchase-money note of the Participant attributable to the
surrendered shares.
5. The Plan Administrator may waive the surrender and
cancellation of one or more unvested shares of Common Stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-attainment of the performance objectives
applicable to those shares. Such waiver shall result in the immediate vesting of
the Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or non-attainment of the
applicable performance objectives.
6. Outstanding share right awards shall automatically
terminate, and no shares of Common Stock shall actually be issued in
satisfaction of those awards, if the performance goals or Service requirements
established for such awards are not attained. The Plan Administrator, however,
shall have the authority to issue shares of Common Stock in satisfaction of one
or more outstanding share right awards as to which the designated performance
goals or Service requirements are not attained.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. All of the Corporation's outstanding repurchase rights shall
terminate automatically, and all the shares of Common Stock subject to those
terminated rights shall immediately vest in full, in the event of any Change in
Control, except to the extent (i) those repurchase rights are assigned to the
successor corporation (or parent thereof) or otherwise continue in full force
and effect pursuant to the terms of the Change in Control or (ii) such
accelerated vesting is precluded by other limitations imposed by the Plan
Administrator at the time the repurchase right is issued.
B. The Plan Administrator may at any time provide for the
automatic termination of one or more of those outstanding repurchase rights and
the immediate vesting of the shares of Common Stock subject to those terminated
rights upon (i) a Change in Control or Hostile Take-Over or (ii) an Involuntary
Termination of the Participant's Service within a
16.
<PAGE> 17
designated period (not to exceed eighteen (18) months) following the effective
date of any Change in Control or Hostile Take-Over in which those repurchase
rights are assigned to the successor corporation (or parent thereof) or
otherwise continue in full force and effect.
III. SHARE ESCROW/LEGENDS
Unvested shares may, in the Plan Administrator's discretion, be
held in escrow by the Corporation until the Participant's interest in such
shares vests or may be issued directly to the Participant with restrictive
legends on the certificates evidencing those unvested shares.
17.
<PAGE> 18
ARTICLE FIVE
AUTOMATIC OPTION GRANT PROGRAM
I. OPTION TERMS
A. GRANT DATES. Options shall be made on the dates specified
below:
1. Each individual who is first elected or appointed as a
non-employee Board member at any time after the Underwriting Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase Fifteen Thousand (15,000) shares of Common
Stock, provided that individual has not previously been in the employ of the
Corporation (or any Parent or Subsidiary).
2. On the date of each Annual Stockholders Meeting beginning
with the 2000 Annual Stockholder Meeting, each individual who is to continue to
serve as a non-employee Board member shall automatically be granted a
Non-Statutory Option to purchase Five Thousand (5,000) shares of Common Stock.
B. EXERCISE PRICE.
1. The exercise price per share shall be equal to one hundred
percent (100%) of the Fair Market Value per share of Common Stock on the option
grant date.
2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchased shares must be made on
the Exercise Date.
C. OPTION TERM. Each option shall have a term of ten (10) years
measured from the option grant date.
D. EXERCISE AND VESTING OF OPTIONS. Each option shall be
immediately exercisable for any or all of the option shares. However, any shares
purchased under the option shall be subject to repurchase by the Corporation, at
the exercise price paid per share, upon the Optionee's cessation of Board
service prior to vesting in those shares. Each initial 15,000-share option shall
vest, and the Corporation's repurchase right shall lapse, in a series of four
(4) successive equal annual installments over the Optionee's period of continued
service as a Board member, with the first such installment to vest upon the
Optionee's completion of one (1) year of Board service measured from the option
grant date. Each annual 5,000-share option shall vest, and the Corporation's
repurchase right shall lapse, upon the Optionee's completion of one (1) year of
Board service measured from the option grant date.
E. CESSATION OF BOARD SERVICE. The following provisions shall
govern the exercise of any options outstanding at the time of the Optionee's
cessation of Board service:
18.
<PAGE> 19
(i) Any option outstanding at the time of the Optionee's
cessation of Board service for any reason shall remain exercisable for
a twelve (12)-month period following the date of such cessation of
Board service, but in no event shall such option be exercisable after
the expiration of the option term.
(ii) Any option exercisable in whole or in part by the
Optionee at the time of death may be subsequently exercised by his or
her Beneficiary.
(iii) Following the Optionee's cessation of Board service,
the option may not be exercised in the aggregate for more than the
number of shares for which the option was exercisable on the date of
such cessation of Board service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term,
the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding for any and all shares for which
the option is not otherwise at that time exercisable.
(iv) However, should the Optionee cease to serve as a Board
member by reason of death or Permanent Disability, then all shares at
the time subject to the option shall immediately vest so that such
option may, during the twelve (12)-month exercise period following such
cessation of Board service, be exercised for all or any portion of
those shares as fully-vested shares of Common Stock.
II. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over, the
shares of Common Stock at the time subject to each outstanding option but not
otherwise vested shall automatically vest in full so that each such option may,
immediately prior to the effective date of such Change in Control or Hostile
Take-Over, became fully exercisable for all of the shares of Common Stock at the
time subject to such option and maybe exercised for all or any of those shares
as fully-vested shares of Common Stock. Each such option accelerated in
connection with a Change in Control shall terminate upon the Change in Control,
except to the extent assumed by the successor corporation (or parent thereof) or
otherwise continued in full force and effect pursuant to the terms of the Change
in Control. Each such option accelerated in connection with a Hostile Take-Over
shall remain exercisable until the expiration or sooner termination of the
option term.
B. All outstanding repurchase rights shall automatically terminate
and the shares of Common Stock subject to those terminated rights shall
immediately vest in full, in the event of any Change in Control or Hostile
Take-Over.
C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding
19.
<PAGE> 20
options. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Option Surrender
Value of the shares of Common Stock at the time subject to each surrendered
option (whether or not the option is otherwise at the time exercisable for those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation.
D. Each option which is assumed in connection with a Change in
Control shall be appropriately adjusted to apply to the number and class of
securities which would have been issuable to the Optionee in consummation of
such Change in Control had the option been exercised immediately prior to such
Change in Control. Appropriate adjustments shall also be made to the exercise
price payable per share under each outstanding option, provided the aggregate
exercise price payable for such securities shall remain the same.
III. REMAINING TERMS
The remaining terms of each option granted under the Automatic
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
20.
<PAGE> 21
ARTICLE SIX
DIRECTOR FEE OPTION GRANT PROGRAM
I. OPTION GRANTS
The Board may implement the Director Fee Option Grant Program as
of the first day of any calendar year beginning after the Underwriting Date.
Upon such implementation of the Program, each non-employee Board member may
elect to apply all or any portion of the annual retainer fee otherwise payable
in cash for his or her service on the Board to the acquisition of a special
option grant under this Director Fee Option Grant Program. Such election must be
filed with the Corporation's Chief Financial Officer prior to the first day of
the calendar year for which the election is to be in effect. Each non-employee
Board member who files such a timely election with respect to the annul retainer
fee shall automatically be granted an option under this Director Fee Option
Grant Program on the first trading day in January in the calendar year for which
that fee would otherwise be payable.
II. OPTION TERMS
Each option shall be a Non-Statutory Option governed by the terms
and conditions specified below.
A. EXERCISE PRICE.
1. The exercise price per share shall be thirty-three and
one-third percent (33-1/3%) of the Fair Market Value per share of Common Stock
on the option grant date.
2. The exercise price shall become immediately due upon
exercise of the option and shall be payable in one or more of the alternative
forms authorized under the Discretionary Option Grant Program. Except to the
extent the sale and remittance procedure specified thereunder is utilized,
payment of the exercise price for the purchased shares must be made on the
Exercise Date.
B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):
X = A / (B x 66-2/3%), where
X is the number of option shares,
A is the portion of the annual retainer fee subject to the
non-employee Board member's election, and
B is the Fair Market Value per share of Common Stock on the
option grant date.
21.
<PAGE> 22
C. EXERCISE AND TERM OF OPTIONS. The option shall become
exercisable in a series of twelve (12) successive equal monthly installments
upon the Optionee's completion of each month of Board service during the
calendar year in which the option is granted. Each option shall have a maximum
term of ten (10) years measured from the option grant date.
D. CESSATION OF BOARD SERVICE. Should the Optionee cease Board
service for any reason (other than death or Permanent Disability) while holding
one or more options, then each such option shall remain exercisable, for any or
all of the shares for which the option is exercisable at the time of such
cessation of Board service, until the earlier of (i) the expiration of the ten
(10)-year option term or (ii) the expiration of the three (3)-year period
measured from the date of such cessation of Board service. However, each option
held by the Optionee at the time of such cessation of Board service shall
immediately terminate and cease to remain outstanding with respect to any and
all shares of Common Stock for which the option is not otherwise at that time
exercisable.
E. DEATH OR PERMANENT DISABILITY. Should the Optionee's service as
a Board member cease by reason of death or Permanent Disability, then each
option held by such Optionee shall immediately become exercisable for all the
shares of Common Stock at the time subject to that option, and the option may be
exercised for any or all of those shares as fully-vested shares until the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the
expiration of the three (3)-year period measured from the date of such cessation
of Board service.
Should the Optionee die after cessation of Board service but while
holding one or more options, then each such option may be exercised, for any or
all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Board service (less any shares subsequently purchased by
Optionee prior to death), by the Optionee's Beneficiary. Such right of exercise
shall lapse, and the option shall terminate, upon the earlier of (i) the
expiration of the ten (10)-year option term or (ii) the three (3)-year period
measured from the date of the Optionee's cessation of Board service.
III. CHANGE IN CONTROL/HOSTILE TAKE-OVER
A. In the event of any Change in Control or Hostile Take-Over
while the Optionee remains in Board service, each outstanding option held by
such Optionee shall automatically accelerate so that each such option shall,
immediately prior to the effective date of the Change in Control or Hostile
Take-Over, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such option and may be exercised for any
or all of those shares as fully-vested shares of Common Stock. Each such option
accelerated in connection with a Change in Control shall terminate upon the
Change in Control, except to the extent assumed by the successor corporation (or
parent thereof) or otherwise expressly continued in full force and effect
pursuant to the terms of the Change in Control. Each such option accelerated in
connection with a Hostile Take-Over shall remain exercisable until the
expiration or sooner termination of the option term.
B. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding
22.
<PAGE> 23
options. The Optionee shall in return be entitled to a cash distribution from
the Corporation in an amount equal to the excess of (i) the Option Surrender
Value of the shares of Common Stock at the time subject to each surrendered
option (whether or not the Optionee is otherwise at the time vested in those
shares) over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the option to the Corporation.
IV. REMAINING TERMS
The remaining terms of each option granted under this Director Fee
Option Grant Program shall be the same as the terms in effect for options made
under the Discretionary Option Grant Program.
23.
<PAGE> 24
ARTICLE SEVEN
MISCELLANEOUS
I. NO IMPAIRMENT OF AUTHORITY
Outstanding awards shall in no way affect the right of the
Corporation to adjust, reclassify, reorganize or otherwise change its capital or
business structure or to merge, consolidate, dissolve, liquidate or sell or
transfer all or any part of its business or assets.
II. FINANCING
The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price of shares issued under the Stock Issuance Program by
delivering a full-recourse, interest bearing promissory note payable in one or
more installments. The terms of any such promissory note (including the interest
rate and the terms of repayment) shall be established by the Plan Administrator
in its sole discretion. In no event may the maximum credit available to the
Optionee or Participant exceed the sum of (i) the aggregate option exercise
price or purchase price payable for the purchased shares plus (ii) any Federal,
state and local income and employment tax liability incurred by the Optionee or
the Participant in connection with the option exercise or share purchase.
III. TAX WITHHOLDING
A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or the issuance or vesting of such shares under the
Plan shall be subject to the satisfaction of all applicable Federal, state and
local income and employment tax withholding requirements.
B. The Plan Administrator may, in its discretion, provide any or
all holders of Non-Statutory Options or unvested shares of Common Stock under
the Plan with the right to use shares of Common Stock in satisfaction of all or
part of the Withholding Taxes incurred by such holders in connection with the
exercise of their options or the vesting of their shares. Such right may be
provided to any such holder in either or both of the following formats:
Stock Withholding: The election to have the Corporation
withhold, from the shares of Common Stock otherwise issuable upon the exercise
of such Non-Statutory Option or the vesting of such shares, a portion of those
shares with an aggregate Fair Market Value equal to the percentage of the
Withholding Taxes (not to exceed one hundred percent (100%)) designated by the
holder.
Stock Delivery: The election to deliver to the Corporation, at
the time the Non-Statutory Option is exercised or the shares vest, one or more
shares of Common Stock previously acquired by such holder (other than in
connection with the option exercise or share
24.
<PAGE> 25
vesting triggering the Withholding Taxes) with an aggregate Fair Market Value
equal to the percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.
IV. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan shall become effective immediately on the Section 12
Registration Date. However, the Salary Investment Option Grant and Director Fee
Option Grant Programs shall not be implemented until such time as the Primary
Committee or the Board may deem appropriate. Options may be granted under the
Discretionary Option Grant Program at any time on or after the Section 12
Registration Date. However, no options granted under the Plan may be exercised,
and no shares shall be issued under the Plan, until the Plan is approved by the
Corporation's stockholders. If such stockholder approval is not obtained within
twelve (12) months after the Section 12 Registration Date, then all options
previously granted under this Plan shall terminate and cease to be outstanding,
and no further options shall be granted and no shares shall be issued under the
Plan.
B. The Plan shall serve as the successor to the Predecessor Plan,
and no further options or direct stock issuances shall be made under the
Predecessor Plan after the Section 12 Registration Date. All options outstanding
under the Predecessor Plan on the Section 12 Registration Date shall be
incorporated into the Plan at that time and shall be treated as outstanding
options under the Plan. However, each outstanding option so incorporated shall
continue to be governed solely by the terms of the documents evidencing such
option, and no provision of the Plan shall be deemed to affect or otherwise
modify the rights or obligations of the holders of such incorporated options
with respect to their acquisition of shares of Common Stock.
C. One or more provisions of the Plan, including (without
limitation) the option/vesting acceleration provisions of Article Two relating
to Changes in Control, may, in the Plan Administrator's discretion, be extended
to one or more options incorporated from the Predecessor Plan which do not
otherwise contain such provisions.
D. The Plan shall terminate upon the earliest of (i) September 30,
2009, (ii) the date on which all shares available for issuance under the Plan
shall have been issued as fully-vested shares or (iii) the termination of all
outstanding options in connection with a Change in Control. Upon such plan
termination, all outstanding options and unvested stock issuances shall
thereafter continue to have force and effect in accordance with the provisions
of the documents evidencing such grants or issuances.
V. AMENDMENT OF THE PLAN
A. The Board shall have complete and exclusive power and authority
to amend or modify the Plan in any or all respects. However, no such amendment
or modification shall adversely affect the rights and obligations with respect
to stock options or unvested stock issuances at the time outstanding under the
Plan unless the Optionee or the Participant consents to such amendment or
modification. In addition, certain amendments may require stockholder approval
pursuant to applicable laws or regulations.
25.
<PAGE> 26
B. Options to purchase shares of Common Stock may be granted under
the Discretionary Option Grant and Salary Investment Option Grant Programs and
shares of Common Stock may be issued under the Stock Issuance Program that are
in each instance in excess of the number of shares then available for issuance
under the Plan, provided any excess shares actually issued under those programs
shall be held in escrow until there is obtained stockholder approval of an
amendment sufficiently increasing the number of shares of Common Stock available
for issuance under the Plan. If such stockholder approval is not obtained within
twelve (12) months after the date the first such excess issuances are made, then
(i) any unexercised options granted on the basis of such excess shares shall
terminate and cease to be outstanding and (ii) the Corporation shall promptly
refund to the Optionees and the Participants the exercise or purchase price paid
for any excess shares issued under the Plan and held in escrow, together with
interest (at the applicable Short Term Federal Rate) for the period the shares
were held in escrow, and such shares shall thereupon be automatically cancelled
and cease to be outstanding.
VI. USE OF PROCEEDS
Any cash proceeds received by the Corporation from the sale of
shares of Common Stock under the Plan shall be used for general corporate
purposes.
VII. REGULATORY APPROVALS
A. The implementation of the Plan, the granting of any stock
option under the Plan and the issuance of any shares of Common Stock (i) upon
the exercise of any granted option or (ii) under the Stock Issuance Program
shall be subject to the Corporation's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the stock
options granted under it and the shares of Common Stock issued pursuant to it.
B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including the
filing and effectiveness of the Form S-8 registration statement for the shares
of Common Stock issuable under the Plan, and all applicable listing requirements
of any stock exchange (or the Nasdaq National Market, if applicable) on which
Common Stock is then listed for trading.
VIII. NO EMPLOYMENT/SERVICE RIGHTS
Nothing in the Plan shall confer upon the Optionee or the
Participant any right to continue in Service for any period of specific duration
or interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.
26.
<PAGE> 27
APPENDIX
The following definitions shall be in effect under the Plan:
A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option
grant program in effect under the Plan.
B. BENEFICIARY shall mean, in the event the Plan Administrator
implements a beneficiary designation procedure, the person designated by an
Optionee or Participant, pursuant to such procedure, to succeed to such person's
rights under any outstanding awards held by him or her at the time of death. In
the absence of such designation or procedure, the Beneficiary shall be the
personal representative of the estate of the Optionee or Participant or the
person or persons to whom the award is transferred by will or the laws of
descent and distribution.
C. BOARD shall mean the Corporation's Board of Directors.
D. CHANGE IN CONTROL shall mean a change in ownership or control
of the Corporation effected through any of the following transactions:
(i) a merger, consolidation or reorganization approved by the
Corporation's stockholders, unless securities representing more than
fifty percent (50%) of the total combined voting power of the voting
securities of the successor corporation are immediately thereafter
beneficially owned, directly or indirectly and in substantially the
same proportion, by the persons who beneficially owned the
Corporation's outstanding voting securities immediately prior to such
transaction,
(ii) any stockholder-approved transfer or other disposition of
all or substantially all of the Corporation's assets, or
(iii) the acquisition, directly or indirectly by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation), of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
recommends such stockholders accept.
E. CODE shall mean the Internal Revenue Code of 1986, as amended.
F. COMMON STOCK shall mean the Corporation's common stock.
A-1.
<PAGE> 28
G. CORPORATION shall mean Crossroads Systems, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Crossroads Systems, Inc. which shall by appropriate
action adopt the Plan.
H. DIRECTOR FEE OPTION GRANT PROGRAM shall mean the director fee
option grant program in effect under the Plan.
I. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary
option grant program in effect under the Plan.
J. EMPLOYEE shall mean an individual who is in the employ of the
Corporation (or any Parent or Subsidiary), subject to the control and direction
of the employer entity as to both the work to be performed and the manner and
method of performance.
K. EXERCISE DATE shall mean the date on which the Corporation
shall have received written notice of the option exercise.
L. FAIR MARKET VALUE per share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing
selling price per share of Common Stock on the date in question, as
such price is reported on the Nasdaq National Market or any successor
system. If there is no closing selling price for the Common Stock on
the date in question, then the Fair Market Value shall be the closing
selling price on the last preceding date for which such quotation
exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price
per share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape
of transactions on such exchange. If there is no closing selling price
for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(iii) For purposes of any option grants made on the
Underwriting Date, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is to be sold in the
initial public offering pursuant to the Underwriting Agreement.
(iv) For purposes of any options made prior to the
Underwriting Date, the Fair Market Value shall be determined by the
Plan Administrator, after taking into account such factors as it deems
appropriate.
A-2.
<PAGE> 29
M. HOSTILE TAKE-OVER shall mean:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more
than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities pursuant to a tender or exchange
offer made directly to the Corporation's stockholders which the Board
does not recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
N. INCENTIVE OPTION shall mean an option which satisfies the
requirements of Code Section 422.
O. INVOLUNTARY TERMINATION shall mean the termination of the
Service of any individual which occurs by reason of:
(i) such individual's involuntary dismissal or discharge by
the Corporation for reasons other than Misconduct, or
(ii) such individual's voluntary resignation following (A) a
change in his or her position with the Corporation or Parent or
Subsidiary employing the individual which materially reduces his or her
duties and responsibilities or the level of management to which he or
she reports, (B) a reduction in his or her level of compensation
(including base salary, fringe benefits and target bonus under any
performance based bonus or incentive programs) by more than fifteen
percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such
change, reduction or relocation is effected by the Corporation without
the individual's consent.
P. MISCONDUCT shall mean the commission of any act of fraud,
embezzlement or dishonesty by the Optionee or Participant, any unauthorized use
or disclosure by such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any intentional wrongdoing by such
person, whether by omission or commission, which adversely affects the business
or affairs of the Corporation (or any Parent or Subsidiary) in
A-3.
<PAGE> 30
a material manner. This shall not limit the grounds for the dismissal or
discharge of any person in the Service of the Corporation (or any Parent or
Subsidiary).
Q. 1934 ACT shall mean the Securities Exchange Act of 1934, as
amended.
R. NON-STATUTORY OPTION shall mean an option not intended to
satisfy the requirements of Code Section 422.
S. OPTION SURRENDER VALUE shall mean the Fair Market Value per
share of Common Stock on the date the option is surrendered to the Corporation
or, in the event of a Hostile Take-Over, effected through a tender offer, the
highest reported price per share of Common Stock paid by the tender offeror in
effecting such Hostile Take-Over, if greater. However, if the surrendered option
is an Incentive Option, the Option Surrender Value shall not exceed the Fair
Market Value per share.
T. OPTIONEE shall mean any person to whom an option is granted
under the Discretionary Option Grant, Salary Investment Option Grant, Automatic
Option Grant or Director Fee Option Grant Program.
U. PARENT shall mean any corporation (other than the Corporation)
in an unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
V. PARTICIPANT shall mean any person who is issued shares of
Common Stock under the Stock Issuance Program.
W. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the
inability of the Optionee or the Participant to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment expected to result in death or to be of continuous duration of twelve
(12) months or more. However, solely for purposes of the Automatic Option Grant
and Director Fee Option Grant Programs, Permanent Disability or Permanently
Disabled shall mean the inability of the non-employee Board member to perform
his or her usual duties as a Board member by reason of any medically
determinable physical or mental impairment expected to result in death or to be
of continuous duration of twelve (12) months or more.
X. PLAN shall mean the Corporation's 1999 Stock Incentive Plan, as
set forth in this document.
Y. PLAN ADMINISTRATOR shall mean the particular entity, whether
the Primary Committee, the Board or the Secondary Committee, which is authorized
to administer the Discretionary Option Grant, Salary Investment Option Grant and
Stock Issuance Programs with respect to one or more classes of eligible persons,
to the extent such entity is carrying out its administrative functions under
those programs with respect to the persons under its jurisdiction.
A-4.
<PAGE> 31
However, the Primary Committee shall have the plenary authority to make all
factual determinations and to construe and interpret any and all ambiguities
under the Plan to the extent such authority is not otherwise expressly delegated
to any other Plan Administrator.
Z. PREDECESSOR PLAN shall mean the Corporation's pre-existing 1996
Stock Option/Stock Issuance Plan in effect immediately prior to the Plan
Effective Date hereunder.
AA. PRIMARY COMMITTEE shall mean the committee of two (2) or more
non-employee Board members appointed by the Board to administer the
Discretionary Option Grant and Stock Issuance Programs with respect to Section
16 Insiders and to administer the Salary Investment Option Grant Program with
respect to all eligible individuals.
BB. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
investment grant program in effect under the Plan.
CC. SECONDARY COMMITTEE shall mean a committee of one (1) or more
Board members appointed by the Board to administer the Discretionary Option
Grant and Stock Issuance Programs with respect to eligible persons other than
Section 16 Insiders.
DD. SECTION 12 REGISTRATION DATE shall mean the date on which the
Common Stock is first registered under Section 12(g) of the 1934 Act.
EE. SECTION 16 INSIDER shall mean an officer or director of the
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.
FF. SERVICE shall mean the performance of services for the
Corporation (or any Parent or Subsidiary) by a person in the capacity of an
Employee, a non-employee member of the board of directors or a consultant or
independent advisor, except to the extent otherwise specifically provided in the
documents evidencing the option grant or stock issuance.
GG. STOCK EXCHANGE shall mean either the American Stock Exchange
or the New York Stock Exchange.
HH. STOCK ISSUANCE PROGRAM shall mean the stock issuance program
in effect under the Plan.
II. SUBSIDIARY shall mean any corporation (other than the
Corporation) in an unbroken chain of corporations beginning with the
Corporation, provided each corporation (other than the last corporation) in the
unbroken chain owns, at the time of the determination, stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
JJ. 10% STOCKHOLDER shall mean the owner of stock (as determined
under Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).
A-5.
<PAGE> 32
KK. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the initial public
offering of the Common Stock.
LL. UNDERWRITING DATE shall mean the date on which the
Underwriting Agreement is executed and priced in connection with an initial
public offering of the Common Stock.
MM. WITHHOLDING TAXES shall mean the Federal, state and local
income and employment withholding tax liabilities to which the holder of
Non-Statutory Options or unvested shares of Common Stock may become subject in
connection with the exercise of those options or the vesting of those shares.
A-6.
<PAGE> 1
EXHIBIT 10.3
CROSSROADS SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
I. PURPOSE OF THE PLAN
This 1999 Employee Stock Purchase Plan is intended to promote the
interests of Crossroads Systems, Inc., a Delaware corporation, by providing
eligible employees with the opportunity to acquire a proprietary interest in the
Corporation through participation in a payroll-deduction based employee stock
purchase plan designed to qualify under Section 423 of the Code.
Capitalized terms herein shall have the meanings assigned to such terms
in the attached Appendix.
II. ADMINISTRATION OF THE PLAN
The Plan Administrator shall have full authority to interpret and
construe any provision of the Plan and to adopt such rules and regulations for
administering the Plan as it may deem necessary in order to comply with the
requirements of Section 423 of the Code. Decisions of the Plan Administrator
shall be final and binding on all parties having an interest in the Plan.
III. STOCK SUBJECT TO PLAN
A. The stock purchasable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares of Common Stock
purchased on the open market. The maximum number of shares of Common Stock which
may be issued over the term of the Plan shall initially be limited to Four
Hundred Fifty Thousand (450,000) shares.
B. The number of shares of Common Stock available for issuance under
the Plan shall automatically increase on the first trading day of each calendar
year during the term of the Plan, beginning with the 2001 calendar year, by an
amount equal to one percent (1%) of the shares of Common Stock outstanding on
the last trading day of the immediately preceding calendar year, but in no event
shall such annual increase exceed Two Hundred Fifty Thousand (250,000) shares.
C. Should any change be made to the Common Stock by reason of any stock
split, stock dividend, recapitalization, combination of shares, exchange of
shares or other change affecting the outstanding Common Stock as a class without
the Corporation's receipt of consideration, appropriate adjustments shall be
made to the maximum number and class of securities issuable in the aggregate
under the Plan, (ii) the maximum number and class of securities purchasable per
Participant and in the aggregate on any one Purchase Date and (iii) the number
and class of securities and the price per share in effect under each outstanding
purchase right in order to prevent the dilution or enlargement of benefits
thereunder.
<PAGE> 2
IV. OFFERING PERIODS
A. Shares of Common Stock shall be offered for purchase under the Plan
through a series of successive offering periods until such time as (i) the
maximum number of shares of Common Stock available for issuance under the Plan
shall have been purchased or (ii) the Plan shall have been sooner terminated.
B. Each offering period shall be of such duration (not to exceed
twenty-four (24) months) as determined by the Plan Administrator prior to the
start date of such offering period. However, the initial offering period shall
commence at the Effective Time and terminate on the last business day in
November 2001. Subsequent offering periods shall commence as designated by the
Plan Administrator.
C. Each offering period shall be comprised of a series of one or more
successive Purchase Intervals. Purchase Intervals shall run from the first
business day in June each year to the last business day in November of the same
year and from the first business day in December each year to the last business
day in May of the following year. However, the first Purchase Interval in effect
under the initial offering period shall commence at the Effective Time and
terminate on the last business day in May 2000.
D. Should the Fair Market Value per share of Common Stock on any
Purchase Date within an offering period be less than the Fair Market Value per
share of Common Stock on the start date of that offering period, then that
offering period shall automatically terminate immediately after the purchase of
shares of Common Stock on such Purchase Date, and a new offering period shall
commence on the next business day following such Purchase Date. The new offering
period shall have a duration of twenty (24) months, unless a shorter duration is
established by the Plan Administrator within five (5) business days following
the start date of that offering period.
V. ELIGIBILITY
A. Each individual who is an Eligible Employee on the start date of an
offering period under the Plan may enter that offering period on such start date
or on any subsequent Semi-Annual Entry Date within that offering period,
provided he or she remains an Eligible Employee.
B. Each individual who first becomes an Eligible Employee after the
start date of an offering period may enter that offering period on any
subsequent Semi-Annual Entry Date within that offering period on which he or she
is an Eligible Employee.
C. The date an individual enters an offering period shall be designated
his or her Entry Date for purposes of that offering period.
D. To participate in the Plan for a particular offering period, the
Eligible Employee must complete the enrollment forms prescribed by the Plan
Administrator (including a
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<PAGE> 3
stock purchase agreement and a payroll deduction authorization) and file such
forms with the Plan Administrator (or its designate) on or before his or her
scheduled Entry Date.
VI. PAYROLL DEDUCTIONS
A. The payroll deduction authorized by the Participant for purposes of
acquiring shares of Common Stock during an offering period may be any multiple
of one percent (1%) of the Base Salary paid to the Participant during each
Purchase Interval within that offering period, up to a maximum of fifteen
percent (15%). The deduction rate so authorized shall continue in effect
throughout the offering period, except to the extent such rate is changed in
accordance with the following guidelines:
(i) The Participant may, at any time during the offering period,
reduce his or her rate of payroll deduction to become
effective as soon as possible after filing the appropriate
form with the Plan Administrator. The Participant may not,
however, effect more than one (1) such reduction per Purchase
Interval.
(ii) The Participant may, prior to the commencement of any new
Purchase Interval within the offering period, increase the
rate of his or her payroll deduction by filing the appropriate
form with the Plan Administrator. The new rate (which may not
exceed the fifteen percent (15%) maximum) shall become
effective on the start date of the first Purchase Interval
following the filing of such form.
B. Payroll deductions shall begin on the first pay day following the
Participant's Entry Date into the offering period and shall (unless sooner
terminated by the Participant) continue through the pay day ending with or
immediately prior to the last day of that offering period. The amounts so
collected shall be credited to the Participant's book account under the Plan,
but no interest shall be paid on the balance from time to time outstanding in
such account. The amounts collected from the Participant shall not be required
to be held in any segregated account or trust fund and may be commingled with
the general assets of the Corporation and used for general corporate purposes.
C. Payroll deductions shall automatically cease upon the termination of
the Participant's purchase right in accordance with the provisions of the Plan.
D. The Participant's acquisition of Common Stock under the Plan on any
Purchase Date shall neither limit nor require the Participant's acquisition of
Common Stock on any subsequent Purchase Date, whether within the same or a
different offering period.
VII. PURCHASE RIGHTS
A. GRANT OF PURCHASE RIGHT. A Participant shall be granted a separate
purchase right for each offering period in which he or she participates. The
purchase right shall be granted on the Participant's Entry Date into the
offering period and shall provide the Participant with the right to purchase
shares of Common Stock, in a series of successive
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<PAGE> 4
installments over the remainder of such offering period, upon the terms set
forth below. The Participant shall execute a stock purchase agreement embodying
such terms and such other provisions (not inconsistent with the Plan) as the
Plan Administrator may deem advisable.
Under no circumstances shall purchase rights be granted under the Plan
to any Eligible Employee if such individual would, immediately after the grant,
own (within the meaning of Code Section 424(d)) or hold outstanding options or
other rights to purchase, stock possessing five percent (5%) or more of the
total combined voting power or value of all classes of stock of the Corporation
or any Corporate Affiliate.
B. EXERCISE OF THE PURCHASE RIGHT. Each purchase right shall be
automatically exercised in installments on each successive Purchase Date within
the offering period, and shares of Common Stock shall accordingly be purchased
on behalf of each Participant (other than Participants whose payroll deductions
have previously been refunded pursuant to the Termination of Purchase Right
provisions below) on each such Purchase Date. The purchase shall be effected by
applying the Participant's payroll deductions for the Purchase Interval ending
on such Purchase Date to the purchase of whole shares of Common Stock at the
purchase price in effect for the Participant for that Purchase Date.
C. PURCHASE PRICE. The purchase price per share at which Common Stock
will be purchased on the Participant's behalf on each Purchase Date within the
offering period shall be equal to eighty-five percent (85%) of the lower of (i)
the Fair Market Value per share of Common Stock on the Participant's Entry Date
into that offering period or (ii) the Fair Market Value per share of Common
Stock on that Purchase Date.
D. NUMBER OF PURCHASABLE SHARES. The number of shares of Common Stock
purchasable by a Participant on each Purchase Date during the offering period
shall be the number of whole shares obtained by dividing the amount collected
from the Participant through payroll deductions during the Purchase Interval
ending with that Purchase Date by the purchase price in effect for the
Participant for that Purchase Date. However, the maximum number of shares of
Common Stock purchasable per Participant on any one Purchase Date shall not
exceed Seven Hundred Fifty (750) shares, subject to periodic adjustments in the
event of certain changes in the Corporation's capitalization. In addition, the
maximum number of shares of Common Stock purchasable in the aggregate by all
Participants on any one Purchase Date under the Plan and the International Plan
shall not exceed Seventy-Five Thousand (75,000) shares, subject to periodic
adjustments in the event of certain changes in the corporation's capitalization.
E. EXCESS PAYROLL DEDUCTIONS. Any payroll deductions not applied to the
purchase of shares of Common Stock on any Purchase Date because they are not
sufficient to purchase a whole share of Common Stock shall be held for the
purchase of Common Stock on the next Purchase Date. However, any payroll
deductions not applied to the purchase of Common Stock by reason of the
limitation on the maximum number of shares purchasable on the Purchase Date
shall be promptly refunded.
F. TERMINATION OF PURCHASE RIGHT. The following provisions shall govern
the termination of outstanding purchase rights:
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<PAGE> 5
(i) A Participant may, at any time prior to the next scheduled
Purchase Date in the offering period, terminate his or her outstanding purchase
right by filing the appropriate form with the Plan Administrator (or its
designate), and no further payroll deductions shall be collected from the
Participant with respect to the terminated purchase right. Any payroll
deductions collected during the Purchase Interval in which such termination
occurs shall, at the Participant's election, be immediately refunded or held for
the purchase of shares on the next Purchase Date. If no such election is made at
the time such purchase right is terminated, then the payroll deductions
collected with respect to the terminated right shall be refunded as soon as
possible.
(ii) The termination of such purchase right shall be irrevocable,
and the Participant may not subsequently rejoin the offering period for which
the terminated purchase right was granted. In order to resume participation in
any subsequent offering period, such individual must re-enroll in the Plan (by
making a timely filing of the prescribed enrollment forms) on or before his or
her scheduled Entry Date into that offering period.
(iii) Should the Participant cease to remain an Eligible Employee
for any reason (including death, disability or change in status) while his or
her purchase right remains outstanding, then that purchase right shall
immediately terminate, and all of the Participant's payroll deductions for the
Purchase Interval in which the purchase right so terminates shall be immediately
refunded. However, should the Participant cease to remain in active service by
reason of an approved unpaid leave of absence, then the Participant shall have
the right, exercisable up until the last business day of the Purchase Interval
in which such leave commences, to (a) withdraw all the payroll deductions
collected to date on his or her behalf for that Purchase Interval or (b) have
such funds held for the purchase of shares on his or her behalf on the next
scheduled Purchase Date. In no event, however, shall any further payroll
deductions be collected on the Participant's behalf during such leave. Upon the
Participant's return to active service (i) within ninety (90) days following the
commencement of such leave or, (ii) prior to the expiration of any longer period
for which such Participant's right to reemployment with the Corporation is
guaranteed by either statute or contract, his or her payroll deductions under
the Plan shall automatically resume at the rate in effect at the time the leave
began. However, should the Participant's leave of absence exceed ninety (90)
days and his or her re-employment rights not be guaranteed by either statute or
contract, then the Participant's status as an Eligible Employee will be deemed
to terminate on the ninety-first (91st) day of that leave, and such
Participant's purchase right for the offering period in which that leave began
shall thereupon terminate. An individual who returns to active employment
following such a leave shall be treated as a new Employee for purposes of the
Plan and must, in order to resume participation in the Plan, re-enroll in the
Plan (by making a timely filing of the prescribed enrollment forms) on or before
his or her scheduled Entry Date into the offering period.
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<PAGE> 6
G. CHANGE IN CONTROL. Each outstanding purchase right shall
automatically be exercised, immediately prior to the effective date of any
Change in Control, by applying the payroll deductions of each Participant for
the Purchase Interval in which such Change in Control occurs to the purchase of
whole shares of Common Stock at a purchase price per share equal to eighty-five
percent (85%) of the lower of (i) the Fair Market Value per share of Common
Stock on the Participant's Entry Date into the offering period in which such
Change in Control occurs or (ii) the Fair Market Value per share of Common Stock
immediately prior to the effective date of such Change in Control. However, the
applicable limitations on the number of shares of Common Stock purchasable in
the aggregate by all Participants shall not apply to any such purchase.
The Corporation shall use its best efforts to provide at least ten
(10)-days prior written notice of the occurrence of any Change in Control, and
Participants shall, following the receipt of such notice, have the right to
terminate their outstanding purchase rights prior to the effective date of the
Change in Control.
H. PRORATION OF PURCHASE RIGHTS. Should the total number of shares of
Common Stock to be purchased pursuant to outstanding purchase rights on any
particular date exceed the number of shares then available for issuance under
the Plan, the Plan Administrator shall make a pro-rata allocation of the
available shares on a uniform and nondiscriminatory basis, and the payroll
deductions of each Participant, to the extent in excess of the aggregate
purchase price payable for the Common Stock pro-rated to such individual, shall
be refunded.
I. ASSIGNABILITY. The purchase right shall be exercisable only by the
Participant and shall not be assignable or transferable by the Participant.
J. STOCKHOLDER RIGHTS. A Participant shall have no stockholder rights
with respect to the shares subject to his or her outstanding purchase right
until the shares are purchased on the Participant's behalf in accordance with
the provisions of the Plan and the Participant has become a holder of record of
the purchased shares.
VIII. ACCRUAL LIMITATIONS
A. No Participant shall be entitled to accrue rights to acquire Common
Stock pursuant to any purchase right outstanding under this Plan if and to the
extent such accrual, when aggregated with (i) rights to purchase Common Stock
accrued under any other purchase right granted under this Plan and (ii) similar
rights accrued under other employee stock purchase plans (within the meaning of
Code Section 423) of the Corporation or any Corporate Affiliate, would otherwise
permit such Participant to purchase more than Twenty-Five Thousand Dollars
($25,000) worth of stock of the Corporation or any Corporate Affiliate
(determined on the basis of the Fair Market Value per share on the date or dates
such rights are granted) for each calendar year such rights are at any time
outstanding.
B. For purposes of applying such accrual limitations to the purchase
rights granted under the Plan, the following provisions shall be in effect:
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<PAGE> 7
(i) The right to acquire Common Stock under each outstanding
purchase right shall accrue in a series of installments on each successive
Purchase Date during the offering period on which such right remains
outstanding.
(ii) No right to acquire Common Stock under any outstanding
purchase right shall accrue to the extent the Participant has already
accrued in the same calendar year the right to acquire Common Stock under
one (1) or more other purchase rights at a rate equal to Twenty-Five
Thousand Dollars ($25,000) worth of Common Stock (determined on the basis of
the Fair Market Value per share on the date or dates of grant) for each
calendar year such rights were at any time outstanding.
C. If by reason of such accrual limitations, any purchase right of a
Participant does not accrue for a particular Purchase Interval, then the payroll
deductions which the Participant made during that Purchase Interval with respect
to such purchase right shall be promptly refunded.
D. In the event there is any conflict between the provisions of this
Article and one or more provisions of the Plan or any instrument issued
thereunder, the provisions of this Article shall be controlling.
IX. EFFECTIVE DATE AND TERM OF THE PLAN
A. The Plan was adopted by the Board on September 15, 1999 and shall
become effective at the Effective Time, provided no purchase rights granted
under the Plan shall be exercised, and no shares of Common Stock shall be issued
hereunder, until (i) the Plan shall have been approved by the stockholders of
the Corporation and (ii) the Corporation shall have complied with all applicable
requirements of the 1933 Act (including the registration of the shares of Common
Stock issuable under the Plan on a Form S-8 registration statement filed with
the Securities and Exchange Commission), all applicable listing requirements of
any stock exchange (or the Nasdaq National Market, if applicable) on which the
Common Stock is listed for trading and all other applicable requirements
established by law or regulation. In the event such stockholder approval is not
obtained, or such compliance is not effected, within twelve (12) months after
the date on which the Plan is adopted by the Board, the Plan shall terminate and
have no further force or effect, and all sums collected from Participants during
the initial offering period hereunder shall be refunded.
B. Unless sooner terminated by the Board, the Plan shall terminate upon
the earliest of (i) the last business day in November 2009, (ii) the date on
which all shares available for issuance under the Plan shall have been sold
pursuant to purchase rights exercised under the Plan or (iii) the date on which
all purchase rights are exercised in connection with a Corporate Transaction. No
further purchase rights shall be granted or exercised, and no further payroll
deductions shall be collected, under the Plan following such termination.
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<PAGE> 8
X. AMENDMENT/TERMINATION OF THE PLAN
A. The Board may alter, amend, suspend or terminate the Plan at any
time to become effective immediately following the close of any Purchase
Interval. However, the Plan may be amended or terminated immediately upon Board
action, if and to the extent necessary to assure that the Corporation will not
recognize, for financial reporting purposes, any compensation expense in
connection with the shares of Common Stock offered for purchase under the Plan,
should the financial accounting rules applicable to the Plan at the Effective
Time be subsequently revised so as to require the recognition of compensation
expense in the absence of such amendment or termination.
B. In no event may the Board effect any of the following amendments or
revisions to the Plan without the approval of the Corporation's stockholders:
(i) increase the number of shares of Common Stock issuable under the Plan,
except for permissible adjustments in the event of certain changes in the
Corporation's capitalization, (ii) alter the purchase price formula so as to
reduce the purchase price payable for the shares of Common Stock purchasable
under the Plan or (iii) modify eligibility requirements for participation in the
Plan.
XI. GENERAL PROVISIONS
A. Nothing in the Plan shall confer upon the Participant any right to
continue in the employ of the Corporation or any Corporate Affiliate for any
period of specific duration or interfere with or otherwise restrict in any way
the rights of the Corporation (or any Corporate Affiliate employing such person)
or of the Participant, which rights are hereby expressly reserved by each, to
terminate such person's employment at any time for any reason, with or without
cause.
B. All costs and expenses incurred in the administration of the Plan
shall be paid by the Corporation; however, each Plan Participant shall bear all
costs and expenses incurred by such individual in the sale or other disposition
of any shares purchased under the Plan.
C. The provisions of the Plan shall be governed by the laws of the
State of Texas without regard to that State's conflict-of-laws rules.
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<PAGE> 9
SCHEDULE A
CORPORATIONS PARTICIPATING IN
1999 EMPLOYEE STOCK PURCHASE PLAN
AS OF THE EFFECTIVE TIME
Crossroads Systems, Inc.
Crossroads Systems (Texas), Inc.
<PAGE> 10
APPENDIX
The following definitions shall be in effect under the Plan:
A. BASE SALARY shall mean the base salary payable to a Participant by
one or more Participating Corporations during such individual's period of
participation in one or more offering periods under the Plan; Base Salary shall
not include any overtime payments, bonuses, commissions, current profit-sharing
distributions or other incentive-type payments. Such Base Salary shall be
calculated before deduction of (A) any income or employment tax withholdings or
(B) any pre-tax contributions made by the Participant to any Code Section 401(k)
salary deferral plan or any Code Section 125 cafeteria benefit program now or
hereafter established by the Corporation or any Corporate Affiliate.
B. BOARD shall mean the Corporation's Board of Directors.
C. CHANGE IN CONTROL shall mean a change of ownership of the
Corporation pursuant to any of the following transactions:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Corporation's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior to
such transaction, or
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Corporation in complete liquidation
or dissolution of the Corporation, or
(iii) the acquisition, directly or indirectly, by a person or
related group of persons (other than the Corporation or a person that
directly or indirectly controls, is controlled by or is under common
control with the Corporation) of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly
to the Corporation's stockholders.
D. CODE shall mean the Internal Revenue Code of 1986, as amended.
E. COMMON STOCK shall mean the Corporation's common stock.
F. CORPORATE AFFILIATE shall mean any parent or subsidiary corporation
of the Corporation (as determined in accordance with Code Section 424), whether
now existing or subsequently established.
A-1
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G. CORPORATION shall mean Crossroads Systems, Inc., a Delaware
corporation, and any corporate successor to all or substantially all of the
assets or voting stock of Crossroads Systems, Inc. which shall by appropriate
action adopt the Plan.
H. EFFECTIVE TIME shall mean the time at which the Underwriting
Agreement is executed. Any Corporate Affiliate which becomes a Participating
Corporation after such Effective Time shall designate a subsequent Effective
Time with respect to its employee-Participants.
I. ELIGIBLE EMPLOYEE shall mean any person who is employed by a
Participating Corporation on a basis under which he or she is regularly expected
to render more than twenty (20) hours of service per week for more than five (5)
months per calendar year for earnings considered wages under Code Section
3401(a).
J. ENTRY DATE shall mean the date an Eligible Employee first commences
participation in the offering period in effect under the Plan. The earliest
Entry Date under the Plan shall be the Effective Time.
K. FAIR MARKET VALUE per share of Common Stock on any relevant date
shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time traded on the Nasdaq
National Market, then the Fair Market Value shall be the closing selling
price per share of Common Stock on the date in question, as such price is
reported by the National Association of Securities Dealers on the Nasdaq
National Market or any successor system. If there is no closing selling
price for the Common Stock on the date in question, then the Fair Market
Value shall be the closing selling price on the last preceding date for
which such quotation exists.
(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.
(iii) For purposes of the initial offering period which begins
at the Effective Time, the Fair Market Value shall be deemed to be equal to
the price per share at which the Common Stock is sold in the initial public
offering pursuant to the Underwriting Agreement.
L. 1933 ACT shall mean the Securities Act of 1933, as amended.
A-2
<PAGE> 12
M. PARTICIPANT shall mean any Eligible Employee of a Participating
Corporation who is actively participating in the Plan.
N. PARTICIPATING CORPORATION shall mean the Corporation and such
Corporate Affiliate or Affiliates as may be authorized from time to time by the
Board to extend the benefits of the Plan to their Eligible Employees. The
Participating Corporations in the Plan are listed in attached Schedule A.
O. PLAN shall mean the Corporation's 1999 Employee Stock Purchase Plan,
as set forth in this document.
P. PLAN ADMINISTRATOR shall mean the committee of two (2) or more Board
members appointed by the Board to administer the Plan.
Q. PURCHASE DATE shall mean the last business day of each Purchase
Interval. The initial Purchase Date shall be May 31, 2000.
R. PURCHASE INTERVAL shall mean each successive six (6)-month period
within the offering period at the end of which there shall be purchased shares
of Common Stock on behalf of each Participant.
S. SEMI-ANNUAL ENTRY DATE shall mean the first business day in June and
December each year on which an Eligible Employee may first enter an offering
period.
T. STOCK EXCHANGE shall mean either the American Stock Exchange or the
New York Stock Exchange.
U. UNDERWRITING AGREEMENT shall mean the agreement between the
Corporation and the underwriter or underwriters managing the Corporation's
initial public offering of its Common Stock.
A-3
<PAGE> 1
EXHIBIT 10.14
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AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
CROSSROADS SYSTEMS, INC.
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
1 ACCOUNTING AND OTHER TERMS......................................................4
2 LOAN AND TERMS OF PAYMENT.......................................................4
2.1 Credit Extensions......................................................4
2.2 Overadvances...........................................................6
2.3 Interest Rate, Payments................................................6
2.4 Fees...................................................................7
3 CONDITIONS OF LOANS.............................................................7
3.1 Conditions Precedent to Initial Credit Extension.......................7
3.2 Conditions Precedent to all Credit Extensions..........................7
4 CREATION OF SECURITY INTEREST...................................................7
4.1 Grant of Security Interest.............................................7
5 REPRESENTATIONS AND WARRANTIES..................................................7
5.1 Due Organization and Authorization.....................................7
5.2 Collateral.............................................................8
5.3 Litigation.............................................................8
5.4 No Material Adverse Change in Financial Statements.....................8
5.5 Solvency...............................................................8
5.6 Regulatory Compliance..................................................8
5.7 Subsidiaries...........................................................8
5.8 Full Disclosure........................................................8
6 AFFIRMATIVE COVENANTS...........................................................9
6.1 Government Compliance..................................................9
6.2 Financial Statements, Reports, Certificates............................9
6.3 Inventory; Returns.....................................................9
6.4 Taxes..................................................................9
6.5 Insurance.............................................................10
6.6 Primary Accounts......................................................10
6.7 Financial Covenants...................................................10
6.8 Further Assurances....................................................10
7 NEGATIVE COVENANTS.............................................................10
7.1 Dispositions..........................................................10
7.2 Changes in Business, Ownership, Management or Business Locations......11
7.3 Mergers or Acquisitions...............................................11
7.4 Indebtedness..........................................................11
7.5 Encumbrance...........................................................11
7.6 Distributions; Investments............................................11
7.7 Transactions with Affiliates..........................................11
7.8 Subordinated Debt.....................................................11
7.9 Compliance............................................................11
8 EVENTS OF DEFAULT..............................................................12
8.1 Payment Default.......................................................12
8.2 Covenant Default......................................................12
8.3 Material Adverse Change...............................................12
8.4 Attachment............................................................12
</TABLE>
2
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<TABLE>
<S> <C> <C>
8.5 Insolvency............................................................12
8.6 Other Agreements......................................................12
8.7 Judgments.............................................................13
8.8 Misrepresentations....................................................13
9 BANK'S RIGHTS AND REMEDIES.....................................................13
9.1 Rights and Remedies...................................................13
9.2 Power of Attorney.....................................................13
9.3 Accounts Collection...................................................14
9.4 Bank Expenses.........................................................14
9.5 Bank's Liability for Collateral.......................................14
9.6 Remedies Cumulative...................................................14
9.7 Demand Waiver.........................................................14
10 NOTICES........................................................................14
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER....................................14
12 GENERAL PROVISIONS.............................................................15
12.1 Successors and Assigns................................................15
12.2 Indemnification.......................................................15
12.3 Time of Essence.......................................................15
12.4 Severability of Provision.............................................15
12.5 Amendments in Writing, Integration....................................15
12.6 Counterparts..........................................................15
12.7 Survival..............................................................15
12.8 Confidentiality.......................................................15
12.9 Effect of Amendment and Restatement...................................16
12.10 Attorneys' Fees, Costs and Expenses...................................16
13 DEFINITIONS....................................................................16
13.1 Definitions...........................................................16
</TABLE>
3
<PAGE> 4
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated August 17,
1999, between SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive,
Santa Clara, California 95054 with a loan production office located at 9020
Capital of Texas Hwy. North, Arboretum Plaza One, Ste. 350, Austin, Texas 78759
and CROSSROADS SYSTEMS, INC. ("Borrower"), whose address is 9390 Research Blvd.,
Suite II-300, Austin, Texas 78759.
RECITALS
A. Bank and Borrower are parties to that certain Promissory Note dated
December 11, 1998, Promissory Note dated December 23, 1997, Promissory Note
dated December 23, 1997, Promissory Note dated December 23, 1997, Promissory
Note dated December 23, 1997 and a Business Loan Agreement dated December 23,
1997, as amended (collectively, the "Original Agreement").
B. Borrower and Bank desire in this Agreement to set forth their
agreement with respect to a working capital, equipment line and term loan and to
amend and restate in its entirety without novation the Original Agreement in
accordance with the provisions herein.
AGREEMENT
The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. THIS AGREEMENT SHALL BE CONSTRUED TO
IMPART UPON BANK A DUTY TO ACT REASONABLY AT ALL TIMES.
2 LOAN AND TERMS OF PAYMENT
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 REVOLVING ADVANCES.
(a) Bank will make Advances not exceeding (i) the lesser of (A) the
Committed Revolving Line minus the Cash Management Services Sublimit or (B) the
Borrowing Base, minus (ii) the amount of all outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit). Amounts borrowed under
this Section may be repaid and reborrowed during the term of this Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to such reliance.
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances are immediately payable.
4
<PAGE> 5
2.1.2 LETTERS OF CREDIT.
Bank will issue or have issued Letters of Credit for Borrower's account
not exceeding (i) the lesser of the Committed Revolving Line or the Borrowing
Base minus (ii) the outstanding principal balance of the Advances minus the Cash
Management Sublimit; however, the face amount of outstanding Letters of Credit
(including drawn but unreimbursed Letters of Credit and any Letter of Credit
Reserve) may not exceed $500,000. Each Letter of Credit will have an expiry date
of no later than 180 days after the Revolving Maturity Date, but Borrower's
reimbursement obligation will be secured by cash on terms acceptable to Bank at
any time after the Revolving Maturity Date if the term of this Agreement is not
extended by Bank. Borrower agrees to execute any further documentation in
connection with the Letters of Credit as Bank may reasonably request.
2.1.3 CASH MANAGEMENT SERVICES SUBLIMIT.
Borrower may use up to $20,000 for Bank's Cash Management Services,
which may include merchant services, direct deposit of payroll, business credit
card, and check cashing services identified in various cash management services
agreements related to such services (the "Cash Management Services"). All
amounts Bank pays for any Cash Management Services will be treated as Advances
under the Committed Revolving Line.
2.1.4 EQUIPMENT ADVANCES.
(a) Through December 11, 1999 (the "Equipment Availability End Date"),
Bank will make advances ("Equipment Advance" and, collectively, "Equipment
Advances") not exceeding the Committed Equipment Line. The Equipment Advances
may only be used to finance Equipment purchased on or after 120 days before the
date of the subject Equipment Advance and may not exceed 100% of the equipment
invoice excluding taxes, shipping, warranty charges, freight discounts and
installation expense. The initial Equipment Advance shall pay off the current
outstanding principal balance under the second draw period of the Promissory
Note dated December 11, 1998 of the Original Agreement (Bank's note
#1100066327), such balance being $330,194.15.
(b) Interest accrues from the date of each Equipment Advance at the
rate in Section 2.3(a) and is payable monthly until the Equipment Availability
End Date occurs. Equipment Advances outstanding on the Equipment Availability
End Date are payable in 36 equal monthly installments of principal, plus accrued
interest, beginning on the 11th of each month following the Equipment
Availability End Date and ending on December 11, 2002 (the "Equipment Maturity
Date"). Equipment Advances when repaid may not be reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify Bank (the
notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1
Business Day before the day on which the Equipment Advance is to be made. The
notice in the form of Exhibit B (Payment/Advance Form) must be signed by a
Responsible Officer or designee and include a copy of the invoice for the
Equipment being financed.
2.1.5 TERM LOAN.
(a) Bank will make a Term Loan available to Borrower for the purpose of
amortizing all current Obligations under the Original Agreement (except for the
Obligations under the Original Agreement which were paid by the initial
Equipment Advance under Section 2.1.4 of this Agreement).
(b) Borrower will pay 24 equal installments of principal plus Interest
of $56,310.98 (the "Term Loan Payment"). Each Term Loan Payment is payable on
the 17th of each month during the term of the loan. Borrower's final Term Loan
Payment, due on August 17, 2001, includes all outstanding Term Loan principal
and accrued interest.
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2.2 OVERADVANCES.
If Borrower's Obligations under Section 2.1.1 and 2.1.2 exceed the
lesser of either (i) the Committed Revolving Line minus the Cash Management
Sublimit or (ii) the Borrowing Base, Borrower must immediately pay Bank the
excess.
2.3 INTEREST RATE, PAYMENTS.
(a) Interest Rate. (i) Advances accrue interest on the outstanding
principal balance at a per annum rate equal to the Prime Rate; (ii) Equipment
Advances accrue interest on the outstanding principal balance at a per annum
rate equal to the Prime Rate; and (iii) the Term Loan accrues interest at a per
annum rate equal to the Prime Rate. The interest rate increases or decreases
when the Prime Rate changes. Interest is computed on a 360 day year for the
actual number of days elapsed. Bank will not compute the interest in a manner
that would cause Bank to contract for, charge or receive interest that would
exceed the Maximum Lawful Rate or the Maximum Lawful Amount. After an Event of
Default, Obligations accrue interest at the Default Interest Rate. The Default
Interest Rate is, at the Bank's options, (I) the Maximum Lawful Rate, if the
Maximum Lawful rate is established by applicable law, or (ii) the interest rate
applicable immediately prior to the occurrence of the Event of Default plus 5
percentage points, if no Maximum Lawful Rate law has been established by
applicable law; or (iii) 18% per annum; or (iv) such lesser rate of interest as
Bank in its sole discretion may choose to charge; but in no event more than the
Maximum Lawful Rate.
(b) Spreading of Interest. Due to irregular periodic balances of
principal, the variable nature of the interest rate, or prepayment, the total
interest that will accrue under this Agreement cannot be determined in advance.
Bank does not intend to contract for, charge or receive more than the Maximum
Lawful Rate or Maximum Lawful Amount permitted by applicable state or federal
law, and to prevent such an occurrence Bank and Borrower agree that all amounts
of interest, whenever contracted for, charged or received by Bank, with respect
to the Obligations, will be spread, prorated or allocated over the full period
of time the Obligations are unpaid, including the period of any renewal or
extension thereof. If the maturity of the Obligations is accelerated for any
reason whether as a lawsuit of an Event of Default or otherwise prior to the
full stated term, the total amount of interest contracted for, charged or
received to the time of such demand shall be spread, prorated or allocated along
with any interest thereafter accruing over the full period of time that the
Obligations thereafter remain unpaid for the purpose of determining if such
interest exceeds the Maximum Lawful Amount.
(c) Excess Interest. At maturity (whether by acceleration or otherwise)
or on earlier final payment of the Obligations, Bank will compute the total
amount of interest that has been contracted for, charged or received by Bank or
payable by Borrower hereunder and compare such amount to the Maximum Lawful
Amount that could have been contracted for, charged or received by Bank. If such
computation reflects that the total amount of interest that has been contracted
for, charged or received by Bank or payable by Borrower exceeds the Maximum
Lawful Amount, then Bank shall apply such excess to the reduction of the
principal balance, such excess shall be refunded to Borrower. This provision
concerning the crediting or refund of excess interest shall control and take
precedence over all other agreements between Borrower and Bank so that under no
circumstances shall the total interest contracted for, charged or received by
Bank exceed the Maximum Lawful Amount.
(d) Payments. Interest due on the Committed Revolving Line is payable
on the last day of each month. Interest due on the Equipment Advances is payable
on the 11th of each month. Bank may debit any of Borrower's deposit accounts
including Account Number 3300050395 for principal and interest payments owing or
any amounts Borrower owes Bank. Bank will promptly notify Borrower when it
debits Borrower's accounts. These debits are not a set-off. Payments received
after 12:00 noon Pacific time are considered received at the opening of business
on the next Business Day. When a payment is due on a day that is not a Business
Day, the payment is due the next Business Day and additional fees or interest
accrue.
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2.4 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of
$15,000 for the Committed Revolving Line due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and reasonable expenses) incurred through and after the date of this
Agreement, are payable when due.
3 CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral. If this Agreement is terminated, Bank's lien and security interest
in the Collateral will continue until Borrower fully satisfies its Obligations.
5 REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified, except where the failure to do so could
reasonably be expected to cause a Material Adverse Change.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause reasonably be expected to cause a
Material Adverse Change.
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5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except
Permitted Liens. The Accounts are bona fide, existing obligations, and the
service or property has been performed or delivered to the account debtor or its
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding
of any account debtor whose accounts are an Eligible Account in any Borrowing
Base Certificate. All Inventory is in all material respects of good and
marketable quality, free from material defects.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to the knowledge of Borrower's Responsible Officers and legal
counsel, threatened by or against Borrower or any Subsidiary in which a likely
adverse decision could reasonably be expected to cause a Material Adverse
Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations T and U of the Federal Reserve Board of Governors). Borrower has
complied in all material respects with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could reasonably be expected to cause a Material Adverse Change. None of
Borrower's or any Subsidiary's properties or assets has been used by Borrower or
any Subsidiary or, to the best of Borrower's knowledge, by previous Persons, in
disposing, producing, storing, treating, or transporting any hazardous substance
other than legally. Borrower and each Subsidiary has timely filed all required
tax returns and paid, or made adequate provision to pay, all material taxes,
except those being contested in good faith with adequate reserves under GAAP.
Borrower and each Subsidiary has obtained all consents, approvals and
authorizations of, made all declarations or filings with, and given all notices
to, all government authorities that are necessary to continue its business as
currently conducted, except where the failure to do so could not reasonably be
expected to cause a Material Adverse Change.
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No written representation, warranty or other statement of Borrower in
any certificate or written statement given to Bank (taken together with all such
written certificates and written statements to Bank) contains any untrue
statement of a material fact or omits to state a material fact necessary to make
the
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statements contained in the certificates or statements not misleading. It being
recognized by Bank that the projections and forecasts provided by Borrower in
good faith and based upon reasonable assumptions are not viewed as facts and
that actual results during the period or periods covered by such projections and
forecasts may differ from the projected and forecasted results.
6 AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and
good standing in its jurisdiction of formation and maintain qualification in
each jurisdiction in which the failure to so qualify would reasonably be
expected to cause a material adverse effect on Borrower's business or
operations. Borrower will comply, and have each Subsidiary comply, with all
laws, ordinances and regulations to which it is subject, noncompliance with
which could have a material adverse effect on Borrower's business or operations
or would reasonably be expected to cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 120 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm reasonably acceptable to Bank; (iii) within 5 days of
filing, copies of all statements, reports and notices made available to
Borrower's security holders or to any holders of Subordinated Debt and all
reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (iv) a prompt report of any legal actions pending or threatened
against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of $100,000 or more; and (v) budgets, sales
projections, operating plans or other financial information Bank reasonably
requests.
(b) Within 20 days after the last day of each month, Borrower will
deliver to Bank a Borrowing Base Certificate signed by a Responsible Officer in
the form of Exhibit C, with aged listings of accounts receivable and accounts
payable and an inventory report detailing raw materials, work in progress and
finished goods.
(c) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit D.
(d) At such times as an Event of Default has occurred and is continuing
Bank has the right to audit Borrower's Collateral at Borrower's expense.
6.3 INVENTORY; RETURNS.
Borrower will keep all Inventory in good and marketable condition, free
from material defects. Returns and allowances between Borrower and its account
debtors will follow Borrower's customary practices as they exist at execution of
this Agreement. Borrower must promptly notify Bank of all returns, recoveries,
disputes and claims, that involve more than $50,000.
6.4 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment
of all material federal, state, and local taxes or assessments and will deliver
to Bank, on demand, appropriate certificates attesting to the payment.
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6.5 INSURANCE.
Borrower will keep its business and the Collateral insured for risks
and in amounts, as Bank may reasonably request. Insurance policies will be in a
form, with companies, and in amounts that are satisfactory to Bank in Bank's
reasonable discretion. All property policies will have a lender's loss payable
endorsement showing Bank as an additional loss payee and all liability policies
will show the Bank as an additional insured and provide that the insurer must
give Bank at least 20 days notice before canceling its policy. At Bank's
request, Borrower will deliver certified copies of policies and evidence of all
premium payments. Proceeds payable under any policy will, at Bank's option, be
payable to Bank on account of the Obligations.
6.6 PRIMARY ACCOUNTS.
Borrower will maintain its primary depository and operating accounts
with Bank.
6.7 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(i) QUICK RATIO. A ratio of Quick Assets to Current
Liabilities of at least 1.50 to 1.00.
(ii) DEBT/TANGIBLE NET WORTH RATIO. A ratio of Total
Liabilities less Subordinated Debt to Tangible Net Worth plus Subordinated Debt
of not more than 1.00 to 1.00.
(iii) LIQUIDITY COVERAGE/DEBT SERVICE. A ratio of cash plus
80% of Eligible Accounts, less any outstanding Advances, divided by the
outstanding Equipment Advances and Term Loan of not less than 1.50 to 1.00. This
covenant will be replaced by a Debt Service covenant at such time as Borrower
achieves 2 consecutive quarters of profitability sufficient to achieve a 1.25 to
1.00 coverage. Debt Service is defined as EBITDA annualized on a trailing 3
month basis divided by the CMLTD plus interest.
(iv) PROFITABILITY. Borrower will have a minimum net profit of
$1.00 for each quarter, except that Borrower may suffer a loss not to exceed
$2,900,000 for the quarter ending October 31, 1999, $2,900,000 for the quarter
ending January 31, 2000, $2,900,000 for the quarter ending April 30, 2000,
$2,300,000 for the quarter ending July 31, 2000 and $1,500,000 for the quarter
ending October 31, 2000.
6.8 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action
as Bank reasonably requests to perfect or continue Bank's security interest in
the Collateral or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
Borrower will not do any of the following without Bank's prior written
consent, which will not be unreasonably withheld:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business; (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business; or (iii) of worn-out or obsolete Equipment.
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7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership or management (other than the
sale of Borrower's equity securities in a public offering or to venture capital
investors approved by Bank) of greater than 25%. Borrower will not, without at
least 30 days prior written notice, relocate its chief executive office or add
any new offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
Merge or consolidate, or permit any of its Subsidiaries to merge or
consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
property of another Person, except where (i) no Event of Default has occurred
and is continuing or would result from such action during the term of this
Agreement and (ii) result in a decrease of more than 25% of Tangible Net Worth.
A Subsidiary may merge or consolidate into another Subsidiary or into Borrower.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here, subject to Permitted Liens.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any
Investment in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with
any Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an
"investment company," under the Investment Company Act of 1940 or undertake as
one of its important activities extending credit to purchase or carry margin
stock, or use the proceeds of any Credit Extension for that purpose; fail to
meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur; fail to comply with the
Federal Fair Labor Standards Act or violate any other law or regulation, if the
violation could reasonable be expected to have a material adverse effect on
Borrower's business or operations or would reasonably be expected to cause a
Material Adverse Change, or permit any of its Subsidiaries to do so.
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8 EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations within 3 days after
their due date. During the additional period the failure to cure the default is
not an Event of Default (but no Credit Extension will be made during the cure
period);
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates
any covenant in Section 7 or does not perform or observe any other material
term, condition or covenant in this Agreement, any Loan Documents, or in any
agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts within 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional period (of not
more than 30 days) to attempt to cure the default. During the additional time,
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or priority
of the Bank's security interest in the Collateral or in the value of such
Collateral (other than normal depreciation) which is not covered by adequate
insurance or (ii) if the Bank determines, based upon information available to it
and in its reasonable judgment, that there is a reasonable likelihood that
Borrower will fail to comply with one or more of the financial covenants in
Section 6 during the next succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized,
levied on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third
party that gives the third party the right to accelerate any Indebtedness
exceeding $100,000 or that could cause a Material Adverse Change;
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8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $50,000 is rendered
against Borrower and is unsatisfied and unstayed for 10 days (but no Credit
Extensions will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
9 BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice
or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's name
on any checks or other forms of payment or security; (ii) sign Borrower's name
on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
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9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any
Person owing Borrower money of Bank's security interest in the funds and verify
the amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons, Bank may make all or part of the payment or obtain
insurance policies required in Section 6.5, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices and Section 9-207 of
the Code, it is not liable for: (a) the safekeeping of the Collateral; (b) any
loss or damage to the Collateral; (c) any diminution in the value of the
Collateral; or (d) any act or default of any carrier, warehouseman, bailee, or
other person. Borrower bears all risk of loss, damage or destruction of the
Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents,
and all other agreements are cumulative. Bank has all rights and remedies
provided under the Code, by law, or in equity. Bank's exercise of one right or
remedy is not an election, and Bank's waiver of any Event of Default is not a
continuing waiver. Bank's delay is not a waiver, election, or acquiescence. No
waiver is effective unless signed by Bank and then is only effective for the
specific instance and purpose for which it was given.
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of
payment and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A party may change its notice address by giving the other party
written notice.
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
Texas law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction of
the State and Federal courts in Travis or Williamson County, Texas.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
14
<PAGE> 15
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH COUNSEL.
12 GENERAL PROVISIONS
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its
officers, employees, and agents against: (a) all obligations, demands, claims,
and liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other
provision in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing and signed by
Borrower and Bank. This Agreement represents the entire agreement about this
subject matter, and supersedes prior negotiations or agreements. All prior
agreements, understandings, representations, warranties, and negotiations
between the parties about the subject matter of this Agreement merge into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or
15
<PAGE> 16
purchasers of any interest in the loans, (iii) as required by law, regulation,
subpoena, or other order, (iv) as required in connection with Bank's examination
or audit and (v) as Bank considers appropriate exercising remedies under this
Agreement. Confidential information does not include information that either:
(a) is in the public domain or in Bank's possession when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank; or (b) is disclosed
to Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.
12.9 EFFECT OF AMENDMENT AND RESTATEMENT.
This Agreement is intended to and does completely amend and restate,
without novation, the Original Agreement. All credit extensions or loans
outstanding under the Original Agreement are and shall continue to be
outstanding under this Agreement. All security interests granted under the
Original Agreement are hereby confirmed and ratified and shall continue to
secure all Obligations under this Agreement.
12.10 ATTORNEYS' FEES, COSTS AND EXPENSES.
In any action or proceeding between Borrower and Bank arising out of
the Loan Documents, the prevailing party will be entitled to recover its
reasonable attorneys' fees and other reasonable costs and expenses incurred, in
addition to any other relief to which it may be entitled.
13 DEFINITIONS
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"ADVANCE" or "ADVANCES" is a loan advance (or advances) under the
Committed Revolving Line.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs
and expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BORROWING BASE" is (i) 80% of Eligible Accounts plus (ii) the 25% of
the value of Borrower's Eligible Inventory (valued at the lower of cost or
wholesale fair market value), capped at 25% of the Borrowing Base, each as
determined by Bank from Borrower's most recent Borrowing Base Certificate.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CASH MANAGEMENT SERVICES" are defined in Section 2.1.3.
"CLOSING DATE" is the date of this Agreement.
16
<PAGE> 17
"CODE" is the Texas Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
"COMMITTED EQUIPMENT LINE" is a Credit Extension of up to
$1,912,205.45.
"COMMITTED REVOLVING LINE" is an Advance of up to $2,500,000.
"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Equipment Advance, Letter of
Credit, Term Loan, or any other extension of credit by Bank for Borrower's
benefit.
"CURRENT LIABILITIES" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"ELIGIBLE ACCOUNTS" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5;
but Bank may change eligibility standards by giving Borrower notice. Unless Bank
agrees otherwise in writing, Eligible Accounts will not include:
(a) Accounts that the account debtor has not paid within 90 days of
invoice date;
(b) Accounts for an account debtor, 50% or more of whose Accounts have
not been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts
that exceed that percentage, unless the Bank approves in writing,
except for those certain Accounts from Compaq, IBM, ADIC, Hewlett
Packard, Storage Tek and EMC, for which the percentage may be 100% ;
(e) Accounts for which the account debtor does not have its principal
place of business in the United States;
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality;
(g) Accounts for which Borrower owes the account debtor, but only up to
the amount owed (sometimes called "contra" accounts, accounts payable,
customer deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in which
goods are consigned, sales guaranteed, sale or return, sale on
approval, bill and hold, or other terms if account debtor's payment may
be conditional;
(i) Accounts for which the account debtor is Borrower's Affiliate,
officer, employee, or agent;
17
<PAGE> 18
(j) Accounts in which the account debtor disputes liability or makes
any claim and Bank believes there may be a basis for dispute (but only
up to the disputed or claimed amount), or if the Account Debtor is
subject to an Insolvency Proceeding, or becomes insolvent, or goes out
of business;
(k) Accounts for which Bank reasonably determines collection to be
doubtful.
"ELIGIBLE INVENTORY" is Borrower's Inventory located at its principal
place of business (or any location permitted under Section 7.2) that complies
with representations and warranties in Section 5.2, but may not include used,
returned, obsolete, consigned, work in progress, demonstrative or custom
inventory, supplies, packing or shipping materials, but may include raw
materials.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 2.1.4.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 2.1.4.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.4.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"LETTER OF CREDIT" is defined in Section 2.1.2.
"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
18
<PAGE> 19
"MAXIMUM LAWFUL RATE" is the maximum rate of interest and the term
"Maximum Lawful Amount" means the maximum amount of interest that is permissible
under applicable state of federal laws for the type of loan evidenced by the
Loan Documents. If the Maximum Lawful Rate is increased by statute of other
governmental action after the Closing Date, then the new Maximum Lawful Rate
will be applicable to the payments from the date of the effective date of the
rate change, unless otherwise prohibited by law.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including cash management services,
letters of credit and foreign exchange contracts, if any and including interest
accruing after Insolvency Proceedings begin and debts, liabilities, or
obligations of Borrower assigned to Bank.
"ORIGINAL AGREEMENT" has the meaning set forth in recital paragraph A.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other
Loan Document;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
19
<PAGE> 20
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"QUICK ASSETS" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of fewer than 12 months determined according to
GAAP.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"REVOLVING MATURITY DATE" is August 30, 2000.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which
more than 50% of the voting stock or other equity interests is owned or
controlled, directly or indirectly, by the Person or one or more Affiliates of
the Person.
"TANGIBLE NET WORTH" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities.
"TERM LOAN" a loan of $1,351,463.75.
"TERM LOAN MATURITY DATE" is August 17, 2001.
"TOTAL LIABILITIES" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
BORROWER:
Crossroads Systems, Inc.
By: /s/
---------------------------------------
Title:
------------------------------------
BANK:
SILICON VALLEY BANK
By: /s/
---------------------------------------
Title:
------------------------------------
20
<PAGE> 21
EXHIBIT A
The Collateral consists of all of Borrower's right, title and interest
in and to the following:
All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities
entitlements, securities accounts, investment property, financial assets,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
All Borrower's Books relating to the foregoing and any and all claims,
rights and interests in any of the above and all substitutions for, additions
and accessions to and proceeds thereof.
<PAGE> 22
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
---------------------
FAX#: (408) 496-2426 TIME:
---------------------
- --------------------------------------------------------------------------------
FROM: Crossroads Systems, Inc.
--------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
----------------------------------------------------------
PHONE NUMBER:
-------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
------------------------ ----------------------------
REQUESTED TRANSACTION TYPE REQUESTED DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
-----------------------------------
PRINCIPAL PAYMENT (ONLY) $
-----------------------------------
INTEREST PAYMENT (ONLY) $
-----------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
-----------------------------------
OTHER INSTRUCTIONS:
------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
All Borrower's representations and warranties in the Amended and
Restated Loan and Security Agreement are true, correct and complete in
all material respects on the date of the telephone request for and
Advance confirmed by this Borrowing Certificate; but those
representations and warranties expressly referring to another date
shall be true, correct and complete in all material respects as of that
date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- --------------------------------------- ------------------------
Authorized Requester Phone #
- --------------------------------------- ------------------------
Received By (Bank) Phone #
-----------------------------
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
<PAGE> 23
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: Crossroads Systems, Inc. Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054
Commitment Amount: $2,500,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ____ $
-----------
2. Additions (please explain on reverse) $
-----------
3. TOTAL ACCOUNTS RECEIVABLE $
-----------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
-----------
5. Balance of 50% over 90 day accounts $
-----------
6. Credit balances over 90 days $
-----------
7. Concentration Limits* $
-----------
8. Foreign Accounts $
-----------
9. Governmental Accounts $
-----------
10. Contra Accounts $
-----------
11. Promotion or Demo Accounts $
-----------
12. Intercompany/Employee Accounts $
-----------
13. Other (please explain on reverse) $
-----------
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
-----------
15. Eligible Accounts (#3 minus #14) $
-----------
16. LOAN VALUE OF ACCOUNTS (80% of #15) $
-----------
* 100% for Compaq, IBM, ADIC, Hewlett Packard, Storage Tek and EMC
INVENTORY
17. Inventory Value as of $
-----------
INVENTORY DEDUCTIONS
18. Obsolete Inventory $
-----------
19. Any Demo Inventory $
-----------
20. Inventory sold on consignment $
-----------
21. Inventory with offsetting claims $
-----------
22. Work in process $
-----------
23. Other (please explain on reverse) $
-----------
24. TOTAL INVENTORY DEDUCTIONS $
-----------
25. Eligible Inventory (#17 minus #24) $
-----------
26. LOAN VALUE OF INVENTORY (25% of #25
Capped at 25% of Borrowing Base) $
-----------
BALANCES
27. Maximum Loan Amount (minus Cash Management
Sublimit) $
-----------
28. Total Funds Available [Lesser of #27 or
(#16 plus #26)] $
-----------
29. Present balance owing on Line of Credit $
-----------
30. Outstanding under Sublimits (LC) $
-----------
31. RESERVE POSITION (#28 minus #29 and #30) $
-----------
The undersigned represents and warrants that this is true, complete and correct,
and that the information in this Borrowing Base Certificate complies with the
representations and warranties in the Amended and Restated Loan and Security
Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
----------------------
BANK USE ONLY
Rec'd By:
-------------
Auth Signor
----------------------
<PAGE> 24
Crossroads Systems, Inc.
By:
----------------------------------
Authorized Signer
2
<PAGE> 25
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: CROSSROADS SYSTEMS, INC.
The undersigned authorized officer of Crossroads Systems, Inc.
("Borrower") certifies that under the terms and conditions of the Amended and
Restated Loan and Security Agreement between Borrower and Bank (the
"Agreement"), (i) Borrower is in complete compliance for the period ending
_______________ with all required covenants except as noted below and (ii) all
representations and warranties in the Agreement are true and correct in all
material respects on this date. Attached are the required documents supporting
the certification. The Officer certifies that these are prepared in accordance
with Generally Accepted Accounting Principles (GAAP) consistently applied from
one period to the next except as explained in an accompanying letter or
footnotes. The Officer acknowledges that no borrowings may be requested at any
time or date of determination that Borrower is not in compliance with any of the
terms of the Agreement, and that compliance is determined not just at the date
this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements + CC Monthly within 30 days Yes No
Annual (Audited) FYE within 120 days Yes No
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
A/R & A/P Agings + Inventory Report Monthly within 20 days Yes No
Borrowing Base Certificate Monthly within 20 days Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C>
Maintain on a Monthly Basis:
Minimum Quick Ratio 1.50:1.00 _____:1.00 Yes No
Maximum Debt/Tangible Net Worth 1.00:1.00 _____:1.00 Yes No
Minimum Liquidity Coverage* Yes No
Profitability: $1 Quarterly $_________ Yes No
Losses not to exceed: $2,900,000 for the quarter ending Yes No
October 31, 1999, $2,900,000 for
the quarter ending January 31, 2000,
$2,900,000 for the quarter ending
April 30, 2000, $2,300,000 for the
quarter ending July 31, 2000 and
$1,500,000 for the quarter ending
October 31, 2000
</TABLE>
* Cash plus 80% of Eligible Accounts, less any outstanding Advances, divided
by the outstanding Equipment Advances and Term Loan. This covenant will be
replaced by a Debt Service covenant at such time as Borrower achieves 2
consecutive quarters of profitability sufficient to achieve a 1.25 to 1.00
coverage. Debt Service is defined as EBITDA annualized on a trailing 3 month
basis divided by the CMLTD plus interest.
<PAGE> 26
--------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Sincerely, Received by:
--------------------
AUTHORIZED SIGNER
Crossroads Systems, Inc.
Date:
---------------------------
- ----------------------------------------
SIGNATURE Verified:
--------------------
- ---------------------------------------- AUTHORIZED SIGNER
TITLE Date:
---------------------------
- ----------------------------------------
DATE Compliance Status: Yes No
--------------------------------
2
<PAGE> 27
[LOGO]
SILICON VALLEY BANK
PRO FORMA INVOICE FOR LOAN CHARGES
BORROWER: CROSSROADS SYSTEMS, INC.
LOAN OFFICER: MIKE DRAEKEN
DATE: AUGUST 17, 1999
REVOLVING LOAN FEE $15,000.00
DOCUMENTATION FEE 750.00
TOTAL FEE DUE $15,750.00
==========
PLEASE INDICATE THE METHOD OF PAYMENT:
{ } A CHECK FOR THE TOTAL AMOUNT IS ATTACHED.
{ } DEBIT DDA # __________________ FOR THE TOTAL AMOUNT.
{ } LOAN PROCEEDS
BORROWER:
BY:
--------------------------------------------
(AUTHORIZED SIGNER)
- -----------------------------------------------
SILICON VALLEY BANK (DATE)
ACCOUNT OFFICER'S SIGNATURE
<PAGE> 28
CORPORATE BORROWING RESOLUTION
<TABLE>
<S> <C>
BORROWER: CROSSROADS SYSTEMS, INC. BANK: SILICON VALLEY BANK
9390 RESEARCH BLVD., SUITE II-300 9020 CAPITAL OF TEXAS HWY. NORTH
AUSTIN, TX 78759 ARBORETUM PLAZA ONE, STE. 350
AUSTIN, TX 78759
</TABLE>
I, THE SECRETARY OR ASSISTANT SECRETARY OF CROSSROADS SYSTEMS, INC.
("BORROWER"), CERTIFY that Borrower is a corporation existing under the laws of
the State of Texas.
I certify that at a meeting of Borrower's Directors (or by other authorized
corporate action) duly held the following resolutions were adopted.
It is resolved that ANY ONE of the following officers of Borrower, whose name,
title and signature is below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
- ------------------------- --------------------------- ------------------------
- ------------------------- --------------------------- ------------------------
- ------------------------- --------------------------- ------------------------
- ------------------------- --------------------------- ------------------------
</TABLE>
may act for Borrower and:
BORROW MONEY. Borrow money from Silicon Valley Bank ("Bank").
EXECUTE LOAN DOCUMENTS. Execute any loan documents Bank requires.
GRANT SECURITY. Grant Bank a security interest in any of Borrower's
assets.
NEGOTIATE ITEMS. Negotiate or discount all drafts, trade acceptances,
promissory notes, or other indebtedness in which Borrower has an
interest and receive cash or otherwise use the proceeds.
LETTERS OF CREDIT. Apply for letters of credit from Bank.
FOREIGN EXCHANGE CONTRACTS. Execute spot or forward foreign exchange
contracts.
ISSUE WARRANTS. Issue warrants for Borrower's stock.
FURTHER ACTS. Designate other individuals to request advances, pay fees
and costs and execute other documents or agreements (including
documents or agreement that waive Borrowers right to a jury trial) they
think necessary to effectuate these Resolutions.
Further resolved that all acts authorized by these Resolutions and performed
before they were adopted are ratified. These Resolutions remain in effect and
Bank may rely on them until Bank receives written notice of their revocation.
I certify that the persons listed above are Borrower's officers with the titles
and signatures shown following their names and that these resolutions have not
been modified are currently effective.
<PAGE> 29
CERTIFIED TO AND ATTESTED BY:
X
----------------------------------------------
*Secretary or Assistant Secretary
X
----------------------------------------------
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2
<PAGE> 30
RECORDATION REQUESTED BY:
SILICON VALLEY BANK, A CALIFORNIA STATE CHARTERED BANK
9020 CAPITAL OF TEXAS HWY. NORTH
ARBORETUM PLAZA ONE, STE. 350
AUSTIN, TX 78759
)
WHEN RECORDED MAIL TO: )
)
SILICON VALLEY BANK, A CALIFORNIA STATE CHARTERED BANK )
9020 CAPITAL OF TEXAS HWY. NORTH )
ARBORETUM PLAZA ONE, STE. 350 )
AUSTIN, TX 78759 )
)
)
)
)
)
)
)
SPACE ABOVE THIS LINE IS FOR RECORDER'S USE ONLY
- --------------------------------------------------------------------------------
LANDLORD'S CONSENT
THIS LANDLORD'S CONSENT IS ENTERED INTO AMONG CROSSROADS SYSTEMS, INC.
("BORROWER"), WHOSE ADDRESS IS 9390 RESEARCH BLVD., SUITE II-300, AUSTIN, TEXAS
78759; SILICON VALLEY BANK, WHOSE ADDRESS IS 3003 TASMAN DRIVE, SANTA CLARA, CA
95054 WITH A LOAN PRODUCTION OFFICE LOCATED AT 9020 CAPITAL OF TEXAS HWY. NORTH,
ARBORETUM PLAZA ONE, STE. 350, AUSTIN, TX 78759; AND _________________________
("LANDLORD"), WHOSE ADDRESS IS ___________________________________. Borrower and
Lender have entered into, or are about to enter into, an agreement whereby
Lender has acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower against
such security interest in the Collateral and for other valuable consideration,
Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
time to time.
BORROWER. The word "Borrower" means CROSSROADS SYSTEMS, INC..
COLLATERAL. The word "Collateral" means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
including without limitation the following specific property:
INVENTORY, CHATTEL PAPER, INVESTMENT PROPERTY, ACCOUNTS, CONTRACT
RIGHTS, DEPOSIT ACCOUNTS, INSTRUMENTS, DOCUMENTS, EQUIPMENT, GENERAL
INTANGIBLES AND FIXTURES
LANDLORD. The word "Landlord" means ____________________________. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or lienholder,
or that of any other holder of an interest in the Premises which may be, or
may become, prior to the interest of Lender.
LEASE. The word "Lease" means that certain lease of the Premises, dated
__________________________, between Landlord and Borrower. The Lease was
recorded as follows: Unrecorded.
LENDER. The word "Lender" means Silicon Valley Bank, a California state
chartered bank, its successors and assigns.
LOAN. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
PREMISES. The word "Premises" means the real property located in
__________________________, commonly known as _____________________, and
legally described as:
REFER TO EXHIBIT "A" ATTACHED HERETO AND MADE A PART HEREOF.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's rights in the Lease, as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
<PAGE> 31
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lender's prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. If Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the Premises
for the purpose of operating a business, Lender will have no liability under the
Lease, including without limitation liability for rent. Whether or not Lender
enters into possession of the Premises for any purpose, Borrower will remain
fully liable for all obligations of Borrower as lessee under the Lease. While
Lender is in possession of the Premises, Lender will cause all payments due
under the Lease and attributable to that period of time to be made to Landlord.
If Lender later reassigns the Lease or vacates the Premises, Lender will have no
further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. If
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the respective
heirs, personal representatives, successors and assigns of the parties to this
Agreement. The covenants of Borrower and Landlord respecting subordination of
the claim or claims of Landlord in favor of Lender shall extend to, include, and
be enforceable by any transferee or endorsee to whom Lender may transfer any
claim or claims to which this Agreement shall apply. Lender need not accept this
Agreement in writing or otherwise to make it effective. This Agreement shall be
governed by and construed in accordance with the laws of the State of Texas. If
Landlord is other than an individual, any agent or other person executing this
Agreement on behalf of Landlord represents and warrants to Lender that he or she
has full power and authority to execute this Agreement on Landlord's behalf.
Lender shall not be deemed to have waived any rights under this Agreement unless
such waiver is in writing and signed by Lender. Without notice to Landlord and
without affecting the validity of this Consent, Lender may do or not do anything
it deems appropriate or necessary with respect to the Loan, any obligors on the
Loan, or any Collateral for the Loan; including without limitation extending,
renewing, rearranging, or accelerating any of the Loan indebtedness. No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Lender of a provision of this
Agreement shall not constitute a waiver of or prejudice Lender's right otherwise
to demand strict compliance with that provision or any other provision. Whenever
consent by Lender is required in this Agreement, the granting of such consent by
Lender in any one instance shall not constitute continuing consent to subsequent
instances where such consent is required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS. THIS AGREEMENT
IS DATED AUGUST 17, 1999.
BORROWER:
CROSSROADS SYSTEMS, INC.
BY:
-----------------------------------------
NAME:
---------------------------------------
TITLE:
--------------------------------------
LANDLORD:
X
------------------------------------------
LANDLORD'S SIGNATURE
LENDER:
SILICON VALLEY BANK, A CALIFORNIA
STATE CHARTERED BANK
BY:
----------------------------------
NAME:
--------------------------------
TITLE:
-------------------------------
2
<PAGE> 32
- -----------------------------------------------------------------
LENDER ACKNOWLEDGMENT
STATE OF )
----------------------------------------- ) Sections
COUNTY OF )
---------------------------------------- )
This instrument was acknowledged before me on __________, 19______ by
_____________________________________, ____________________________ of Silicon
Valley Bank, a California state chartered bank, on behalf of Silicon Valley
Bank, a California state chartered bank.
Notary Public, State of Texas
- --------------------------------------------------
3
<PAGE> 33
CORPORATE ACKNOWLEDGMENT
STATE OF )
----------------------------------------- ) Sections
COUNTY OF )
---------------------------------------- )
This instrument was acknowledged before me on __________, 19______ by
Name:__________________________________, Title:_____________________ of
Crossroads Systems, Inc., a Texas corporation, on behalf of said corporation
________________________________________________________________________________
of _____________________________________________ on behalf of said _____________
_____________________________________.
Notary Public, State of Texas
- ---------------------------------------------------
4
<PAGE> 34
- -----------------------------------------------------------------
LANDLORD ACKNOWLEDGMENT
STATE OF )
----------------------------------------- ) Sections
COUNTY OF )
---------------------------------------- )
This instrument was acknowledged before me on __________, 19______ by___________
__________________________, Landlord.
Notary Public, State of Texas
- ---------------------------------------------------
5
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated September 17, 1999 relating to the financial statements of
Crossroads Systems, Inc. and Subsidiary, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Austin, Texas
September 23, 1999
