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.
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(Name of Registrant as Specified in Its Charter)
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(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)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(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:
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(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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(CROSSROADS LOGO)
CROSSROADS SYSTEMS, INC.
8300 N. MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
February 21, 2003
Dear Stockholder:
You are cordially invited to attend the 2003 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 27, 2003, at
9:00 a.m. Central Standard 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.
After careful consideration, our Board of Directors has unanimously approved the
proposal set forth in the Proxy Statement and recommends that you vote in favor
of the proposal and for both of the directors nominated for election to the
Crossroads Systems, Inc. Board of Directors.
You may vote your shares by telephone, by the Internet, or by signing, dating
and returning the enclosed proxy promptly in the accompanying reply envelope.
Telephone and Internet voting instructions can be found on the attached proxy
card. Representation of your shares at the meeting is very important.
Accordingly, whether or not you plan to attend the meeting, we urge you to
submit your proxy promptly by one of the methods offered. If you are able to
attend the Annual Meeting and wish to change your proxy vote, you may do so
simply by voting in person at the meeting.
We look forward to seeing you at the meeting.
Sincerely,
/s/ BRIAN R. SMITH
Brian R. Smith
Chairman of the Board, President
and Chief Executive Officer
[This page is intentionally left blank.]
CROSSROADS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 27, 2003
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 27, 2003,
at 9:00 a.m. Central Standard 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 II directors to serve until our 2006 Annual
Meeting of Stockholders or until their successors are duly
elected and qualified;
2. To ratify the appointment of KPMG LLP as independent auditors
for our company for the fiscal year ending October 31, 2003;
and
3. 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 27, 2003 are
entitled to notice of and to vote at the Annual Meeting. Our stock transfer
books will remain open between the record date and the date of the 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 vote your shares by telephone, by the
Internet, or by signing, dating and returning the enclosed proxy as promptly as
possible in the envelope enclosed for your convenience. 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 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,
/s/ ANDREA WENHOLZ
Andrea Wenholz
Chief Financial Officer and Secretary
Austin, Texas
February 21, 2003
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 27, 2003
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 27, 2003. 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 February 21, 2003, 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 27, 2003, the record date for
determination of stockholders entitled to notice of and to vote at the Annual
Meeting, we had 24,859,408 outstanding shares of our common stock and no
outstanding preferred stock. Each stockholder is entitled to one vote for each
share of common stock held by such stockholder on January 27, 2003. Stockholders
may not cumulate votes in the election of directors.
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. Abstentions and broker non-votes are counted
as present for purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions will be counted towards the tabulations
of votes cast on proposals presented to the stockholders and will have the same
effect as negative votes, whereas broker non-votes will not be counted for
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 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 approval of
Proposal Two described in the accompanying notice and proxy statement. 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, telegram or
other 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.
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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 2004 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 Secretary, not later than October 25, 2003, the date which is 120 days prior
to February 21, 2004. With respect to any stockholder proposal not submitted
pursuant to Rule 14a-8 and unless notice is received by us in the manner
specified in the previous sentence, persons acting as proxies shall have
discretionary authority to vote against any proposal presented at our 2004
Annual Meeting of Stockholders. 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.
2
MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE: ELECTION OF DIRECTORS
GENERAL
Our certificate of incorporation provides that our board of directors be
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 II directors whose terms will expire at our 2006 Annual
Meeting. Our board currently consists of five 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 II DIRECTORS WHOSE TERMS EXPIRE AT THE 2006 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:
<Table>
<Caption>
PROPOSED CLASS
NAME AGE CURRENT POSITION OF DIRECTOR
- ---- --- ---------------- --------------
Richard D. Eyestone 56 Director Class II
William P. Wood 47 Director Class II
</Table>
NOMINEES FOR CLASS II DIRECTORS
RICHARD D. EYESTONE, 56, has served as a member of our board of directors since
May 1999. From 1993 to September 1996, Mr. Eyestone was employed at Bay Networks
as Vice President of Sales and, from September 1996 to September 1998, as Senior
Vice President of Market and Product Management. Mr. Eyestone currently serves
on the board of directors of eSoft, Inc. Mr. Eyestone holds a B.S.E. in
education from Drake University and an M.B.A. from the University of Iowa.
WILLIAM P. WOOD, 47, has served as a member of our board of directors since
December 1996. Since 1984, Mr. Wood has been a general partner and, for certain
funds created since 1996, a special limited partner with Austin Ventures, a
venture capital firm. Since 1996, Mr. Wood has also served as the sole general
partner of Silverton Partners, an investment partnership. Mr. Wood 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.
OTHER DIRECTORS
Set forth below is information concerning our other directors whose term of
office continues after this Annual Meeting.
Class III Director Whose Term Expires at the 2004 Annual Meeting of
Stockholders.
PAUL S. ZITO, 47, has served as a member of our board of directors since April
2000. 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 Computer Corporation 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.
3
Class I Directors Whose Terms Expire at the 2005 Annual Meeting of Stockholders.
DAVID L. RIEGEL, 64, has served as a member of our board of directors since
November 1997. Mr. Riegel is the President and Chief Executive Officer of
NANOTECHNOLGIES, Inc. From November 1992 to September 1997, Mr. Riegel served as
Chief Operating Officer of Exabyte Corporation. Mr. Riegel also served on the
board of directors of Bolder Technologies Corporation, an energy technology
company, from May 1992 to June 2000. Mr. Riegel holds a B.S.E.E. from Purdue
University.
BRIAN R. SMITH, 37, is our Chairman of the Board, President and Chief Executive
Officer. Mr. Smith, our co-founder, has served as our Chairman of the Board
since our inception in April 1995, as Chief Executive Officer from our inception
until October 2001 and from May 2002 to the present, and as our President from
our inception to October 1997 and from May 2002 to the present. From November
2001 to December 2002, Mr. Smith served as managing director of Convergent
Investors, a venture capital firm. From October 1994 to April 1995, Mr. Smith
was President of a consulting services company. From January 1985 to October
1994, Mr. Smith held various development and management positions at IBM. Mr.
Smith 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.
BOARD COMMITTEES AND MEETINGS
During the fiscal year ended October 31, 2002, our board of directors held
eight meetings and acted by unanimous written consent one time. The board of
directors has an audit committee and a compensation committee. Each director
attended or participated in 75% or more of the aggregate of (i) the total number
of meetings of the board of directors and (ii) the total number of meetings held
by all committees of the board on which such director served during fiscal 2002.
Audit Committee. The audit committee reports to the board of directors with
regard to the selection of our independent auditors, the scope of our annual
audits, fees to be paid to the auditors, the performance of our independent
auditors, compliance with our accounting and financial policies, and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Riegel, Wood
and Zito. Mr. Zito serves as the Chairman of the audit committee. The audit
committee held six meetings during fiscal 2002. The board of directors has
adopted a written charter for the audit committee and has determined that all
members of the audit committee are "independent" as that term is defined in Rule
4200(a)(15) of the listing standards of the National Association of Securities
Dealers.
Compensation Committee. The compensation committee reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our directors, executive officers and certain
other employees. In addition, the compensation committee reviews bonus and stock
compensation arrangements for all of our other employees. The compensation
committee also administers our stock option and stock purchase plans. The
members of the compensation committee are Messrs. Eyestone and Zito. The
compensation committee held eleven meetings during fiscal 2002.
DIRECTOR COMPENSATION AND INDEMNIFICATION ARRANGEMENTS
Beginning in fiscal 2003, non-employee members of our board of directors
who serve on a committee currently receive an annual retainer of $24,000, paid
in 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. Additionally, our directors receive reimbursement
for reasonable expenses incurred in connection with their attendance at board
and committee meetings. The board of directors approved the annual cash
compensation due to the increasing burdens and time commitment placed on
non-employee members of the board of directors, 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 this program annually.
Non-employee directors receive option grants at periodic intervals under
the automatic option grant program of our 1999 Stock Incentive Plan.
Non-employee and employee directors are also eligible to receive option grants
under the discretionary option grant program of the 1999 plan. Under the
automatic option grant program, each individual who first becomes a non-employee
board member receives an option grant to purchase 15,000 shares of common stock
on the date such individual joins the board. Beginning in fiscal 2003, the board
plans to grant an
4
additional option under our discretionary option grant program to purchase
25,000 shares of common stock at the time a new individual first become a
non-employee board member, for a total grant of 40,000 options at such time as a
non-employee director joins our board. In addition, on the date of each annual
stockholders meeting, each non-employee board member who continues to serve as a
non-employee board member 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. Under this program, on the date of our 2002 Annual Meeting of
stockholders each of Messrs. Eyestone, Riegel, Smith, Wood and Zito received an
option grant to purchase 5,000 shares of common stock at an exercise price of
$3.54 per share. Beginning in fiscal 2003, the board plans to grant an
additional option under our discretionary option grant program to purchase an
additional 15,000 shares of common stock on the date of our annual meeting to
each non-employee board member who continues to serve as a non-employee member
of our board of directors. Therefore. beginning in fiscal 2003 the option grant
on the date of our annual meeting for continuing non-employee members of our
board of directors will be an aggregate of 20,000 shares.
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 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.
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.
5
PROPOSAL TWO: RATIFICATION OF INDEPENDENT AUDITORS
The audit committee of our board of directors appointed the firm of KPMG
LLP, as the Company's independent auditors for the fiscal year ended October 31,
2003, subject to KPMG LLP's completion of their customary client acceptance
procedures. 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.
PricewaterhouseCoopers LLP served in that capacity for the fiscal year ending
October 31, 2002.
In the event the stockholders fail to ratify the appointment, our audit
committee will reconsider its selection. Even if the selection 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 the audit committee
believes that such a change would be in the best interests of the company and
our stockholders.
During fiscal 2002, KPMG LLP did not provide any services to us. A summary
of the fees billed to us by PricewaterhouseCoopers LLP is provided below.
Audit Fees. PricewaterhouseCoopers LLP has billed us $153,918, in the
aggregate, for professional services for the audit of our annual financial
statements for fiscal 2002 and for the review of our interim financial
statements which are included in our Quarterly Reports on Form 10-Q for fiscal
2002.
Financial Information Systems Design and Implementation Fees. We did not
engage PricewaterhouseCoopers LLP to provide advice to us regarding financial
information systems design and implementation, as described in Paragraph
(c)(4)(ii) of Rule 2-01 of Regulation S-X, during fiscal 2002.
All Other Fees. PricewaterhouseCoopers LLP has billed us $236,285 in the
aggregate, for professional services rendered for all services other than those
services covered in the sections captioned "Audit Fees" and "Financial
Information Systems Design and Implementation Fees" for fiscal 2002. These other
services include (i) $126,736 in tax related fees and (ii) $109,549 for other
accounting, auditing and tax services.
Representatives of both KPMG LLP and PricewaterhouseCoopers LLP are
expected to be present at the Annual Meeting. They will have the opportunity to
make a statement if he or she desires to do so and will also be available to
respond to appropriate questions.
RECOMMENDATION OF THE BOARD OF DIRECTORS
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, 2003.
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.
6
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, 2002, by:
o each person known by us to be a beneficial owners of five percent (5%)
or more of our common stock;
o each current director (both of our director nominees is a current
director);
o each executive officer named in the summary compensation table of the
Executive Compensation and Other Information section of this proxy
statement; and
o 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, 2002. 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.
<Table>
<Caption>
PERCENTAGE
OF
OUTSTANDING
SHARES SHARES
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER(1) OWNED OWNED(2)
------------------- ------------ ------------
Executive Officers and Directors:
Brian R. Smith(3)......................................................... 3,821,500 15.4%
Robert C. Sims(4) ........................................................ 147,948 *
Reagan Y. Sakai(5)........................................................ 494,351 2.0%
Richard D. Eyestone(6).................................................... 66,400 *
David L. Riegel(7)........................................................ 52,400 *
William P. Wood(8)........................................................ 2,833,094 11.4%
Paul S. Zito(9)........................................................... 52,812 *
Larry Sanders(10)......................................................... 741,250 3.0%
Allen R. Sockwell(11) .................................................... 131,635 *
All current directors and executive officers as a group (7 persons)(12)... 7,468,505 30.0%
Other 5% Stockholders:
Entities deemed to be affiliated with Austin Ventures(13) ................ 2,711,740 10.9%
</Table>
* 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 24,859,408 shares of common stock
outstanding on January 27, 2003. Shares of common stock subject to
stock options which are currently exercisable or will become
exercisable within 60 days after December 31, 2002 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 450,000 shares issuable upon the exercise of stock options and
includes 132,000 shares held in trust for the benefit of Mr. Smith's
children as to which Mr. Smith disclaims beneficial ownership.
(4) Includes 119,872 shares of common stock issuable upon the exercise of
stock options.
(5) Includes 402,528 shares of common stock issuable upon exercise of stock
options and share right awards. Mr. Sakai served as our Vice President
and Chief Financial Officer until January 6, 2003.
7
(6) Includes 5,000 shares issuable upon the exercise of stock options. Of
the shares indicated as owned by Mr. Eyestone, 5,500 shares are held by
the Echo Family Limited Partnership, of which Mr. Eyestone is the
general partner.
(7) Includes 5,000 shares issuable upon the exercise of stock options.
(8) 2,420,329 shares of common stock indicated as owned by Mr. Wood are
included due to his affiliation with funds affiliated with Austin
Ventures. Mr. Wood is a general partner of AV Partners IV, L.P., the
general partner of (a) Austin Ventures IV-A, L.P. and (b) Austin
Ventures IV-B, L.P. Mr. Wood disclaims beneficial ownership of the
shares held by Austin Ventures IV-A, L.P. and Austin Ventures IV-B,
L.P., except to the extent of his pecuniary interest in such shares
arising from his general partnership interest in AV Partners IV, L.P.
Mr. Wood is a special limited partner of AV Partners VI, L.P., the
general partner of Austin Ventures VI, L.P. and Austin Ventures
Affiliates Fund VI, L.P., and as such does not have beneficial
ownership of any of the 300,000 shares owned by Austin Ventures VI,
L.P. or Austin Ventures Affiliates Fund VI, L.P. 396,888 shares
indicated as owned by Mr. Wood are included due to his affiliation with
Silverton Partners, L.P., of which Mr. Wood is the general partner.
Includes 5,000 shares of common stock issuable upon the exercise of
stock options. Mr. Wood's address is c/o Austin Ventures, 300 West 6th
Street, Suite 2300, Austin, Texas 78701.
(9) Includes 22,812 shares of common stock issuable upon exercise of
options.
(10) Based on Mr. Sanders share ownership on May 7, 2002. Includes 706,250
shares issuable upon the exercise of stock options. Includes 25,000
shares of common stock held by the L and J Sanders Revocable Trust of
which Mr. Sanders and his spouse are the trustees. Mr. Sanders resigned
as our President and Chief Executive Officer on May 7, 2002.
(11) All shares of common stock indicated as owned by Mr. Sockwell are
issuable upon exercise of stock options. Mr. Sockwell resigned as our
Vice President of Human Resources on June 28, 2002.
(12) Includes shares of common stock beneficially owned by Reagan Y. Sakai,
our Vice President and Chief Financial officer on December 31, 2002.
Mr. Sakai resigned from our service on January 6, 2003. Andrea Wenholz
is our current Vice President and Chief Financial Officer. Ms. Wenholz
did not beneficially own any shares of our common stock as of December
31, 2002.
(13) Pursuant to written verification dated as of December 31, 2002,
entities deemed to be affiliated with Austin Ventures have sole voting
power and sole dispositive power over an aggregate of 2,711,740 shares
of common stock as of December 31, 2002, in the following amounts:
Austin Ventures IV-A, L.P. 778,487
Austin Ventures IV-B, L.P. 1,633,253
Austin Ventures Affiliates Fund VI, 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 be the
beneficial owner of 2,411,740 shares of our common stock. AV Partners VI, L.P.
is the general partner of both Austin Ventures Affiliates Fund VI, L.P. and
Austin Ventures VI, L.P., and, as such, may be deemed to be the beneficial owner
of 300,000 shares of our common stock.
8
CERTAIN TRANSACTIONS
Registration rights. Some of our stockholders, including Brian R. Smith,
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 executive officers and directors. For more
information regarding the grant of stock options to executive officers and
directors, please see "Director Compensation and Indemnification Arrangements"
above and "Option Grants in Fiscal 2002" below.
Loan to directors and officers. In May 1999, we made a loan to our then
Vice President Chief Financial Officer, Reagan Y. Sakai, in the amount of
$99,999 to allow Mr. Sakai to exercise certain of his outstanding stock options.
Mr. Sakai delivered a full-recourse promissory note to us with respect to his
loan. The promissory note was secured by the purchased shares and accrued
interest at a rate of 7.0% per year, compounded semi-annually. When Mr. Sakai
resigned from our service in January 2003, he repaid the promissory note in
full.
In October 1999, we loaned our Vice President of Human Resources, Allen R.
Sockwell, $100,000 in connection with certain relocation expenses in exchange
for a full-recourse promissory note which accrued interest at a rate of 7.0% per
year, compounded semi-annually. When Mr. Sockwell left our service in June 2002,
we forgave all remaining outstanding principal and interest, an aggregate amount
of $119,825, under the note.
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.
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 Plan
with our former Chief Financial Officer, Reagan Y. Sakai, and our former Vice
President of Human Resources, Allen E. Sockwell. Pursuant to the terms of the
plans, to the extent these executive officers are terminated 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 June 2002, we entered into an agreement with our
former Vice President of Human Resources, Allen E. Sockwell, regarding the
termination of his employment with us. We agreed to pay Mr. Sockwell an
aggregate of $195,000 which will be paid monthly through June 2003, accelerate
the vesting of 84,552 options to purchase common stock and restricted shares of
common stock held by Mr. Sockwell and extend the exercisability of all vested
options held by Mr. Sockwell for a period of one year. In exchange for this, Mr.
Sockwell agreed to release us from any and all claims he may make against us.
9
In July 2002, we entered into a Settlement Agreement and Mutual Release
with our former President and Chief Executive Officer, Larry Sanders, regarding
the termination of his employment with us. We agreed to pay Mr. Sanders
$373,750, pay Mr. Sanders a bonus to which he was entitled of $231,000,
accelerate the vesting of 331,250 options to purchase common stock held by Mr.
Sanders, and extend the time period in which Mr. Sanders may exercise these
options and other vested options. In exchange for this, Mr. Sanders agreed to
release us from any and all claims he may make against us.
Stock bonus incentive program. In November 2001, we granted share right
awards under our 1999 Stock Incentive Plan to Robert C. Sims, Reagan Y. Sakai
and Allen E. Sockwell of up to 24,129, 26,258 and 27,677 shares of common stock,
respectively. The share right awards are exercisable when they vest for no
additional consideration. The share right 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 in accordance with the original agreements
if Crossroads accomplishes specified pre-defined performance goals. Upon Mr.
Sockwell's resignation in June 2002, we accelerated the vesting of his share
right awards.
10
AUDIT COMMITTEE REPORT
The Audit Committee reports as follows with respect to the audit of our
fiscal 2002 audited consolidated financial statements.
Management is responsible for the company's internal controls and the
financial reporting process. The independent accountants 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 Committee's responsibility is to monitor and oversee these
processes.
In this context, the Committee has met and held discussions with management
and the independent accountants. Management represented to the Committee that
the company's consolidated financial statements were prepared in accordance with
generally accepted accounting principles, and the Committee has reviewed and
discussed the consolidated financial statements with management and the
independent accountants. The Committee discussed with the independent
accountants matters required to be discussed by Statement on Auditing Standards
No. 61 (Communication with Audit Committees).
The company's independent accountants also provided to the Committee the
written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees), and the Committee discussed
with the independent accountants that firm's independence.
Based upon Committee's discussion with management and the independent
accountants and the Committee's review of the representation of management and
the report of the independent accountants to the Committee, the 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, 2002 filed with the Securities and Exchange Commission.
Paul S. Zito (Chair)
David L. Riegel
William P. Wood
11
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 and both of the two other
most highly compensated executive officers whose salary and bonus for fiscal
2002 was in excess of $100,000, for services rendered in all capacities to the
company and our subsidiaries for the fiscal years ended October 31, 2000, 2001
and 2002. In addition, Mr. Sanders is included in the table because he served as
our President and Chief Executive Officer during fiscal 2002, although he
resigned in May 2002. Mr. Sockwell is also included in the table because he
would have been among the four most highly compensated executive officers of the
Company on the last day of the 2002 fiscal year had he not resigned earlier
during the year. No other executive officer who would have otherwise been
includible in such table on the basis of salary and bonus earned for fiscal 2002
has been excluded by reason of his or her termination of employment or change in
executive status during that year.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------- ----------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
FISCAL SALARY BONUS COMPENSATION AWARD(s) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
--------------------------- ------ ------- ------- ------------ ---------- ---------- ------------
Brian R. Smith(1) 2002 6,417 -- -- -- 305,000 --
Chief Executive Officer, President 2001 297,500 128,700 -- -- 300,000 --
and Chairman of the Board 2000 200,000 12,000 -- -- -- --
Reagan Y. Sakai(2) 2002 182,154 -- -- 81,400(3) 117,000 3,000(4)
Vice President, Chief 2001 181,250 48,100 29,706(5) -- 40,000 --
Financial Officer, Secretary 2000 155,000 13,500 -- -- 100,000 --
and Treasurer
Robert C. Sims(6) 2002 167,384 300 -- 74,800(7) 124,000 1,400(8)
Vice President and Chief 2001 158,333 51,000 -- -- 40,000 --
Operating Officer 2000 112,333 19,500 -- -- 70,000 --
Larry D. Sanders(9) 2002 159,206 231,000 -- -- 500,000 376,750(10)
Former President and Chief 2001 322,500 148,500 -- -- 500,000 --
Executive Officer 2000 201,154 200,000 344,828(11) -- 500,000 --
Allen E. Sockwell(12) 2002 130,000 -- -- 85,799(13) 20,000 186,325(14)
Former Vice President of 2001 191,250 58,500 -- 50,000 --
Human Resources 2000 180,000 27,000 22,409(15) 125,000 --
</Table>
(1) Mr. Smith served as our Chief Executive Officer until October 31, 2001.
On May 2002, Mr. Smith rejoined us as our President and Chief Executive
Officer. Mr. Smith has served as our Chairman of the Board since our
inception.
(2) Mr. Sakai resigned as our Vice President, Chief Financial Officer,
Secretary and Treasurer in January 2003.
(3) Value of share right 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. 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.
(4) Represents amounts we paid in connection with professional services
related to year-end tax planning and tax return preparation.
(5) Represents amounts we paid in connection with the reimbursement of
moving expenses for Mr. Sakai.
(6) Mr. Sims was named our Chief Operating Officer in May 2002.
(7) Value of share right 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, the
value of the share right award was $12,305. Dividends which are paid by
us on outstanding shares of our common stock will not be payable on the
share right award.
(8) Represents amounts we paid in connection with professional services
related to year-end tax planning and tax return preparation.
12
(9) Mr. Sanders joined us as our President and Chief Operating Officer in
February 2000. He served as our President and Chief Executive Officer
from November 2001 through May 2002.
(10) Represents $373,750 in severance amount paid in connection with
Mr. Sanders leaving our service and $3,000 we paid in connection with
professional services related to year-end tax planning and tax return
preparation.
(11) Represents amounts we paid in connection with the reimbursement of
moving expenses for Mr. Sanders.
(12) Mr. Sockwell served as our Vice President of Human Resources until June
2002.
(13) Value of share right award is based on the closing price of our common
stock on November 1, 2001, the date of grant. Represents share right
award of 27,677 shares of common stock granted to Mr. Sockwell. On
October 31, 2002, the value of the share right award was $14,115.
Dividends which are paid by us on outstanding shares of our common
stock will not be payable on the share right award. Upon Mr. Sockwell's
resignation in June 2002, the vesting of the share right award was
fully accelerated.
(14) Includes $119,825 worth of a promissory note which we forgave in
connection with Mr. Sockwell leaving our service; $65,000 paid as
severance in connection with Mr. Sockwell leaving our service; and
$1,500 we paid in connection with professional services related to
year-end financial planning and tax return preparation. Mr. Sockwell
is entitled to an additional $130,000 in severance amounts which will
be paid in fiscal 2003.
(15) Represents amounts we paid in connection with reimbursement of moving
expenses for Mr. Sockwell.
13
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during fiscal 2002 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 3,306,837 shares of common stock granted during fiscal 2002. The
following table sets forth information concerning the individual grants of stock
options to each of our named executive officers in fiscal 2002.
OPTION GRANTS IN FISCAL 2002
<Table>
<Caption>
INDIVIDUAL GRANTS
-------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF OF ASSUMED ANNUAL RATES
SECURITIES TOTAL OF STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION ----------------------------
NAME GRANTED(#)(1) FISCAL 2002(%) PER SHARE DATE 5%($) 10%($)
- ---- ------------- --------------- --------- ---------- ------- ---------
Brian R. Smith 5,000(2) * $3.54 3/11/2012 11,131 28,209
150,000 4.5% $2.51 5/7/2012 236,779 600,044
150,000 4.5% $0.71 8/7/2012 66,977 169,733
Robert C. Sims 24,000 * $5.57 1/31/2012 84,071 213,051
100,000 3.0% $1.55 5/31/2012 97,479 247,030
Reagan Y. Sakai 17,000 * $5.57 1/31/2012 59,550 150,911
100,000 3.0% $1.55 5/31/2012 97,479 247,030
Larry D. Sanders 500,000 15.1% $2.65 1/2/2012 833,285 2,111,709
Allen E. Sockwell 20,000 * $5.57 1/31/2012 70,059 177,543
</Table>
- ----------
* Less than one percent.
(1) Unless otherwise noted, options vest over a four-year period. Each option
expires on the earlier of ten years from the date of grant or within a
specified period following termination of the optionee's employment with
us.
(2) This option was granted to Mr. Smith in connection with his service as a
non-employee member of our board of directors. It vests on the one year
anniversary of the date of grant.
14
FISCAL YEAR-END OPTION VALUES
The following table provides information about stock options exercised in
fiscal 2002 and options held as of October 31, 2002 by each of our executive
officers named in the Summary Compensation Table. No stock appreciation rights
were exercised during fiscal 2002 and none were outstanding at October 31, 2002.
Actual gains on exercise, if any, will depend on the value of our common stock
on the date on which the shares are sold.
FISCAL 2002 OPTION VALUES
<Table>
<Caption>
NUMBER OF
SHARES SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON EXERCISE(#) REALIZED($)(1) OCTOBER 31, 2002(#)(2) OCTOBER 31, 2002($)(2)(3)
-------------- -------------- --------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
Brian R. Smith........ -- -- 300,000 5,000 -- --
Robert C. Sims........ -- -- 91,080 152,294 -- --
Reagan Y. Sakai....... -- -- 119,270 165,294 -- --
Larry D. Sanders...... -- -- 706,250 -- -- --
Allen E. Sockwell..... -- -- 103,958 -- -- --
</Table>
- ----------
(1) The value realized of shares acquired on exercise was determined by
subtracting the exercise price from the fair market value of the common
stock on the exercise date multiplied by the number of shares acquired on
exercise.
(2) Options granted under our 1996 Stock Option/Stock Issuance Plan, the
predecessor to our 1999 Stock Incentive Plan, are immediately exercisable.
(3) Value is determined by subtracting the exercise price from the fair market
value of our common stock at October 31, 2002 ($0.51 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 our agreements described in "Certain Transactions" 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:
o 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.
o 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.
o 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.
o 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
15
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 our company.
16
BOARD 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 Crossroads' performance and the
value created for Crossroads' stockholders. In addition, the compensation
programs should support the short-term and long-term strategic goals and values
of the company and should reward individual contribution to Crossroads' success.
Crossroads is engaged in a very competitive industry, and the company's success
depends upon its ability to attract and retain qualified executives through the
competitive compensation packages it offers to such individuals.
General Compensation Policy. The compensation committee's policy is to
provide the company's executive officers with compensation opportunities which
are based upon their personal performance, the financial performance of the
company 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 the company's 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
Crossroads' executive officers and its stockholders. As an officer's level of
responsibility increases, a greater proportion of his or her total compensation
will be dependent upon the company's financial performance and stock price
appreciation rather than base salary.
Factors. The principal factors that were taken into account in establishing
each executive officer's compensation package for fiscal 2002 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 its industry. The base salary for each
officer reflects the salary levels for comparable positions in the published
survey and the comparative group of companies, 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 2002, 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 2002, the Company entered into
agreements with certain of its executive officers, Robert C. Sims, Reagan Y.
Sakai and Allen E. Sockwell, to grant share right awards of up to 24,129, 26,258
and 27,677 shares of common stock, respectively, for no consideration. The share
right 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 in
accordance with the original agreements if Crossroads accomplishes specified
pre-defined performance goals. In setting these share right award amounts, the
compensation committee looked to tie certain entity 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. In connection
with Mr. Sander's resignation from his position as our President and Chief
Executive Officer in fiscal 2002, the compensation committee paid Mr. Sanders an
bonus amount of $231,000 to which he would have been entitled had he remained in
our service. Based on the foregoing factors and the company's performance for
fiscal year 2002, no stock or cash bonuses were awarded to the executive
officers named in the Summary Compensation Table, other than Mr. Sanders.
17
Long-Term Incentives. Generally, stock option grants are made annually by
the compensation committee to each of the company's 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 the company's
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 the company 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 the company, 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 Larry
Sanders and Brian R. Smith, both of whom served in the capacity of Chief
Executive Officer in fiscal 2002, the compensation committee has taken into
consideration the 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 Crossroads' performance and
stock price appreciation for a significant percentage of his 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. Crossroads' 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 Crossroads' executive officers
for fiscal 2002 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 the company's executive officers will exceed that
limit. Because it is unlikely that the cash compensation payable to any of the
company's 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
the company's 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 the company's performance and the interests of Crossroads'
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 (Chair)
Paul S. Zito
18
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of October 31, 2002 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans.
<Table>
<Caption>
A B C
-------------------- ------------------- -------------------------
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES FUTURE ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED AVERAGE EQUITY COMPENSATION PLANS
EXERCISE OF EXERCISE PRICE OF (EXCLUDING SECURITIES
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS REFLECTED IN COLUMN A
------------- -------------------- ------------------- -------------------------
EQUITY COMPENSATION PLANS 5,389,385(2) $5.64 2,155,688(3)
APPROVED BY STOCKHOLDERS(1)
EQUITY COMPENSATION PLANS -- -- --
NOT APPROVED BY STOCKHOLDERS
TOTAL 5,389,385(2) $ 5.64 2,155,688(3)
</Table>
(1) Consists of the 1996 Stock Option/Stock Issuance Plan, 1999 Stock Incentive
Plan and the Employee Stock Purchase Plan.
(2) Excludes purchase rights accruing under the Company's Employee Stock
Purchase Plan (the "Purchase Plan") which has a shareholder approved
reserve of 700,000 shares. Under the Purchase Plan, 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
share right awards issued to our employees pursuant to our 1999 Stock
Incentive Plan.
(3) Consists of shares available for future issuance under the Purchase Plan
and the 1999 Stock Incentive Plan. As of October 31, 2002, an aggregate of
312,624 shares of Common Stock were available for issuance under the
Purchase Plan and 1,843,064 shares of Common Stock were available for
issuance under the 1999 Stock Incentive Plan.
19
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.
CROSSROADS SYSTEMS, INC
<Table>
<Caption>
Cumulative Total Return
------------------------------------------------------------
10/20/99 10/99 1/00 4/00 7/00 10/00 1/01
-------- ------ ------ ------ ------ ------ -----
CROSSROADS SYSTEMS, INC. 100.00 395.14 404.17 392.36 25.35 38.54 53.13
NASDAQ STOCK MARKET (U.S.) 100.00 106.45 140.24 137.56 134.51 120.13 98.25
NASDAQ COMPUTER MANUFACTURER 100.00 105.57 141.79 163.26 160.87 148.29 98.85
<Caption>
Cumulative Total Return
---------------------------------------------------------
4/01 7/01 10/01 1/02 4/02 7/02 10/02
----- ----- ----- ----- ----- ----- -----
CROSSROADS SYSTEMS, INC. 34.28 14.72 17.22 30.94 17.27 4.61 2.83
NASDAQ STOCK MARKET (U.S.) 75.16 72.19 60.36 69.00 60.41 47.72 47.89
NASDAQ COMPUTER MANUFACTURER 66.60 61.97 47.73 56.83 49.23 38.43 39.66
</Table>
* $100 invested on 10/20/99 in stock or index-
including reinvestment of dividends.
Fiscal year ending October 31.
(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, 2002.
(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.
20
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 2002
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 2002, we believe that all
reporting requirements under Section 16(a) for fiscal 2002 were met in a timely
manner by our directors, executive officers and greater than ten percent
beneficial owners.
ANNUAL REPORT
A copy of our Annual Report to Stockholders for fiscal 2002 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 29, 2003, which we amended on January 31, 2003.
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: February 21, 2003
21
CROSSROADS(TM)
CROSSROADS SYSTEMS, INC. VOTE BY MAIL
8300 N. MOPAC EXPRESSWAY Mark, sign and date your proxy card and return
AUSTIN, TEXAS 78759 it in the postage-paid envelope we've provided
or return to Crossroads Systems, Inc., c/o ADP,
51 Mercedes Way, Edgewood, NY 11717.
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS:
CRS501 KEEP THIS PORTION FOR YOUR RECORDS
- --------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
<Table>
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CROSSROADS SYSTEMS, INC.
1. TO ELECT THE FOLLOWING (2) NOMINEES AS DIRECTORS:
Class II Directors to serve for a three-year term
ending at the 2005 annual meeting of stockholders
or until their successors are duly elected and For Withhold For All To withhold authority to vote, mark
qualified: All All Except "For All Except" and write the
nominee's number on the line below.
01) Richard D. Eyestone [ ] [ ] [ ]
02) William P. Wood -----------------------------------
VOTE ON PROPOSAL For Against Abstain
2. TO RATIFY THE APPOINTMENT OF KPMG LLP AS INDEPENDENT AUDITORS FOR CROSSROADS FOR THE [ ] [ ] [ ]
FISCAL YEAR ENDING OCTOBER 31, 2003.
3. 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.
The Board of Directors recommends a vote FOR both of the directors listed above
and a vote FOR the listed proposal. This Proxy, when properly executed, will be voted
as specified hereon. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE
ELECTION OF THE DIRECTORS LISTED ABOVE AND "FOR" THE LISTED PROPOSAL.
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.
HOUSEHOLDING ELECTION
MARK "FOR" TO ENROLL THIS ACCOUNT TO RECEIVE CERTAIN FUTURE INVESTOR
COMMUNICATIONS IN A SINGLE PACKAGE PER HOUSEHOLD. MARK "AGAINST"
IF YOU DO NOT WANT TO PARTICIPATE. SEE NOTICE ON THE REVERSE SIDE.
TO CHANGE YOUR ELECTION IN THE FUTURE, CALL 1-800-542-1061.
For Against
HOUSEHOLDING ELECTION --> [ ] [ ]
[ ][ ] [ ][ ]
Signature (PLEASE SIGN WITHIN BOX) Date Signature (Joint Owners) Date
- -----------------------------------------------------------------------------------------------------------------------------------
</Table>
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 February 21, 2003, 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 or on
behalf of any entity or entities, at the Annual Meeting to be held March 27,
2003 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)