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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
Crossroads Systems, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION
CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A
CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
CROSSROADS (TM)
CROSSROADS SYSTEMS, INC.
8300 N. MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
January 29, 2004
Dear Stockholder:
You are cordially invited to attend the 2004 Annual Meeting of
Stockholders of Crossroads Systems, Inc., which will be held at our corporate
headquarters at 8300 N. MoPac Expressway, Austin, Texas 78759 on Thursday, March
4, 2004, at 9:00 a.m. Central Time.
Details of the business to be conducted at the Annual Meeting are given
in the accompanying Notice of Annual Meeting of Stockholders and Proxy
Statement. You will also have the opportunity to hear what has happened in our
business in the past year and to ask questions.
We hope that you can join us at the meeting. However, whether or not
you plan to attend, please sign and return your Proxy in the enclosed envelope,
or vote your shares by telephone or the internet as soon as possible so that
your vote will be counted.
Sincerely,
Robert C. Sims
President and Chief Executive Officer
[This page is intentionally left blank.]
CROSSROADS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 4, 2004
TO THE STOCKHOLDERS OF CROSSROADS SYSTEMS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of
Crossroads Systems, Inc., a Delaware corporation, will be held on Thursday,
March 4, 2004, at 9:00 a.m. Central Time, at our corporate headquarters at 8300
N. MoPac Expressway, Austin, Texas 78759 for the following purposes, as more
fully described in the Proxy Statement accompanying this Notice:
1. To elect two Class III directors to serve until our 2007
Annual Meeting of Stockholders, or until their successors are
duly elected and qualified;
2. To approve an amendment to our 1999 Employee Stock Purchase
Plan that will, beginning with the June 1, 2004 purchase
period, (i) increase the maximum number of shares of our
common stock purchasable in the aggregate by all participants
on any one purchase date under the plan by 112,500 shares,
from 75,000 shares to 187,500 shares, and (ii) eliminate the
provision of the plan which states that any one participant on
any one purchase date may purchase a maximum of 750 shares of
our common stock. In addition, beginning with the December 1,
2004 purchase period, it will amend and restate the plan to
change from two-year purchase periods to six-month purchase
periods;
3. To ratify the appointment of KPMG LLP as our independent
auditors for the fiscal year ending October 31, 2004; and
4. To transact such other business as may properly come before
the meeting or any adjournment or adjournments thereof.
Only stockholders of record at the close of business on January 5, 2004
are entitled to notice of and to vote at the Annual Meeting. A list of
stockholders entitled to vote at the Annual Meeting will be available for
inspection at our executive offices.
All stockholders are cordially invited to attend the meeting in person.
Whether or not you plan to attend, please sign and return the Proxy in the
envelope enclosed for your convenience, or vote your shares by telephone or the
internet as promptly as possible. Telephone and internet voting instructions can
be found on the attached Proxy Card. Should you receive more than one Proxy
because your shares are registered in different names and addresses, each Proxy
should be signed and returned, or voted by telephone or the internet to assure
that all your shares will be voted. You may revoke your Proxy at any time prior
to the Annual Meeting. If you attend the Annual Meeting and vote by Proxy, your
Proxy will be revoked automatically and only your vote at the Annual Meeting
will be counted.
Sincerely,
Andrea Wenholz
Vice President, Chief Financial Officer,
Secretary and Treasurer
Austin, Texas
January 29, 2004
YOUR VOTE IS VERY IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. PLEASE
READ THE ATTACHED PROXY STATEMENT CAREFULLY, AND VOTE YOUR SHARES BY TELEPHONE,
BY THE INTERNET OR BY COMPLETING, SIGNING AND DATING THE ENCLOSED PROXY CARD AS
PROMPTLY AS POSSIBLE AND RETURNING IT IN THE ENCLOSED ENVELOPE.
CROSSROADS SYSTEMS, INC.
8300 N. MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
PROXY STATEMENT
FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 4, 2004
GENERAL
The enclosed Proxy is solicited on behalf of the Board of Directors of
Crossroads Systems, Inc., a Delaware corporation, for use at the Annual Meeting
of Stockholders to be held on Thursday, March 4, 2004. The Annual Meeting will
be held at 9:00 a.m. Central Standard Time at our corporate headquarters at 8300
N. MoPac Expressway, Austin, Texas 78759. These proxy solicitation materials
were mailed on or about January 29, 2004, to all stockholders entitled to vote
at our Annual Meeting.
VOTING
The specific proposals to be considered and acted upon at our Annual
Meeting are summarized in the accompanying notice and are described in more
detail in this Proxy Statement. On January 5, 2004, the record date for
determination of stockholders entitled to notice of and to vote at the Annual
Meeting, we had 25,049,221 outstanding shares of our common stock and no
outstanding shares of our preferred stock. Each stockholder is entitled to one
vote for each share of common stock held by such stockholder on January 5, 2004.
The presence, in person or by proxy, of the holders of a majority of our shares
entitled to vote is necessary to constitute a quorum at this Annual Meeting.
Stockholders may not cumulate votes in the election of directors. The vote of a
plurality of the shares of our common stock present in person or represented by
proxy at this meeting and entitled to vote on the election of directors is
necessary for the election of a director. The nominees receiving the greatest
number of votes at this meeting will be elected to our Board of Directors, even
if they receive less than a majority of such shares.
All votes will be tabulated by the inspector of election appointed for
the meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes (i.e., a proxy submitted by a broker or nominee
specifically indicating the lack of discretionary authority to vote on the
matter). Abstentions and broker non-votes will be counted as present for
purposes of determining the presence or absence of a quorum for the transaction
of business, but will not be counted for the purposes of determining whether a
proposal has been approved.
PROXIES
If the enclosed form of Proxy is properly signed and returned or if you
properly follow the instructions for telephone or internet voting, the shares
represented thereby will be voted at the Annual Meeting in accordance with the
instructions specified thereon. If you sign and return your Proxy without
specifying how the shares represented thereby are to be voted, the Proxy will be
voted FOR the election of the directors proposed by our Board of Directors
unless the authority to vote for the election of such director is withheld and,
if no contrary instructions are given, the Proxy will be voted FOR the
ratification of the selection of KPMG LLP as our independent auditors and FOR
the amendment to our 1999 Employee Stock Purchase Plan. You may revoke or change
your Proxy at any time before the Annual Meeting by filing with our corporate
secretary at our principal executive offices at 8300 N. MoPac Expressway,
Austin, Texas 78759, a notice of revocation or another signed Proxy with a later
date. You may also revoke your Proxy by attending the Annual Meeting and voting
in person.
SOLICITATION
We will bear the entire cost of solicitation, including the
preparation, assembly, printing and mailing of this Proxy Statement, the Proxy
and any additional solicitation materials furnished to the stockholders. Copies
of solicitation materials will be furnished to brokerage houses, fiduciaries and
custodians holding shares in their names that are beneficially owned by others
so that they may forward this solicitation material to such beneficial owners.
In addition, we may reimburse such persons for their costs in forwarding the
solicitation materials to such beneficial owners. The original solicitation of
proxies by mail may be supplemented by a solicitation by telephone or other
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means by our directors, officers or employees. No additional compensation will
be paid to these individuals for any such services. Except as described above,
we do not presently intend to solicit proxies other than by mail.
DEADLINE FOR RECEIPT OF STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
stockholder proposals to be presented at our 2005 Annual Meeting of Stockholders
and in our Proxy Statement and form of Proxy relating to that meeting must be
received by us at our principal executive offices in Austin, Texas, addressed to
our Corporate Secretary, not later than October 2, 2004, the date which is 120
days prior to January 29, 2005. These proposals must comply with applicable
Delaware law, the rules and regulations promulgated by the Securities and
Exchange Commission and the procedures set forth in our bylaws. Unless we
receive notice in the manner specified in the previous sentence, the Proxy
holders shall have discretionary authority to vote against any proposal
presented at our 2005 Annual Meeting of Stockholders.
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MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE: ELECTION OF DIRECTORS
GENERAL
Our Board of Directors is divided into three classes of directors, as
nearly equal in size as practicable, and each of which will serve staggered
three-year terms or until his or her successor has been duly elected and
qualified. At this Annual Meeting, we will be electing two Class III directors
whose terms will expire at our 2007 Annual Meeting. Our Board of Directors
currently consists of six persons. Both of the nominees listed below are current
directors.
Both nominees for election have agreed to serve if elected, and
management has no reason to believe that the nominees will be unavailable to
serve. In the event a nominee is unable or declines to serve as a director at
the time of the Annual Meeting, the proxies will be voted for any nominee who
may be designated by our present Board of Directors to fill the vacancy. Unless
otherwise instructed, the proxy holders will vote the proxies received by them
FOR the nominees named below.
NOMINEES FOR CLASS III DIRECTORS WHOSE TERMS EXPIRE AT THE 2007 ANNUAL MEETING
OF STOCKHOLDERS
The following table sets forth the name, age and current position of
each person who is a nominee for election as one of our directors:
PROPOSED CLASS OF
NAME AGE CURRENT POSITION DIRECTOR
- -------------- --- ---------------- -----------------
Robert C. Sims 36 Director Class III
Paul S. Zito 48 Director Class III
NOMINEES FOR CLASS III DIRECTORS
ROBERT C. SIMS, 36, is our President and Chief Executive Officer and has served
as a member of our Board of Directors since November 2003. From May 2002 to
September 2003, Mr. Sims served as our Chief Operating Officer. From April 2001
to May 2002, Mr. Sims served as our Vice President of Engineering and
Operations. From July 2000 to April 2001, Mr. Sims served as our Vice President
of Operations and Corporate Quality. From March 1999 to July 2000, Mr. Sims
served as our Director of Operations. From January 1998 to March 1999, Mr. Sims
managed the advanced manufacturing and product test organizations at Kentek
Corp. From 1990 to 1998, Mr. Sims served in various capacities at Exabyte,
including manager of the manufacturing engineering and quality organizations for
the high-end tape drive division. Mr. Sims holds a B.S.E.E. from Colorado State
University.
PAUL S. ZITO, 48, has served as a member of our Board of Directors since April
2000. Since July 1998, Mr. Zito has served as President of Z Start I, L.P., a
private investment firm. From April 1996 to April 1998, Mr. Zito served as Chief
Operating Officer, Secretary, and Treasurer of NetSpeed, Inc., a privately held
company that was acquired by Cisco Systems. From 1993 to March 1996, Mr. Zito
served as Chief Financial Officer and director of NetWorth, Inc, a publicly
traded company that was acquired by Compaq in 1995. Mr. Zito also serves as a
member of the board of directors of TippingPoint Technologies. Mr. Zito holds a
B.A. in Accounting from the University of Texas.
OTHER DIRECTORS
Set forth below is information concerning our other directors whose
term of office continues after this Annual Meeting.
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Class I Directors Whose Terms Expire at the 2005 Annual Meeting of Stockholders.
DAVID L. RIEGEL, 65, has served as a member of our Board of Directors since
November 1997. From September 2002 to January 2003, Mr. Riegel served as the
President and Chief Executive Officer of Nanotechnologies, Inc. From November
1992 to September 1997, Mr. Riegel served as Chief Operating Officer of Exabyte
Corporation. Mr. Riegel holds a B.S.E.E. from Purdue University.
BRIAN R. SMITH, 38, is our co-founder and has served as our Chairman of the
Board since our inception in April 1995. From November 2001 to May 2002 and
again since September 2003, Mr. Smith has served as general partner of
Convergent Investors, a venture capital firm. Mr. Smith served as our Chief
Executive Officer from our inception until November 2001 and again from May 2002
to September 2003, and as our President from our inception until October 1997
and again from May 2002 to September 2003. Mr. Smith also serves on the board of
directors of several private companies. Mr. Smith holds a B.S.E.E from the
University of Cincinnati and an M.S.E.E. from Purdue University.
Class II Directors Whose Terms Expire at the 2006 Annual Meeting of
Stockholders.
RICHARD D. EYESTONE, 57, has served as a member of our Board of Directors since
May 1999. Mr. Eyestone has served as the President and Chief Executive Officer
of SmartSwing, Inc. since February 2003. 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 also serves on the board of directors of TippingPoint
Technologies, as well as several private companies. Mr. Eyestone holds a B.S. in
education from Drake University and an M.B.A. from the University of Iowa.
WILLIAM P. WOOD, 48, has served as a member of our Board of Directors since
December 1996. Since 1996, Mr. Wood has also served as general partner of
Silverton Partners, a venture capital firm. From 1984 to 2003, Mr. Wood was a
general partner and, for certain funds created since 1996, a special limited
partner with Austin Ventures, a venture capital firm. Mr. Wood also serves on
the board of Silicon Laboratories Inc. as well as 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
During the fiscal year ended October 31, 2003, our Board of Directors
held nine meetings and did not act by written consent. 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 of Directors on which such director served during fiscal
2003.
Audit Committee. The primary function of the Audit Committee is to
assist the Board of Directors in fulfilling its oversight responsibilities for:
- the integrity of our financial statements;
- our financial reporting process, systems of internal
accounting and financial controls;
- the independent auditors' qualifications,
compensation and independence; and
- the adequacy of our internal accounting controls, the
need for an internal audit function and the
performance of the independent auditors.
The Board of Directors maintains a written charter for the Audit
Committee, a copy of which is attached as Appendix A to this Proxy Statement.
The members of the Audit Committee are Messrs. Riegel, Wood and Zito. Mr. Zito
serves as the Chairman of the Audit Committee. The Audit Committee held six
meetings during fiscal 2003. The Board of Directors has determined that all
members of the Audit Committee are "independent" as that term is defined in Rule
4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc. The Board
has determined that Mr. Zito is qualified as an "audit committee financial
expert" under Item 401(h) of Regulation S-K.
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Compensation Committee. The Compensation Committee reviews and makes
recommendations to the Board of Directors 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
employee stock purchase plans. The members of the Compensation Committee are
Messrs. Eyestone and Zito. The Compensation Committee held seven meetings during
fiscal 2003. The Board of Directors has determined that all members of the
Compensation Committee are "independent" as that term is defined in Rule
4200(a)(15) of the Marketplace Rules of The NASDAQ Stock Market, Inc.
EXECUTIVE SESSIONS
Non-management directors meet regularly in executive sessions without
management or management directors present. "Non-management" directors are those
who are not officers but include directors, if any, who are not "independent" by
virtue of the existence of a material relationship with Crossroads. Executive
sessions are led by our "Lead Director." Mr. Riegel has been designated as the
Lead Director. An executive session is held in conjunction with each regularly
scheduled Board of Directors meeting and other sessions may be called by the
Lead Director in his or her own discretion or at the request of the Board of
Directors.
Independent directors also meet regularly in closed sessions. The Board
of Directors has determined that each of Messrs. Eyestone, Riegel, Wood and Zito
are independent as defined in Rule 4200(a)(15) of the Marketplace Rules of The
NASDAQ Stock Market, Inc. Our Lead Director leads these sessions.
DIRECTOR NOMINATION
Due to the relatively small size of our company and the resulting
efficiency of a Board of Directors that also is limited in size, as well as the
lack of turnover in our Board of Directors, the Board of Directors has
determined that it is not necessary or appropriate at this time to establish a
separate Nominating Committee. Potential candidates are discussed by the entire
Board of Directors, and director nominees are selected by a majority of the
independent directors meeting in executive session. Both of the nominees
recommended for election to the Board of Directors at the Annual Meeting are
current directors standing for re-election.
The Board of Directors believes that it is appropriate that the
majority of the Board of Directors be comprised of independent directors as set
forth in the Marketplace Rules 4200 and 4350 of The NASDAQ Stock Market, Inc.
and it is desirable to have at least one "financial expert" on the Board of
Directors as set forth in Section 401(h) of Regulation S-K under the federal
securities laws. When considering potential director candidates, the Board also
considers the candidate's character, judgment, diversity, age, skills, including
financial literacy, and experience in the context of the needs of Crossroads and
the Board of Directors. To date, we have not paid any fees to any third party to
identify or evaluate or assist in identifying or evaluating potential nominees.
Our bylaws include a procedure whereby our stockholders can nominate
persons for election to the Board of Directors. The Board of Directors will
consider director candidates recommended by our stockholders in a similar manner
as those recommended by members of management or other directors, provided the
stockholder submitting such nomination has complied with the procedures set
forth in our bylaws. To date, we have not received any recommended nominees from
any non-management stockholder or group of stockholders that beneficially owns
five percent of our voting stock.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
The Board of Directors maintains a process for stockholders to
communicate with the Board of Directors or with individual directors.
Stockholders who wish to communicate with the Board of Directors or with
individual directors should direct written correspondence to our corporate
secretary at our principal executive offices located at 8300 North MoPac
Expressway, Austin, Texas 78759. Any such communication must contain (i) a
representation that the stockholder is a holder of record of stock of the
corporation, (ii) the name and address, as they appear on the corporation's
books, of the stockholder sending such communication and (iii) the class and
number of shares of the corporation that are beneficially owned by such
stockholder. The corporate secretary will forward such communications to the
Board of Directors or the specified individual director to whom the
communication is
5
directed unless such communication is unduly hostile, threatening, illegal or
similarly inappropriate, in which case the corporate secretary has the authority
to discard the communication or to take appropriate legal action regarding such
communication.
CODE OF ETHICS
We have adopted Standards of Professional Practice and Ethical Conduct
that applies to all officers, including our chief executive officer and chief
financial officer, directors, employees and consultants and a Code of Ethics for
Senior Financial Officers that applies to our chief executive officer, chief
financial officer, director of finance, corporate controllers and other
employees of the finance organization. The Standards of Professional Practice
and Ethical Conduct and Code of Ethics for Senior Financial Officers are both
intended to comply with Item 406 of Regulation S-K of the Securities Exchange
Act of 1934 and with applicable rules of The NASDAQ Stock Market, Inc. Both
codes will be posted on our website under the "Corporate Governance" page. Our
website address is http://www.crossroads.com.
DIRECTOR COMPENSATION AND INDEMNIFICATION ARRANGEMENTS
Non-employee members of our Board of Directors currently receive an
annual retainer of $24,000, paid in equal monthly installments, from us for
their service as non-employee directors. The chairman of the Audit Committee of
our Board of Directors receives an additional $6,000 per year and our Lead
Director receives an additional $36,000 per year for their service in such
capacities. Additionally, our directors receive reimbursement for reasonable
expenses incurred in connection with their attendance at Board of Directors and
committee meetings. The Board of Directors approved the annual cash compensation
to directors generally, and the additional amounts for the Audit Committee Chair
and Lead Director, due to the increasing burdens and time commitment placed on
non-employee members of the Board of Directors, and the Audit Committee Chair
and Lead Director in particular, as well as the need to continue to retain and
attract qualified candidates for service on our Board of Directors. The amount
of the cash compensation to be paid was determined based on a review of
comparable companies. The Compensation Committee of our Board of Directors will
review our director compensation programs annually.
Non-employee directors also receive option grants at periodic intervals
under the automatic option grant program of our 1999 Stock Incentive Plan. In
addition, beginning in fiscal 2003, the Compensation Committee recommended and
the Board of Directors has adopted as company policy that directors receive
additional option grants at periodic intervals under the discretionary option
grant program of the 1999 Stock Incentive Plan, although such policy is subject
to revision at the discretion of the Board of Directors. Under the automatic
option grant program, each individual who first becomes a non-employee board
member receives an option grant to purchase 15,000 shares of common stock on the
date such individual joins the board. In addition, the Board of Directors has
adopted as company policy that at the time a new individual first become a
non-employee board member such director will be granted an additional option
under our discretionary option grant program to purchase 25,000 shares of common
stock, for a total grant of 40,000 options at such time as a non-employee
director joins our Board of Directors. 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 is automatically granted an option to purchase 5,000
shares of common stock, provided such individual has served on the board for at
least six months. In addition, the Board of Directors has adopted as company
policy that each non-employee board member who continues to serve as a
non-employee board member on the date of our Annual Meeting will be granted an
additional option under our discretionary option grant program to purchase
15,000 shares of common stock, for a total grant of 20,000 options on the date
of each annual stockholders meeting. Under these programs, on the date of our
2003 Annual Meeting each of Messrs. Eyestone, Riegel, Wood and Zito received an
option grant to purchase 20,000 shares of common stock at an exercise price of
$1.23 per share. At the 2004 Annual Meeting, each of Messrs. Eyestone, Smith,
Riegel and Wood and, assuming his re-election, Mr. Zito, will receive an option
grant to purchase 20,000 shares of common stock at an exercise price equal to
the closing sale price of our common stock on The NASDAQ Stock Market on such
date.
Our certificate of incorporation limits the liability of our directors
to us or our stockholders for breaches by them of their fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide for mandatory indemnification of directors and
officers to the fullest extent
6
permitted by Delaware law. We also maintain directors' and officers' liability
insurance and enter into indemnification agreements with all of our directors
and executive officers.
ATTENDANCE AT ANNUAL MEETINGS
We encourage, but do not require, the members of our Board of Directors
to attend our Annual Meetings. Two of our five directors attended the Annual
Meeting of Stockholders held on March 27, 2003.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR the
election of each of the nominees listed above.
7
PROPOSAL TWO: APPROVAL OF AMENDMENT TO 1999 EMPLOYEE STOCK PURCHASE PLAN
GENERAL
Our stockholders are being asked to approve an amendment to our 1999
Employee Stock Purchase Plan (the "ESPP") which will effect the following
changes:
(1) beginning with the June 1, 2004 purchase period, amend the ESPP to
(i) increase the maximum number of shares of our common stock purchasable in the
aggregate by all participants on any one purchase date by 112,500 shares, from
75,000 shares to 187,500 shares, and (ii) eliminate the provision which states
that any one participant on any one purchase date may purchase a maximum of 750
shares of common stock; and
(2) beginning with the December 1, 2004 purchase period, the ESPP will
be amended and restated to effect a change from two-year purchase periods to
six-month purchase periods.
The affirmative vote of a majority of the shares represented and voting
at the Annual Meeting is required to approve the amendment to the ESPP.
The Board of Directors adopted the amendments to the ESPP that are
subject to this proposal in January 2004, subject to stockholder approval at
this Annual Meeting.
Our Board of Directors believes that approval of the amendment to the
ESPP will promote our interests and the interests of our stockholders and
continue to enable us to attract, retain and reward persons important to our
success and to provide incentives based on the attainment of corporate
objectives and increases in stockholder value. We rely on the ESPP in order to
attract and retain key employees and we believe that such equity incentives are
necessary for us to remain competitive in the marketplace for executive talent
and other key employees.
SUMMARY OF THE ESPP
The following is a summary of the principal features of the ESPP as
proposed to be amended. Any stockholder who wishes to obtain a copy of the
actual ESPP document may do so upon written request to our corporate secretary
at 8300 N. MoPac Expressway, Austin, Texas 78759.
Introduction. The ESPP was initially approved by our Board of Directors
in September 1999 and has been approved by our stockholders. The ESPP became
effective in connection with the consummation of our initial public offering in
October 1999. The ESPP is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of our
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
Share reserve. As of January 2, 2004, 714,514 shares of our common
stock were reserved for issuance under the ESPP. The reserve automatically
increases on the first trading day of January in each calendar year by an amount
equal to one percent (1%) of the total number of outstanding shares of our
common stock on the last trading day of December in the prior calendar year. In
no event will any such annual increase exceed 250,000 shares.
Offering periods. As amended, the ESPP will have a series of successive
offering periods, each with a duration of six months. The offering periods will
run from June 1 to November 30 and from December 1 to May 31 of each year.
Eligible employees. Individuals scheduled to work more than 20 hours
per week for more than five calendar months per year may join an offering period
on their start date or any semi-annual entry date within that period.
Semi-annual entry dates will occur on the first business day of June and
December each year. Individuals who become eligible employees after the start
date of an offering period may participate in the ESPP on any subsequent
semi-annual entry date within that offering period.
Payroll deductions. A participant may contribute up to 15% of his or
her base salary through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase
8
date. The purchase price per share will be equal to 85% of the fair market value
per share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date.
Semi-annual purchase dates will occur on the last business day of May and
November each year. However, assuming the approval of this proposal, no more
than 187,500 shares may be purchased in total by all participants on any one
semi-annual purchase date. Without contravening the express terms of the ESPP,
beginning with the June 1, 2004 purchase period, our Compensation Committee will
have the authority to change these limitations for any subsequent offering
period.
Change in control. Should we be acquired by merger or sale of
substantially all of our assets or more than fifty percent of our voting
securities, then all outstanding purchase rights will automatically be exercised
immediately prior to the effective date of the acquisition. The purchase price
will be equal to 85% of the market value per share on the participant's entry
date into the offering period in which an acquisition occurs or, if lower, 85%
of the fair market value per share immediately prior to the acquisition.
Termination and amendment of ESPP. The ESPP will terminate no later
than the last business day of November 2009. The Board of Directors at any time
may amend, suspend or discontinue the ESPP. However, certain amendments may
require stockholder approval.
Administration: The ESPP is administered by our Compensation Committee.
The Compensation Committee has the full power and discretion to adopt, amend or
rescind any rules and regulations for carrying out the ESPP. The Compensation
Committee has full power and discretion to construe and interpret the ESPP,
which construction or interpretation is final and conclusive on all persons.
No Limit on Other Plans. The ESPP does not limit the ability of our
board of directors or the Compensation Committee to grant awards or authorize
any other compensation under any other plan or authority.
FEDERAL INCOME TAX CONSEQUENCES OF THE ESPP
The current federal income tax consequences of the ESPP are summarized
in the following general discussion of the general tax principles applicable to
the ESPP. This summary is not intended to be exhaustive and does not describe
state, local, or international tax consequences.
The ESPP is intended to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code. Participant contributions to the
ESPP are made on an after-tax basis (that is, the contributions are deducted
from compensation that is taxable to the participant and for which we or one of
our subsidiaries are generally entitled to a tax deduction).
For U.S. federal income tax purposes, an employee does not realize
income at the time of entry into the ESPP or purchase of a share. If no
disposition of the stock is made within two years from the first day of an
Offering Period, or one year from the date the share is purchased by the
employee, upon subsequent disposition of the stock, ordinary income will be
realized to the extent of the lesser of (1) 15% of the average market value on
the first business day of the Offering Period, or (2) the amount by which the
net proceeds of the sale exceed the price paid. Any further gain will be treated
as capital gain. No income tax deduction will be allowed the Company for shares
purchased by the employee, provided such shares are held for the periods
described above. If the shares are disposed of within the periods described
above, the employee will recognize ordinary income for the taxable year of the
disposition equal to the excess of the fair market value of the shares on the
date of purchase over the price paid, and in these circumstances, the Company
will be entitled to a deduction equal to the amount of ordinary income
recognized by the employee. Tax treatment in jurisdictions outside the U.S. will
be governed by local laws.
SPECIFIC BENEFITS
The benefits that will be received by or allocated to eligible
employees under the ESPP in the future cannot be determined at this time because
the amount of contributions set aside to purchase shares of common stock under
the ESPP (subject to the limitations discussed above) is entirely within the
discretion of each participant. We are unable to determine if the number of
shares purchased by participants in the ESPP during that year would have been
9
materially different than the numbers of shares purchased as set forth in the
table below if the amendment to the ESPP had been in effect for our fiscal year
ended October 31, 2003.
STOCK AWARDS
The table below shows, as to our Chief Executive Officer, the four
other most highly compensated executive officers of Crossroads (with base salary
and bonus for the past fiscal year in excess of $100,000), and the other
individuals and groups indicated, the number of shares of our common stock
purchased pursuant to the ESPP in the periods indicated.
AGGREGATE NUMBER AGGREGATE NUMBER OF
OF SHARES PURCHASED SHARES PURCHASED
UNDER THE PLAN IN THE UNDER THE PLAN IN ALL
FISCAL YEAR ENDED COMPLETED OFFERING
NAME AND POSITION OCTOBER 31, 2003 PERIODS (1)
- ------------------------------------------------------------ --------------------- ---------------------
Robert C. Sims 1,500 5,666
President, Chief Executive Officer and Director
Brian R. Smith -- --
Chairman of the Board
Andrea Wenholz -- --
Vice President, Chief Financial Officer, Secretary and
Treasurer
John Cummings -- 750
Vice President, Sales and Marketing
Richard D. Eyestone -- --
Director
David L. Riegel -- --
Director
William P. Wood -- --
Director
Paul S. Zito -- --
Director
All current executive officers as a group (3 persons) 1,500 6,416
All current non-employee directors as a group (5 persons) -- --
All employees, including current officers who are not 82,026 289,096
executive officers, as a group (94 persons)
(1) Includes shares purchased in the offering period ended November 28, 2003.
* Non-Employee members of our Board of Directors are not eligible to participate
in the ESPP.
10
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of October 31, 2003 with
respect to the shares of our common stock that may be issued under our existing
equity compensation plans.
A B C
-------------------------- ------------------- ------------------------------
NUMBER OF SECURITIES REMAINING
AVAILABLE FOR FUTURE ISSUANCE
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE UNDER EQUITY COMPENSATION
ISSUED UPON EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN A)
- ------------------------------ -------------------------- ------------------- ------------------------------
Equity Compensation Plans
Approved by Stockholders (1) 4,662,758(2) $2.89 3,105,540(3)
Equity Compensation Plans Not
Approved by Stockholders -- -- --
--------- ----- ---------
TOTAL 4,662,758(2) $2.89 3,105,540(3)
(1) Consists of the 1996 Stock Option/Stock Issuance Plan, 1999 Stock
Incentive Plan and the 1999 Employee Stock Purchase Plan.
(2) Excludes purchase rights accruing under the ESPP which has a
stockholder approved reserve of 1,200,000 shares. As of January 2,
2004, 714,514 shares remained available for issuance under the ESPP.
Under the ESPP as it is currently in effect, each eligible employee may
purchase up to 750 shares of Common Stock at semi-annual intervals on
the last business day of May and November each year at a purchase price
per share equal to 85% of the lower of (i) the closing selling price
per share of Common Stock on the employee's entry date into the
two-year offering period in which that semi-annual purchase date occurs
or (ii) the closing selling price per share on the semi-annual purchase
date. Also excludes stock bonus awards issued to our employees pursuant
to our 1999 Stock Incentive Plan. If this Proposal is approved by our
stockholders, the provision of the ESPP limiting the ability of
individual employees to purchase more than 750 shares of Common Stock
in any one purchase period will be eliminated. In addition, beginning
with the December 1, 2004 offering period, offering periods will have a
duration of six months.
(3) Consists of shares available for future issuance under the ESPP and the
1999 Stock Incentive Plan. As of October 31, 2003, an aggregate of
513,989 shares of Common Stock were available for issuance under the
Purchase Plan and 2,591,551 shares of Common Stock were available for
issuance under the 1999 Stock Incentive Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the stockholders vote FOR the
proposed amendment to the 1999 Employee Stock Purchase Plan.
11
PROPOSAL THREE: RATIFICATION OF INDEPENDENT AUDITORS
Our Audit Committee appointed the firm of KPMG LLP as our independent
auditors for the fiscal year ending October 31, 2004. The Audit Committee is
asking the stockholders to ratify this appointment. The affirmative vote of a
majority of the shares represented and voting at the Annual Meeting is required
to ratify the selection of KPMG LLP. KPMG LLP has audited our financial
statements for fiscal 2003. PricewaterhouseCoopers LLP served in that capacity
for the fiscal year ending October 31, 2002.
Stockholder ratification of the appointment of KPMG LLP as our
independent auditors is not required by our bylaws or other applicable legal
requirement. However, the appointment of KPMG LLP is being submitted to the
stockholders for ratification. If the stockholders fail to ratify the
appointment, our Audit Committee will reconsider its selection of KPMG LLP, but
will not be required to select another auditor. Even if the appointment is
ratified, the Audit Committee, in its discretion, may direct the appointment of
a different independent auditing firm at any time during the year if it believes
that such a change would be in the best interests of Crossroads and our
stockholders.
AUDIT MATTERS
KPMG LLP did not provide any services to us in fiscal 2002.
PricewaterhouseCoopers LLP provided services to us in fiscal 2002 and in the
first quarter of fiscal 2003.
The aggregate fees included in the Audit Fees category below are fees
billed for the fiscal years for the audit of Crossroads' annual financial
statements and review of financial statements and statutory and regulatory
filings or engagements. The aggregate fees for each of the other categories are
fees billed in the fiscal years.
Audit Fees. The aggregate fees billed to us by KPMG LLP for
professional services rendered in connection with the audit of the financial
statements included in our Annual Report on Form 10-K for fiscal 2003 and for
the review of the financial statements included in our Quarterly Reports on Form
10-Q during fiscal 2003, totaled $100,000. The aggregate fees billed to us by
PricewaterhouseCoopers LLP, our independent auditors for the first quarter of
fiscal 2003, for the review of the financial statements included in our
Quarterly Report on Form 10-Q for the period ended January 31, 2003, totaled
$30,719. The aggregate fees billed to us by PricewaterhouseCoopers LLP for
professional services rendered in connection with the audit of the financial
statements included in our Annual Report on Form 10-K for fiscal 2002 and for
the review of the financial statements included in our Quarterly Reports on Form
10-Q during fiscal 2002, totaled $153,918.
Audit-Related Fees. The aggregate fees billed to us by KPMG LLP and
PricewaterhouseCoopers LLP for assurance and related services that are
reasonably related to the performance of the audit and review of our financials
statements that are not already reported in the paragraph immediately above
totaled $0 and $9,211, respectively, for fiscal 2003, and $0 and $0,
respectively, for fiscal 2002. These services include the review of work papers
and a Current Report on Form 8-K related to our change in independent auditors.
Tax Fees. The aggregate fees billed to us by KPMG LLP and
PricewaterhouseCoopers LLP for professional services rendered for tax
compliance, tax advice and tax planning totaled approximately $29,000 and
$7,500, respectively, for fiscal 2003 and $0 and $126,736, respectively, for
fiscal 2002. These services included the preparation of our tax returns and work
performed which was related to our change in independent auditors.
All Other Fees. The aggregate fees billed to us by KPMG LLP and
PricewaterhouseCoopers LLP for products and services provided that are not set
forth above totaled $0 and $13,729, respectively, for fiscal 2003 and $0 and
$109,549, respectively, for fiscal 2002. These fees were billed in connection
with work performed by PricewaterhouseCoopers LLP for the preparation of a
Registration Statement on Form S-8 and work related to our stock option exchange
program.
Representatives of KPMG LLP are expected to be present at the Annual
Meeting. They will have the opportunity to make a statement if they desire to do
so and will also be available to respond to appropriate questions.
12
PRE-APPROVAL POLICIES
The Audit Committee pre-approves all audit and non-audit services
provided by the independent auditors prior to the engagement of the independent
auditors with respect to such services. Each member of the Audit Committee has
the authority to approve any additional audit services and permissible non-audit
services provided such member informs the Audit Committee of such approval at
its next regularly scheduled meeting.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Upon the recommendation of our Audit Committee, our Board of Directors
recommends that the stockholders vote FOR the ratification of the selection of
KPMG LLP to serve as our independent auditors for the fiscal year ending October
31, 2004.
OTHER MATTERS
We know of no other matters that will be presented for consideration at
the Annual Meeting. If any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the enclosed form of proxy
to vote the shares they represent as our Board of Directors may recommend.
Discretionary authority with respect to such other matters is granted by the
execution of the enclosed proxy.
13
BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth certain information known to us with respect
to the beneficial ownership of our common stock as of December 31, 2003, by:
- - each person known by us to be a beneficial owners of five percent or
more of our common stock;
- - each current director (each of our director nominees is a current
director);
- - each executive officer named in the summary compensation table of the
Executive Compensation and Other Information section of this Proxy
Statement; and
- - all current directors and executive officers as a group.
Our common stock is the only class of voting securities outstanding.
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. The number of shares of common stock used to
calculate the percentage ownership of each listed person also includes shares
underlying options or warrants held by such person that are exercisable within
60 days of December 31, 2003. Unless otherwise indicated, each stockholder has
sole voting and investment power with respect to the shares beneficially owned,
subject to community property laws, where applicable.
PERCENTAGE OF
OUTSTANDING
SHARES SHARES
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER (1) OWNED OWNED (2)
- -------------------------------------------------------------------------- ------------ ------------
Executive Officers and Directors:
Robert C. Sims (3) 302,278 1.2%
Brian R. Smith (4) 3,391,400 13.5%
Andrea Wenholz (5) 81,986 *
John Cummings 0 *
Reagan Y. Sakai (6) 22,000 *
Richard D. Eyestone (7) 91,400 *
David L. Riegel (8) 77,400 *
William P. Wood (9) 483,930 1.9%
Paul S. Zito (10) 65,312 *
All current directors and executive officers as a group (8 persons) (11) 4,515,706 16.6%
Other 5% Stockholders:
Entities deemed to be affiliated with Austin Ventures (12) 1,511,740 6.0%
* Less than one percent of the outstanding common stock
(1) Unless otherwise indicated, the address for all officers and directors
is 8300 N. MoPac Expressway, Austin, Texas 78759.
(2) Percentage of ownership is based on 25,049,221 shares of common stock
outstanding on January 5, 2004. Shares of common stock subject to stock
options which are currently exercisable or will become exercisable
within 60 days after December 31, 2003 are deemed outstanding for
computing the percentage of the person or group holding such options,
but are not deemed outstanding for computing the percentage of any
other person or group.
(3) Includes 216,707 shares of common stock issuable upon the exercise of
stock options.
(4) Includes 605,000 shares issuable upon the exercise of stock options and
includes 152,000 shares held in trust for the benefit of Mr. Smith's
children as to which Mr. Smith disclaims beneficial ownership.
14
(5) Includes 43,750 shares of common stock issuable upon exercise of stock
options.
(6) Mr. Sakai served as our Vice President, Chief Financial Officer and
Secretary until January 2003.
(7) Includes 30,000 shares issuable upon the exercise of stock options. Of
the shares indicated as owned by Mr. Eyestone, 1,400 shares are held by
the Echo Family Limited Partnership, of which Mr. Eyestone is the
general partner.
(8) Includes 30,000 shares issuable upon the exercise of stock options.
(9) Includes 30,000 shares issuable upon the exercise of stock options and
445,127 shares are included due to Mr. Wood's affiliation with
Silverton Partners, of which he is the general partner.
(10) Includes 55,312 shares of common stock issuable upon exercise of
options.
(11) Includes 1,010,769 shares of common stock issuable upon exercise of
options.
(12) Pursuant to written verification dated as of December 31, 2003,
entities deemed to be affiliated with Austin Ventures had sole voting
power and sole dispositive power over an aggregate of 1,511,740 shares
of common stock as of December 31, 2003, in the following amounts:
Austin Ventures IV-A, L.P. 391,139
Austin Ventures IV-B, L.P. 820,601
Austin Ventures VI Affiliates Fund, L.P. 8,207
Austin Ventures VI, L.P. 291,793
AV Partners IV, L.P. is the general partner of both Austin Ventures
IV-A, L.P. and Austin Ventures IV-B, L.P. and, as such, may be deemed
to possess indirect beneficial ownership of 1,211,740 shares of our
common stock. AV Partners VI, L.P. is the general partner of both
Austin Ventures VI Affiliates Fund, L.P. and Austin Ventures VI, L.P.,
and, as such, may be deemed to possess indirect beneficial ownership of
300,000 shares of our common stock.
15
CERTAIN TRANSACTIONS
Registration rights. Pursuant to the terms of the investors' rights
agreement among us, investors who purchased shares of our preferred stock in
financings prior to our initial public offering and Brian R. Smith, our Chairman
of the Board, have piggyback registration rights with respect to future
registration of our shares of common stock under the Securities Act. If we
propose to register any shares of common stock under the Securities Act, the
holders of shares having piggyback registration rights are entitled to receive
notice of such registration and are entitled to include their shares in the
registration.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and commissions incurred by the
selling stockholders. The investors' rights agreement also contains our
commitment to indemnify the holders of registration rights for losses they incur
in connection with registrations under the agreement. Registration of any of the
shares of common stock held by security holders with registration rights would
result in those shares becoming freely tradable without restriction under the
Securities Act.
Stock options granted to directors and executive officers. For more
information regarding the granting of stock options to executive officers and
directors, please see "Director Compensation and Indemnification Arrangements"
above and "Option/SAR Grants in Last Fiscal Year" below.
Indemnification, insurance and limitation of liability. Our bylaws
require us to indemnify our directors and executive officers to the fullest
extent permitted by Delaware law. We have entered into indemnification
agreements with all of our directors and executive officers and have purchased
directors' and officers' liability insurance. In addition, our certificate of
incorporation and bylaws limit the personal liability of the members of our
Board of Directors for breaches by the directors of their fiduciary duties.
Employment agreements. We are parties to Employment Agreements with
each of Robert C. Sims and Andrea Wenholz which provides for the general terms
of their respective employment, including salary and benefits, but which also
provides that both Mr. Sims and Ms. Wenholz are employed on at "at will" basis
and may be terminated at any time, with or without cause.
Severance benefit plans. We are parties to Severance Benefit Plans with
Robert C. Sims and Andrea Wenholz and were a party to a Severance Benefit Plans
with our Chairman of the Board and former President and Chief Executive Officer,
Brian R. Smith and our former Vice President and Chief Financial Officer, Reagan
Y. Sakai. Pursuant to the terms of the plans, to the extent these executive
officers resigned prior to a change of control involving Crossroads (i) they
will receive a cash payment equal to one month of salary for each quarter of
service they have provided to us, up to a maximum of twelve months salary and
(ii) the vesting all options held by such executive officer will accelerate by a
period of one year.
Severance agreements. In January 2003, we entered into an agreement
with our former Vice President and Chief Financial Officer, Reagan Y. Sakai,
regarding his resignation. We agreed to pay Mr. Sakai an aggregate of $185,000,
to accelerate the vesting of 283,696 options to purchase common stock and bonus
shares of common stock held by Mr. Sakai, and to extend the exercisability of
all vested options held by Mr. Sakai for a period of six months. In exchange for
this, Mr. Sakai agreed to release us from any and all claims he may make against
us.
In November 2003, we entered into an agreement with our Chairman of the
Board and former President and Chief Executive Officer, Brian R. Smith,
regarding his resignation. We agreed to pay Mr. Smith $250,000, to accelerate
the vesting of 200,000 options to purchase common stock and bonus shares of
common stock held by Mr. Smith, and to extend the time period in which Mr. Smith
may exercise these options and other vested options until six months following
such time as Mr. Smith no longer serves on our Board of Directors. In exchange
for this, Mr. Smith agreed to release us from any and all claims he may make
against us.
16
AUDIT COMMITTEE REPORT
The Audit Committee reports as follows with respect to the audit of our
fiscal 2003 audited consolidated financial statements.
Management is responsible for the company's internal controls and the
financial reporting process. The independent auditors are responsible for
performing an independent audit of the company's consolidated financial
statements in accordance with generally accepted auditing standards and to issue
a report thereon. The Audit Committee's responsibility is to monitor and oversee
these processes.
In this context, the Audit Committee has met and held discussions with
management and the independent auditors. Management represented to the Audit
Committee that the company's consolidated financial statements were prepared in
accordance with generally accepted accounting principles, and the Audit
Committee has reviewed and discussed the consolidated financial statements with
management and the independent auditors. The Audit Committee discussed with the
independent auditors matters required to be discussed by Statement on Auditing
Standards No. 61 (Communication with Audit Committees). The company's
independent auditors also provided to the Audit Committee the written
disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees). The Audit Committee reviewed
non-audit services provided by the independent auditors for the last fiscal
year, and determined that those services are not incompatible with maintaining
the auditors' independence.
Based upon Audit Committee's discussion with management and the
independent auditors and the Audit Committee's review of the representation of
management and the report of the independent auditors to the Audit Committee,
the Audit Committee recommended that the Board of Directors include the audited
consolidated financial statements in the company's Annual Report on Form 10-K
for the year ended October 31, 2003 filed with the Securities and Exchange
Commission.
Submitted by the Audit Committee of the Board of Directors:
Paul S. Zito (Chairman)
David L. Riegel
William P. Wood
17
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides certain summary information concerning the
compensation earned, by our Chief Executive Officer, the two other most highly
compensated executive officers whose salary and bonus for fiscal 2003 was in
excess of $100,000, for services rendered in all capacities to the company and
our subsidiaries for the fiscal years ended October 31, 2001, 2002 and 2003. In
addition, Mr. Smith is included in the table because he served as our President
and Chief Executive Officer during fiscal 2003, although he resigned in
September 2003. Mr. Sakai is also included in the table because he would have
been among the four most highly compensated executive officers of the Company on
the last day of the 2003 fiscal year had he not resigned earlier in the fiscal
year. No other executive officer who would have otherwise been includible in
such table on the basis of salary and bonus earned for fiscal 2003 has been
excluded by reason of his or her termination of employment or change in
executive status during that year.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ---------------------------
OTHER ANNUAL RESTRICTED SECURITIES ALL OTHER
FISCAL COMPENSATION STOCK UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) AWARD(S) ($) OPTIONS (#) ($)
--------------------------- ---- ---------- --------- --- ------------ ----------- ---
Robert C. Sims (1) 2003 199,558 1,500 -- 88,000(2) 225,000 --
President and Chief Executive 2002 167,384 300 -- 74,800(3) 124,000 1,400(4)
Officer 2001 158,333 51,000 -- -- 40,000 --
Brian R. Smith (5) 2003 217,529 -- -- 137,460(6) 450,000 --
Chairman and Former Chief 2002 6,417 -- -- -- 305,000 --
Executive Officer and President 2001 297,500 128,700 -- -- 300,000 --
Andrea Wenholz (7) 2003 120,141 -- -- 114,240(8) 155,000 --
Vice President, Chief 2002 -- -- -- -- -- --
Financial Officer, Secretary 2001 -- -- -- -- -- --
and Treasurer
John Cummings (9) 2003 82,901 18,750 -- -- 200,000 --
Vice President of Sales and 2002 -- -- -- -- -- --
Marketing 2001 -- -- -- -- -- --
Reagan Y. Sakai (10) 2003 33,679 -- -- 81,400(11) -- 151,321(12)
Former Vice President, Chief 2002 182,154 -- -- 81,400(14) 117,000 3,000(4)
Financial Officer, Secretary 2001 181,250 48,100 29,706(13) -- 40,000 --
and Treasurer
(1) Mr. Sims was named our Chief Operating Officer in May 2002 and our
President and Chief Executive Officer in September 2003.
(2) Value of stock bonus award is based on the closing price of our common
stock on November 1, 2002, the date of grant. Represents share right
award of 160,000 shares of common stock granted to Mr. Sims. Mr. Sims
will have a right to the shares as they vest over a period of 25
months; however, the vesting may be accelerated upon the attainment by
Crossroads of certain performance objectives. On October 31, 2003, the
value of the share right award was $484,800. Cash dividends which are
paid by us on outstanding shares of our common stock will not be
payable on the share right award.
(3) Value of stock bonus award is based on the closing price of our common
stock on November 1, 2001, the date of grant. Represents share right
award of 24,129 shares of common stock granted to Mr. Sims. Mr. Sims
will have a right to the shares as they vest over a period of 25
months; however, the vesting may be accelerated upon the attainment by
Crossroads of certain performance objectives. On October 31, 2002,
18
the value of the share right award was $12,305. Cash dividends which
are paid by us on outstanding shares of our common stock will not be
payable on the share right award.
(4) Represents amounts we paid in connection with professional services
related to year-end tax planning and tax return preparation.
(5) Mr. Smith served as our Chief Executive Officer until October 31, 2001
and as our interim President and Chief Executive Officer from May 2002
to November 2002 and as our President and Chief Executive Officer from
November 2002 to September 2003. Mr. Smith has served as our Chairman
of the Board since our inception.
(6) Value of stock bonus award is based on the closing price of our common
stock on November 19, 2002, the date of grant. Represents share right
award of 174,000 shares of common stock granted to Mr. Smith. In
connection with Mr. Smith's resignation as our President and Chief
Executive Officer, on September 30, 2003, 50,000 shares were
accelerated and the remaining 124,000 shares were cancelled. On October
31, 2003, the value of the share right award after such acceleration
and cancellation was $121,500. Cash dividends which are paid by us on
outstanding shares of our common stock will not be payable on the share
right award.
(7) Ms. Wenholz was named our Vice President, Chief Financial Officer,
Secretary and Treasurer in January 2003.
(8) Value of stock bonus award is based on the closing price of our common
stock on January 6, 2003, the date of grant. Represents share right
award of 112,000 shares of common stock granted to Ms. Wenholz. Ms.
Wenholz will have a right to the shares as they vest over a period of
23 months; however, the vesting may be accelerated upon the attainment
by Crossroads of certain performance objectives. On October 31, 2003,
the value of the share right award was $339,360. Cash dividends which
are paid by us on outstanding shares of our common stock will not be
payable on the share right award.
(9) Mr. Cummings was named our Vice President, Sales in May 2003 and Vice
President, Sales and Marketing in November 2003.
(10) Mr. Sakai served as our Vice President, Chief Financial Officer,
Secretary and Treasurer from May 1999 to January 2003.
(11) Value of stock bonus award is based on the closing price of our common
stock on November 1, 2002, the date of grant. Represents share right
award of 148,000 shares of common stock granted to Mr. Sakai. Upon Mr.
Sakai's resignation in January 2003, this share right award was
accelerated.
(12) Represents severance payments paid to Mr. Sakai.
(13) Represents amounts we paid in connection with the reimbursement of
moving expenses for Mr. Sakai.
(14) Value of stock bonus award is based on the closing price of our common
stock on November 1, 2001, the date of grant. Represents share right
award of 26,258 shares of common stock granted to Mr. Sakai. On October
31, 2002, the value of the share right award was $13,392. Cash
dividends which are paid by us on outstanding shares of our common
stock will not be payable on the share right award. Upon Mr. Sakai's
resignation in January 2003, the vesting of the share right award was
fully accelerated.
19
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants
of stock options made during fiscal 2003 to each of our executive officers named
in the Summary Compensation Table. We have never granted any stock appreciation
rights. Unless otherwise indicated, the exercise prices represent the fair
market value of the common stock on the grant date.
The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of our common stock. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. The potential realizable
value is calculated based on the ten year term of the option at its time of
grant. It is calculated based on the assumption that the our common stock
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 1999 Stock Incentive Plan. Each
option has a maximum term of ten years, subject to earlier termination if the
optionee's services are terminated. The percentage of total options granted to
our employees in the last fiscal year is based on options to purchase an
aggregate of 2,015,376 shares of common stock granted during fiscal 2003. The
following table sets forth information concerning the individual grants of stock
options to each of our named executive officers in fiscal 2003.
OPTION/SAR GRANTS IN FISCAL 2003
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE VALUE OF
NUMBER OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES PERCENT OF TOTAL PRICE APPRECIATION FOR OPTION
UNDERLYING OPTIONS/SARS TERM
OPTION/SARS GRANTED TO EXERCISE OF -----------------------------
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#)(1) FISCAL 2003(%) ($/SH)(2) DATE 5%($) 10%($)
- ---- ------ --------------- --------- ---- ----- ------
Robert C. Sims 50,000 2.5 1.14 02/12/2013 35,847 90,843
50,000 2.5 1.87 08/21/2013 58,802 149,015
125,000 6.2 2.43 09/30/2013 191,027 484,099
Brian R. Smith 150,000 7.4 0.69 11/7/2012 65,091 164,952
300,000 14.9 0.79 11/19/2012 149,048 377,717
Andrea Wenholz 140,000 6.9 1.02 1/6/2013 89,806 227,586
15,000 * 1.87 8/21/2013 17,640 44,704
John Cummings 200,000 9.9 1.93 5/12/2013 242,753 615,185
Reagan Y. Sakai -- -- -- -- -- --
* Less than one percent
(1) Unless otherwise noted, options vest over a four-year period. Each
option expires on the earlier of ten years from the date of grant or within a
specified period following termination of the optionee's employment with us.
(2) The exercise price may be paid in cash or shares of our common stock
valued at fair market value on the exercise date. Alternatively, the option may
be exercised through a cashless exercise procedure. Outstanding options will
become exercisable on an accelerated basis if we are acquired and (i) such
options are not assumed or (ii) upon termination under certain circumstances
within 12 months following an acquisition, or pursuant to the terms of the
Severance Benefit Plans we have in place with Mr. Sims and Ms. Wenholz, which
are more fully described above in "Certain Transactions--Severance benefit
plans."
20
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options exercised
in fiscal 2003 and options held as of October 31, 2003 by each of our executive
officers named in the Summary Compensation Table. No stock appreciation rights
were exercised during fiscal 2003 and none were outstanding at October 31, 2003.
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 2003 OPTION VALUES
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES OCTOBER 31, 2003 (#) OCTOBER 31, 2003 ($)(2)
ACQUIRED VALUE -------------------- -----------------------
NAME ON EXERCISE (#) REALIZED ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- --------------- ----------- ------------- ----------- -------------
Robert C. Sims -- -- 180,580 287,794 133,976 277,319
Brian R. Smith -- -- 605,000 -- 1,113,000 --
Andrea Wenholz -- -- -- 155,000 -- 298,800
John Cummings -- -- -- 200,000 -- 220,000
Reagan Y. Sakai 205,165 51,945 -- -- -- --
(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 multiplied by the number of shares acquired
on exercise.
(2) Value is determined by subtracting the exercise price from the fair
market value of our common stock at October 31, 2003 ($3.03 per share
based upon the closing sale price of our common stock on the Nasdaq
National Market on such date) and multiplying by the number of shares
underlying the options.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
Other than the agreements with Mr. Sims and Ms. Wenholz described in
"Certain Transactions--Severance Benefit Plans" above, we do not have any
employment or change of control agreements with any of the executive officers
named in the Summary Compensation Table.
Our 1999 Stock Incentive Plan, which governs the options granted to the
named executive officers, includes the following change in control provisions
which may result in the accelerated vesting of outstanding option grants and
stock issuances:
- In the event that we are acquired by merger or asset sale or
board-approved sale by the stockholders of more than 50% of
our outstanding voting stock, each outstanding option under
the discretionary option grant program which is not to be
assumed or replaced by the successor corporation or otherwise
continued in effect will immediately become exercisable for
all the option shares, and all outstanding unvested shares
will immediately vest, except to the extent our repurchase
rights with respect to those shares are to be assigned to the
successor corporation or otherwise continued in effect.
- The Compensation Committee will have complete discretion to
grant one or more options that will become exercisable for all
the option shares in the event those options are assumed in
the acquisition and the optionee's service with us or the
acquiring entity is subsequently involuntarily terminated. The
vesting of any outstanding shares under our 1999 plan may be
accelerated upon similar terms and conditions.
- The Compensation Committee may grant options and structure
repurchase rights so that the shares subject to those options
or repurchase rights will immediately vest in connection with
a hostile take-over effected through a successful tender offer
for more than 50% of our outstanding voting stock or a change
in the majority of our board through one or more contested
elections. Such accelerated vesting may occur either at the
time of such transaction or upon the subsequent termination of
the optionee's services.
21
- The options currently outstanding under our 1996 Stock
Option/Stock Issuance Plan, which was succeeded by the 1999
plan, will immediately vest in the event we are acquired by
merger or asset sale, unless those options are assumed by the
acquiring entity or our repurchase rights with respect to any
unvested shares subject to those options are assigned to such
entity. If the options are so assumed by the acquiring entity
and our repurchase rights are so assigned to such entity, then
no accelerated vesting will occur at the time of the
acquisition but the options will accelerate and vest in full
upon an involuntary termination of the optionee's employment
within 18 months following the acquisition.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the Board of
Directors or Compensation Committee of any entity that has one or more of its
executive officers serving as a member of our Board of Directors or Compensation
Committee. Our Compensation Committee currently consists of Messrs. Eyestone and
Zito, neither of whom currently serves or has previously served as an officer or
employee of Crossroads.
22
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
It is the duty of the Compensation Committee to review and determine
the salaries and bonuses of executive officers of Crossroads, including the
Chief Executive Officer, and to establish the general compensation policies for
such individuals. The Compensation Committee also has the sole and exclusive
authority to make discretionary option grants to the company's executive
officers under our 1999 Stock Incentive Plan.
The Compensation Committee believes that the compensation programs for
the company's executive officers should reflect our performance and the value
created for our stockholders. In addition, the compensation programs should
support our short-term and long-term strategic goals and values and should
reward individual contribution to our success. We are engaged in a very
competitive industry, and our success depends upon its ability to attract and
retain qualified executives through the competitive compensation packages we
offer to such individuals.
General Compensation Policy. The Compensation Committee's policy is to
provide our executive officers with compensation opportunities which are based
upon their personal performance, our financial performance and their
contribution to that performance and which are competitive enough to attract and
retain highly skilled individuals. Each executive officer's compensation package
is comprised of three elements: (i) base salary that is competitive with the
market and reflects individual performance, (ii) annual variable performance
awards payable in stock with the issuance period tied to our achievement of
annual financial performance goals as well as individual contributions to these
goals and (iii) long-term stock-based incentive awards designed to strengthen
the mutuality of interests between our executive officers and our stockholders.
As an officer's level of responsibility increases, a greater proportion of his
or her total compensation will be dependent upon our financial performance and
stock price appreciation rather than base salary. In fiscal 2004, the annual
variable performance award (item (ii) above) will be payable in cash with the
issuance period tied to our achievement of annual financial performance goals,
as well as individual contributions to these goals.
Factors. The principal factors that were taken into account in
establishing each executive officer's compensation package for fiscal 2003 are
described below. However, the Compensation Committee may in its discretion apply
entirely different factors, such as different measures of financial performance,
for future fiscal years.
Base Salary. In setting base salaries, the Compensation Committee
reviewed published compensation survey data for our industry. The base salary
for each officer reflects the salary levels for comparable positions in
published surveys, as well as the individual's personal performance and internal
alignment considerations. The relative weight given to each factor varies with
each individual in the sole discretion of the Compensation Committee. Each
executive officer's base salary is adjusted each year on the basis of (i) the
Compensation Committee's evaluation of the officer's personal performance for
the year and (ii) the competitive marketplace for persons in comparable
positions. Crossroads' performance and profitability may also be a factor in
determining the base salaries of executive officers. For fiscal 2003, the base
salary of the company's executive officers ranged from the 10th percentile to
the 50th percentile of the base salary levels in effect for comparable positions
in the surveyed compensation data.
Stock Bonus Incentive Program. During fiscal 2003, the Company entered
into agreements with certain of its executive officers, Robert C. Sims, Brian R.
Smith and Andrea Wenholz, to grant bonus share awards of up to 160,000, 174,000
and 112,000 shares of common stock, respectively, for no additional cash
consideration. In connection with Mr. Smith's resignation as our President and
Chief Executive Officer, the Company accelerated 50,000 of the 174,000 bonus
shares and cancelled the remaining bonus shares. The bonus share awards vest
over a period of approximately two years of continued service to us. However,
the vesting of the share right awards may be accelerated if Crossroads
accomplishes specified pre-defined performance goals. In setting these bonus
share award amounts, the Compensation Committee looked to tie certain
company-wide performance targets to specific individual incentives for these
executive officers. This stock bonus incentive program was implemented to
preserve our cash position and to focus on future profitability.
Annual Incentives. In setting bonus amounts to executive officers, the
Compensation Committee looks to external market data to assemble competitive
variable compensation levels in competitive companies and markets. Based on the
foregoing factors and the company's performance for fiscal year 2003, stock
bonuses were awarded to the executive officers named in the Summary Compensation
Table.
23
Long-Term Incentives. Generally, stock option grants are made annually
by the Compensation Committee to each of our executive officers. Each grant is
designed to align the interests of the executive officer with those of the
stockholders and provide each individual with a significant incentive to manage
Crossroads from the perspective of an owner with an equity stake in the
business. Each grant allows the officer to acquire shares of our common stock at
a fixed price per share (typically, the market price on the grant date) over a
specified period of time (up to ten years). Each option becomes exercisable in a
series of installments over a specified period, contingent upon the officer's
continued employment with Crossroads. Accordingly, the option will provide a
return to the executive officer only if he or she remains employed by us during
the vesting period, and then only if the market price of the shares appreciates
over the option term.
The size of the option grant to each executive officer is set by the
Compensation Committee at a level that is intended to create a meaningful
opportunity for stock ownership based upon the individual's current position
with us, the individual's personal performance in recent periods and his or her
potential for future responsibility and promotion over the option term. The
Compensation Committee also takes into account the number of unvested options
held by the executive officer in order to maintain an appropriate level of
equity incentive for that individual. The relevant weight given to each of these
factors varies from individual to individual. The Compensation Committee has
established certain guidelines with respect to the option grants made to the
executive officers, but has the flexibility to make adjustments to those
guidelines at its discretion.
CEO Compensation. In setting the total compensation payable to Robert
C. Sims and Brian R. Smith, both of whom served in the capacity of Chief
Executive Officer in fiscal 2003, the Compensation Committee has taken into
consideration both of our CEO's prior accomplishments and strategic leadership
in our industry and also sought to make that compensation competitive with the
compensation paid to the chief executive officers of comparable companies.
Additionally, the Compensation Committee looked to our performance and stock
price appreciation for a significant percentage of both of our CEO's total
compensation.
Compliance with Internal Revenue Code Section 162(m). Section 162(m) of
the Internal Revenue Code disallows a tax deduction to publicly held companies
for compensation paid to certain of their executive officers, to the extent that
compensation exceeds $1 million per covered officer in any fiscal year. The
limitation applies only to compensation that is not considered to be
performance-based. Our 1999 Stock Incentive Plan has been structured so that any
compensation deemed paid in connection with the exercise of option grants made
under that plan with an exercise price equal to the fair market value of the
option shares on the grant date will qualify as performance-based compensation
which will not be subject to the $1 million limitation. Cash and other
non-performance based compensation paid to our executive officers for fiscal
2003 did not exceed the $1 million limit per officer, and the Compensation
Committee does not anticipate that the non-performance based compensation to be
paid to our executive officers will exceed that limit. Because it is unlikely
that the cash compensation payable to any of our executive officers in the
foreseeable future will approach the $1 million limit, the Compensation
Committee has decided at this time not to take any action to limit or
restructure the elements of cash compensation payable to our executive officers.
The Compensation Committee will reconsider this decision should the individual
cash compensation of any executive officer ever approach the $1 million level.
It is the opinion of the Compensation Committee that the executive
compensation policies and plans provide the necessary total remuneration program
to properly align our performance and the interests of our stockholders through
the use of competitive and equitable executive compensation in a balanced and
reasonable manner, for both the short and long-term.
Submitted by the Compensation Committee of the Board of Directors:
Richard D. Eyestone (Chairman)
Paul S. Zito
24
STOCK PERFORMANCE GRAPH
The graph depicted below shows a comparison of cumulative total
stockholder returns for an investment in our common stock, The NASDAQ Stock
Market Index and the NASDAQ Computer Manufacturer Index.
COMPARISON OF 4 YEAR CUMULATIVE TOTAL RETURN*
AMONG CROSSROADS SYSTEMS, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ COMPUTER MANUFACTURERS INDEX
[PERFORMANCE GRAPH]
* $ 100 invested on 10/20/99 in stock or index-including reinvestment of
dividends.
Fiscal year ending october 31.
Research Data Group Peer Group Total Return Worksheet
CROSSROADS SYS INC
Cumulative Total Return
-----------------------------------------------------------------
10/99 10/99 10/00 10/01 10/02 10/03
CROSSROADS SYSTEMS, INC. 100.00 395.14 38.54 17.22 2.83 16.83
NASDAQ STOCK MARKET (U.S.) 100.00 108.01 122.12 61.38 48.71 70.53
NASDAQ COMPUTER MANUFACTURERS 100.00 107.03 152.19 48.98 40.66 56.30
(1) The graph covers the period from October 20, 1999, the first date on
which our common stock began trading following our initial public
offering of shares of our common stock, to October 31, 2003.
(2) The graph assumes that $100 was invested in our common stock on October
20, 1999 and in each index, and that all dividends were reinvested. No
cash dividends have been declared on our common stock.
(3) Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
25
NO INCORPORATION BY REFERENCE OF CERTAIN PORTIONS OF THIS PROXY STATEMENT
Notwithstanding anything to the contrary set forth in any of our
previous filings made under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings made by us under those statutes, neither the preceding Stock Performance
Graph, the audit committee report nor the Compensation Committee Report is to be
incorporated by reference into any such prior filings, nor shall such graph or
report be incorporated by reference into any future filings made by us under
those statutes.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The members of our Board of Directors, our executive officers and
persons who hold more than 10% of our outstanding common stock are subject to
the reporting requirements of Section 16(a) of the Securities Exchange Act of
1934, which require them to file reports with respect to their ownership of our
common stock and their transactions in such common stock. Based upon (i) the
copies of Section 16(a) reports we received from such persons for their fiscal
2003 transactions in our common stock and their common stock holdings, and (ii)
the written representations received from one or more of such persons that no
other reports were required to be filed by them for fiscal 2003, we believe that
all reporting requirements under Section 16(a) for fiscal 2003 were met in a
timely manner by our directors, executive officers and greater than ten percent
beneficial owners, with the following exceptions: Robert C. Sims failed to
timely report his acquisition of options to purchase 50,000 shares of common
stock which were granted on February 12, 2003 and options to purchase 50,000
shares of common stock which were granted on August 21, 2003; and Andrea Wenholz
failed to timely report her acquisition of options to purchase 15,000 shares of
common stock which were granted on August 21, 2003. Mr. Sims and Ms. Wenholz
have since filed reports reflecting such option grants.
ANNUAL REPORT
A copy of our Annual Report to Stockholders for fiscal 2003 has been
mailed concurrently with this Proxy Statement to all stockholders entitled to
notice of and to vote at the Annual Meeting. The Annual Report is not
incorporated into this Proxy Statement and is not considered proxy solicitation
material.
ANNUAL REPORT ON FORM 10-K
We filed an Annual Report on Form 10-K with the Securities and Exchange
Commission on January 22, 2004. Stockholders may obtain a copy of this report,
without charge, by writing to the attention of Investor Relations, at our
principal executive offices located at 8300 N. MoPac Expressway, Austin, Texas
78759.
THE BOARD OF DIRECTORS OF CROSSROADS SYSTEMS, INC.
Dated: January 29, 2004
26
Research Data Group Total Return Worksheet
Begin: 10/20/1999
Period End: 10/31/2003
CROSSROADS SYS INC End: 10/31/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
----- ---- ------- -------- --------- ---- ---------- ------ ------
20-Oct-99 Begin 18.000 5.56 5.556 100.00
31-Oct-99 Year End 71.125 5.56 5.556 395.14
31-Oct-00 Year End 6.938 5.56 5.556 38.54
31-Oct-01 Year End 3.100 5.56 5.556 17.22
31-Oct-02 Year End 0.510 5.56 5.556 2.83
31-Oct-03 End 3.030 5.56 5.556 16.83
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.
Research Data Group Total Return Worksheet
Begin: 10/20/1999
Period End: 10/31/2003
NASDAQ STOCK MARKET (U.S.) End: 10/31/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
- ----- ---- ------- --------- --------- ---- ---------- ------ ------
20-Oct-99 Begin 936.037 0.11 0.107 100.00
31-Oct-99 Year End 996.460 0.11 0.107 106.46
31-Oct-00 Year End 1126.607 0.11 0.107 120.36
31-Oct-01 Year End 566.317 0.11 0.107 60.50
31-Oct-02 Year End 449.363 0.11 0.107 48.01
31-Oct-03 End 650.737 0.11 0.107 69.52
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.
Research Data Group Total Return Worksheet
Begin: 10/20/1999
Period End: 10/31/2003
NASDAQ COMPUTER MANUFACTURERS End: 10/31/2003
Beginning
Transaction Closing No. Of Dividend Dividend Shares Ending Cum. Tot.
Date* Type Price** Shares*** per Share Paid Reinvested Shares Return
- ----- ---- ------- --------- --------- ---- ---------- ------ ------
20-Oct-99 Begin 1873.036 0.05 0.053 100.00
31-Oct-99 Year End 1977.341 0.05 0.053 105.57
31-Oct-00 Year End 2811.602 0.05 0.053 150.11
31-Oct-01 Year End 904.903 0.05 0.053 48.31
31-Oct-02 Year End 751.161 0.05 0.053 40.10
31-Oct-03 End 1040.063 0.05 0.053 55.53
* Specified ending dates or ex-dividends dates.
** All Closing Prices and Dividends are adjusted for stock splits and stock
dividends.
***'Begin Shares' based on $100 investment.
APPENDIX A
CHARTER OF THE AUDIT COMMITTEE
OF
CROSSROADS SYSTEMS, INC.
PURPOSE
The primary functions of the Committee are to:
1. Assist the board of directors in fulfilling its oversight
responsibilities for:
o the integrity of the Company's financial statements;
o the Company's compliance with legal and regulatory requirements;
o the Company's overall risk management profile;
o the external auditors' qualifications and independence; and
o the performance of the Company's internal audit function, if any,
and external auditors; and
2. Prepare the report, required by the proxy rules of the Securities
and Exchange Commission ("SEC"), to be included in the Company's
annual proxy statement, or, if the Company does not file such a
proxy statement, in the Company's annual report filed on Form 10-K
with the SEC.
Except as separately empowered and accorded specific responsibilities
below, the Committee's function is one of oversight only. The Company's
management is responsible for preparing the Company's financial statements. The
Company's external auditors are responsible for auditing the financial
statements. It is not the duty or responsibility of the Committee or its members
to conduct "field work" or other types of auditing, legal or other accounting
reviews or procedures. The activities of the Committee are in no way designed to
supersede or alter those traditional responsibilities.
AUTHORITY
The Committee has authority to conduct or authorize investigations into
any matters within its scope of responsibilities. It is also empowered to:
1. Appoint, compensate, retain and oversee the work of any public
accounting firm engaged by the Company for the purpose of preparing
or issuing an audit report or performing other audit, review or
attest services for the Company.
2. Resolve any disagreements between management and any public
accounting firm regarding financial reporting matters.
A1
3. Pre-approve all audit and permitted non-audit services performed by
the external auditors. Committee pre-approval of audit and non-audit
services will not be required if the engagement for the services is
entered into pursuant to pre-approval policies and procedures
established by the Committee regarding the Company's engagement of
external auditors, provided that:
o the policies and procedures are detailed as to the particular
service;
o the Committee is informed of each service provided; and
o such policies and procedures do not include delegation of the
Committee's responsibilities under the 1934 Act to the Company's
management.
4. Engage such outside legal, accounting or other advisors to provide
such advice and assistance as the Committee deems necessary to carry
out its duties, with the Company to provide funding, as determined
by the Committee, for such outside legal, accounting and other
advisors and for any administration expenses of the Committee.
5. Seek any information it requires from employees (all of whom are
directed to cooperate with the Committee's requests) or other
parties.
6. Meet with the Company's officers, external auditors, general counsel
and outside counsel, as necessary to fulfill its responsibilities.
7. Delegate authority to subcommittees (consisting solely of one or
more members of the Committee), including its authority to
pre-approve all auditing and permitted non-audit services, provided
that any decisions made pursuant to such delegated authority and a
description of the services rendered are presented to the full
Committee at its next regularly scheduled meeting.
COMPOSITION
The Committee shall be comprised of three or more directors elected by
the board of directors, each of whom (except as otherwise permitted) shall:
(A) be independent as defined in the Nasdaq National Market listing
standards in effect from time to time (the "Nasdaq Standards");
(B) meet the criteria for independence set forth in Section 10A(m)(3)
of the Securities Exchange Act of 1934, as amended (the "1934
Act"), and applicable rules promulgated thereunder;
(C) have not participated in the preparation of the financial
statements of the Company or any current subsidiary at any time
during the past three years;
(D) be able to read and understand fundamental financial statements,
including a company's balance sheet, income statement and cash
flow statement, at the time of his or her appointment to the
Committee; and
A2
(E) otherwise be free from any relationship that, in the opinion of
the board of directors, would interfere with the exercise of his
or her independent judgment as a member of the Committee;
provided, however, that one director who (i) is not independent as defined in
the Nasdaq Standards, (ii) meets the criteria for independence set forth in
Section 10A(m)(3) of the 1934 Act and the rules thereunder, and (iii) is not a
current officer or employee or a Family Member (as defined in the Nasdaq
Standards) of such officer or employee, may be appointed to the Committee, if
the board of directors, under exceptional and limited circumstances, determines
that membership on the Committee by the individual is required by the best
interests of the Company and its stockholders, and the board of directors
discloses, in the Company's next annual meeting proxy statement subsequent to
such determination (or if the Company does not file such a proxy statement, in
its next Form 10-K annual report), the nature of the relationship and the
reasons for that determination. A member appointed under this proviso (x) may
only serve on the Committee for no longer than two (2) years from the date of
his or her appointment and (y) may not serve as Chair of the Committee.
Members of the Committee are not required to be engaged in the
accounting and auditing profession and, consequently, some members may not be
expert in financial matters, or in matters involving auditing or accounting.
However, at least one Committee member shall have past employment experience in
finance or accounting, requisite professional certification in accounting, or
any other comparable experience or background, which results in the individual's
financial sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with financial
oversight responsibilities. Furthermore, at least one Committee member shall be,
as determined by the board of directors in its business judgment, an "audit
committee financial expert" within the definition adopted by the SEC, or the
Company shall disclose in its periodic reports required pursuant to the 1934 Act
the reasons why at least one member of the Committee is not an "audit committee
financial expert."
A Chair of the Committee shall be appointed by the board of directors.
MEETINGS
The Committee shall meet at least once during each fiscal quarter, and
more frequently as the Committee in its discretion deems desirable or advisable.
All Committee members are expected to attend each meeting, in person or via
teleconference or videoconference. The Committee may invite members of
management, auditors and others to attend meetings and provide pertinent
information, as deemed necessary and appropriate. The Committee will meet
separately with management, with internal auditors and with external auditors.
It will also meet periodically in executive session. Meeting agendas will be
prepared and provided in advance to Committee members, along with appropriate
briefing materials. Minutes will be kept of each meeting of the Committee and
will be provided to each member of the board of directors.
A3
RESPONSIBILITIES
Although the Committee may wish to consider other duties from time to
time, the general recurring activities of the Committee in carrying out its
oversight role are described below. The Committee shall be responsible for:
FINANCIAL STATEMENTS
1. Reviewing the audited financial statements and discussing them with
management and the external auditors. These discussions shall
include the matters required to be discussed under Statement of
Auditing Standards No. 61 and consideration of the quality of the
Company's accounting principles as applied in financial reporting,
including a review of particularly sensitive accounting estimates,
reserves and accruals, judgmental areas, audit adjustments (whether
or not recorded), and other such inquiries as the Committee or the
external auditors shall deem appropriate.
2. Discussing with a representative of management and the external
auditors:
o the interim financial information contained in the Company's
quarterly report on Form 10-Q prior to its filing;
o the earnings announcement prior to its release (if practicable),
particularly any use of "pro forma," or "adjusted" non-GAAP,
information;
o financial information and earnings guidance provided to analysts
and rating agencies; and
o the results of the review of such information by the external
auditors.
3. Review significant accounting and reporting issues and understand
their impact on the financial statements. These issues include:
o complex or unusual transactions and highly judgmental areas;
o major issues regarding accounting principles and financial
statement presentations, including any significant changes in the
Company's selection or application of accounting principles; and
o the effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements of the
Company.
4. Review analyses prepared by management and/or the external auditors
setting forth significant financial reporting issues and judgments
made in connection with the preparation of the financial statements,
including analyses of the effects of alternative GAAP methods on the
financial statements.
5. Inquire as to the external auditors regarding accounting policies
and alternatives to those policies views and consider the external
auditors' judgments about whether
A4
management's choices of accounting policies are conservative,
moderate, or aggressive from the perspective of income, asset, and
liability recognition, and whether those policies are common
practices or are minority practices.
6. Determine, as regards new acquisitions, dispositions other
transactions or events, the external auditors' reasoning for the
appropriateness of the accounting principles and disclosures
practices adopted by management.
INTERNAL CONTROLS
7. Consider the effectiveness of the Company's internal control system,
including information technology security and control.
8. Review disclosures made by the Company's chief executive and chief
financial officers in the Forms 10-K and 10-Q certification
processes about significant deficiencies in the design or operation
of internal controls or any fraud that involves management or other
employees who have a significant role in the Company's internal
controls.
9. Understand the scope of internal auditors' and external auditors'
review of internal controls over financial reporting, and obtain
reports on significant findings and recommendations, together with
management's responses.
INTERNAL AUDIT
10. From time to time, consider the need for an internal audit function
and, if and when an internal audit function is put into place,
perform the functions listed in paragraphs 11 to 14 below.
11. Review with management and the Company's chief audit executive the
charter, plans, activities, staffing and organizational structure of
the internal audit function.
12. Ensure there are no unjustified restrictions or limitations, and
review and concur in the appointment, replacement or dismissal of,
the chief audit executive.
13. Review the effectiveness of the internal audit function, including
compliance with The Institute of Internal Auditors' Standards for
the Professional Practice of Internal Auditing.
14. On a regular basis, meet separately with the chief audit executive
to discuss any matters that the Committee or any internal auditor
believes should be discussed privately.
A5
INDEPENDENT AUDITORS AND EXTERNAL AUDIT
15. Exercise ultimate and direct authority to select, retain, compensate
and oversee the work of the external auditors and determine and
approve audit engagement fees and other compensation to be paid to
the external auditors, which shall be provided by the Company.
16. Establish a clear understanding with the external auditors that they
are ultimately accountable to the board of directors and the
Committee and that the external auditors shall report directly to
the Committee.
17. Review the external auditors' proposed audit scope and approach,
including coordination of audit effort with the internal audit
staff, if any.
18. Review the results of the audit with management and the external
auditors, including any difficulties encountered. This review will
include any restrictions on the scope of the external auditors'
activities or on access to requested information, and any
significant disagreements with management.
19. Review the performance of and the independence of the external
auditors. In performing this review, the Committee will:
o At least annually, obtain, review and, as necessary, discuss with
the external auditors, a report prepared by the external auditors
describing: (a) the firm's internal quality-control procedures;
(b) any material issues raised by the most recent internal
quality-control review, or peer review, of the firm, or by
inquiry or investigation by governmental or professional
authorities, within the preceding five years, respecting one or
more independent audits carried out by the firm, and any steps
taken to deal with any such issues; and (c) to assess the
auditor's independence, all relationships between the firm and
the Company, consistent with Independence Standards Board
Standard 1;
o Take into account the opinions of Company management and the
internal audit staff, if any;
o Review and evaluate the lead partner of the external auditors;
and
o Present its conclusions regarding the external auditors to the
full board of directors.
20. At least annually, confirm with the external auditors that their
firm is in compliance with the partner rotation requirements
established by the SEC, and consider whether there should be regular
rotations of the external audit firm itself.
21. On a regular basis, meet separately with the external auditors to
discuss any matters that the Committee or the external audit firm
believes should be discussed privately.
A6
22. Review any management decision to seek a second opinion from
external auditors other than the Company's regular external auditors
with respect to any significant accounting issue.
COMPLIANCE
23. Review the effectiveness of the Company's system for monitoring
compliance with laws and regulations and the results of management's
investigation and follow-up (including disciplinary action) of any
instances of noncompliance.
24. Establish procedures for:
o the receipt, retention, and treatment of complaints received by
the Company regarding accounting, internal accounting controls or
auditing matters; and
o the confidential, anonymous submission by employees of the
Company of concerns regarding questionable accounting or auditing
matters.
25. Review the findings of any examinations by regulatory agencies, and
any auditor observations.
26. Consider and recommend to the board of directors for approval a code
of conduct applicable to all directors, officers and employees of
the Company; and ensure that such code includes an enforcement
mechanism. Review management's monitoring compliance with the
Company's code of conduct. No waiver of the code of conduct as
applied to any director or executive officer shall be authorized
without prior approval of the Committee. Periodically review the
Company's code of conduct and recommend any proposed changes to the
board of directors for approval.
27. Receive, retain and determine treatment of material violation of a
federal or state securities law, a material breach of fiduciary duty
arising under federal or state law, or a similar material violation
of any federal or state law that is reported to the Committee by an
attorney because the attorney reasonably believes that it would be
futile to report such material violation to the general counsel or
chief executive officer or the attorney reasonably believes that the
response of the general counsel or chief executive officer to his
report of such material violation was not appropriate or not timely.
28. Obtain regular updates from management and Company legal counsel
regarding compliance matters.
REPORTING RESPONSIBILITIES
29. Report to the full board of directors following meetings of the
Committee, and as otherwise requested by the board of directors,
regarding the Committee's actions and recommendations, if any.
A7
30. Foster an open avenue of communication between internal audit, if
any, the external auditors, and the full board of directors.
31. Report annually to the Company's stockholders, describing the
Committee's composition, responsibilities and how they were
discharged, and any other information required by rule, including
approval of non-audit services and recommendation to the board of
directors as to the inclusion of the Company's audited financial
statements in the Company's annual report on Form 10-K.
32. Review any other reports the Company issues related to Committee
responsibilities.
LEGAL AND TAX MATTERS
33. Discuss with Company management (including the general counsel) the
status of significant legal and tax matters that could have a
material impact on the Company's financial statements.
RISK MANAGEMENT
34. Discuss with Company management the Company's major policies with
respect to risk assessment and risk management.
35. Meet periodically with Company management to discuss the Company's
major risk exposures and the steps taken to insure appropriate
processes are in place to identify, manage and control business
risks associated with the Company's business objectives.
36. Discuss with Company management significant risk management
failures, if any, including management's response.
OTHER RESPONSIBILITIES
37. Review on an ongoing basis all transactions that would require
disclosure under SEC Regulation S-K, Item 404, and no such
transaction shall be authorized unless approved by the Committee.
38. Establish the policy for the Company's hiring of employees or former
employees of the external auditors who were engaged on the Company's
account.
39. Institute and oversee special investigations, as deemed necessary.
40. Review and assess the adequacy of this Committee charter annually,
request full board of director approval for proposed changes, and
ensure appropriate disclosure as may be required by applicable law
or regulation.
41. Confirm annually that all responsibilities outlined in this charter
have been carried out.
A8
42. Evaluate the Committee's and each individual member's performance at
least annually.
43. Perform any other activities consistent with this charter, the
Company's bylaws and governing law as the Committee or the board of
directors deems necessary or appropriate.
A9
CROSSROADS(TM)
CROSSROADS SYSTEMS, INC. VOTE BY MAIL
8300 N. MOPAC EXPRESSWAY MARK, SIGN AND DATE YOUR PROXY CARD AND
AUSTIN, TEXAS 78759 RETURN IT IN THE POSTAGE-PAID ENVELOPE
WE'VE PROVIDED OR RETURN TO CROSSROADS
SYSTEMS, INC. C/O ADP, 51 MERCEDES WAY,
EDGEWOOD, NY 11717.
AUTO DATA PROCESSING
INVESTOR COMM SERVICES
ATTENTION:
TEST PRINT
51 MERCEDES WAY
EDGEWOOD, NY
11717
123,456,789,012.00000
-------------
000000000000
-------------
A/C 1234567890123456789
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: [X]
CRSYS1 KEEP THIS PORTION FOR YOUR RECORDS
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
- --------------------------------------------------------------------------------
CROSSROADS SYSTEMS, INC.
02 0000000000 215377716498
1. TO ELECT THE FOLLOWING (2) NOMINEES AS DIRECTORS:
<Table>
Class III Directors to serve for a three-year FOR WITHHOLD FOR ALL
term ending at the 2007 annual meeting of ALL ALL EXCEPT
stockholders or until their successors are
duly elected and qualified: [ ] [ ] [ ]
01) Paul S. Zito
02) Rob Sims
To withhold authority to vote, mark "For All
Except" and write the nominee's number on the
line below.
-----------------------------------------------
VOTE ON PROPOSALS FOR AGAINST ABSTAIN
2. TO APPROVE THE AMENDMENTS TO THE 1999 EMPLOYEE [ ] [ ] [ ]
STOCK PURCHASE PLAN.
3. TO RATIFY THE APPOINTMENT OF KPMG LLP AS [ ] [ ] [ ]
INDEPENDENT AUDITORS FOR CROSSROADS FOR
THE FISCAL YEAR ENDING OCTOBER 31, 2004.
4. In accordance with the discretion of the proxy
holders, to act upon all matters incident to
the conduct of the meeting and upon other
matters as may properly come before the
Annual Meeting.
</Table>
The Board of Directors recommends a vote FOR both of the directors listed
above and a vote FOR the listed proposals. This Proxy, when properly executed,
will be voted as specified herein. IF NO SPECIFICATION IS MADE, THIS PROXY
WILL BE VOTED "FOR" THE ELECTION OF THE DIRECTORS LISTED ABOVE AND "FOR" THE
LISTED PROPOSALS.
IMPORTANT: Please sign as your name appears hereon. If shares are held jointly,
all holders must sign. When signing as attorney, executor, administrator,
trustee or guardian, please give your full title. If a corporation, please sign
in full corporate name by president or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
AUTO DATA PROCESSING
INVESTOR COMM SERVICES
ATTENTION:
TEST PRINT
51 MERCEDES WAY
EDGEWOOD, NY
11717
- -------------------------- ------------------------------ 123,456,789,012
22765D100
- -------------------------- ------------------------------ 22
Signature Date Signature Date
(PLEASE SIGN (Joint Owners)
WITHIN BOX)
P87136
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
CROSSROADS SYSTEMS, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF CROSSROADS SYSTEMS, INC.
The undersigned revokes all previous proxies, acknowledges receipt of the
Notice of the Annual Meeting of Stockholders (the "Annual Meeting") of
Crossroads Systems, Inc., a Delaware corporation ("Crossroads"), and the
related Proxy Statement dated January 29, 2004, and appoints Andrea Wenholz and
Robert Alvarez, and each of them, the Proxy of the undersigned, with full power
of substitution, to vote all shares of Common Stock of Crossroads which the
undersigned is entitled to vote, either on his or her own behalf of any entity
or entities, at the Annual Meeting to be held March 4, 2004 at our corporate
headquarters at 8300 N. MoPac Expressway, Austin, Texas at 9:00 a.m. Central
Standard Time, and at any adjournment or postponement thereof, with the same
force and effect as the undersigned might or could do if personally present at
the Annual Meeting. The shares represented by this Proxy shall be voted in the
manner set forth hereon.
(continued and to be signed on the reverse)