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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended OCTOBER 31, 1999
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
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CROSSROADS SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 74-2846643
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
9390 RESEARCH BOULEVARD, SUITE II-300
AUSTIN, TEXAS 78759
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (512) 349-0300
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
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(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicated by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of Common Stock on January
27, 2000, as reported on the Nasdaq National Market, was approximately $1.34
billion (affiliates being, for these purposes only, directors, executive
officers and holders of more than 5% of the Registrant's Common Stock.
As of January 27, 2000, the Registrant had 26,588,019 outstanding
shares of Common Stock.
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PART I
ITEM 1. BUSINESS.
This annual report 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, making projections of our future results of operations 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 "Additional
Factors That May Affect Future Results" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," as well as any
cautionary language in this annual report, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially
from the expectations we described in our forward-looking statements.
OVERVIEW
We are the leading provider of storage routers for storage area
networks, or "SAN", based on our market share of storage routers shipped. Our
storage routers serve the critical function of enabling Fibre Channel storage
area networks to connect with many of an organization's other computer devices
that use different computer protocols. Specifically, when used in storage area
networks our storage routers decrease congestion in the transfer of data within
a network, reduce the time required to back up data, improve utilization of
storage resources, and preserve and enhance existing server and storage system
investments.
To date, we have sold approximately 7,300 storage routers, primarily to
major manufacturers of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their storage area networks. We have also recently begun to sell our storage
routers through companies that distribute, resell or integrate our storage
routers as part of a complete SAN solution.
INDUSTRY BACKGROUND
Increasing Importance of Information Management
Information management has become a strategic imperative for many
organizations today. The broad deployment of widely dispersed computer networks
combined with the widespread use of the Internet, intranets and electronic
commerce have enabled organizations to empower employees, customers and
suppliers with access to vast amounts of data. However, the dramatic growth in
the amount of data generated, stored, protected and accessed has created
increasingly serious information management challenges. Exacerbating these
challenges are the greater number and types of users who access this data, as
well as the proliferation of various types of software applications across many
different computer devices that use different protocols for the input and output
of data. Organizations therefore are seeking to implement processes and systems
that effectively and efficiently store, manage and ensure the integrity and
availability of data 24 hours-a-day, seven days-a-week, 365 days-a-year.
The Interconnect Bottleneck and Limitations of the Point-to-Point Storage System
Architecture
While data storage capacity and microprocessor speeds have increased
dramatically, the speed at which information is transmitted from storage systems
to microprocessors has not increased nearly as rapidly. This imbalance has
resulted in bottlenecks at the interconnection points where the input and output
of data occurs. These interconnect points are commonly referred to as the I/O.
These I/O bottlenecks cause large delays in the movement of data within a
network, significantly slowing down the network's day-to-day operations and
frustrating network users. The I/O bottleneck persists due, in large part, to
the limitations of the computer protocols that traditionally have been used to
transport data across the I/O.
One of the most commonly used I/O protocols is the small computer
system interface, or SCSI. While widely used, SCSI has inherent performance
limitations, including:
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o the amount of data SCSI can transport at one time;
o the physical distances over which SCSI can operate;
o the limited number of storage devices SCSI can connect to a
server;
o SCSI's inability to grow with and adapt to the requirements of
growing and changing computer networks;
o SCSI's lack of management capabilities; and
o SCSI's inability to connect more than one server to a storage
device, which restricts data accessibility.
For example, a SCSI connection enables data throughput of only 40 or 80
megabytes per second, can transmit data over no more than 25 meters, and can
support a maximum of only 15 devices. In addition, SCSI does not have any
inherent capability to manage storage systems or any devices attached to those
systems. As a result, already busy network servers also must perform these
tasks. Finally, a SCSI-connected device can only be accessed by a single server.
If the server becomes unavailable for any reason, data on its connected device
becomes inaccessible. Despite its limitations, SCSI currently is the most
prevalent interconnect, or I/O, protocol and is expected to remain an important
I/O protocol in the future.
Adding to the problems created by the I/O bottleneck is the so-called
"point-to-point" architecture used in the vast majority of enterprise computing
systems today. This architecture relies on a dedicated, point-to-point SCSI
connection between each server and only one storage device. In effect, each
server/storage pair becomes an island. To perform data backup -- making a copy
of data to protect it from loss or corruption -- data must be moved from a
storage system, through its attached server, over the primary computer network
(referred to as the local area network, or LAN), then through another server to
a backup storage system.
Because users can access information residing on a storage device only
from the server connected to that storage device, and because a significant
amount of data must be moved across the local area network, two bottlenecks
occur. First, the amount of data which can traverse the SCSI interconnect
between the server and the storage device at a given time is severely limited,
the information going to and coming from the storage device is more difficult to
access and manage, and the risk of data loss is increased. As the number of
requests for stored data from the server grows, congestion within the server
increases and server performance further decreases. Second, the LAN becomes
congested, slowing an organization's day-to-day operations. As a result, many
organizations are moving away from point-to-point storage system architectures
to reduce I/O bottlenecks and improve their overall information management.
Addressing the I/O Bottleneck with Fibre Channel Storage Area Networks
The higher performance Fibre Channel protocol has received broad
recognition as a means to address many of the current limitations and
difficulties of information management. Fibre Channel is an industry standard
interconnect protocol developed in the early 1990s and approved by the American
National Standards Institute in 1994. Fibre Channel enables data throughput of
more than 100 megabytes per second, can transmit data over distances of up to 10
kilometers and can enable the interconnection of hundreds of different servers
and storage systems. As a result of these capabilities, Fibre Channel has
enabled the evolution of a new network storage architecture: the SAN.
A SAN is a high-speed computer network dedicated to data storage that
allows different types of storage devices, such as tape libraries and disk
arrays, to be shared by all end users through network servers. Similar to the
way in which traditional local and wide area computer networks permit any end
user on the network to access any network server, a SAN creates a "pool" of data
storage that can be shared by multiple servers. Through various configurations
similar to those used in traditional computer networks, SANs can connect any
server with any storage system, and storage systems with each other. This
any-to-any connectivity enables large amounts of data to be shared and accessed
among servers and storage systems running different computer operating systems
or software applications.
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Three key devices enable the interconnection of a SAN with other
network components, as well as the various components of the SAN with each
other:
o The Storage Hub is a Fibre Channel-based device which connects
Fibre Channel servers to Fibre Channel storage devices via a
single shared data communication path. Leading suppliers of
storage hubs include Gadzoox Networks and Vixel.
o The Storage Switch is a Fibre Channel-based device which
connects Fibre Channel servers to Fibre Channel storage
devices via multiple communication paths. Leading suppliers of
storage switches include Ancor Communications, Brocade
Communications and McDATA.
o The Storage Router is a device which, in effect, translates
communications across different computer protocols, including
both SCSI and Fibre Channel, in order to connect all of the
various components of the SAN, including servers, storage
systems, storage hubs and storage switches. By enabling data
transport across multiple computer protocols, storage routers
facilitate seamless communication between the SAN and attached
SCSI-based servers and storage systems. As such, storage
routers enable both server-to-storage and storage-to-storage
communication. We are the leading supplier of storage routers
based on the number of units shipped, and believe that we were
the first company to ship a storage router.
New Applications Enabled by Fibre Channel SANs
Fibre Channel SANs have enabled a number of important applications,
including:
o LAN-free Backup. Disruptions to a computer system can result
in the loss or corruption of data. Therefore, most
organizations regularly perform data backup by moving data
from storage systems to separate or off-site storage systems
or data centers where the data can be safely stored. Because
data backup can account for a significant portion of the data
traffic over local area networks, it is often a major
contributor to bottlenecks at the input/output interconnect.
As networks are increasingly required to be available to users
on an around-the-clock basis, the available time during which
data backup can be performed has decreased, while the time
required to perform backup has increased due to the growth of
the amount of data being backed up. Unlike traditional backup
which entails the use of multiple servers to access each of
their storage devices, LAN-free backup uses the SAN to move
data from a storage system through one server then directly to
a backup storage system. By moving the data backup function
from the LAN to the SAN, LAN-free backup substantially reduces
I/O bottlenecks.
o Server-free Backup. The development of server-free backup has
the potential to further extend the benefits of LAN-free
backup by virtually removing the server from the backup
process. This application will enable automated data movement
between storage systems directly across the SAN, allowing data
backup while utilizing a very small percentage of the server's
internal data processing capacity. As a result, organizations
will no longer need to identify lengthy time periods, or
"backup windows," for disconnecting servers from the network
in order to perform backup.
o Shared Storage. In the traditional point-to-point storage
architecture, a significant portion of storage resources are
underutilized because they are accessible only by a single
server which may not efficiently use the resource. With SANs,
multiple servers can access the same storage devices, enabling
more stored data to be available to more users, and reducing
the need to add more servers or storage devices to support
greater storage requirements.
o Data Mirroring and Disaster Tolerance. SANs improve an
organization's ability to ensure the integrity of its data by
facilitating data replication, or mirroring, and enhanced
disaster tolerance and recovery. In mirroring, two copies of
transaction data are created and maintained on separate
storage systems. This redundancy reduces the chance of data
loss or corruption. Because SANs enable very high data
transmission rates and support transmission distances of up to
10 kilometers per Fibre Channel link, SANs enable mirroring
across storage systems that may be many kilometers apart from
each other.
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These capabilities also facilitate the creation and
maintenance of offsite data centers that support business
recovery in the event data is lost at a primary storage site.
The Need for Storage Routers to Facilitate the Adoption of SANs and Emerging I/O
Protocols
As storage area networks are relatively new, most storage devices in
the market continue to be sold with the small computer system interface.
Additionally, most organizations have made significant investments in storage
devices and servers that use the small computer system interface. Thus, in order
to enable organizations to achieve the benefits of deploying a storage area
network, the SAN must be able to operate in conjunction with the different I/O
protocols employed by the devices which are connected to it or within it.
Because many organizations have made significant investments in computer
equipment which uses the small computer system interface protocol, organizations
are reluctant to replace these devices on a wholesale basis or to stop
purchasing them. As a result, these organizations will require their Fibre
Channel-based SANs to communicate with SCSI-based devices.
Several other current and emerging I/O protocols also are expected to
be incorporated into commercial SAN products, servers and storage systems in the
future. These protocols include asynchronous transfer mode, which would support
the high-speed transmission of data between multiple SANs via networks operating
over large distances, otherwise known as wide area networks. Other current and
future I/O protocols under development are intended to reduce the incidence of
I/O bottlenecks. These include Next Generation I/O (NGIO) and Future I/O, as
well as Infiniband, the recently announced combination of these two competing
protocols. As new protocols achieve commercial acceptance, storage routers will
be increasingly essential to connect these devices to the SAN, enabling seamless
communication among servers, storage devices and other SAN components that
utilize different computer protocols.
THE CROSSROADS SOLUTION
We are the leading provider of storage routers for storage area
networks, based on our market share of storage routers shipped. Our storage
routers enable organizations to deploy SANs within their existing computing
networks. Our storage routers presently connect Fibre Channel SANs with SCSI
servers and SCSI storage systems and are fully interoperable with commercially
available Fibre Channel storage devices and equipment. Using our storage
routers, organizations can deploy and derive the benefits of SAN technology
today, while preserving their existing investments in SCSI-based computer
equipment.
Incorporated into our storage routers is our proprietary storage
routing software that "intelligently" examines data traffic in the SAN to
prioritize transmission and minimize congestion in the flow of data. This
software also enables communication between different I/O protocols, supports
rapid field deployment of new storage area network configurations, enables
sharing of storage resources by multiple servers and can be adapted to new I/O
protocols as they emerge. Our proprietary software is combined with software
management tools and embedded in our storage routers. Our storage router
hardware consists of industry-standard microprocessors and industry-standard
application specific integrated circuits.
Our storage routers are purchased by end-user organizations of all
sizes, primarily to improve backup systems in their SANs. Our storage routers
are in use in the data centers of large, multi-national corporations, as well as
in smaller companies such as Crossroads, where we use two of our storage routers
in conjunction with our own storage area network for LAN-free backup and to
connect SCSI-based disk storage devices.
We believe that deploying our storage routers helps organizations
improve and reduce their total cost of information management by offering a
number of important benefits, including:
Facilitating Efficient Backup and Recovery
Currently, our storage routers are used primarily to connect SCSI tape
storage systems to Fibre Channel SANs for LAN-free backup. By allowing the
backup process to be accomplished across the SAN, rather than across the local
area network, our storage routers remove a common source of congestion within
the LAN. As a result, the primary computer network has greater availability to
perform day-to-day operations. LAN-free backup also provides flexibility to
conduct backup at any time of day. This capability is increasingly important as
users demand network
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availability around the clock and from geographically dispersed locations. In
addition, we have software nearing completion which is designed to enable
server-free backup. By removing the server almost entirely from the backup
process, server-free backup will offer further significant reductions in network
server utilization. Finally, our storage routers support the distance
capabilities of Fibre Channel SANs, enabling long distance data mirroring and
the creation of redundant data sites to restore data when a dedicated storage
system fails or is damaged.
Providing Broad, Verified Interoperability
Our storage routers are designed to function together, or interoperate,
with all commercially available Fibre Channel storage hubs and storage switches,
as well as other SAN components, including storage devices, host bus adapters,
operating systems and storage management software. Our storage routers function
in over 3,000 different configurations of SANs, thus providing organizations
with flexibility in designing and changing their SANs. Furthermore, our storage
routers support concurrent transmissions of data utilizing multiple computer
protocols, including SCSI and the Internet Protocol. Our storage routers can be
deployed in SANs which connect servers running diverse operating systems,
including NetWare, Unix and Windows NT. Our storage routers have been tested and
verified through our Crossroads Verified-Storage Area Network (CV-SAN) program,
which is now available through our Web-based Configurator.
Increasing Scalability and Implementation Flexibility
Our storage routers are designed to operate in any SAN computing
environment and are designed to be able to adapt as organizations grow and
change their computer networks to address their increasing data storage and
information management needs. Our storage routers also are designed to work in
all Fibre Channel SAN configurations so that organizations can modify their
storage architecture to address their changing needs without changing their
storage routers. Organizations can incrementally add storage routers as backup
demands grow or as new storage devices are added to their networks. Our newest
line of storage routers can be configured to support data transmission over
copper or fiber optic lines.
Enhancing Storage Area Network Manageability
Our storage routers are designed with features that support an
organization's ability to conduct systems diagnostics and management, as well as
real-time application monitoring, from remote locations. In addition, the
proprietary software embedded in our storage routers enhances the ability of an
organization to manage storage systems that are attached to the storage router
by translating network management protocols to storage management protocols. To
this end, we work closely with leading independent software vendors, such as BMC
Software, Computer Associates, Hewlett-Packard and Tivoli Systems, to ensure
that our storage routers can be managed through their network management
software products.
Leveraging Existing Server and Storage System Investments
Our storage routers enable an organization's continued use of its large
installed base of servers and storage devices that rely on the small computer
system interface within a storage area network. In addition to enabling
organizations to preserve these existing investments, our storage routers
improve the functionality of those systems when operated in conjunction with a
SAN. For example, by connecting SCSI-only servers to SANs, a process referred to
as server migration, our storage routers enable those SCSI servers to run
applications on a SAN. By allowing consolidation of storage resources in
centralized facilities, our solutions also reduce the need for organizations to
maintain a number of geographically dispersed and costly data storage centers
and enable them to more efficiently use their existing data storage capacity.
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OUR STRATEGY
Our objective is to maintain our position as the leading provider of
storage routers and to leverage this position to become the leading provider of
I/O routing solutions. The key elements of our strategy include the following:
Leverage and Extend Market Leadership
We are the leading provider of storage routers based on our market
share of storage routers shipped, and believe that we were the first company to
ship storage routers. We intend to capitalize on our market leadership position
by expanding the depth and breadth of our relationships with OEM, distributor,
reseller and system integrator customers. To achieve this objective, we are
committing additional resources to extend the interoperability of our storage
routers to address new and emerging applications. In order to accelerate the
interoperability of our storage routers, we developed the Crossroads
Verified-Storage Area Network program. We believe that CV-SAN differentiates our
company by proactively ensuring the interoperability of our products with other
SAN components. Through our CV-SAN initiative, we have tested and verified the
interoperability of over 3,000 different SAN configurations using our storage
routers. We intend to continue leveraging our technology expertise to expand and
improve our storage routers and gain additional market share.
Leverage and Expand Our Relationships with Leading OEM Customers
We believe that working with leading OEMs enables us to effectively
distribute our storage routers, anticipate the needs of enterprises, introduce
new products to meet those needs and target new markets. Since OEMs must expend
substantial resources to qualify our storage routers for inclusion in their SAN
solutions, they tend to qualify only a few vendors for a particular product. As
a result, we believe that our success depends heavily on maintaining and
augmenting our OEM relationships. To date, we have cultivated customer
relationships with leading server and storage system OEMs, including ADIC, ATL
Products, Compaq, Dell, Exabyte, Fujitsu-Siemens, Groupe Bull, Hewlett-Packard,
Hitachi Data Systems, INRANGE, McDATA and StorageTek. We intend to continue
targeting major server and storage system OEMs to further strengthen our market
position.
Capitalize on Emerging I/O Market Opportunities
We intend to leverage our significant expertise in software, hardware,
storage routing algorithms, and existing and emerging I/O protocols to remain at
the forefront of the SAN market. We believe this expertise has enabled us to
establish our market leadership in our core market of storage routing. We intend
to extend our technological capabilities to emerging I/O routing market
opportunities. We are currently developing:
o a SAN-to-WAN router, which will enable multiple SANs to be
connected over wide area networks;
o our Active Fabric storage router software, which we expect
will provide enhanced features for SANs, including server-free
backup; and
o new I/O router products that will incorporate emerging I/O
technology.
o We actively participate in the working groups that define and
shape emerging I/O standards, including the Infiniband forum,
the recently announced successor to the NGIO Forum (whose
members included Dell, Hitachi Data Systems, Intel, NEC,
Siemens and Sun Microsystems) and the Future I/O Alliance
(whose members included Adaptec, Cisco, Compaq,
Hewlett-Packard, IBM and 3Com). In addition to the Infiniband
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.
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Broaden Relationships with Leading Software Vendors
We believe that establishing relationships with leading enterprise and
storage management software companies is essential to facilitating the efficient
and reliable integration of their capabilities with our storage routers. To this
end, we have developed relationships with leading software vendors, including
BMC Software, Computer Associates, Legato Systems, Tivoli Systems and VERITAS
Software. The focus of our strategic initiatives with these companies has been
to ensure the integration of our storage routers with leading software solutions
to optimize SAN management. We intend to continue expanding our relationships
with leading software vendors to ensure the compatibility of our storage routers
with their software.
Expand Distribution Channels
In addition to building upon our established OEM sales channel, we
believe that we can achieve additional growth by selling through distributors,
resellers and system integrators. To date, we have developed relationships with
Andataco, Bdata, Bell Microproducts, Cranel, Datalink, EIE Data Media
Products-Japan, Pinacor and Tricom. We intend to enter into additional
agreements with distributors, resellers and system integrators, both in the
United States and abroad, to increase our geographic coverage and address
additional opportunities. We regularly conduct sales training for prospective
distributor, reseller and system integrator customers to educate them in the
sale of our storage routers. In addition, we have initiated an out-bound
marketing program directed at end-user organizations to build greater awareness
of the benefits of our storage routers. This is intended to generate demand for
distributors, resellers and system integrators selling our storage routers.
PRODUCTS
Our storage routers are an integral component of SAN solutions and are
critical to enabling organizations to attain the benefits of these solutions
within their existing computer network infrastructures. We have developed a line
of storage routers which enable bi-directional, seamless communications between
Fibre Channel devices in the SAN and SCSI devices. Each of our storage routers
is designed to support all forms of SAN architecture, including point-to-point,
arbitrated loop and switched fabric networks, provides management capability
through an Ethernet port, and supports full Simple Network Management Protocol,
or SNMP, and remote Web-based management.
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Storage Router Products
The following table summarizes the key features and benefits of our
products:
<TABLE>
<CAPTION>
STORAGE PRODUCT FIRST SHIPMENT DEVICE
ROUTER NAME TO OEM CONFIGURATION BENEFITS
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<S> <C> <C> <C> <C>
Mid-Range 4100 August 1997 o 1 Fibre Channel o Enables LAN-free backup and recovery
o 1 SCSI bus o Supports shared storage (disk, tape and
o 1 Ethernet optical)
management port o Connects up to 15 SCSI devices
o Transmits data over distances up to 10 km
o Enables server migration to SANs
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Enterprise 4400 September 1997 o 2 Fibre Channel port o Allows RAID (Redundant Array of
Independent Disks) migration
o 4 SCSI buses
o Enables LAN-free backup
and recovery
o Supports shared storage
(disk and tape)
o Connects up to 60 SCSI
devices
- ------------------------------------------------------------------------------------------------------------------------------
High End 4200 May 1998 o 1 Fibre Channel port o Enables LAN-free backup and recovery
o 2 SCSI buses o Supports shared storage (disk, tape and
o 1 Ethernet optical)
management port o Connects up to 30 SCSI devices
o Transmits data over distances up to 10 km
o Enables server migration to SANs
- ------------------------------------------------------------------------------------------------------------------------------
Third Generation 4x50* May 1999* o 1 Fibre Channel port Will provide the same benefits as 4200 router, and:
o 1 to 4 SCSI buses o Enable server-free backup
o 1 Ethernet o Double the SCSI throughput via low
management port voltage differential technology
o 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
accounted for 50% and 66% of our product revenue in fiscal 1998 and 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 3,000 different SAN configurations utilizing
our storage router solutions. We have designed our Web-based Configurator to
enable our customers to access this interoperability data and dynamically
configure interoperable SANs. Our Configurator serves as a tool for our current
and potential customers to assist them in designing a SAN by determining which
SAN components are interoperable with other SAN components.
OUR CUSTOMERS
To date, we have sold approximately 7,300 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
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following is a list of our OEM customers, each of which has purchased at least
$50,000 of our products, and their branded Crossroads products:
<TABLE>
<CAPTION>
CROSSROADS
OEM OEM-BRANDED PRODUCT PRODUCT
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ADIC FCR100 Fibre Channel Router 4100
FCR200 Fibre Channel Router 4200
FCR400 Fibre Channel Router 4400
- ----------------------------------------------------------------------------------------------------------------------
ATL Products Crossroads 4200 4200
- ----------------------------------------------------------------------------------------------------------------------
Compaq StorageWorks Fibre Channel Tape Controller 4100
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Dell PowerVault 35F Multi-port Bridge 4200
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Exabyte FC-11 Storage Router 4100
FC-12 Storage Router 4200
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Fujitsu Siemens PSFR--CP41M and PSFR -CP415 4100
- ----------------------------------------------------------------------------------------------------------------------
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 Router 4100
*
- ----------------------------------------------------------------------------------------------------------------------
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.
In fiscal 1999, revenue from Compaq and StorageTek represented 36% and
36% 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 January 1, 2000, 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 nStar
Cranel Datalink
Forefront Graphics EIE Data Media Products-Japan
Pinacor Tricom
</TABLE>
SALES AND MARKETING
We base our sales and marketing strategy on an indirect sales model
executed through OEMs and distributors, re
sellers and system integrators. For
the past two years, our sales activity has focused principally on OEM adoption
through extensive OEM testing and product qualification. As the market for SAN
products matures, we believe that open market branded sales through
distributors, resellers and system integrators will represent an increasing
percentage of our total revenues. While we sell most of our products today
through OEMs, with an expanded sales channel we believe that we will gain
broader brand awareness and a greater presence in the departmental and mid-sized
business markets where distributors, resellers and system integrators generally
have a strong presence and can influence product adoption choices.
We also anticipate expanding our international sales activities in the
near future. Currently, sales to international end users are handled through our
OEM customers. In the future, we plan to establish an office in Europe to
support and manage our customer relationships there.
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Our marketing organization primarily focuses on coordinating strategic
planning activities which help us to determine market segments to pursue,
understand size and growth characteristics of these market segments, analyze
competition within the market segments, define product features to successfully
penetrate market segments and construct business analyses to measure expected
return on investments. Additionally, our marketing efforts are geared toward
developing key relationships with OEMs, distributors, resellers and system
integrators; participating in tradeshows to promote and launch our products; and
coordinating our involvement in various industry standards organizations. In
order to raise potential customer awareness of the benefits of our storage
routers, we also intend to increase our advertising in trade publications.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization provides comprehensive
training programs and telephone, e-mail and Web-based direct support to our
customers. These programs allow us to minimize the need for a large end-user
support organization by enabling our OEMs to provide installation, service and
primary technical support to their customers while we focus on high-level
secondary support. In addition, we replicate field issues to help our customers
solve end-user problems and will test the interoperability of various SAN
configurations upon customer request. All newly verified SAN configurations are
entered into our online Configurator and published in our CV-SAN guide.
TECHNOLOGY
Our storage router products are based on an architecture that combines
our proprietary software and hardware designs using industry standard
components. Our proprietary routing software intelligently examines data packet
traffic to prioritize transmission and minimize network congestion in the flow
of I/O transactions between servers and storage systems. This software also
manages delays in data transmissions that result from variances in I/O speeds
and provides accurate communication of transmission status to connected devices.
Our software provides critical interoperability between diverse I/O computer
protocols, supports rapid field deployment of new configurations and features,
enables sharing of storage resources by multiple servers and can be adapted to
new I/O protocols as they emerge. Additionally, our software is easily
configurable and can be quickly adapted to varying customer requirements and
computing environments. While our software architecture serves as the foundation
for our current products, it is also designed to be able to accommodate several
planned generations of new designs. Our hardware is the "engine" that provides
basic performance and functionality such as operating speed, data movement,
external device connectivity, network management interfaces and the ability to
operate in extreme environmental conditions of temperature and humidity.
We possess a high level of multi-disciplinary expertise encompassing
I/O technologies, software design, operating systems, hardware and application
specific integrated circuit design, and local and wide area network
technologies, which we utilize to design, develop, manufacture and deliver our
products. We believe that our combined expertise in each of these technologies
provides us with a competitive advantage in the ability to develop new products
on a timely basis, verify interoperability, expand our product features, and
integrate additional I/O interfaces and functions.
I/O Technologies
We believe that our I/O routing expertise is a critical factor in our
ability to maintain our leadership position in storage routing. There are three
key I/O technologies in use today for open systems and mainframe systems: SCSI
and Fibre Channel in open systems (e.g., NetWare, Windows NT and Unix) and IBM's
ESCON for mainframes. We employ a large number of engineers and technologists
who have significant involvement in the evolution of these I/O technologies.
Based on their expertise and our overall capabilities, we believe that we
possess insight and understanding into the capabilities and limits of each new
technology and the requirements for I/O routing. We initially chose to build our
routers to interconnect SCSI and Fibre Channel technology, and we plan to evolve
this interconnectivity into additional interfaces over time. As new I/O
standards are developed, we expect to contribute to these developments and
leverage our software and technical expertise in developing additional I/O
routers. Such additional areas of focus include ATM, Gigabit Ethernet, TCP/IP
and Infiniband, the recently announced successor to both NGIO and Future I/O.
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Embedded Software Design
We design, develop and test all of our own embedded software. As of
October 31, 1999, our engineering staff included 34 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 Infiniband Trade Association, 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
Our manufactured product contains printed circuit board assemblies
which consist of the electronics that control the function of our product. The
printed circuit board is assembled and tested by a contract manufacturer, who
purchases the required components to meet demand in accordance with our purchase
orders and six month forecast. During product final assembly and test, the
printed circuit board is assembled with the remaining components (power supply,
cables, enclosures, etc.) and tested to create the final product.
To date, substantially all of our manufacturing process other than
final assembly and test is outsourced to XeTel Corporation, a contract
manufacturer. XeTel invoices us based on agreed prices and payment terms that
are set forth in purchase orders issued by us. The pricing takes into account
component costs, manufacturing costs and margin requirements. XeTel purchases
the components for our products based upon our specifications; however, we
assume the inventory risk and risk of loss for these components ordered on our
behalf. In this process, we determine the components that are incorporated into
our products and select the appropriate suppliers of the components. Recently,
we have engaged another contract manufacturer, Solectron, to make our 4x50
family of products. We believe that this will enable us to reduce our reliance
on XeTel. Our contract with XeTel can be terminated by either party with 90 days
advance written notice.
During September 1999, we transferred much of the final assembly and
test portion of our product manufacturing process to our internal facilities. In
connection with this transition, we have hired additional employees, purchased
the necessary equipment, initiated customer qualification efforts and leased
additional facilities. We believe that bringing our final assembly and test
operations in-house will allow us to reduce our total per unit manufacturing
costs and provide us with greater flexibility to respond to changes in customer
demand. As the needs of our customers continue to evolve, we plan to reassess
our manufacturing requirements on a periodic basis and address changes as we
deem necessary.
Although we use standard parts and components for our products where
possible, we and/or XeTel currently purchase several key components used in the
manufacture of our products from single or limited sources. XeTel purchases the
components used in the printed circuit board assemblies whereas we purchase the
remaining components used during final assembly including the power supply, fan
and chassis materials. We have an obligation to XeTel for portions of excess
inventory arising from a sudden reduction in purchase orders by us to the extent
it differs from the six month forecast which we supply to XeTel. Our principal
single-source components include application specific integrated circuits, power
supplies, licensed software and chassis.
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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:
o SCSI-to-Fibre Channel storage routing: Increased connectivity
and port density, improved manageability, broader
interoperability and higher performance products;
o Active Fabric software: Modular software focused on the
development of enhanced SAN features, including server-free
backup, "intelligent" data management and data movement;
o 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
o System I/O routing: Technology development focused on
multi-protocol I/O routing products for Infiniband 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 Infiniband
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 and $5.3
million in fiscal 1998 and fiscal 1999, respectively. At October 31, 1999, we
employed 34 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:
o OEMs, including our customers and potential customers;
o LAN router manufacturers;
o storage system industry suppliers, including manufacturers and
vendors of other SAN products or entire SAN systems; and
o 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
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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:
o OEM endorsement;
o product reliability and verified interoperability;
o customer service and technical support;
o product performance and features;
o brand awareness and credibility;
o ability to meet delivery schedules;
o strength of distribution channel; and
o 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 five patents
pending under the Patent Cooperation Treaty with the intent of filing in
additional countries. One of our patent applications pending under the Patent
Cooperation Treaty has a number of claims for which a favorable opinion of
allowability has been provided by the International Preliminary Examining
Authority. However, none of our patents, including patents that may be issued in
the future, may adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to protect our intellectual property could materially harm our business.
In addition, our competitors may independently develop similar or superior
technology.
We have issued a license to Hewlett-Packard for our 4200 storage router
technology. This license allows Hewlett-Packard to create and incorporate into
their own products modifications and derivative works of this licensed
technology. This license expires in April 2001 but will automatically renew for
successive one year periods after that date unless it is terminated by either
party.
We have registered the trademark "CROSSROADS" in the United States. We
have filed trademark registration applications for "CROSSROADS SYSTEMS" and
"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 October 31, 1999, we had 153 employees, with 50 engaged in research
and development; 30 in manufacturing; 25 in sales; 21 in marketing and customer
support; and 27 in administration, information technology, human resources 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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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to the other information in this Form 10-K, the following
factors should be considered in evaluating Crossroads and our business. 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
October 31, 1999, we had an accumulated deficit of $13.4 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 three 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:
o 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;
o the rate of adoption of storage area networks as an
alternative to existing data storage and management systems;
o the ongoing need for storage routing products in storage area
network architectures;
o 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
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o the rate at which new markets emerge for products we are
currently developing.
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:
o 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;
o maintain and enhance our relationships with OEM customers,
distributors, resellers, system integrators and end-user
organizations;
o predict and base our products on standards which ultimately
become industry standards; and
o 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 fiscal 1999, sales of our 4100 product
accounted for 50% and 66% 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:
o growth of, and changing requirements of customers within, the
SAN and storage router markets;
o performance, quality, price and total cost of ownership of our
products;
o availability, performance, quality and price of competing
products and technologies;
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o our customer service and support capabilities and
responsiveness; and
o 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.
In fiscal 1998 and 1999, approximately 90% and 85% of our revenue,
respectively, 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
fiscal 1999, revenue from Compaq and StorageTek represented 36% and 36% 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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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 PRIMARY CONTRACT MANUFACTURER, OR THE FAILURE TO FORECAST DEMAND
ACCURATELY FOR OUR PRODUCTS OR TO MANAGE OUR RELATIONSHIP WITH OUR PRIMARY
CONTRACT MANUFACTURER SUCCESSFULLY, WOULD NEGATIVELY IMPACT OUR ABILITY TO
MANUFACTURE AND SELL OUR PRODUCTS.
To date, we have relied on a third-party manufacturer, XeTel
Corporation, to manufacture substantially all of our products on a purchase
order basis. We do not have a long-term supply contract with XeTel and,
therefore, XeTel is not obligated to manufacture products for us for any
specific period, or in any specific quantity, except as may be provided in a
particular purchase order. Although we believe that other providers of
manufacturing services can adequately address our needs, we expect that it would
take approximately three months to transition the performance of these services
from XeTel to a new manufacturer. We generally place orders for products with
XeTel approximately four months prior to the anticipated delivery date, with
order volumes based on forecasts of demand from our customers. Accordingly, if
we inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from XeTel to meet our customers' delivery
requirements, or we may accumulate 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.
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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 HAVE TRANSITIONED THE FINAL ASSEMBLY AND TEST PORTION OF OUR MANUFACTURING
PROCESS TO AN IN-HOUSE FACILITY, WHICH HAS INCREASED OUR FIXED COSTS AND EXPOSED
US TO INCREASED INVENTORY RISKS.
In September 1999, we transitioned 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. 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 final assembly and test operations requires 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 our internal final 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
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
18
<PAGE> 20
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 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 volume, 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
19
<PAGE> 21
errors also could cause us to incur significant warranty, diagnostic and repair
costs, divert the attention of our engineering personnel from our product
development efforts and cause significant customer relations and business
reputation problems. We are currently aware of a defect in a module purchased
from a component supplier that was incorporated into some of our installed
products. While we no longer include this module in new products, the existence
of this defective module in our installed product base could result in product
returns and future loss of business.
WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.
We believe our future success will depend in large part upon our
ability to attract and retain highly skilled managerial, engineering and sales
and marketing personnel. In particular, due to the relatively early stage of our
business, we believe that our future success is highly dependent on Brian R.
Smith, our co-founder, chief executive officer and chairman of the board, to
provide continuity in the execution of our growth plans. We do not have
employment contracts with any of our key personnel. We have experienced
difficulty in hiring engineers with appropriate qualifications in networking,
routing and storage technologies and we may not be successful in attracting and
retaining sufficient levels of such engineers to support our anticipated growth.
The loss of the services of any of our key employees, the inability to attract
or retain qualified personnel in the future or delays in hiring required
personnel, particularly engineers and sales personnel, could delay the
development and introduction of, and negatively impact our ability to sell, our
products.
TO MANAGE OUR GROWTH AND EXPANSION, WE PLAN TO RELOCATE TO NEW FACILITIES AND
UPGRADE AND IMPLEMENT OUR ENTERPRISE RESOURCE PLANNING SYSTEM, WHICH MAY DISRUPT
OUR BUSINESS.
Our rapid growth in personnel and operations has placed, and will
continue to place, a significant strain on our management and operational
resources, including our physical facilities and enterprise resource planning
system. We plan to continue to aggressively expand our operations to pursue
existing and potential market opportunities. We plan to relocate our
headquarters facility to a larger facility in the near future. In addition, we
also are planning to replace our current enterprise resource planning system in
2000 in order to integrate manufacturing, resource planning and financial
accounting. We expect these changes to be disruptive, time-consuming and
expensive processes. If we are unsuccessful or experience delays in effecting
these changes, our ability to effectively manage our operations may be
compromised.
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:
o increased complexity and costs of managing international
operations;
o protectionist laws and business practices that favor local
competition in some countries;
o multiple, conflicting and changing laws, regulations and tax
schemes;
o longer sales cycles;
o greater difficulty in accounts receivable collection and
longer collection periods; and
o political and economic instability.
20
<PAGE> 22
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, trademarks 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
intellectual property 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:
o cease selling our products that use the challenged
intellectual property;
o obtain from the owner of the infringed intellectual property
right a license to sell or use the relevant technology or
trademark, which license may not be available on reasonable
terms, or at all; or
o redesign those products that use infringing intellectual
property or cease to use an infringing trademark.
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:
o problems integrating the acquired operations, technologies or
products with our existing business and products;
o diversion of management's time and attention from our core
business;
o difficulties in retaining business relationships with
suppliers and customers of the acquired company;
o risks associated with entering markets in which we lack prior
experience; and
o potential loss of key employees of the acquired company.
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<PAGE> 23
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.
RESIDUAL YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES
AND COSTS AND AFFECT THE TIMING OF OUR REVENUES.
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, software programs that have time-sensitive components may recognize a
date represented as "00" as the year 1900 rather than the year 2000. In
addition, programs may fail to recognize February 29, 2000 as a leap year date
as a result of an exception to the calculation of leap years that will occur in
the year 2000 and otherwise occurs only once every 400 years. The problem could
result in miscalculations, data corruption, system failures or disruptions in
operations.
Because our products are used in connection with other products,
residual Year 2000 problems affecting these products could cause our products to
fail. If residual Year 2000 problems cause the failure of any of the technology,
software or systems necessary to use our products or operate our business, we
could lose customers, suffer significant disruptions on our business, lose
revenues and incur substantial liabilities and expenses. We could also become
involved in costly litigation resulting from Year 2000 problems. This could
materially and adversely affect our business, financial condition and results of
operations.
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AND COULD
DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.
At January 17, 2000, our executive officers and directors, and their
respective affiliates, beneficially owned, in the aggregate, approximately 46%
of our outstanding common stock. As a result, these stockholders will be able to
exert significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of voting power could delay or prevent an
acquisition of our company on terms which other stockholders may desire.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws could have
the effect of discouraging, delaying or preventing a merger or acquisition that
a stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware which may discourage, delay or prevent someone
from acquiring or merging with us, which may adversely affect the market price
of our common stock.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has been volatile in the past and
may be volatile in the future. The market price of our common stock may be
significantly affected by the following factors:
o actual or anticipated fluctuations in our operating results;
o changes in financial estimates by securities analysts or our
failure to perform in line with such estimates;
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<PAGE> 24
o changes in market valuations of other technology companies,
particularly those that sell products used in SANs;
o announcements by us or our competitors of significant
technical innovations, acquisitions, strategic partnerships,
joint ventures or capital commitments;
o introduction of technologies or product enhancements that
reduce the need for storage routers;
o the loss of one or more key OEM customers; and
o 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.
OF OUR TOTAL OUTSTANDING SHARES, 22,275,519, OR 84%, 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.
At January 27, 2000, we had 26,588,019 shares of common stock
outstanding. This includes the 4,312,500 shares, which are currently freely
tradeable, unless they are purchased by our "affiliates" as such term is defined
in the Securities Act. The remaining 22,275,519 shares will become available for
resale in the public market as shown in the chart below.
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF SHARES SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
- ----------------- ------------------ ------------------------------------------------------
<S> <C> <C>
4,312,500 16% Immediately (except to the extent purchased by Dell or our
affiliates).
18,046,822 69% These shares will become freely tradeable on April 16,
2000 due to an agreement these stockholders have with the
underwriters of our initial public offering. However, the
underwriters can waive this restriction and allow these
stockholders to sell their shares at any time without
prior notice.
4,228,697 15% These shares are restricted securities as defined in Rule
144 of the Securities Act, and will become freely
tradeable on a date after April 16, 2000, unless they are
purchased by our affiliates.
</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.
ITEM 2. PROPERTIES.
Our corporate headquarters facility consists of approximately 24,000
square feet in Austin, Texas. We lease our headquarters facility pursuant to a
lease agreement that expires in December 2003. In fiscal 1999 we entered into a
lease for our new corporate headquarters facility, consisting of 63,548 square
feet in Austin, Texas, which will commence in April 2000. The lease for our new
facility expires on January 31, 2006. We currently intend to terminate the lease
for our existing headquarters facility shortly after we move to our new
facility.
Our final assembly and test facility of approximately 11,250 square
feet is also located in Austin, Texas. The lease on this facility expires in
June 2004.
We also maintain sales offices, each with 400 square feet or less, in
Boston, Massachusetts; Boulder, Colorado; and San Diego, California.
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<PAGE> 25
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
In the fourth quarter of fiscal 1999, our stockholders took action by
written consent on two occasions:
o On August 5, 1999, our stockholders approved the amendment of our
certificate of incorporation to create a new series of preferred stock
to be issued to investors in our Series E Preferred Stock financing.
o On August 13, 1999, our stockholders approved the amendment of our
certificate of incorporation to approve a stock divided and to
authorize a sufficient number of shares to be sold by us in our initial
public offering.
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<PAGE> 26
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock has been quoted on the Nasdaq National Market under
the symbol "CRDS" since our initial public offering on October 20, 1999. Prior
to the initial public offering, there had been no public market for our common
stock. The following table lists the high and low per share sales prices for our
common stock as reported by the Nasdaq National Market for the periods
indicated:
<TABLE>
<CAPTION>
FISCAL 1999 HIGH LOW
----------- ------ ------
<S> <C> <C>
Fourth Quarter (October 20 to October 31, 1999) $97.25 $65.00
</TABLE>
As of January 27, 2000, there were 26,588,019 shares of our common
stock outstanding held by 183 stockholders of record.
We have never declared or paid cash dividends on our capital stock. The
Company currently intend to retain any earnings for use in our business and do
not anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our Board of Directors.
During fiscal 1999, we issued an aggregate 2,534,112 shares of our
common stock to employees pursuant to exercises of stock options (with exercise
prices ranging from $.08 to $18.00 per share) under our 1996 Stock Option/Stock
Issuance Plan which were deemed exempt from registration under Section 5 of the
Securities Act of 1933 in reliance upon Rule 701 thereunder and 1999 Stock
Incentive Plan which were registered pursuant to a Registration Statement on
Form S-8. The recipients of securities in each such transaction represented
their intentions to acquire the securities for investment only and not with a
view to, or for sale in connection with, any distribution thereof and
appropriate legends were affixed to the share certificates issued in each such
transaction.
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<PAGE> 27
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following selected consolidated financial data should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations," in Item 7 of our consolidated financial statements and the notes to
those statements included in Item 14 of this Form 10-K. The consolidated balance
sheet data at October 31, 1998 and 1999 and the consolidated statement of
operations data for the fiscal years ended October 31, 1997, 1998 and 1999 have
been derived from audited consolidated financial statements included in item 14
of this Form 10-K. The consolidated balance sheet data as of October 31, 1997
and the consolidated statement of operations data for the year ended October 31,
1996 have been derived from audited consolidated financial statements not
included in this Form 10-K. 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 have been derived from
unaudited consolidated financial statements not included in this Form 10-K.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995
(INCEPTION) FISCAL YEAR ENDED OCTOBER 31,
TO OCTOBER 31, --------------------------------------
1995 1996 1997 1998 1999
-------------- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Product revenue .................... $ 15 $ 160 $ 821 $ 2,930 $ 18,859
Other revenue ...................... 270 332 188 279 65
-------- -------- -------- -------- --------
Total revenue .................. 285 492 1,009 3,209 18,924
Cost of revenue ........................ 160 170 465 1,911 10,946
-------- -------- -------- -------- --------
Gross profit ........................... 125 322 544 1,298 7,978
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing ................ -- -- 641 2,461 4,409
Research and development ........... -- 291 1,329 2,336 5,271
General and administrative ......... 52 235 1,323 1,896 2,597
Amortization of stock-based
compensation ....................... -- -- -- 41 1,205
-------- -------- -------- -------- --------
Total operating expenses ....... 52 526 3,293 6,734 13,482
-------- -------- -------- -------- --------
Income (loss) from
operations ......................... 73 (204) (2,749) (5,436) (5,504)
Other income (expense), net ............ (3) (8) 56 82 319
-------- -------- -------- -------- --------
Net income (loss) ...................... 70 (212) (2,693) (5,354) (5,185)
Accretion on redeemable
convertible preferred stock ........ -- -- (58) (196) (247)
-------- -------- -------- -------- --------
Net income (loss) attributable
to common .......................... $ 70 $ (212) $ (2,751) $ (5,550) $ (5,432)
-------- -------- -------- -------- --------
Basic and diluted net loss per
share $ (0.04) $ (0.46) $ (0.90) $ (0.74)
-------- -------- -------- --------
Shares used in computing basic
and diluted net loss per share 6,000 6,000 6,146 7,378
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------------------------------
1995 1996 1997 1998 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 $ 80,820
Working capital ........................ 99 (168) 5,757 4,461 83,165
Total assets ........................... 127 150 7,615 7,187 91,730
Long-term debt, net of current
portion ................................ 41 82 301 591 1,325
Redeemable convertible
preferred stock ........................ -- -- 9,277 13,438 --
Total stockholders' equity
(deficit) .............................. 85 (124) (2,875) (8,347) 84,885
</TABLE>
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<PAGE> 28
ITEM 7. 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 in Item 14 of
this Form 10-K. 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 in this section entitled
"Additional Factors That May Affect Future Results" in Item 1 of this Form 10-K.
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 7,300 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 fiscal 1999, sales to Compaq and StorageTek accounted for
36% and 36% of our total revenue. No other customer accounted for more than 10%
of our total revenue in these periods. While we currently sell products to all
of our OEM customers, we do not have contracts with Compaq or with some of our
other customers. Although none of our customers is obligated to purchase minimum
quantities of our products, we seek to enter into contracts in order to provide
a framework for our customer relationships. Generally, our contracts require our
customers to provide us with forecasts to assist us in our planning and ordering
process. They also specify payment terms, allocate liability for potential third
party claims and provide for other terms governing the legal rights of the
parties.
In the past we have experienced fluctuation in the timing of orders
from our OEM customers, and we expect to continue to experience these
fluctuations in the future. These fluctuations have resulted from, among other
things, OEM customers placing initial orders for our products for purposes of
qualification and testing. As a result, we may report an increase in sales or a
commencement of sales of a product in a quarter that will not be followed by
similar sales in subsequent quarters as OEMs conduct qualification and testing.
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,
27
<PAGE> 29
resellers and system integrators will increase as a percentage of our total
revenue in future periods, we expect to continue to experience significant
customer concentration in sales to key OEM accounts for the foreseeable future.
Substantially all of our product revenue has been derived from sales of
a limited number of our storage router products. In particular, our first
generation product -- the 4100 -- has accounted for 50% and 66% of our product
revenue in fiscal 1998 and 1999, respectively. Moreover, although we negotiate
the prices for our products on an individual basis with each of our OEM
customers, many of our current agreements with our OEM customers include
provisions that require reductions in the sales price for our products over
time. We believe that this practice is common within our industry. To date, our
agreements with OEM customers, including our largest customers, provide for
quarterly reductions in pricing on a product-by-product basis ranging from 8% to
15% annually, with the actual discount determined according to the volume
potential expected from the customer, the OEM's customer base, the credibility
the OEM may bring to our solution, additional technology the OEM may help us
incorporate with our product and other Crossroads products the OEM supports.
Notwithstanding, the decreases in our average selling prices of our older
products has been offset by higher average selling prices for our newer
products, as well as sales to distributors, resellers and system integrators
where price decreases are not generally required. Nonetheless, we could
experience declines in our average unit selling prices for our products in the
future, especially if our newer products do not receive broad market acceptance
or if our efforts to increase sales to distributors, resellers and system
integrators are not successful. In addition, declines in our average selling
prices may be more pronounced should we encounter significant pricing pressures
from increased competition within the storage router market.
With respect to sales of our products to OEMs, we recognize product
revenue when products are shipped to the OEM. Product sales to distributors,
resellers and system integrators who do not have return rights are recognized at
the time of shipment. To the extent that we sell products to distributors,
resellers and system integrators that have rights of return, we defer revenue
and cost of revenue associated with such sales and recognize these amounts when
that customer sells our products to its customers. At October 31, 1999, our
deferred revenue totaled $116,700. We provide a repair or replace warranty of
between 15 and 39 months following the sale of our products, and we provide a
reserve for warranty costs when the related product revenue is recognized.
To date, we have outsourced substantially all of our manufacturing
requirements to XeTel Corporation, a contract manufacturer, and a significant
portion of our cost of revenue historically has consisted of payments to that
manufacturer. In September 1999, we transitioned the final assembly and test
portion of our manufacturing process from our contract manufacturer to an
in-house facility. In connection with this transition, we have incurred one-time
charges of $239,100 in moving and operating expenses, including our planned
customer qualification efforts, and $280,500 in purchased equipment and
leasehold improvements. Beginning in September 1999, we have incurred and expect
to continue to incur monthly charges of $61,500 related to rent, payroll and
other operating expenses. During the transition period, our manufacturing costs
increased, and our gross margin decreased, as we incurred costs of final
assembly and test performed both by us and our contract manufacturer. We believe
that bringing final assembly and test operations in-house will allow us to
reduce our total manufacturing costs on a per unit basis and provide us with
greater flexibility to respond to changes in customer demand. As the needs of
our customers continue to evolve, we plan to reassess our manufacturing
requirements on a periodic basis and effect appropriate changes to our
manufacturing processes.
In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998 and 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, $1,246,000 has been
amortized as of October 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 October 31, 1999 in the periods
indicated:
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<PAGE> 30
<TABLE>
<S> <C>
November 1, 1999 to October 31, 2000 $ 2,263,000
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
-----------
$ 3,718,000
===========
</TABLE>
We have incurred significant operating losses in every fiscal quarter
and annual period since November 1, 1995 and our accumulated deficit was $13.4
million at October 31, 1999. Moreover, we anticipate that we will continue to
incur net losses on both a quarterly and annual basis for the foreseeable
future, in part due to our plans to devote substantial resources to expand our
sales and marketing and research and development activities.
As of October 31, 1999, we had approximately $10.5 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>
FISCAL YEAR ENDED OCTOBER 31,
-----------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenue:
Product revenue ........................... 81.4% 91.3% 99.7%
Other revenue ............................. 18.6 8.7 0.3
------ ------ ------
Total revenue ..................... 100.0 100.0 100.0
Cost of revenue ............................. 46.1 59.6 57.8
------ ------ ------
Gross margin ................................ 53.9 40.4 42.2
------ ------ ------
Operating expenses:
Sales and marketing ....................... 63.5 76.7 23.3
Research and development .................. 131.7 72.7 27.9
General and administrative ................ 131.2 59.1 13.7
Amortization of stock-based compensation .. -- 1.3 6.4
------ ------ ------
Total operating expenses .......... 326.4 209.8 71.3
------ ------ ------
Loss from operations ........................ (272.5) (169.4) (29.1)
Other income (expense) ...................... 5.6 2.6 1.7
------ ------ ------
Net loss .................................... (266.9)% (166.8)% (27.4)%
====== ====== ======
</TABLE>
COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1997, 1998 AND 1999
Revenue. Our total revenue increased 218% from $1.0 million in fiscal
1997 to $3.2 million in fiscal 1998, and increased 490% to $18.9 million in
fiscal 1999.
Product revenue. Product revenue increased 257% from $821,000 in fiscal
1997 to $2.9 million in fiscal 1998, and increased 544% to $18.9 million in
fiscal 1999. As a percentage of total revenue, product revenue increased from
81% in fiscal 1997 to 91% in fiscal 1998, and to 99.7% in fiscal 1999. The
increases in product revenue resulted from the introduction of our 4100 and 4200
products in fiscal 1997 and 1998, respectively, and increases in product sales
to significant OEM customers of $2.9 million and $16.0 million in fiscal 1998
and 1999, respectively.
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 increased 49% from $188,000 in fiscal 1997
to $279,000 in fiscal 1998, and decreased 77% to $65,000 in fiscal 1999. The
increase in fiscal 1998 was due to the nonrecurring license of a product design
for $150,000 in that period. We do not anticipate significant other revenue in
the future.
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<PAGE> 31
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 311% from $465,000 in fiscal 1997 to
$1.9 million in fiscal 1998, and increased 473% to $10.9 million in fiscal 1999.
These increases were primarily due to increases in unit sales volume and a
corresponding increase in costs related to manufacturing. Gross profit increased
139% from $544,000 in fiscal 1997 to $1.3 million in fiscal 1998, and 515% to
$8.0 million in fiscal 1999. The increase was primarily due to increased product
revenue in each of these periods. Gross margin decreased from 54% in fiscal 1997
to 40% in fiscal 1998, and increased to 42% in fiscal 1999. The decrease in
gross margin in fiscal 1998 resulted from a decrease in the percentage of total
revenue attributable to higher margin license revenue. In fiscal 1999, gross
margin 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 from $641,000 in fiscal 1997 to $2.5 million in fiscal 1998,
and increased 79% to $4.4 million in fiscal 1999. 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. The increase in sales
and marketing expenses in fiscal 1999 was primarily due to the hiring of
additional sales and marketing personnel resulting in approximately $1.7 million
of increased compensation expense and increased commissions of $334,000
commensurate with greater sales. As a percentage of total revenue, sales and
marketing expenses increased from 64% in fiscal 1997 to 77% in fiscal 1998 and
decreased to 23% in fiscal 1999. 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 76% from $1.3
million in fiscal 1997 to $2.3 million in fiscal 1998, and increased 126% to
$5.3 million in fiscal 1999. The increases primarily consisted of $500,000 for
salaries and expenses from the hiring of additional research and development
personnel during fiscal 1998 and product development and prototyping costs of
$400,000 related to the development of our 4200 product in fiscal 1998. In
fiscal 1999, the increase in research and development expenses was primarily due
to the hiring of additional research and development personnel resulting in
approximately $2.0 million of increased compensation expense and increased
prototyping costs related to the development of our 4200 product. As a
percentage of total revenue, research and development expenses decreased from
132% in fiscal 1997 to 73% in fiscal 1998, and decreased to 28% in fiscal 1999.
The decrease in fiscal 1998 and 1999 was primarily due to substantially higher
revenue in each of these fiscal years. Research and development personnel
totaled 22 at October 31, 1998 and 58 at October 31, 1999. We expect that
research and development expenses will continue to increase in absolute dollars
and will 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 43% from $1.3 million in fiscal 1997 to $1.9
million in fiscal 1998, and 37% to $2.6 million in fiscal 1999. The significant
increases in general and administrative expenses were primarily due to the
hiring of administrative personnel resulting in increased compensation expense
and associated costs of $240,000 and $770,000 in fiscal 1998 and 1999,
respectively, which were necessary to manage and support the growth in our
business. As a percentage of total revenue, general and administrative expenses
decreased from 131% in fiscal 1997 to 59% in fiscal 1998, and decreased to 14%
in fiscal 1999. These decreases as a percentage of total revenue were primarily
due to substantially higher revenue in each of these fiscal years. . 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> 32
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity at October 31, 1999 consisted of
$61.3 million in cash and cash equivalents, $19.5 million in short-term
investments 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 8.25% at October 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 October 31, 1999, there were borrowings of approximately
$1.3 million outstanding under the revolving line of credit and approximately
$1.1 million of term loans outstanding.
Our bank credit facility requires that we comply with the following
financial covenants:
o 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);
o a debt-to-tangible net worth ratio of not more than
1.00-to-1.00; and
o 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 December
1999, we paid all outstanding obligations under our bank credit facility.
During fiscal 1997, cash utilized by operating activities was $2.7
million, compared to $5.8 million in fiscal 1998 and $5.8 million in fiscal
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 1997, cash provided by financing activities was $9.5
million compared to $4.6 million in fiscal 1998 and $85.1 million in fiscal
1999. We have funded our operations to date primarily through sales of preferred
stock and our initial public offering, resulting in aggregate gross proceeds to
us of $98.2 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 1997, cash used in investing activities was $809,000
compared to $3.2 million in fiscal 1998 and $19.6 million in fiscal 1999.
Capital expenditures were $719,000 in fiscal 1997, $956,000 in fiscal 1998 and
$2.3 million in fiscal 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 fiscal 2000 of at least $9.7 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.
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<PAGE> 33
We believe the net proceeds we received from our initial public
offering, together with our existing cash balances, the net proceeds from the
sale of our Series E preferred stock and our 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. Prior to January 1, 2000,
there was a great deal of concern regarding the ability of computers to
adequately recognize 21st century dates from 20th century dates due to the
two-digit date fields used by many systems. Most reports to date, however, are
that computer systems are functioning normally and the compliance and
remediation work accomplished leading up to 2000 was effective to prevent any
problems. Computer experts have warned that there may still be residual
consequences of the change in centuries and any such difficulties could result
in an interruption in the flow of materials into the manufacturing process, 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.
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 substantially completed the implementation phase in December 1999 and are
currently in the monitoring stage.
State of readiness of our products. We have tested 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, some of which may not be discovered until later in
the year 2000.
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 identified one internal system that required
an upgrade to be Year 2000 compliant and one of our enterprise systems utilizes
a database system that required an upgrade to be Year 2000 compliant.
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 requested written
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<PAGE> 34
assurances from our third-party suppliers that they are Year 2000 compliant. We
received responses from many of our third party suppliers indicating that they
are Year 2000 compliant. However, there are only eight suppliers who could pose
significant problems to us if there was a Year 2000 event to interrupt
deliveries. They are AMP Inc., Austin Foam, Hewlett-Packard, IBM, LSI Logic,
Sterling Commerce, Tenere Inc. and Tyrex Corporation. Four of these,
Hewlett-Packard, IBM, Sterling Commerce and Tyrex, responded with letters of
compliance. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101
did not have a material impact on the financial statements of the Company.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS
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.
We invest its cash in a variety of financial instruments, including
bank time deposits, and taxable and tax-advantaged variable rate and fixed rate
obligations of corporations, municipalities, and local, state and national
government entities and agencies. These investments are denominated in U.S.
dollars.
Interest income on our investments is carried in "Other income, net."
We account for its investment instruments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). All of the cash equivalents and
short-term investments are treated as held to maturity under SFAS 115.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities which have seen a decline in market
value due to changes in interest rates. Our investment securities are held for
purposes other than trading. While certain of the investment securities had
maturities in excess of 90 days, we intend to liquidate such securities within
one year. The weighted-average interest on investment securities at October 31,
1999 was 5.68%. The fair value of securities held at October 31, 1999 was $79.4
million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in Part IV Item 14
(a)(1) and (2).
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table sets forth certain information concerning our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ------------------------------------ --- -----------
<S> <C> <C>
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.......... 40 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)......... 44 Director
</TABLE>
- ------------------
(1) Member of the compensation committee
(2) Member of the audit committee
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 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.
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<PAGE> 36
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 several private companies. Mr. Wood holds a B.A. in
history from Brown University and an M.B.A. from Harvard University.
BOARD COMMITTEES AND MEETINGS
The Board of Directors held 11 meetings and acted by unanimous written
consent 2 times during fiscal 1999. The Board of Directors has an Audit
Committee and a Compensation Committee. Each director attended or participated
in 75% or more of the aggregate of (i) the total number of meetings of the Board
of Directors, and (ii) the total number of meetings held by all committees of
the Board on which such director served during fiscal 1999.
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. Their
were no audit committee meetings held during fiscal 1999.
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. The compensation
committee held 2 meetings during fiscal 1999.
35
<PAGE> 37
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.
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.
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 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, 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.
ITEM 11. 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 $100,000 in fiscal 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
-------------------------------------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS COMPENSATION
- ----------------------------------- ---- ---------- --------- --------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Smith ................................... 1999 $150,000 -- -- -- $ 405(1)
Chief Executive Officer ........................ 1998 150,000 $ 2,000 -- -- 405(1)
James H. Moore ................................... 1999 200,000 -- -- 90,000 $ 1,015(2)
President and Chief Operating Officer .......... 1998 200,000 -- -- 570,000 1,015(2)
Robert F. LiVolsi ................................ 1999 175,000 51,266 -- 60,000 --
Senior Vice President of Sales and Marketing ... 1998 100,849 9,420 -- 187,500 --
T. Dale Quisenberry(3) ........................... 1999 120,000 -- -- -- --
Vice President ................................. 1998 120,000 -- -- -- --
</TABLE>
- ---------------
(1) Represents the amount we paid in premiums for a life insurance policy for
Mr. Smith.
(2) Represents the amount we paid in premiums for a life insurance policy for
Mr. Moore.
(3) Mr. Quisenberry served as an executive officer in fiscal 1998. He ceased to
be an executive officer in March 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants
of stock options made during fiscal 1999 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.
36
<PAGE> 38
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 our initial public offering
price, $18.00 per share, appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our common
stock. The amounts reflected in the table may not necessarily be achieved.
We granted these options under our 1996 Stock Option/Stock Issuance
Plan. Each option has a maximum term of ten years, subject to earlier
termination if the optionee's services are terminated. Except as otherwise
noted, these options are immediately exercisable, but we have the right to
repurchase, at the exercise price, any shares that have not vested at the time
the optionee terminates employment with us. The percentage of total options
granted to our employees in the last fiscal year is based on options to purchase
an aggregate of 1,590,646 shares of common stock granted during fiscal 1999. The
following table sets forth information concerning the individual grants of stock
options to each of our named executive officers in fiscal 1999.
OPTION GRANTS IN FISCAL 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
------------------------------------------------ OF ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE APPRECIATION
SECURITIES PERCENT OF TOTAL FOR OPTION TERM
UNDERLYING OPTIONS GRANTED EXERCISE ---------------------------
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#)(1) FISCAL 1999(%) PER SHARE DATE 5%($) 10%($)
- ------------------ ------------- ----------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Smith .......... -- -- -- -- -- --
James H. Moore .......... 90,000 5.7% $ 1.000 05/24/09 $1,018,809 $2,581,863
Robert F. LiVolsi ....... 60,000 3.8 1.000 05/24/09 679,206 1,721,242
T. Dale Quisenberry ..... -- -- -- -- -- --
</TABLE>
- -------------------------
(1) These options are fully exercisable but if the employee leaves us before he
has vested in his option shares, we have the right to repurchase, at the
exercise price, any shares that have not vested.
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options held as of
October 31, 1999 by each of our executive officers named in the Summary
Compensation Table. None of these executive officers exercised any options in
fiscal 1999. Actual gains on exercise, if any, will depend on the value of our
common stock on the date on which the shares are sold.
FISCAL 1999 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OCTOBER 31, 1999(#) OCTOBER 31, 1999($)
ON EXERCISE REALIZED(1) ---------------------------- ---------------------------
------------ --------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Smith -- -- -- -- -- --
James H. Moore 660,000 11,657,190(2) -- -- -- --
Robert F. LiVolsi 247,500 4,351,313(3) -- -- -- --
T. Dale Quisenberry -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------
(1) The value realized of shares acquired on exercise was determined by
subtracting the exercise price from the fair market value of the common
stock on the exercise date (the fair market value on the exercise date has
been deemed to be our initial public offering price of $18.00 per share),
multiplied by the number of shares acquired on exercise.
37
<PAGE> 39
(2) As of October 31, 1999, Mr. Moore was unvested as to 375,000 shares. If Mr.
Moore leaves us before these 375,000 shares vest, we have the right to
repurchase the unvested shares at the exercise price paid per share.
(3) As of October 31, 1999, Mr. LiVolsi was unvested as to 177,188 shares. If
Mr. LiVolsi leaves us before these 117,188 shares vest, we have the right
to repurchase the unvested shares at the exercise price paid per share.
CHANGE IN CONTROL ARRANGEMENTS
If we are acquired in a stockholder-approved transaction, whether by
merger or asset sale, then all of the outstanding options granted under our 1996
plan, including those held by our executive officers, will accelerate in full,
unless those options are assumed by the successor company and our repurchase
rights with respect to unvested option shares are assigned to that company. In
addition, if the optionee's employment is terminated other than for cause within
18 months after the acquisition, the options will accelerate and become fully
vested, and such options may be exercised at any time prior to the earlier of
the expiration date of the option or one year after such termination without
cause.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of January 27, 2000 for:
o each person known by us to beneficially own more than 5% of
our common stock;
o each executive officer named in the Summary Compensation Table
on page 36;
o each of our directors; and
o 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 January 27, 2000. Percentage of beneficial
ownership is based on 26,588,019 shares outstanding including the 4,312,500
shares sold in our initial public offering.
<TABLE>
<CAPTION>
SHARES PERCENTAGE OF
BENEFICIALLY COMMON STOCK
NAME OF BENEFICIAL OWNER OWNED BENEFICIALLY OWNED
------------------------ ------------ ------------------
<S> <C> <C>
Executive Officers and Directors:
Brian R. Smith ...................................... 4,570,000 17.2%
James H. Moore ...................................... 660,000 2.5
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 23.6
T. Dale Quisenberry ................................. 1,125,000 4.2%
All directors and executive officers as a group
10 persons) ...................................... 12,347,175 46.4%
Other 5% Stockholders:
Advanced Digital Information Corporation............. 2,608,697 9.8%
Funds affiliated with Austin Ventures................ 6,577,175 24.7
Hewlett-Packard Company.............................. 1,204,169 4.5
Intel Corporation.................................... 1,476,147 5.6%
</TABLE>
38
<PAGE> 40
- --------------------
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.
o 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.
o 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.
o James H. Moore. 375,000 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.
o Robert F. LiVolsi. 177,188 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.
o Richard D. Eyestone. Represents 37,500 shares of common stock
issuable upon exercise of stock options.
o William P. Wood. All shares indicated as owned by Mr. Wood are
included due to 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.
o T. Dale Quisenberry. Includes 705,000 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.
o Other 5% Stockholders. Information regarding the beneficial
owners of 5% or more of our stock is set forth below.
o 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 his pecuniary interest, 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 his pecuniary interest,
if any. The address of the investment funds affiliated with
Austin Ventures is 114 West Seventh Street, Suite 1300,
Austin, Texas 78701.
39
<PAGE> 41
o 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.
40
<PAGE> 42
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
PRIVATE PLACEMENTS OF EQUITY
5% Stockholders. During fiscal 1999, we raised capital primarily
through the sale of our securities, including:
o 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. As a result
of a 3-for-2 split of our common stock in August 1999, 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 automatically converted into 1,455,315 shares of our
common stock upon the consummation of our initial public
offering, and the effective purchase price per share of common
stock received upon such conversion was $3.63.
o 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. As a
result of a 3-for-2 split of our common stock in August 1999,
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 automatically converted into 400,001 shares of our
common stock upon the consummation of our initial public
offering, and the effective purchase price per share of common
stock received upon such conversion was $10.00.
OTHER TRANSACTIONS
Advanced Digital Information Corporation. In August 1997, we entered
into an OEM and Reseller Agreement with ADIC, one of our 5% stockholders. 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 the amount of $734,314 in fiscal 1999. In 1999,
products sales to ADIC accounted for 3.88% of our total revenue. This agreement
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.
Intel Corporation. In April 1999, we entered into a Collaboration
Agreement with Intel, one of our 5% stockholders. 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 held 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.
Stock options granted to executive officers and directors. For more
information regarding the grant of stock options to executive officers and
directors, please see "Item 10-Director Compensation."
Loan 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. We have released 93,000 of the shares which secured
Mr. Moore's note to enable him to transfer these shares for estate planning
purposes. However, the fair market value of remaining shares which secure Mr.
Moore's note, based on the per share price of our common stock in this offering,
substantially exceeds the $216,000 amount of Mr. Moore's note.
41
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Form 10-K:
1. Consolidated Financial Statements. The following
consolidated financial statements of Crossroads Systems, Inc. are filed as a
part of this Form 10-K on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................................................... F-1
Consolidated Balance Sheets as of October 31, 1998 and 1999................................................. F-2
Consolidated Statements of Operations for each of the three years in the period ended October 31, 1999...... F-3
Consolidated Statements of Changes in Stockholders' (Deficit)Equity for each of the three years in the
period ended October 31, 1999............................................................................ F-4
Consolidated Statements of Cash Flows for each of the three years in the period ended October 31, 1999...... F-5
Notes to Consolidated Financial Statements.................................................................. F-6
</TABLE>
2. Consolidated Financial Statement Schedules. The following
consolidated financial statement schedule of Crossroads Systems, Inc. is filed
as a part of this Form 10-K on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants........................................................................... S-1
Schedule II - Valuation and Qualifying Accounts............................................................. S-2
</TABLE>
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the consolidated financial
statements or the notes thereto.
42
<PAGE> 44
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* Sixth Amended and Restated Certificate of Incorporation
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-85505) (the "IPO
Registration Statement") and incorporated herein by
reference)
3.2* Amended and Restated Bylaws (filed as Exhibit 3.2 to the IPO
Registration Statement and incorporated herein by reference)
4.1* Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the IPO Registration Statement and
incorporated herein by reference)
10.1* Form of Indemnity Agreement between Registrant and each of
its directors and executive officers (filed as Exhibit 10.1
to the IPO Registration Statement and incorporated herein by
reference)
10.2* Crossroads Systems, Inc. 1999 Stock Incentive Plan (filed as
Exhibit 10.2 to the IPO Registration Statement and
incorporated herein by reference)
10.3* Crossroads Systems, Inc. 1999 Employee Stock Purchase Plan
(filed as Exhibit 10.3 to the IPO Registration Statement and
incorporated herein by reference)
10.4* Fourth Amended and Restated Investors Rights Agreement dated
August 6, 1999 by and among Registrant and certain purchasers
of Registrant's preferred stock (filed as Exhibit 10.4 to the
IPO Registration Statement and incorporated herein by
reference)
10.5*+ OEM Agreement dated April 23, 1998 by and between Registrant
and Storage Technology Corporation (filed as Exhibit 10.5 to
the IPO Registration Statement and incorporated herein by
reference)
10.6* Lease Agreement dated February 28, 1997 by and between
Registrant and Eurus Estates II, Ltd. (filed as Exhibit 10.6
to the IPO Registration Statement and incorporated herein by
reference)
10.7* First Supplement to Lease Agreement dated October 6, 1997 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.7 to the IPO Registration Statement and
incorporated herein by reference)
10.8* Second Supplement to Lease Agreement dated September 28, 1998
by and between Registrant and Eurus Estates II, Ltd. (filed
as Exhibit 10.8 to the IPO Registration Statement and
incorporated herein by reference)
10.9* Third Supplement to Lease Agreement dated December 1, 1998 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.9 to the IPO Registration Statement and
incorporated herein by reference)
10.10* Fourth Supplement to Lease Agreement dated June 23, 1999 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.10 to the IPO Registration Statement and
incorporated herein by reference)
10.11* Fifth Supplement to Lease Agreement dated June 22, 1997 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.11 to the IPO Registration Statement and
incorporated herein by reference)
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 (filed as Exhibit 10.12 to the IPO
Registration Statement and incorporated herein by reference)
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 (filed as Exhibit 10.13 to
the IPO Registration Statement and incorporated herein by
reference)
</TABLE>
43
<PAGE> 45
<TABLE>
<S> <C>
10.14* Amended and Restated Loan and Security Agreement dated August
17, 1999 by and between Registrant and Silicon Valley Bank
(filed as Exhibit 10.14 to the IPO Registration Statement and
incorporated herein by reference)
10.15* Office Building Lease dated October 8, 1999 by and between
Registrant and Maplewood Associates, L.P. (filed as Exhibit
10.15 to the IPO Registration Statement and incorporated
herein by reference)
10.16* CP4200 License Agreement dated April 15, 1998 by and between
Registrant and Hewlett-Packard Company (filed as Exhibit
10.16 to the IPO Registration Statement and incorporated
herein by reference)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney, pursuant to which amendment to this Form
10-K may be filed, is included on the signature page
contained on Part IV of this Form 10-K
27.1 Financial Data Schedule
</TABLE>
* Incorporated herein by reference to the indicated filing
+ Confidential treatment previously granted
(b) Reports on Form 8-K.
None.
44
<PAGE> 46
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CROSSROADS SYSTEMS, INC.
By: /s/ Brian R. Smith
------------------------
Brian R. Smith,
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints, Brian R. Smith and
Reagan Y. Sakai, and each or any of them, his true and lawful attorney-in-fact
and agent, each with the power of substitution and resubstitution, for him in
any and all capacities, to sign any and all amendments to this Annual Report
(Form 10-K) and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------- --------------------------------------- -------------------
<S> <C> <C>
/s/ Brian R. Smith Chief Executive Officer and Chairman of January 31, 2000
- --------------------------------------------- the Board (principal executive officer)
Brian R. Smith
/s/ Reagan Y. Sakai Chief Financial Officer (principal January 31, 2000
- --------------------------------------------- financial and accounting officer)
Reagan Y. Sakai
/s/ Richard D. Eyestone Director January 31, 2000
- ---------------------------------------------
Richard D. Eyestone
/s/ Wo Overstreet Director January 31, 2000
- ---------------------------------------------
Wo Overstreet
/s/ David L. Riegel Director January 31, 2000
- ---------------------------------------------
David L. Riegel
/s/ William P. Wood Director January 31, 2000
- ---------------------------------------------
William P. Wood
</TABLE>
<PAGE> 47
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) equity and cash flows present fairly, in all material respects, the
financial position of Crossroads Systems, Inc. and Subsidiary at October 31,
1998 and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1999 in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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
November 29, 1999
F-1
<PAGE> 48
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
OCTOBER 31,
--------------------------
1998 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 1,695 $ 61,320
Short-term investments ............................................. 2,239 19,500
Accounts receivable, net of allowance for doubtful
accounts of $14 and $95, respectively ........................... 906 3,654
Inventories ........................................................ 896 3,278
Prepaids and other current assets .................................. 230 933
---------- ----------
Total current assets ....................................... 5,966 88,685
Note receivable from related party, net .............................. 90 154
Property and equipment, net .......................................... 968 2,273
Other assets ......................................................... 163 618
---------- ----------
Total assets ............................................... $ 7,187 $ 91,730
========== ==========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable ................................................... $ 875 $ 3,328
Accrued expenses ................................................... 103 735
Accrued warranty costs ............................................. 35 309
Deferred revenue ................................................... -- 117
Current portion of long-term debt .................................. 492 1,031
---------- ----------
Total current liabilities .................................. 1,505 5,520
Long-term debt, net of current portion ............................... 591 1,325
Commitments (Note 6)
Redeemable convertible preferred stock, $.001 par value,
11,000,000 and 25,000,000 shares authorized,
respectively, 7,544,688 and 0 shares designated, respectively,
7,294,688 and none issued and outstanding, respectively, aggregate
liquidation value of $13,278 and $0, respectively .................. 13,438 --
Stockholders' (deficit) equity:
Common stock, $.001 par value, 49,000,000 and 175,000,000 shares
authorized, respectively, 6,378,468 and 26,549,919 shares issued
and outstanding, respectively ...................................... 6 27
Additional paid-in capital ........................................... 72 102,461
Deferred stock-based compensation .................................... (188) (3,718)
Notes receivable from stockholders ................................... -- (463)
Accumulated deficit .................................................. (8,235) (13,420)
Treasury stock at cost (22,500 shares) ............................... (2) (2)
---------- ----------
Total stockholders' (deficit) equity ....................... (8,347) 84,885
---------- ----------
Total liabilities, redeemable convertible preferred
stock and stockholders' (deficit) equity ................... $ 7,187 $ 91,730
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-2
<PAGE> 49
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue:
Product revenue ...................... $ 821 $ 2,930 $ 18,859
Other revenue ........................ 188 279 65
------------ ------------ ------------
Total revenue ................ 1,009 3,209 18,924
Cost of revenue ........................ 465 1,911 10,946
------------ ------------ ------------
Gross profit ........................... 544 1,298 7,978
------------ ------------ ------------
Operating expenses:
Sales and marketing .................. 641 2,461 4,409
Research and development ............. 1,329 2,336 5,271
General and administrative ........... 1,323 1,896 2,597
Amortization of stock-based
compensation ...................... -- 41 1,205
------------ ------------ ------------
Total operating
expenses ................... 3,293 6,734 13,482
------------ ------------ ------------
Loss from operations ................... (2,749) (5,436) (5,504)
Other income (expense):
Interest income ...................... 83 183 433
Interest expense ..................... (29) (65) (122)
Other income (expense) ............... 2 (36) 8
------------ ------------ ------------
Other income, net ....... 56 82 319
------------ ------------ ------------
Net loss ............................... (2,693) (5,354) (5,185)
Accretion on redeemable convertible
preferred stock ...................... (58) (196) (247)
------------ ------------ ------------
Net loss attributable to common
stock ................................ $ (2,751) $ (5,550) $ (5,432)
============ ============ ============
Basic and diluted net loss per
share ................................ $ (0.46) $ (0.90) $ (0.74)
============ ============ ============
Shares used in computing basic and
diluted net loss per share ........... 6,000,000 6,146,115 7,377,984
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE> 50
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
----------------------------- PAID-IN STOCK-BASED FROM
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at November 1, 1996 ......... 6,000,000 $ 6 $ 12 $ -- $ --
Accretion on redeemable
convertible preferred
stock ........................... (12)
Net loss .......................... -- -- -- -- --
------------ ------ --------- -------- --------
Balance at October 31, 1997 ......... 6,000,000 6 -- -- --
Issuance of common stock .......... 378,468 -- 39 -- --
Purchase of treasury
stock ........................... -- -- -- -- --
Stock-based compensation .......... -- -- 229 (188) --
Accretion on redeemable
convertible preferred
stock ........................... (196)
Net loss .......................... -- -- -- -- --
------------ ------ --------- -------- --------
Balance at October 31, 1998 ......... 6,378,468 6 72 (188) --
Issuance of common stock .......... 2,534,112 3 753 -- (447)
Stock-based compensation .......... -- -- 4,735 (3,530) --
Accretion on redeemable
convertible preferred
stock ........................... -- -- (247) -- --
Conversion of redeemable
convertible preferred ........... 30,934
stock ........................... 13,599,839 14 30,920 -- --
Initial public offering ........... 4,037,500 4 66,228 -- --
Accrued interest on notes
receivable from stockholders ... -- -- -- -- (16)
Net loss .......................... -- -- -- -- --
------------ ------ --------- -------- --------
Balance at October 31, 1999 ......... 26,549,919 $ 27 $ 102,461 $ (3,718) $ (463)
============ ====== ========= ======== ========
<CAPTION>
TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK (DEFICIT) EQUITY
------------ ------------ ---------------
<S> <C> <C> <C>
Balance at November 1, 1996 ......... $ (142) $ -- $ (124)
Accretion on redeemable
convertible preferred
stock ........................... (46) (58)
Net loss .......................... (2,693) -- (2,693)
--------- ------ ---------
Balance at October 31, 1997 ......... (2,881) -- (2,875)
Issuance of common stock .......... -- -- 39
Purchase of treasury
stock ........................... -- (2) (2)
Stock-based compensation .......... -- -- 41
Accretion on redeemable
convertible preferred
stock ........................... (196)
Net loss .......................... (5,354) -- (5,354)
--------- ------ ---------
Balance at October 31, 1998 ......... (8,235) (2) (8,347)
Issuance of common stock .......... -- -- 309
Stock-based compensation .......... -- -- 1,205
Accretion on redeemable
convertible preferred
stock ........................... -- -- (247)
Conversion of redeemable
convertible preferred ...........
stock ........................... -- --
Initial public offering ........... -- -- 66,232
Accrued interest on notes
receivable from stockholders ... -- -- (16)
Net loss .......................... (5,185) -- (5,185)
--------- ------ ---------
Balance at October 31, 1999 ......... $ (13,420) $ (2) $ 84,885
========= ====== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE> 51
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $ (2,693) $ (5,354) $ (5,185)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ................ 208 471 971
Amortization of stock-based
compensation ............................... -- 41 1,205
Loss on disposal of property and
equipment .................................. 4 136 9
Provision for doubtful accounts receivable ... 8 6 81
Amortization of note receivable
from related party ......................... -- -- 36
Changes in assets and liabilities:
Accounts receivable ........................ (319) (559) (2,829)
Inventories ................................ (197) (699) (2,382)
Prepaids and other assets .................. (248) (130) (703)
Other assets ............................... (31) 17 (456)
Accounts payable ........................... 523 239 2,453
Accrued expenses ........................... 71 40 906
Deferred revenue ........................... 3 (7) 117
Other ...................................... -- -- (15)
-------- -------- --------
Net cash used in operating
activities ............................ (2,671) (5,799) (5,792)
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment .............. (719) (956) (2,306)
Proceeds from sale of property and
equipment .................................... -- 13 21
Purchase of held-to-maturity investments ........ -- (2,239) (19,500)
Maturity of held-to-maturity investments ........ -- -- 2,239
Note receivable from related party .............. (90) -- (100)
-------- -------- --------
Net cash used in investing .............. (809) (3,182) (19,646)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock .......... -- 39 309
Proceeds from initial public offering ........... -- -- 72,675
Costs associated with initial public
offering ...................................... -- -- (6,443)
Proceeds from issuance of preferred stock,
net of issuance costs ........................ 9,219 3,965 17,249
Purchase of treasury stock ...................... -- (2) --
Borrowings under long-term debt
agreements ................................... 602 852 1,750
Repayment of long-term indebtedness ............. (278) (241) (477)
-------- -------- --------
Net cash provided by financing
activities ............................ 9,543 4,613 85,063
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ..................................... 6,063 (4,368) 59,625
Cash and cash equivalents, beginning of
period .......................................... -- 6,063 1,695
-------- -------- --------
Cash and cash equivalents, end of period .......... $ 6,063 $ 1,695 $ 61,320
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE> 52
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.
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.
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. Revenue is concentrated with several major customers.
The loss of a major customer, a change of suppliers or significant
technological change in the industry could affect operating results adversely.
F-6
<PAGE> 53
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The percentage of sales to significant customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A 17% 20% 36%
Customer B 3% 14% 36%
Customer C 27% 25% 4%
Customer D 11% 16% 3%
</TABLE>
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 at October 31, 1998 and high grade
commercial paper at October 31, 1999. Cash equivalents totaled $0 and $59.8
million at October 31, 1998 and 1999, respectively. 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 amortized 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 72% of
total trade accounts receivable at October 31, 1998 and 1999, respectively. 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.
F-7
<PAGE> 54
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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. Sales and cost of sales related 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, 1999.
Income Taxes
The Company accounts for income taxes in accordance with the liability
method. Under the liability method, deferred tax assets and liabilities are
recorded for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The Company recorded
no income tax expense during the years ended October 31, 1997, 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 considered
more likely than not.
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
F-8
<PAGE> 55
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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, up until the date of their
conversion, and all 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 11,639,532, 13,556,157,
and 15,070,185 for the years ended October 31, 1997, 1998 and 1999,
respectively.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). 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.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB
No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. The application of SAB No. 101 is
not expected to have a material impact on the consolidated financial statements
of the Company.
3. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------------------------------
1998 1999
------ ------
<S> <C> <C>
Raw materials........................ $ 317 $ 2,247
Finished goods....................... 579 1,031
------ -------
$ 896 $ 3,278
====== =======
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------------------
1998 1999
------ ------
<S> <C> <C>
Equipment .............................. $ 1,403 $ 3,536
Furniture and fixtures ................. 117 146
Leasehold improvements ................. 140 245
-------- --------
1,660 3,927
Less: accumulated depreciation
and amoritization....... ......... (692) (1,654)
-------- --------
$ 968 $ 2,273
======== ========
</TABLE>
5. LONG-TERM DEBT:
At October 31, 1998, the Company had an unused line of credit of $2,500
and an equipment line of $1,000. At October 31, 1999, the Company had an unused
line of credit of $2,500 and an equipment line of $1,900. The
F-9
<PAGE> 56
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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% and 8.25% at October 31, 1998 and 1999,
respectively). Outstanding borrowings under the equipment line were $780 and
$1,118 at October 31, 1998 and 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 August 2000.
The Company has a term loan with a bank, the proceeds of which were
used to finance equipment purchases. Borrowings outstanding under the term loan
bear interest at the bank's prime rate plus 0.5% (8.5% and 8.75% at October 31,
1998 and 1999, respectively) and are payable in equal monthly installments of
principal and interest through April 2002. Borrowings outstanding on the term
loans were $303 and $1,238 at October 31, 1998 and 1999, respectively.
Borrowings under the line of credit, equipment line and term loan
arrangements are collateralized by substantially all assets of the Company,
excluding intellectual property. Under the provisions of these credit
arrangements, the Company is prohibited from declaring or paying dividends.
Additionally, the Company must meet certain quarterly minimum financial
covenants, including minimum tangible net worth, liquidity ratio and
profitability covenants. During certain quarters in 1998 and 1999, the Company
was not in compliance with its profitability covenant. The profitability
covenant violations were waived under the Company's credit arrangements in a
letter to the Company dated July 27, 1999. The Company was in compliance with
all covenants at October 31, 1999.
The scheduled maturities of the Company's outstanding debt at October
31, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000.................................... $ 1,031
2001.................................... 923
2002.................................... 358
2003.................................... 44
-------
$ 2,356
=======
</TABLE>
6. COMMITMENTS:
The Company leases office space and equipment under long-term operating
lease agreements which expire on various dates through January 31, 2006. Rental
expense under these agreements was approximately $154, $327, and $466 for the
years ended October 31, 1997, 1998, and 1999, respectively. The minimum annual
future rentals under the terms of these leases at October 31, 1999 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
2000.................................... $ 1,661
2001.................................... 1,747
2002.................................... 1,741
2003.................................... 1,833
thereafter.............................. 2,578
-------
$ 9,560
=======
</TABLE>
If the Company reduces or cancels production orders with its third
party contract manufacturer, the Company may be required to reimburse its
contract manufacturer for materials purchased on its behalf.
F-10
<PAGE> 57
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Conversion - All shares of the Company's redeemable convertible
preferred stock were converted into common stock of the Company on October 19,
1999, the effective date of the Company's initial public offering, at the rate
of 1.5 to 1.
Authorized Shares - The Company has the authority to issue 25,000,000
million shares of preferred stock, par value $.001 per share, subject to the
designation of the board of directors. At October 31, 1999, no shares of
preferred stock were issued or outstanding.
8. STOCKHOLDERS' (DEFICIT) EQUITY:
Amendment to Certificate of Incorporation and Stock Split:
On September 15, 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
175,000,000 shares of common stock and 25,000,000 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.
Initial Public Offering
In October 1999, the Company completed its initial public offering of
4,312,500 shares of its common stock including the exercise of the underwriters'
over-allotment option. A total of 4,037,500 of those shares of common stock were
sold by the Company resulting in net proceeds of $66,232 after deducting
offering expenses and the underwriting discount of $6,443.
9. STOCK INCENTIVE/PURCHASE PLANS:
1999 Stock Incentive Plan
The 1999 Stock Incentive Plan (the "1999 Plan") is the successor program to the
Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan"). The 1999 Plan
became effective in October 1999. At that time, all outstanding options under
the 1996 Plan transferred to the 1999 Plan, and no further options will be
granted under the 1996 Plan. The 1999 Plan has five separate programs:
- the discretionary option grant program, under which eligible
employees may be granted options to purchase shares of the Company's
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;
F-11
<PAGE> 58
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
- 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 the Company's
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.
The 1999 Plan provides for a maximum number of common shares to be
optioned/issued of 6,375,000. 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. The share reserve under
the 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 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. 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 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 the
Company's compensation committee, 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 by the
Company's compensation committee. 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. 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. Options previously issued
under the 1996 Plan allowed for those options to be immediately exercisable,
subject to the Company's right of repurchase for unvested shares at the original
exercise price.
The discretionary option grant and stock issuance programs will be
administered by the Company's compensation committee, appointed by the board of
directors. The compensation 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 non-statutory 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.
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
common stock. None of the options originally issued under the 1996 Plan have any
stock appreciation rights.
Option activity under the 1996 Plan and the 1999 Plan and related
information follows:
F-12
<PAGE> 59
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------------------------------------------------------
1997 1998 1999
--------------------- --------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------
<S> <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................. 978,750 0.12 1,273,500 0.25 1,590,646 6.48
Exercised............... -- -- (400,968) 0.10 (2,534,112) 0.30
Cancelled............... (11,250) 0.10 (455,907) 0.15 (200,322) 0.45
--------- --------- ----------
Outstanding at end of
period................ 2,197,500 $ 0.10 2,614,125 $ 0.16 1,470,337 $ 6.73
========= ========= ==========
Options exercisable at the
end of the period..... 2,197,500 2,614,125 1,470,337
========= ========= ==========
</TABLE>
At October 31, 1998 and 1999 the Company had the right to repurchase 75,000
and 984,778 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 Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). 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>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Net loss attributable to common stock -- as reported..... $ (2,751) $ (5,550) $ (5,432)
Net loss attributable to common stock -- pro forma....... $ (2,760) $ (5,598) $ (5,625)
Basic and diluted net loss per share -- as reported...... $ (0.46) $ (0.90) $ (0.74)
Basic and diluted net loss per share -- pro forma........ $ (0.46) $ (0.91) $ (0.76)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <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........................... $ 21 $ 38 $ 3,933
========= ========= ==========
Per share value........................... $ 0.02 $ 0.04 $ 6.65
========= ========= ==========
Exercise price less than the market price of
stock on the grant date:
Aggregate value........................... -- $ 288 $ 4,891
========= ========= ==========
Per share value........................... -- $ 0.84 $ 4.90
========= ========= ==========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999: no dividend yield;
F-13
<PAGE> 60
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
risk-free interest rate of 6.32%, 5.71% and 5.57%; expected volatility of 0%,
0%, and 16%; expected lives of five years, respectively.
The following table summarizes information with respect to stock options
outstanding at October 31, 1999:
October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
----------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER REMAINING
--------------- OUTSTANDING CONTRACTUAL LIFE
----------- ----------------
<S> <C> <C>
$0.08....................... 100,000 6.92
$0.10....................... 107,212 7.38
$0.23....................... 111,143 8.24
$0.50....................... 152,501 9.04
$0.83....................... 127,234 9.38
$1.00....................... 196,914 9.56
$1.33....................... 86,008 9.68
$10.00...................... 157,200 9.76
$18.00...................... 432,125 9.92
-----------
1,470,337 9.19
===========
</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 1996
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.
The 1999 Plan includes change in control provisions which may result in the
accelerated vesting of outstanding option grants and stock issuances. The 1999
Plan will terminate no later than September 30, 2009.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Plan") became effective
immediately upon the effective date of the Company's initial public offering.
The Plan is designed to allow eligible employees to purchase shares of common
stock, at semi-annual intervals, with their accumulated payroll deductions. The
Company has reserved 450,000 shares of common stock for issuance under the Plan.
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 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.
The Plan will have a series of successive offering periods, each with a
maximum duration of 24 months. The initial offering period began in October 1999
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 the compensation committee.
Eligible employees 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 eligible 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
F-14
<PAGE> 61
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
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.
Should the Company be acquired by merger or sale of substantially all of
our assets or more than fifty percent of its 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.
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.
10. INCOME TAXES:
As of October 31, 1998 and 1999 the Company had federal net operating loss
carryforwards of approximately $7,740 and $10,512, respectively and research and
experimentation tax credit carryforwards of approximately $167 and $370,
respectively.
For federal income tax purposes, net operating loss carryforwards begin to
expire in 2011.
The components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating losses ............................... $ 2,865 $ 3,893
Inventory and other reserves ....................... 78 412
Basis of property and equipment .................... 95 132
Research and experimentation credit ................ 167 370
Net deferred tax assets before valuation allowance ... 3,205 4,807
Valuation allowance .................................. (3,205) (4,807)
------------ ------------
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,
------------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Tax benefit at statutory rate of 34% ........ $ 916 $ 1,810 $ 1,763
State income tax benefit .................... 81 160 77
Research and experimentation credit ......... 72 92 203
Net increase in valuation allowance ......... (1,065) (2,060) (1,602)
Amortization of stock-based compensation .... -- -- (410)
Permanent difference and other .............. (4) (2) (31)
---------- ---------- ----------
$ -- $ -- $ --
========== ========== ==========
</TABLE>
F-15
<PAGE> 62
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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.
11. RELATED PARTY TRANSACTIONS:
Product Sales
The Company recorded product sales of $383, $1,343 and $1,235 to certain
holders of shares of redeemable convertible preferred stock of the Company for
the years ended October 31, 1997, 1998, and 1999, respectively. Accounts
receivable from these preferred stockholders totaled approximately $181 and $378
at October 31, 1998 and 1999, respectively. During 1999, all shares of the
Company's redeemable convertible preferred stock were converted into common
stock (see Note 7).
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.
During May 1999, the Company's board of directors approved the acceptance
of full recourse notes in the amount of $442 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 are due in one lump sum in 2003.
In October 1999, the Company loaned an officer of the Company $100 in
exchange for a promissory note due in full, with accrued interest, in 6 years
or upon the date in which the officer ceases to remain in service. The note
accrues interest at 7% per year, compounded annually and principal and accrued
interest are due in one lump sum on December 31, 2006.
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest totaled $29, $65, and $113 during fiscal year 1997,
1998 and 1999, respectively.
Accretion on redeemable convertible preferred stock totaled $58, $196, and
$247 during fiscal year 1997, 1998 and 1999, respectively.
Loans to officers and notes receivable from stockholders totaled $90, $0
and $542 during fiscal year 1997, 1998 and 1999, respectively.
13. EMPLOYEE BENEFITS:
In 1996, the Company established the Crossroads Systems, Inc. 401(k)
Savings Plan (the "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
F-16
<PAGE> 63
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
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, 1997, 1998, and 1999.
14. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT ACCOUNTANTS:
In December 1999, the Company paid off the remaining balance, principal
plus accrued interest, under its existing term loan and equipment line of $1,123
and $1,120, respectively.
F-17
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Crossroads Systems, Inc. and Subsidiary
Our audits of the consolidated financial statements referred to in our
report dated November 30, 1999 appearing in this Annual Report on Form 10-K of
Crossroads Systems, Inc. and Subsidiary also included an audit of the financial
statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion,
this financial statement schedule presents fairly, in all materials respects,
the information set forth therein when read in conjunction with the related
financial statements.
PricewaterhouseCoopers LLP
Austin, Texas
November 30, 1999
S-1
<PAGE> 65
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY
VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
PERIOD ENDED OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended October 31, 1997..................... $ -- $ 8 $ -- $ 8
Year ended October 31, 1998..................... $ 8 $ 6 $ -- $ 14
Year ended October 31, 1999..................... $ 14 $ 81 $ -- $ 95
</TABLE>
S-2
<PAGE> 66
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1* Sixth Amended and Restated Certificate of Incorporation
(filed as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (SEC File No. 333-85505) (the "IPO
Registration Statement") and incorporated herein by
reference)
3.2* Amended and Restated Bylaws (filed as Exhibit 3.2 to the IPO
Registration Statement and incorporated herein by reference)
4.1* Specimen certificate for shares of common stock (filed as
Exhibit 4.1 to the IPO Registration Statement and
incorporated herein by reference)
10.1* Form of Indemnity Agreement between Registrant and each of
its directors and executive officers (filed as Exhibit 10.1
to the IPO Registration Statement and incorporated herein by
reference)
10.2* Crossroads Systems, Inc. 1999 Stock Incentive Plan (filed as
Exhibit 10.2 to the IPO Registration Statement and
incorporated herein by reference)
10.3* Crossroads Systems, Inc. 1999 Employee Stock Purchase Plan
(filed as Exhibit 10.3 to the IPO Registration Statement and
incorporated herein by reference)
10.4* Fourth Amended and Restated Investors Rights Agreement dated
August 6, 1999 by and among Registrant and certain purchasers
of Registrant's preferred stock (filed as Exhibit 10.4 to the
IPO Registration Statement and incorporated herein by
reference)
10.5*+ OEM Agreement dated April 23, 1998 by and between Registrant
and Storage Technology Corporation (filed as Exhibit 10.5 to
the IPO Registration Statement and incorporated herein by
reference)
10.6* Lease Agreement dated February 28, 1997 by and between
Registrant and Eurus Estates II, Ltd. (filed as Exhibit 10.6
to the IPO Registration Statement and incorporated herein by
reference)
10.7* First Supplement to Lease Agreement dated October 6, 1997 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.7 to the IPO Registration Statement and
incorporated herein by reference)
10.8* Second Supplement to Lease Agreement dated September 28, 1998
by and between Registrant and Eurus Estates II, Ltd. (filed
as Exhibit 10.8 to the IPO Registration Statement and
incorporated herein by reference)
10.9* Third Supplement to Lease Agreement dated December 1, 1998 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.9 to the IPO Registration Statement and
incorporated herein by reference)
10.10* Fourth Supplement to Lease Agreement dated June 23, 1999 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.10 to the IPO Registration Statement and
incorporated herein by reference)
10.11* Fifth Supplement to Lease Agreement dated June 22, 1997 by
and between Registrant and Eurus Estates II, Ltd. (filed as
Exhibit 10.11 to the IPO Registration Statement and
incorporated herein by reference)
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 (filed as Exhibit 10.12 to the IPO
Registration Statement and incorporated herein by reference)
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 (filed as Exhibit 10.13 to
the IPO Registration Statement and incorporated herein by
reference)
</TABLE>
<PAGE> 67
<TABLE>
<S> <C>
10.14* Amended and Restated Loan and Security Agreement dated August
17, 1999 by and between Registrant and Silicon Valley Bank
(filed as Exhibit 10.14 to the IPO Registration Statement and
incorporated herein by reference)
10.15* Office Building Lease dated October 8, 1999 by and between
Registrant and Maplewood Associates, L.P. (filed as Exhibit
10.15 to the IPO Registration Statement and incorporated
herein by reference)
10.16* CP4200 License Agreement dated April 15, 1998 by and between
Registrant and Hewlett-Packard Company (filed as Exhibit
10.16 to the IPO Registration Statement and incorporated
herein by reference)
23.1 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney, pursuant to which amendment to this Form
10-K may be filed, is included on the signature page
contained on Part IV of this Form 10-K
27.1 Financial Data Schedule
</TABLE>
* Incorporated herein by reference to the indicated filing
+ Confidential treatment previously granted
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File No. 333-92467) of Crossroads Systems, Inc. and
Subsidiary our reports dated November 30, 1999 relating to the consolidated
financial statements and financial statement schedule which appear in this Form
10-K.
PricewaterhouseCoopers LLP
Austin, Texas
January 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 61,320
<SECURITIES> 0
<RECEIVABLES> 3,654
<ALLOWANCES> 95
<INVENTORY> 933
<CURRENT-ASSETS> 88,685
<PP&E> 2,273
<DEPRECIATION> 1,654
<TOTAL-ASSETS> 91,730
<CURRENT-LIABILITIES> 5,520
<BONDS> 0
0
0
<COMMON> 27
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 91,730
<SALES> 18,859
<TOTAL-REVENUES> 18,924
<CGS> 10,946
<TOTAL-COSTS> 10,946
<OTHER-EXPENSES> 13,163
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> 122
<INCOME-PRETAX> (5,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,504)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,185)
<EPS-BASIC> (.74)
<EPS-DILUTED> (.74)
</TABLE>
