SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[_] Definitive Additional Materials by Rule 14a-6(e)(2))
[_] Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 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)
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statement number, or the form or schedule and the date of its filing.
1) Amount previously paid:
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[LOGO] CROSSROADS(TM)
CROSSROADS SYSTEMS, INC.
8300 N. MoPac Expressway
Austin, Texas 78759
January 19, 2001
Dear Stockholder:
You are cordially invited to attend the 2001 Annual Meeting of Stockholders
of Crossroads Systems, Inc., which will be held at The Hyatt Regency Hotel, 208
Barton Springs Road, Austin, Texas 78704 on Friday, March 2, 2001, 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 proposals set forth in the Proxy Statement and recommends that you
vote in favor of each such proposal and for each 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
Chief Executive Officer
CROSSROADS SYSTEMS, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH 2, 2001
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 Friday, March
2, 2001, at 9:00 a.m. Central Standard Time, at The Hyatt Regency Hotel, 208
Barton Springs Road, Austin, Texas 78704, for the following purposes, as more
fully described in the Proxy Statement accompanying this Notice:
1. To elect two Class I directors, two Class II directors and two Class
III directors to serve until our 2002, 2003 and 2004 annual meetings
of stockholders, respectively, or until their successors are duly
elected and qualified;
2. To approve an amendment to our 1999 Stock Incentive Plan to increase
the number of shares of our common stock authorized to be issued under
the plan by 1,000,000 shares and to amend the 1999 plan to increase
the amount the share reserve under the plan which will increase on the
first trading day of each calendar year, beginning with calendar year
2002, from two percent (2%) of the shares of common stock outstanding
on the last trading day of the immediately preceding calendar year
(subject to a maximum annual increase of 500,000 shares) to four
percent (4%) of such outstanding shares (subject to a maximum annual
increase of 1,000,000 shares).
3. To ratify the appointment of PricewaterhouseCoopers LLP as independent
auditors for our company for the fiscal year ending October 31, 2001;
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 2, 2001 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/ Reagan Y. Sakai
Reagan Y. Sakai
Secretary
Austin, Texas
January 19, 2001
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
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Proxy Statement
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FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 2, 2001
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 March 2, 2001. The annual meeting will be held at
9:00 a.m. Central Standard Time at The Hyatt Regency, 208 Barton Springs Rd.,
Austin, Texas 78704. These proxy solicitation materials were mailed on or about
January 19, 2001, 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 2, 2001, the record date for
determination of stockholders entitled to notice of and to vote at the annual
meeting, we had outstanding 27,788,352 shares of our common stock and no shares
of our preferred stock. Each stockholder is entitled to one vote for each share
of common stock held by such stockholder on January 2, 2001. 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 director 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 Proposals 2 and 3 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.
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 2002 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 September 21, 2001, the date which is 120 days
prior to January 19, 2002. 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 2002
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.
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MATTERS TO BE CONSIDERED AT ANNUAL MEETING
PROPOSAL ONE: ELECTION OF DIRECTORS
General
Our certificate of incorporation provides that at our first annual meeting
of stockholders following the closing of our initial public offering, our board
of directors will be divided into three classes of directors, as nearly equal in
size as practicable, and each of which will serve staggered three-year terms or
until his or her successor has been duly elected and qualified:
o Class I, whose term will expire at our next annual meeting;
o Class II, whose term will expire at our annual meeting to be held in
2003; and
o Class III, whose term will expire at our annual meeting to be held in
2004.
As this is our first annual meeting of stockholders following our initial
public offering in October 1999, at this annual meeting, we will be electing two
Class I directors, two Class II directors, and two Class III directors. Our
board currently consists of six persons. The nominees listed below are our
current directors.
Each nominee for election has 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 Director
The following table sets for the name, age and current position of each
person who is a nominee for election as one of our directors:
Proposed Class
Name Age Current Position of Director
---- --- ---------------- -----------
David L. Riegel ........... 62 Director Class I
Brian R. Smith ............ 35 Director Class I
Richard D. Eyestone ....... 54 Director Class II
William P. Wood ........... 45 Director Class II
Morton L. Topfer .......... 64 Director Class III
Paul S. Zito .............. 45 Director Class III
Nominees for Class I Directors
David L. Riegel, 62, has served as a member of our board of directors since
November 1997. From November 1992 to September 1997, Mr. Riegel served as Chief
Operating Officer of Exabyte Corporation. Mr. Riegel has served on the board of
directors of Bolder Technologies Corporation, an energy technology company
involved in the development of rechargeable battery systems, since May 1992. Mr.
Riegel holds a B.S.E.E. from Purdue University.
Brian R. Smith, 35, a co-founder of Crossroads, has served as our Chief
Executive Officer and Chairman of the Board of Directors since our inception in
April 1995. From inception until October 1997, Mr. Smith also served as our
President. From October 1994 to April 1995, Mr. Smith was President of a
consulting services company. From January 1985 to October 1994, Mr. Smith held
various development and management positions at IBM. Among other things, he led
the development of IBM's Fibre Channel products and FDDI products and worked on
several ESCON projects. He was also a technical representative for IBM on the
Fibre Channel Systems Initiative for TCP/IP and SCSI. Mr. Smith has served on
the American National Standards Institute committee developing many Fibre
Channel standards since 1992. Mr. Smith holds a B.S.E.E. from the University of
Cincinnati and an M.S.E.E. from Purdue University.
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Nominees for Class II Directors
Richard D. Eyestone, 54, has served as a member of our board of directors
since May 1999. From 1993 to September 1996, Mr. Eyestone was employed at Bay
Networks as Vice President of Sales and, from September 1996 to September 1998,
as Senior Vice President of Market and Product Management. Mr. Eyestone
currently serves on the board of directors of eSoft, Inc. and several private
companies. Mr. Eyestone holds a B.S.E. in education from Drake University and an
M.B.A. from the University of Iowa.
William P. Wood, 45, 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, of various funds associated
with Austin Ventures, a venture capital firm located in Austin, Texas. Since
1996, Mr. Wood has also served as the sole general partner of Silverton
Partners, an investment partnership located in Austin, Texas. 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.
Nominees for Class III Directors
Morton L. Topfer, 64, has served as a member of our board of directors
since May 2000. Since December 1999, Mr. Topfer has served as a counselor to the
CEO of Dell Computer Corporation. From June 1994 to December 1999, Mr.Topfer
served as Vice Chairman of Dell Computer Corporation. For 23 years prior to
joining Dell, Mr. Topfer held various positions with Motorola, Inc., last
serving as Corporate Executive Vice President and President of the Land Mobile
Products Sector. Before joining Motorola in 1971, Mr. Topfer spent 11 years with
RCA Laboratories in various research and development and management positions.
He began his professional career as a research engineer with Kollsman
Instruments Corporation in New York. Mr. Topfer received a Bachelor of Science
degree in Physics from Brooklyn College and a Master of Science degree in
Physics from the Polytechnic Institute of Brooklyn. He is a member of the board
of directors of Autodesk, Inc., Alliance Gaming and Dell.
Paul S. Zito, 45, 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 currently is
the secretary of and serves on the board of directors of Netpliance, Inc.
Board Committees and Meetings
During the fiscal year ended October 31, 2000, our board of directors held
10 meetings and acted by unanimous written consent seven times. 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 2000.
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. The audit committee held five meetings during fiscal 2000.
Our board adopted and approved an amended charter for the audit committee
in January, 2001, a copy of which is attached hereto as Appendix A. The board
has determined that all members of the audit committee are "independent" as that
term is defined in Rule 4200 of the listing standards of the National
Association of Securities Dealers.
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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. Our former
director, Wo Overstreet, served as a member of our compensation committee until
her resignation from the board in February 2000. From February to June, when the
board appointed Mr. Topfer to the compensation committee, the full board
fulfilled the duties of the compensation committee. The members of the
compensation committee are Messrs. Eyestone and Topfer. The compensation
committee held nine meetings during fiscal 2000.
Director Compensation and Indemnification Arrangements
Directors currently do not receive any fees from us for their service as
directors, although by resolution of the board, they may receive a fixed sum and
reimbursement for expenses in connection with their attendance at board and
committee meetings or a stated salary. In connection with our acquisition of
Polaris Communications, Inc., in March 2000, we paid Mr. Riegel $28,000 for his
consulting services rendered in connection with the acquisition and subsequent
integration of Polaris.
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 at any time after our initial public offering receives an option
grant to purchase 15,000 shares of common stock on the date such individual
joins the board. In addition, on the date of each annual stockholders meeting
held after our initial public offering, 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.
Our certificate of incorporation limits the liability of our directors to
us or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. 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.
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PROPOSAL TWO: APPROVAL OF AMENDMENT
TO THE 1999 STOCK INCENTIVE PLAN
Our stockholders are being asked to approve an amendment to our 1999 Stock
Incentive Plan, which will effect the following changes:
(i) increase the number of shares of our common stock reserved for
issuance under the 1999 plan by an additional 1,000,000 shares; and
(ii) increase the number of shares by which the share reserve under the
1999 plan will automatically increase on the first trading day of each
calendar year, beginning with calendar year 2002, from two percent
(2%) of the shares of common stock outstanding on the last trading day
of the immediately preceding calendar year (subject to a maximum
annual increase of 500,000 shares) to four percent (4%) of such
outstanding shares (subject to a maximum annual increase of 1,000,000
shares).
The board adopted the amendment on January 12, 2001, subject to stockholder
approval at this meeting.
The board believes the amendment is necessary to assure that a sufficient
reserve of common stock remains available for issuance under the 1999 plan in
order to allow us to continue to utilize equity incentives to attract and retain
the services of key individuals essential to our long-term growth and financial
success. We rely significantly on equity incentives in the form of stock option
grants 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. Option grants made to newly-hired
or continuing employees will be based on both competitive market conditions and
individual performance.
The following is a summary of the principal features of the 1999 plan, as
most recently amended. Any stockholder who wishes to obtain a copy of the actual
plan document may do so upon written request to Crossroads at 8300 N. MoPac
Expressway, Austin, Texas 78759.
Equity Incentive Programs
The 1999 plan consists of five separate equity incentive programs: (i) the
discretionary option grant program, (ii) the salary investment option grant
program, (iii) the stock issuance program, (iv) the automatic option grant
program for non-employee board members and (v) the director fee option grant
program for non-employee board members. The principal features of each program
are described below. The compensation committee of the board has been delegated
exclusive authority to administer the discretionary option grant and stock
issuance programs with respect to option grants and stock issuances made to our
executive officers and non-employee board members and also has the authority to
make option grants and stock issuances under those programs to all other
eligible individuals. However, the board may at any time appoint a secondary
committee of one or more board members to have separate but concurrent authority
with the compensation committee to make option grants and stock issuances under
those two programs to individuals other than our executive officers and
non-employee board members. The compensation committee has complete discretion
to determine the calendar year or years in which the salary investment option
grant and director fee option grant programs will be in effect and to select the
individuals who are to participate in the salary investment option grant
program. All grants made to the participants in the salary investment option
grant and director fee option grant programs are governed by the express terms
of those programs. Neither the compensation committee nor any secondary
committee exercises any administrative discretion under the automatic option
grant program or director fee option grant program. All grants under those
programs are made in strict compliance with the express provisions of each such
program.
The term Plan Administrator, as used in this summary, will mean the
compensation committee and any secondary committee, to the extent each such
entity is acting within the scope of its administrative jurisdiction under the
1999 plan.
Share Reserve
5,368,923 shares of our common stock have been reserved for issuance over
the term of the 1999 plan. Such share reserve consists of (i) the 3,868,923
shares initially reserved for issuance under the 1999 plan, (ii) the additional
500,000 shares added to the reserve on January 2, 2001 pursuant to the automatic
share increase
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provisions of the 1999 plan plus (iii) the additional increase of 1,000,000
shares of common stock that forms part of this proposal. In addition, on the
first trading day of each calendar year during the term of the 1999 plan,
beginning calendar year 2002, the number of shares of common stock available for
issuance under the 1999 plan will automatically increase by an amount equal to
four percent (4%) of the shares of our common stock outstanding on the last
trading day of the immediately preceding calendar year, subject to a maximum
annual increase of 1,000,000 shares and subject to approval of this proposal.
As of December 31, 2000, 2,581,770 shares of common stock were subject to
outstanding options under the 1999 plan, 19,125 shares of common stock had been
issued under the 1999 plan, and 1,268,028 shares of common stock remained
available for future issuance, assuming stockholder approval of this proposal.
No participant in the 1999 plan may receive option grants, separately
exercisable stock appreciation rights or direct stock issuances for more than
500,000 shares of common stock in the aggregate per calendar year. Stockholder
approval of this proposal will also constitute a reapproval of the 500,000-share
limitation for purposes of Internal Revenue Code section 162(m).
The shares of common stock issuable under the 1999 plan may be drawn from
shares of our authorized but unissued shares of such common stock or from shares
of such common stock reacquired by us, including shares repurchased on the open
market.
In the event any change is made to the outstanding shares of common stock
by reason of any recapitalization, stock dividend, stock split, combination of
shares, exchange of shares or other change in corporate structure effected
without our receipt of consideration, appropriate adjustments will be made to
the securities issuable (in the aggregate and per participant) under the 1999
plan and the securities and the exercise price per share in effect under each
outstanding option.
Eligibility
Officers and employees, non-employee board members and independent
consultants in our service or our parent and subsidiaries (whether now existing
or subsequently established) are eligible to participate in the discretionary
option grant and stock issuance programs. Executive officers and other highly
paid employees are also eligible to participate in the salary investment option
grant program. Participation in the automatic option grant and director fee
option grant programs is limited to non-employee members of the board.
Valuation
The fair market value per share of our common stock on any relevant date
under the 1999 plan will be deemed to be equal to the closing selling price per
share on that date on the Nasdaq National Market. On December 31, 2000 the fair
market value per share determined on such basis was $4.688.
Discretionary Option Grant Program
The plan administrator has complete discretion under the discretionary
option grant program portion of the 1999 plan to determine which eligible
individuals are to receive option grants, the time or times when those grants
are to be made, the number of shares subject to each such grant, the status of
any granted option as either an incentive stock option or a non-statutory option
under the federal tax laws, the vesting schedule (if any) to be in effect for
the option grant and the maximum term for which any granted option is to remain
outstanding.
Each granted option will have an exercise price per share equal to the fair
market value of the shares on the grant date unless otherwise determined by the
plan administrator. No granted option will have a term in excess of ten years,
and the option will generally become exercisable in one or more installments
over a specified period of service measured from the grant date. However, one or
more options may be structured so that they will be immediately exercisable for
any or all of the option shares; the shares acquired under those options will be
subject to repurchase by the us, at the exercise price paid per share, if the
optionee ceases service with us prior to vesting in those shares.
Upon cessation of service, the optionee will have a limited period of time
in which to exercise any outstanding option to the extent exercisable for vested
shares. The plan administrator will have complete discretion to extend
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the period following the optionee's cessation of service during which his or her
outstanding options may be exercised and/or to accelerate the exercisability or
vesting of such options in whole or in part. Such discretion may be exercised at
any time while the options remain outstanding, whether before or after the
optionee's actual cessation of service.
The plan administrator is authorized to issue tandem stock appreciation
rights under the discretionary option grant program, which provide the holders
with the right to surrender their options for an appreciation distribution from
us equal to the excess of (i) the fair market value of the vested shares of
common stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may, at the
discretion of the plan administrator, be made in cash or in shares of our common
stock.
The plan administrator also has the authority to effect the cancellation of
any or all options outstanding under the discretionary option grant program and
to grant, in substitution therefor, new options covering the same or a different
number of shares of common stock but with an exercise price per share based upon
the fair market value of the option shares on the new grant date.
Salary Investment Option Grant Program
The compensation committee of the board has complete discretion in
implementing the salary investment option grant program for one or more calendar
years and in selecting the executive officers and other eligible individuals who
are to participate in the program for those years. As a condition to such
participation, each selected individual must, prior to the start of the calendar
year of participation, file with the compensation committee an irrevocable
authorization directing us to reduce his or her base salary for the upcoming
calendar year by a specified dollar amount not less than $5,000 nor more than
$50,000 and to apply that amount to the acquisition of a special option grant
under the program.
Each selected individual who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that salary reduction is to be in effect.
The number of shares subject to each such option will be determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of our common stock on the grant date, and the exercise price will be
equal to one-third of the fair market value of the option shares on the grant
date. As a result, the total spread on the option shares at the time of grant
(the fair market value of the option shares on the grant date less the aggregate
exercise price payable for those shares) will be equal to the amount by which
the optionee's salary is to be reduced for the calendar year. In effect, the
salary reduction serves as a immediate prepayment, as of the time of the option
grant, of two thirds of the then current market price of the shares of common
stock subject to the option.
The option will become exercisable in a series of twelve (12) equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such salary reduction is in effect and will become
immediately exercisable for all the option shares on an accelerated basis should
we experience certain changes in ownership or control. Each option will remain
exercisable for any vested shares until the earlier of (i) the expiration of the
ten-year option term or (ii) the end of the three (3)-year period measured from
the date of the optionee's cessation of service.
We have not yet implemented the salary investment option grant program.
Stock Issuance Program
Shares of our common stock will be issued under the stock issuance program
at a price per share equal to the fair market value of the shares on the
issuance date unless otherwise determined by the plan administrator. Shares will
be issued for such valid consideration as the plan administrator deems
appropriate, including cash and promissory notes. The shares may also be issued
as a bonus for past services without any cash outlay required of the recipient.
The shares issued may be fully vested upon issuance or may vest upon the
completion of a designated service period or the attainment of pre-established
performance goals. The plan administrator will, however, have the discretionary
authority at any time to accelerate the vesting of any and all unvested shares
outstanding under the stock issuance program.
8
Automatic Option Grant Program
Under the automatic option grant program, eligible non-employee board
members receive a series of option grants over their period of board service.
Each non-employee board member will, at the time of his or her initial election
or appointment to the board, receive an option grant for 15,000 shares of our
common stock. In addition, on the date of each annual stockholders meeting, each
individual who continues to serve as a non-employee board member will
automatically be granted an option to purchase 5,000 shares of our common stock.
There will be no limit on the number of such 5,000-share option grants any one
eligible non-employee board member may receive over his or her period of
continued board service.
Stockholder approval of this proposal will also constitute pre-approval of
each option granted under the automatic option grant program on or after the
date of the annual stockholders meeting and the subsequent exercise of that
option in accordance with the terms of the program summarized below.
Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a maximum term of ten years, subject to earlier termination following the
optionee's cessation of board service. Each option will be immediately
exercisable for the option shares; the shares acquired under the option will be
subject to repurchase by us at the option exercise price paid per share, upon
the optionee's cessation of board service prior to vesting in those shares. The
shares subject to each initial 15,000-share automatic grant will vest in four
successive equal annual installments upon the optionee's completion of each year
of board service over the four year period measured from the grant date. The
shares subject to each annual 5,000-share grant will vest upon the optionee's
completion of one year of board service measured from the grant date. However,
each outstanding automatic option grant will automatically accelerate and become
immediately exercisable for any or all of the option shares as fully-vested
shares upon certain changes in control or ownership of Crossroads or upon the
optionee's death or disability while a board member. Following the optionee's
cessation of board service for any reason, each option will remain exercisable
for a 12-month period and may be exercised during that time for any or all
shares in which the optionee is vested at the time of such cessation of board
service.
Director Fee Option Grant Program
The compensation committee has complete discretion in implementing the
director fee option grant program for one or more calendar years in which
non-employee board members may participate. As a condition to such
participation, each non-employee board member must, prior to the start of the
calendar year of participation, file with the compensation committee an
irrevocable authorization directing us to apply all or a portion of his or her
cash retainer fee for the upcoming calendar year to the acquisition of a special
option grant under the program.
Each non-employee board member who files such a timely election will
automatically be granted a non-statutory option on the first trading day in
January of the calendar year for which that retainer fee election is to be in
effect.
The number of shares subject to each such option will be determined by
dividing the amount of the retainer fee for the calendar year to be applied to
the program by two-thirds of the fair market value per share of our common stock
on the grant date, and the exercise price will be equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the portion of the retainer fee that optionee has
elected to be applied to the program. In effect, the portion of the annual
retainer fee otherwise payable in cash serves as an immediate prepayment, as of
the time of the option grant, of two thirds of the then current market price of
the shares of common stock subject to the option.
The option will become exercisable in a series of 12 equal monthly
installments upon the optionee's completion of each month of service in the
calendar year for which such retainer fee election is in effect and will become
immediately exercisable for all the option shares on an accelerated basis should
Crossroads experience certain changes in ownership or control. Each option will
remain exercisable for any vested shares until the earlier of (i) the expiration
of the ten-year option term or (ii) the end of the three-year period measured
from the date of the optionee's cessation of service.
We have not yet implemented the director fee option grant program.
9
General Provisions
Acceleration
In the event that we are acquired by merger or asset sale, each outstanding
option under the discretionary option grant program that is not to be assumed or
replaced by the successor corporation or otherwise continued in effect will
automatically accelerate in full, and all unvested shares outstanding under the
discretionary option grant and stock issuance programs 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 plan administrator will have the authority under the discretionary
option grant program to provide that those options will automatically vest in
full (i) upon an acquisition of Crossroads, whether or not those options are
assumed or replaced, (ii) upon a hostile change in control of Crossroads
effected through a tender offer for more than 50% of our outstanding voting
stock or by proxy contest for the election of board members, or (iii) in the
event the individual's service is terminated, whether involuntarily or through a
resignation for good reason, within a designated period (not to exceed 18
months) following an acquisition in which those options are assumed or replaced
upon a hostile change in control. The vesting of outstanding shares under the
stock issuance program may be accelerated upon similar terms and conditions. The
options granted under the salary investment option grant program, the automatic
option grant program and the director fee option grant program will
automatically accelerate and become exercisable in full upon any acquisition or
change in control transaction.
The acceleration of vesting in the event of a change in the ownership or
control of Crossroads may be seen as an anti-takeover provision and may have the
effect of discouraging a merger proposal, a takeover attempt or other efforts to
gain control of Crossroads.
Limited Stock Appreciation Rights
Each option granted under the salary investment option grant program, the
automatic option grant program and the director fee option grant program will
include a limited stock appreciation right so that upon the successful
completion of a hostile tender offer for more than 50% of our outstanding voting
securities or a change in a majority of the board as a result of one or more
contested elections for board membership, the option may be surrendered to us in
return for a cash distribution from us. The amount of the distribution per
surrendered option share will be equal to the excess of (i) the fair market
value per share at the time the option is surrendered or, if greater, the tender
offer price paid per share in the hostile take-over over (ii) the exercise price
payable per share under such option. In addition, the plan administrator may
grant such rights to our officers as part of their option grants under the
discretionary option grant program.
Stockholder approval of this proposal will also constitute pre-approval of
each limited stock appreciation right granted under the salary investment option
grant program, the automatic option grant program and director fee option grant
program and the subsequent exercise of those rights in accordance with the
foregoing terms.
Financial Assistance
The plan administrator may institute a loan program to assist one or more
participants in financing the exercise of outstanding options under the
discretionary option grant program or the purchase of shares under the stock
issuance program through full-recourse interest-bearing promissory notes.
However, the maximum amount of financing provided any participant may not exceed
the cash consideration payable for the issued shares plus all applicable
withholding taxes incurred in connection with the acquisition of those shares.
Special Tax Election
The plan administrator may provide one or more holders of non-statutory
options or unvested share issuances under the 1999 plan with the right to have
us withhold a portion of the shares otherwise issuable to such individuals in
satisfaction of the withholding taxes to which such individuals become subject
in connection with the exercise of those options or the vesting of those shares.
Alternatively, the plan administrator may allow such individuals to deliver
previously acquired shares of common stock in payment of such withholding tax
liability.
10
Amendment and Termination
The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval pursuant to applicable laws and regulations.
Unless sooner terminated by the board, the 1999 plan will terminate on the
earliest of (i) September 30, 2009, (ii) the date on which all shares available
for issuance under the 1999 plan have been issued as fully-vested shares or
(iii) the termination of all outstanding options in connection with certain
changes in control or ownership of Crossroads.
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 $100,000) and the other individuals
and groups indicated, the number of shares of our common stock subject to option
grants made under the 1999 plan from October 1, 1999 (the date of adoption of
the 1999 plan) through December 31, 2000, together with the weighted average
exercise price payable per share. We have not made any direct stock issuances to
date under the 1999 plan.
OPTION TRANSACTIONS
Weighted
Number of Shares Average
Underlying Exercise Price
Name and Position Options Granted (#) Per Share ($)
- ------------------ -------------------- --------------
Brian R. Smith ................................................... -- --
Chief Executive Officer and Director Nominee
Larry D. Sanders ................................................. 500,000 $116.50
President and Chief Operating Officer
Reagan Y. Sakai .................................................. 100,000 13.39
Vice President, Chief Financial Officer,
Secretary and Treasurer
John Middleton ................................................... 60,000 10.45
Vice President of Engineering
Allen R. Sockwell ................................................ 125,000 11.63
Vice President of Human Resources
Robert F. LiVolsi ................................................ -- --
Former Vice President of Sales and Marketing
James H. Moore ................................................... -- --
Former President and Chief Operating Officer
David L. Riegel .................................................. -- --
Director
Richard D. Eyestone .............................................. -- --
Director
William P. Wood .................................................. -- --
Director
Morton L. Topfer ................................................. 30,000 36.81
Director
Paul S. Zito ..................................................... 30,000 36.25
Director
All current executive officers as a group (5 persons) ............ 785,000 78.56
All current non-employee directors as a group (5 persons) ........ 60,000 36.53
All employees, including current officers who
are not executive officers, as a group (199 persons) ........ 1,736,770 30.92
11
Federal Income Tax Consequences
Option Grants
Options granted under the 1999 plan may be either incentive stock options
which satisfy the requirements of Section 422 of the Internal Revenue Code or
non-statutory options which are not intended to meet such requirements. The
federal income tax treatment for the two types of options differs as follows:
Incentive Options. No taxable income is recognized by the optionee at the
time of the option grant, and no taxable income is generally recognized at the
time the option is exercised. The optionee will, however, recognize taxable
income in the year in which the purchased shares are sold or otherwise disposed
of. For federal tax purposes, dispositions are divided into two categories: (i)
qualifying and (ii) disqualifying. A qualifying disposition occurs if the sale
or other disposition is made after the optionee has held the shares for more
than two years after the option grant date and more than one year after the
exercise date. If either of these two holding periods is not satisfied, then a
disqualifying disposition will result.
If the optionee makes a disqualifying disposition of the purchased shares,
we will be entitled to an income tax deduction, for the taxable year in which
such disposition occurs, equal to the excess of (i) the fair market value of
such shares on the option exercise date over (ii) the exercise price paid for
the shares. If the optionee makes a qualifying disposition, we will not be
entitled to any income tax deduction.
Non-Statutory Options. No taxable income is recognized by an optionee upon
the grant of a non-statutory option. The optionee will in general recognize
ordinary income, in the year in which the option is exercised, equal to the
excess of the fair market value of the purchased shares on the exercise date
over the exercise price paid for the shares, and the optionee will be required
to satisfy the tax withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-statutory option are
unvested and subject to repurchase by us in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when our repurchase right lapses, an amount equal to
the excess of (i) the fair market value of the shares on the date the repurchase
right lapses over (ii) the exercise price paid for the shares. The optionee may,
however, elect under Section 83(b) of the Internal Revenue Code to include as
ordinary income in the year of exercise of the option an amount equal to the
excess of (i) the fair market value of the purchased shares on the exercise date
over (ii) the exercise price paid for such shares. If the Section 83(b) election
is made, the optionee will not recognize any additional income as and when the
repurchase right lapses.
We will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-statutory option. The deduction will in general be allowed for the taxable
year in which such ordinary income is recognized by the optionee.
Stock Appreciation Rights
No taxable income is recognized upon receipt of a stock appreciation right.
The holder will recognize ordinary income, in the year in which the stock
appreciation right is exercised, in an amount equal to the appreciation
distribution. We will be entitled to an income tax deduction equal to the
appreciation distribution in the taxable year in which such ordinary income is
recognized by the optionee.
Direct Stock Issuances
The tax principles applicable to direct stock issuances under the 1999 plan
will be substantially the same as those summarized above for the exercise of
non-statutory option grants.
12
Deductibility of Executive Compensation
We anticipate that any compensation deemed paid by us in connection with
the disqualifying dispositions of incentive stock option shares or the exercise
of non-statutory options with exercise prices equal to the fair market value of
the option shares on the grant date will qualify as performance-based
compensation for purposes of Internal Revenue Code Section 162(m) and will not
have to be taken into account for purposes of the $1 million limitation per
covered individual on the deductibility of the compensation paid to certain of
our executive officers. Accordingly, all compensation deemed paid with respect
to those options will remain deductible by Crossroads without limitation under
Internal Revenue Code Section 162(m).
Accounting Treatment
Option grants under the discretionary option grant and automatic option
grant programs with exercise prices equal to the fair market value of the option
shares on the grant date will not result in any direct charge to the our
reported earnings. However, the fair value of those options is required to be
disclosed in the notes to our financial statements, and we must also disclose,
in footnotes to our financial statements, the pro-forma impact those options
would have upon our reported earnings were the fair value of those options at
the time of grant treated as a compensation expense. In addition, the number of
outstanding options may be a factor in determining our earnings per share on a
fully-diluted basis.
Option grants or stock issuances made under the 1999 plan with exercise or
issue prices less than the fair market value of the shares on the grant or issue
date will result in a direct compensation expense to Crossroads in an amount
equal to the excess of such fair market value over the exercise or issue price.
The expense must be amortized against our earnings over the period that the
option shares or issued shares are to vest.
On March 31, 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, which is an interpretation of APB Opinion No. 25
governing the accounting principles applicable to equity incentive plans. Under
the interpretation, option grants made to consultants (but not non-employee
board members) after December 15, 1998 will result in a direct charge to our
reported earnings based upon the fair value of the option measured initially as
of the grant date and then subsequently on the vesting date of each installment
of the underlying option shares. Such charge will accordingly include the
appreciation in the value of the option shares over the period between the grant
date of the option (or, if later, the July 1, 2000 effective date of the
Interpretation) and the vesting date of each installment of the option shares.
In addition, if the proposed interpretation is adopted, any options which are
repriced after December 15, 1998 will also trigger a direct charge to our
earnings measured by the appreciation in the value of the underlying shares over
the period between the grant date of the option (or, if later, the July 1, 2000
effective date of the Interpretation) and the date the option is exercised for
those shares.
Should one or more individuals be granted tandem stock appreciation rights
under the 1999 plan, then such rights would result in a compensation expense to
be charged against our reported earnings. Accordingly, at the end of each fiscal
quarter, the amount (if any) by which the fair market value of the shares of
common stock subject to such outstanding stock appreciation rights has increased
from the prior quarter-end would be accrued as compensation expense, to the
extent such fair market value is in excess of the aggregate exercise price in
effect for those rights.
New 1999 Plan Benefits
As of December 31, 2000, no stock options had been granted, and no shares
of common stock had been issued, on the basis of the share increases which are
the subject of this proposal. However, on the date of the annual meeting, and
assuming their re-election, Messrs. Riegel, Eyestone, Wood, Topfer and Zito will
each receive an option grant for 5,000 shares at an exercise price equal to the
fair market value per share of common stock on that date pursuant to the
automatic option grant program.
13
Stockholder Approval
The affirmative vote of at least a majority of the outstanding shares of
common stock present in person or by proxy at the annual meeting and entitled to
vote on this proposal is required for approval of the amendment to the 1999
plan. Should such stockholder approval not be obtained, then the 1,000,000-share
increase to the share reserve under the 1999 plan will not be implemented, the
two percentage increase to the automatic share increase provision will not be
implemented, any stock options granted under the 1999 plan on the basis of the
increases will immediately terminate without ever becoming exercisable for the
shares of common stock subject to those options, and no additional options or
stock issuances will be made on the basis of such increases. The 1999 plan will,
however, continue in effect with the two percent (2%) annual automatic share
increase as previously approved by the stockholders, and option grants and
direct stock issuances may continue to be made under the 1999 plan until all the
shares available for issuance under the 1999 plan have been issued pursuant to
such option grants and direct stock issuances.
Recommendation of the Board of Directors
Our board of directors recommends that the stockholders vote For the
amendment to our 1999 Stock Incentive Plan.
14
PROPOSAL THREE:
RATIFICATION OF INDEPENDENT AUDITORS
Our board of directors appointed the firm of PricewaterhouseCoopers LLP,
independent public auditors for the fiscal year ended October 31, 2000 and has
appointed PricewaterhouseCoopers LLP to serve in the same capacity for the
fiscal year ending October 31, 2001. The board 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 PricewaterhouseCoopers LLP.
In the event the stockholders fail to ratify the appointment, our board
will reconsider its selection. Even if the selection is ratified, the board in
its discretion may direct the appointment of a different independent auditing
firm at any time during the year if the board believes that such a change would
be in the best interests of the company and our stockholders.
A representative of PricewaterhouseCoopers LLP is expected to be present at
the annual meeting, will have the opportunity to make a statement if he or she
desires to do so, and will 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 PricewaterhouseCoopers LLP to serve as our
independent auditors for the fiscal year ending October 31, 2001.
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.
15
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, 2000, 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, each of whom is a nominee for election as a
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. Unless
otherwise indicated, each of the stockholders has sole voting and investment
power with respect to the shares beneficially owned, subject to community
property laws, where applicable.
Percentage of
Shares Shares
Beneficially Beneficially
Beneficial Owner(1) Owned Owned (2)
- ------------------- ------------ -------------
Executive Officers and Directors:
Brian R. Smith (3) ......................................... 3,792,500 13.6%
Larry D. Sanders (4) ....................................... 125,000 *
Reagan Y. Sakai (5) ........................................ 120,201 *
John R. Middleton (6) ...................................... 51,438 *
Allen R. Sockwell (7) ...................................... 120,000 *
Robert F. LiVolsi (8) ...................................... 179,100 *
James H. Moore (9) ......................................... 241,600 *
Richard D. Eyestone (10) ................................... 16,900 *
David L. Riegel ............................................ 47,400 *
Morton L. Topfer ........................................... 10,000 *
William P. Wood (11) ....................................... 4,418,584 15.9
Paul S. Zito ............................................... 20,000 *
All current directors and executive officers
as a group (10 persons) ..................................... 8,722,023 31.4
Other 5% Stockholders:
Entities deemed to be affiliated with Austin Ventures(12) .. 4,461,739 16.1
- ----------
* 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 27,788,352 shares of common stock
outstanding on January 2, 2001. Shares of common stock subject to stock
options which are currently exercisable or will become exercisable within
60 days after December 31, 2000 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 124,000 shares held in trust for the benefit of Mr. Smith's
children as to which Mr. Smith disclaims beneficial ownership.
(4) All shares of common stock indicated as owned by Mr. Sanders are issuable
upon the exercise of stock options.
(5) Includes 27,501 shares of common stock issuable upon exercise of stock
options.
(6) Includes 4,666 shares held in trust for Mr. Middleton's children as to
which Mr. Middleton disclaims beneficial ownership.
16
(7) All shares of common stock indicated as owned by Mr. Sockwell are issuable
upon the exercise of stock options.
(8) Pursuant to written verification dated as of December 31, 2000. Mr. LiVolsi
served as our Senior Vice President of Sales and Marketing until June 2000.
Includes 6,400 shares held in trust for Mr. LiVolsi's children as to which
Mr. LiVolsi disclaims beneficial ownership.
(9) Pursuant to written verification dated as of December 31, 2000. Mr. Moore
served as our President and Chief Operating Officer until March 2000.
(10) 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.
(11) 4,161,740 shares indicated as owned by Mr. Wood are included due to his
affiliation with funds affiliated with Austin Ventures. Mr. Wood is a
general partner of AV Partners IV, L.P., 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
299,999 shares owned by Austin Ventures VI, L.P. or Austin Ventures
Affiliates Fund VI, L.P. Mr. Wood's address is c/o Austin Ventures, 701
Brazos Street, Suite 1400, Austin, Texas 78701. 255,000 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.
(12) Pursuant to written verification dated as of December 31, 2000, entities
deemed to be affiliated with Austin Ventures have sole voting power and
sole dispositive power over an aggregate of 4,461,739 shares of common
stock as of December 31, 2000, in the following amounts:
Austin Ventures IV-A, L.P. ....................... 1,343,369
Austin Ventures IV-B, L.P. ....................... 2,818,371
Austin Ventures Affiliates Fund VI, L.P. ......... 8,206
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 4,161,740 shares of our common stock. AV Partners VI, L.P., is the
general partner of both Austin Ventures VI, L.P. and Austin Ventures Affiliates
Fund VI, L.P., and as such, may be deemed to be the beneficial owner of 299,999
shares of our common stock.
17
CERTAIN TRANSACTIONS
Registration rights. According to the terms of an investors' rights
agreement, some of our stockholders, including Austin Ventures, may require us
to file a registration statement under the Securities Act of 1933 with respect
to the resale of their shares. We are not required to effect more than two
demand registrations in any twelve-month period. Holders of demand registration
rights may require us to file an unlimited number of registration statements on
Form S-3 with respect to their shares of common stock.
Additionally, some of our stockholders, including Brian R. Smith and Austin
Ventures, 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 tradeable 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 2000" below.
Loan to directors and officers. In May 1999, we made loans to our officers
Reagan Y. Sakai and John R. Middleton in the amounts of $99,999 and $22,250,
respectively, to allow each such individual to exercise certain of his
outstanding stock options. Both officers delivered a full-recourse promissory
note to us with respect to his loan. Both promissory notes are secured by the
purchased shares and accrue interest at a rate of 7.0% per year, compounded
semi-annually. Both notes become due on May 26, 2003, or earlier if the officer
leaves us or if the shares securing the promissory note are sold.
In October 1999, we loaned our Vice President of Human Resources, Allen R.
Sockwell $100,000 in exchange for a full recourse promissory note which is due
in full, with accrued interest, in six years or upon the date which Mr. Sockwell
leaves us. The note accrues interest at 7.0% per year, compounded annually and
all principal and accrued interest are due in one lump sum on December 31, 2006.
Employment agreements. In February 2000 we entered into a letter agreement
with our President and Chief Operating Officer, Larry D. Sanders, regarding the
terms of his employment with us, including the salary, bonus, reimbursable
expenses and potential stock option grants to which he is entitled. This
agreement is terminable by either party at any time and without prior notice.
However, if we terminate Mr. Sanders other than for cause, we would be obligated
to pay him one year of his then current salary plus any bonus to which he would
be entitled. Additionally, if we undergo a change in control, all of Mr.
Sanders' then unvested options will accelerate and become immediately
exercisable. In the event Mr. Sanders is terminated or his responsiblities or
salary is reduced within 18 months of such change in control, he will be
entitled to a one time payment of one year salary plus any bonus to which he
would be entitled.
Severance agreements. In February 2000 we entered into a letter agreement
with our former President and Chief Operating Officer, James H. Moore, regarding
the termination of his employment with us. We agreed to pay Mr. Moore
approximately $133,333 in cash and forgive a promissory note he issued to us in
the amount of $90,000. In exchange for this, Mr. Moore agreed to release us from
any and all claims he may make against us. Mr. Moore owes approximately $109,000
in repayment of promissory notes. In May 2000 we entered into a letter agreement
with our former Vice President of Sales and Marketing, Robert F. LiVolsi,
regarding the termination of his employment with us. We agreed to accelerate the
vesting of 56,250 shares of common stock held by Mr. LiVolsi. In exchange for
this, Mr. LiVolsi agreed to release us from any and all claims he may make
against us.
18
AUDIT COMMITTEE REPORT
The Audit Committee reports as follows with respect to the audit of our
fiscal 2000 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, 2000 filed with the Securities and Exchange Commission.
Paul S. Zito (Chair)
David L. Riegel
William P. Wood
19
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 each of the four other
most highly compensated executive officers whose salary and bonus for fiscal
2000 was in excess of $100,000, for services rendered in all capacities to the
company and our subsidiaries for the fiscal years ended October 31, 1998, 1999
and 2000.
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation Compensation Awards
----------------------------------------- -------------------------------
Other Securities
Fiscal Annual Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- --------------------------- ---- --------- -------- --------------- ------------ ---------------
Brian R. Smith ........................... 2000 $200,000 $ 1,000 -- -- --
Chief Executive Officer ................ 1999 150,000 -- -- -- $ 405(1)
1998 150,000 2,000 -- -- 405(1)
Larry D. Sanders (2) ..................... 2000 201,154 200,000 -- 500,000 344,828(3)
President and Chief
Operating Officer
Reagan Y. Sakai (4) ...................... 2000 160,000 8,500 -- 100,000 29,706(5)
Vice President, Chief .................. 1999 62,490 -- -- 127,500 --
Financial Officer, Secretary
and Treasurer
John Middleton ........................... 2000 129,375 7,000 -- 60,000 --
Vice President of ...................... 1999 109,708 1,000 22,500 --
Engineering ............................ 1998 48,000 -- -- 15,000 --
Allen R. Sockwell (6) .................... 2000 180,000 27,000 -- 125,000 18,477(7)
Vice President of ...................... 1999 27,346 -- -- 120,000 --
Human Resources
Robert F. LiVolsi (8) .................... 2000 102,083 15,750 $ 85,668(9) -- 7,292(10)
Former Vice President of ............... 1999 175,000 51,266 -- 60,000 --
Sales and Marketing .................... 1998 100,849 9,420 187,500 --
James H. Moore (8) ....................... 2000 75,000 -- -- -- 127,500(12)
Former President and ................... 1999 200,000 -- -- 90,000 1,015(13)
Chief Operating Officer ................ 1998 200,000 -- -- 570,000 1,015(13)
- ----------
(1) Represents the amount we paid in premiums for a life insurance policy for
Mr. Smith.
(2) Mr. Sanders joined us as our President and Chief Operating Officer in March
2000.
(3) Represents amounts we paid in connection with the reimbursement of moving
expenses for Mr. Sanders.
(4) Mr. Sakai joined us as our Vice President, Chief Financial Officer,
Secretary and Treasurer in May 1999.
(5) Represents amounts we paid in connection with the reimbursement of moving
expenses for Mr. Sakai.
(6) Mr. Sockwell joined us as our Vice President of Human Resources in
September 1999.
(7) Represents amounts we paid in connection with the reimbursement of moving
expenses for Mr. Sockwell.
(8) Mr. LiVolsi served as our Vice President of Sales and Marketing until June
2000.
(9) Represents sales commissions we paid to Mr. LiVolsi.
(10) Represents a severance payment we paid to Mr. LiVolsi in connection with
his leaving Crossroads.
(11) Mr. Moore served as our President and Chief Operating Officer until March
2000.
(12) Represents a severance payment we made to Mr. Moore in connection with his
leaving Crossroads.
(13) Represents the amount we paid in premiums for a life insurance policy for
Mr. Moore.
20
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information concerning individual grants of
stock options made during fiscal 2000 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 2,823,895 shares of common stock granted during fiscal 2000. The
following table sets forth information concerning the individual grants of stock
options to each of our named executive officers in fiscal 2000.
21
OPTION GRANTS IN FISCAL 2000
Individual Grants
--------------------------------------------- Potential Realizable
Value of Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term
Options Employees in Price Per Expiration ---------------------------
Granted(#)(1) Fiscal 2000(%) Share (2) Date 5%($) 10%($)
-------------- --------------- ---------- ---------- ----------- -----------
Brian R. Smith ................... -- -- -- -- -- --
Larry D. Sanders ................. 250,000 8.86 $ 142.75 2/28/2010 $22,443,677 $56,876,684
250,000 8.86 90.25(3) 2/28/2010 35,568,677 70,001,684
Reagan Y. Sakai .................. 25,000 * 39.88(4) 5/16/2010 1,690,676 3,282,675
75,000 0.03 4.56 7/30/2010 215,200 545,359
John R. Middleton ................ 10,000 * 39.88(4) 5/16/2010 676,270 1,313,070
50,000 0.02 4.56 7/30/2010 143,467 363,572
Allen R. Sockwell ................ 25,000 * 39.88(4) 5/16/2010 1,690,676 3,282,675
100,000 0.04 4.565 7/30/2010 286,933 727,145
Robert F. LiVolsi(5) ............. -- -- -- -- -- --
James H. Moore(6) ................ -- -- -- -- -- --
- ----------
* Less than 0.01% of options granted in fiscal 2000
(1) 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, in certain circumstances,
through a promissory note payable to us.
(3) This option was granted on February 29, 2000 and the fair market value on
the date of this grant was $142.75 per share.
(4) This option was granted on May 17, 2000 and the fair market value on the
date of this grant was $66.00 per share.
(5) Mr. LiVolsi served as our Vice President of Sales and Marketing until June
2000.
(6) Mr. Moore served as our President and Chief Operating Officer until March
2000.
22
Fiscal Year-end Option Values
The following table provides information about stock options exercised in
fiscal 2000 and options held as of October 31, 2000 by each of our executive
officers named in the Summary Compensation Table. No SARs were exercised during
fiscal 2000 and none were outstanding at October 31, 2000. Actual gains on
exercise, if any, will depend on the value of our common stock on the date on
which the shares are sold.
FISCAL 2000 OPTION VALUES
Number of
Shares Securities Underlying Value of Unexercised
Acquired Value Unexercised Options At In-the-Money Options At
On Exercise Realized(1) October 31, 2000 (2) October 31, 2000 ($)(2)(3)
------------ ----------- -------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ------------ -------------
Brian R. Smith -- -- -- -- -- --
Larry D. Sanders -- -- -- -- -- --
Reagan Y. Sakai -- -- 39,843 187,657 $236,588 $689,670
John R. Middleton 14,061 $2,081,380 47,812 94,688 659,939 338,626
Allen R. Sockwell -- -- 30,000 215,000 -- 237,550
Robert F. LiVolsi (4) -- -- -- -- -- --
James H. Moore (5) -- -- -- -- -- --
- ----------
(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.
"Exercisable" refers to those options which were both exercisable and
vested while "unexercisable" refers to those options which were unvested.
(3) Value is determined by subtracting the exercise price from the fair market
value of our common stock at October 31, 2000 ($6.938 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.
(4) Mr. LiVolsi served as our Vice President of Sales and Marketing until June
2000.
(5) Mr. Moore served as our President and Chief Operating Officer until March
2000.
Employment Contracts, Termination of Employment and Change in Control
Arrangements
Other than our agreement with Larry D. Sanders 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 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.
23
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
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
Topfer, neither of whom currently serves or has previously served as an officer
or employee of our company.
24
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 cash and 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 2000 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
surveys 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
the fiscal 2000, the base salary of the company's executive officers ranged from
the 30th percentile to the 90th percentile of the base salary levels in effect
for comparable positions in the surveyed compensation data.
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 2000, bonuses were
awarded to the executive officers named in the Summary Compensation Table in the
indicated amounts.
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 four-year 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.
25
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.
Grants of Additional Stock Options. At various times in fiscal 2000, the
compensation committee considered the options held by our executive officers and
employees and the fact that a broad decline in the price of our common stock had
resulted in a substantial number of stock options granted pursuant to the 1999
Stock Incentive Plan having exercise prices well above the recent historical
trading prices of the common stock. Our management advised the compensation
committee that it believed employee turnover was likely to increase in part
because our company's total compensation package for long-term employees, which
included substantial options with exercise prices well above the then current
trading price, was less attractive than compensation offered by other companies
in the same geographic location, because options granted to new hires at other
companies would be granted at current trading prices.
The compensation committee determined (i) that our company's success in the
future would depend in large part on its ability to retain a number of its
highly skilled technical and managerial personnel, (ii) that competition for
such personnel would be intense, (iii) that the loss of key employees could have
a significant adverse impact on our company's business, (iv) that it would be
important and cost-effective to provide equity incentives to employees and
executive officers of our company to improve the performance and the value of
our company for its stockholders, and (v) that the morale of long-term employees
holding stock options with exercise prices well below the current trading price
would decrease as more recently hired employees are granted options with
exercise prices set at current, lower market prices. Considering these factors,
the compensation committee determined it to be in the best interests of
Crossroads and its stockholders to restore the incentives for employees and
certain executive officers to remain as employees of Crossroads and to exert
their maximum efforts on behalf of the company by granting additional stock
options under the 1999 Stock Incentive Plan with exercise prices equal to the
then current market value. Accordingly, on May 31, 2000, the compensation
committee approved additional grants of 554,270 stock options to some of our
executive officers and employees generally with an exercise price of $39.875 per
share, to some of our executive officers and employees generally, and on July
31, 2000, the compensation committee approved additional grants of 1,106,490
stock options to some of our executive officers and employees generally with an
exercise price of $4.5625 per share to some of our executive officers and
employees generally. With respect to the additional grants, the ten-year term of
the options and the four-year vesting period commenced as of the date of each
grant.
CEO Compensation. In setting the total compensation payable to our Chief
Executive Officer, Brian R. Smith, in fiscal 2000, the compensation committee
has taken into consideration Mr. Smith'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.
Employee Stock Purchase Plan. We maintain an employee stock purchase plan
that qualifies under Section 423 of the Internal Revenue Code and permits
substantially all of our employees to purchase shares of our common stock.
Participating employees may purchase our common stock at a purchase price equal
to 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or on the exercise date. Employees may designate
up to 15% of their base compensation for the purchase of our common stock under
this plan. Crossroads' executive officers are eligible to participate in this
program, subject to any applicable tax laws.
Retirement Plans. We maintain a plan that complies with the provisions of
Section 401(k) of the Internal Revenue Code. Substantially all U.S. employees
are eligible to participate in this plan, and eligibility for participation
commences upon hiring. We also maintain retirement plans for certain non-U.S.
employees. Obligations under these plans are determined in accordance with local
regulations and customs. Crossroads' executive officers are eligible to
participate in this program, subject to any applicable tax laws.
26
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 2000 did not exceed the $1 million limit per officer, and the
compensation committee does not anticipate that the non-performance based
compnsation 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
Morton L. Topfer
27
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 CUMULATIVE TOTAL RETURN*
[THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL].
CROSSROADS NASDAQ NASDAQ COMPUTER
SYSTEMS, INC. STOCK MARKET (U.S.) MANUFACTURER
------------- ------------------- ------------
10/20/99 100.00 100.00 100.00
10/99 395.14 106.48 105.55
11/99 489.93 119.43 124.45
12/99 469.44 145.69 147.00
1/00 404.17 140.31 141.72
2/00 793.06 166.97 173.12
3/00 573.61 163.52 184.13
4/00 392.36 137.54 163.19
5/00 221.53 120.95 136.47
6/00 140.28 142.17 159.75
7/00 25.35 134.47 160.86
8/00 62.50 150.35 183.33
9/00 47.22 130.81 163.02
10/00 38.54 120.02 148.27
* $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, 2000.
(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.
28
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 2000
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 2000, we believe that all
reporting requirements under Section 16(a) for fiscal 2000 were met in a timely
manner by our directors, executive officers and greater than ten percent
beneficial owners except as set forth below.
o Richard E. Eyestone did not timely file a Form 4 in May 2000.
o Pursuant to an administrative error by Crossroads, Larry D. Sanders
inadvertently reported option grants on his Form 5 for fiscal 2000
which he did not receive.
o Brian R. Smith did not timely file a Form 5 for fiscal 2000.
ANNUAL REPORT
A copy of our Annual Report to Stockholders for fiscal 2000 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 16, 2001. 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 19, 2001
29
Appendix A
AMENDED AND RESTATED
CHARTER OF THE AUDIT COMMITTEE
OF
CROSSROADS SYSTEMS, INC.
I. PURPOSE
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing the
financial information which will be provided to the stockholders and others, the
systems of internal controls which management and the Board of Directors have
established, and the Corporation's audit and financial reporting processes.
The Corporation's independent accountants' ultimate accountability is to
the Board of Directors and the Audit Committee, as representatives of
stockholders. The Audit Committee, as such representatives, has the ultimate
authority and responsibility to select, evaluate, and, where appropriate,
replace the independent accountants (or to nominate the independent accountants
to be proposed for stockholder ratification in any proxy statement).
The Audit Committee's primary duties and responsibilities are to:
1. Oversee that management has maintained the reliability and integrity
of the accounting policies and financial reporting and disclosure
practices of the Corporation.
2. Oversee that management has established and maintained processes to
assure that an adequate system of internal control is functioning
within the Corporation.
3. Oversee that management has established and maintained processes to
assure compliance by the Corporation with all applicable laws,
regulations and corporate policy.
The Audit Committee will primarily fulfill these responsibilities by
carrying out the activities enumerated in Section IV of this Charter.
The Corporation's management is responsible for preparing the Corporation's
financial statements. The Corporation's independent auditors are responsible for
auditing the financial statements. The activities of the Committee are in no way
designed to supersede or alter those traditional responsibilities. Except to the
extent required by the Nasdaq Policy (defined below), membership on the
Committee does not call for the professional training or technical skills
generally associated with career professionals in the fields of accounting and
auditing. In addition, the Corporation's independent auditors and the internal
audit staff have more available time and information than does the Committee.
Accordingly, the Committee's role does not provide any special assurances with
regard to the Corporation's financial statements, nor does it involve a
professional evaluation of the quality of the audits performed by the
independent auditors.
II. COMPOSITION
The Audit Committee shall be comprised of three or more independent
directors elected by the Board of Directors for a one-year term, all of whom
(except as otherwise permitted) shall meet the requirements of NASD Marketplace
Rule 4310(c)(26) (the "Nasdaq Policy"). The Chairman, if any, of the Audit
Committee shall be appointed by the Board of Directors.
In addition to the other requirements of the Nasdaq Policy, all members of
the Audit Committee shall have a working familiarity with basic finance and
accounting practices, and at least one member of the Audit Committee shall have
accounting or related financial management expertise.
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III. MEETINGS
The Audit Committee shall meet on a regular basis and shall hold special
meetings as required to discharge the functions specified in this Charter. A
majority of the Audit Committee will constitute a quorum for the conduct of
business.
Minutes will be kept of each meeting of the Audit Committee and will be
provided to each member of the board. Any action of the Audit Committee shall be
subject to revision, modification, rescission or alteration by the Board of
Directors, provided that no neglect of third parties shall be affected by any
such revision, modification, rescission or alteration.
IV. RESPONSIBILITIES AND DUTIES
To fulfill its responsibilities and duties the Audit Committee shall:
1. Review this Charter at least annually to ensure compliance with the
Nasdaq Policy and, if required, recommend changes to the Board of
Directors.
2. Review the Corporation's significant accounting principles, policies
and practices.
3. Review the Corporation's annual financial statements and any other
relevant reports or other financial information.
4. Review the regular internal financial reports prepared by management
and any internal auditing department.
5. Recommend to the Board of Directors the selection of the independent
accountants and approve the fees and other compensation to be paid to
the independent accountants. On an annual basis, the Committee shall
obtain a formal written statement from the independent accountants
delineating all relationships between the accountants and the
Corporation consistent with Independence Standards Board Standard 1,
and shall review and discuss with the accountants all significant
relationships the accountants have with the Corporation to determine
the accountants' independence.
6. Review the intended scope of the annual audit and the audit methods
and principles being applied by the independent accountants.
7. In conjunction with the independent accountants, review the integrity
of the Corporation's financial reporting processes, both internal and
external.
8. Review the performance of the independent accountants and approve any
proposed discharge of the independent accountants when circumstances
warrant.
9. Following completion of the annual audit, review separately with the
independent accountants, the internal auditing department, if any, and
management any significant difficulties encountered during the course
of the audit.
10. Review with financial management and the independent accountants the
Corporation's quarterly financial results prior to the release of
earnings and/or the Corporation's quarterly financial statements prior
to filing or distribution. Discuss any significant changes to the
Corporation's accounting principles and any items required to be
communicated by the independent accountants in accordance with SAS 61
(see item 11.) The Chair of the Committee may represent the entire
Audit Committee for purposes of this review.
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11. Discuss certain matters required to be communicated to the audit
committees in accordance with AICPA Auditing Standards (SAS) No. 61,
including:
(a) The auditors' responsibility under Generally Accepted Auditing
Standards;
(b) Significant accounting policies;
(c) Management judgments and accounting estimates;
(d) Significant audit adjustments;
(e) Other information in documents containing audited financial
statements;
(f) Disagreements with management including accounting principles,
scope of audit and disclosures;
(g) Consultation with other accountants by management, and
(h) Difficulties encountered in performing the audit.
12. On at least an annual basis, review with the Corporation's counsel,
any legal matters that could have a significant impact on the
organization's financial statements, the Corporation's compliance with
applicable laws and regulations and inquiries received from regulators
or governmental agencies.
13. Perform any other activities consistent with this Charter, the
Corporation's Bylaws and governing law, as the Audit Committee or the
Board of Directors deems necessary or appropriate.
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================================================================================
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 19, 2001, and appoints Reagan Y. Sakai and Patricia E.
Prince, 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 2, 2001 at The
Hyatt Regency Hotel, 208 Barton Springs Road, Austin, Texas 78704, 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)
================================================================================
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: [X]
CRXRDS 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.
1. TO ELECT THE FOLLOWING (6) NOMINEES AS DIRECTORS:
Class I Directors to serve for a one-year term ending at the 2002 annual
meeting of stockholders or until their successors are duly elected and
qualified:
01) David L. Riegel 02) Brian R. Smith
Class II Directors to serve for a two-year term ending at the 2003 annual
meeting of stockholders or until their successors are duly Elected and
qualified:
03) Richard E. Eyestone 04) William P. Wood
Class III Directors to serve for a three-year term ending at the 2004
annual meeting of stockholders or until their successors are duly Elected
and qualified:
05) Morton L. Topfer 06) Paul S. Zito
For All |_| Withhold All |_| For All Except |_|
To withhold authority to vote, mark "For All Except" and write the
nominee's number on the line below.
- --------------------------------------------------------------------------------
2. TO APPROVE AN AMENDMENT OF THE 1999 STOCK INCENTIVE PLAN.
For |_| Against |_| Abstain |_|
3. TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS FOR CROSSROADS FOR THE FISCAL YEAR ENDING OCTOBER 31, 2001.
For |_| Against |_| Abstain |_|
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.
The Board of Directors recommends a vote FOR each 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 each 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.
- ------------------------------------------ ------------------------------
Signature (PLEASE SIGN WITHIN BOX) Date Signature (Joint Owners) Date