<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1999
REGISTRATION NO. 333-74711
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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<S> <C> <C>
CALIFORNIA (PRIOR TO 7372 77-0409517
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY L. REYES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BROCADE COMMUNICATIONS SYSTEMS, INC.
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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<S> <C>
LARRY W. SONSINI GREGORY M. GALLO
JOHN T. SHERIDAN DENNIS C. SULLIVAN
ALISANDE M. ROZYNKO JULIE F. HANIGER
WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP
PROFESSIONAL CORPORATION 400 HAMILTON AVENUE
650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94301-1825
PALO ALTO, CALIFORNIA 94304-1050 (650) 328-6561
(650) 493-9300
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 1999
3,250,000 Shares
[BROCADE LOGO]
COMMON STOCK
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC. IS OFFERING 3,250,000 SHARES OF ITS COMMON
STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS
FOR OUR COMMON STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL
BE BETWEEN $8 AND $10 PER SHARE.
------------------------
WE HAVE APPLIED TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "BRCD."
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
PRICE $ A SHARE
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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO BROCADE
-------- ------------- ----------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Brocade has granted the underwriters the right to purchase up to 487,500
additional shares to cover over-allotments. Morgan Stanley & Co. Incorporated
expects to deliver the shares of common stock to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEXS BROWN
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
Special Note Regarding
Forward-Looking Statements........ 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 20
Business............................ 30
</TABLE>
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PAGE
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Management.......................... 42
Certain Transactions................ 54
Principal Stockholders.............. 58
Description of Capital Stock........ 61
Shares Eligible for Future Sale..... 64
Underwriters........................ 66
Legal Matters....................... 68
Experts............................. 68
Change in Independent Accountants
and Fiscal Year End............... 68
Where You May Find Additional
Information....................... 69
Index to Financial Statements....... F-1
</TABLE>
-------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in those jurisdictions where offers and sales
are permitted.
Unless otherwise specifically stated, the information in this prospectus
has been adjusted to reflect the assumed exercise of warrants to purchase
296,881 shares of preferred stock prior to this offering and the subsequent
conversion of all outstanding shares of preferred stock into common stock on the
completion of this offering, but does not take into account the possible
issuance of additional shares of common stock to the underwriters pursuant to
their right to purchase additional shares to cover over-allotments.
UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL
DEALERS EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
2
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and our financial statements and notes to the financial statements appearing
elsewhere in this prospectus.
BROCADE COMMUNICATIONS SYSTEMS, INC.
We are the leading provider of switching solutions for storage area
networks, commonly referred to as SANs, which are networks that connect a
company's data storage systems and computer servers. Our switching solutions
utilize the Fibre Channel interconnect protocol, an industry networking standard
designed for data-intensive transfers. Our family of SilkWorm switches enables a
company to cost-effectively manage growth of its data storage requirements,
improve the data transfer performance between its servers and data storage
systems and increase the size and scope of its SAN, while allowing the company
to operate data-intensive computer applications, such as data backup and
restore, on the SAN. We sell our SAN switching solutions through original
equipment manufacturers that combine our products with their own products and
sell the combined products under their own brand, and system integrators that
integrate our products with products of other manufacturers. Our customers
include Compaq Computer, Dell Computer, McDATA Corporation, Sequent Computer
Systems and StorageTek.
Over the past decade, the volume of business-critical data that is being
captured, processed, stored and manipulated in business environments has
exploded, creating a data transmission bottleneck between storage systems and
servers. In response to the demand for high-speed and high-performance
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol was developed in the early 1990s and has earned broad
support from storage and server industry leaders. Fibre Channel's support for
networked connections, large data block transfers and multiple protocols enables
SANs to meet the increasing performance, scalability, flexibility and management
requirements of companies' data processing centers.
Our SilkWorm family of Fibre Channel switches provides a switch
interconnect, enabling any-to-any connectivity between storage systems and
servers. Multiple interconnected switches enable the deployment of our Brocade
Fabric, which includes our Brocade Fabric Operating System, SAN management
tools, fabric services and ready-to-deploy configurations. Our SAN solutions
offer the following benefits:
-- Address the input/output bottleneck. Our solutions are designed to
deliver gigabit transfer rates and any-to-any connectivity, addressing
the storage-to-server and server-to-server bottleneck.
-- Provide scalability to SANs. Our switches can be used to incrementally
increase the size and scope of the SAN, enabling companies to grow
clusters of high performance storage systems and servers. Connecting
in a meshed topology, or cascading, multiple SilkWorm switches enable
companies to interconnect separate SAN clusters into one large SAN to
share distributed data.
-- Support a mission-critical data processing center. We have designed
our solutions to provide high levels of resiliency and availability
with maximum up-time for business-critical applications.
-- Enable SAN applications. Our products provide a network infrastructure
that allows our customers and partners to address compelling data
requirements by running multiple new data-intensive applications
concurrently on the SAN, including data backup and restore, and
disaster recovery.
-- Enhance SAN management. Our Brocade Fabric is designed for ease of use
and implementation to reduce the overall costs and improve the
efficiency of managing SANs.
We intend to capitalize on our SAN switching market leadership and our
Fibre Channel technology leadership to leverage our core technologies and
products to address the evolving SAN market. In addition to focusing on our
distribution relationships with leading storage systems and server original
equipment manufacturers, we have recently launched our system integrator
program. Furthermore, we intend to continue building relationships with leading
technology partners.
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THE OFFERING
Common stock offered................ 3,250,000 shares
Common stock to be outstanding after
this offering....................... 25,281,781 shares
Use of proceeds..................... We intend to use the net proceeds for
general corporate purposes, including
repayment of outstanding indebtedness,
capital expenditures and working
capital.
Proposed Nasdaq National Market
symbol.............................. BRCD
The foregoing information is as of January 31, 1999 and excludes 2,082,471
shares of common stock issuable upon exercise of options outstanding as of
January 31, 1999 with a weighted average exercise price of $1.95 per share,
287,788 shares of common stock issuable upon exercise of warrants outstanding as
of January 31, 1999 with a weighted average exercise price of $1.37 per share,
and 466,516 shares of common stock reserved for additional option grants under
our stock plans as of January 31, 1999, and assumes no exercise of the
underwriters' over-allotment option.
We are a California corporation and will reincorporate in Delaware prior to
the consummation of this offering. Our principal executive offices are located
at 1901 Guadalupe Parkway, San Jose, California 95131, and our telephone number
is (408) 487-8000.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
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1995 1996 1997 1998 1998 1999
----- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ -- $ -- $ 8,482 $ 24,246 $ 7,850 $ 8,007
Gross profit............................... -- -- 1,800 8,487 3,153 4,686
Loss from operations....................... (176) (3,818) (9,442) (15,231) (1,398) (1,846)
Net loss................................... (166) (3,934) (9,619) (15,111) (1,355) (1,839)
Pro forma basic net loss per share......... $ (.84) $ (.10)
Shares used in per share calculations...... 17,915 18,973
</TABLE>
The following table presents summary balance sheet data as of January 31,
1999, which has been adjusted to reflect the assumed exercise of warrants to
purchase 296,881 shares of preferred stock at an exercise price of $6.78 per
share prior to this offering and the subsequent conversion of our preferred
stock into 14,623,614 shares of common stock upon completion of this offering,
our sale of 3,250,000 shares of our common stock in this offering at an assumed
initial public offering price of $9.00 per share and the application of the
estimated net proceeds. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 10,137 $
Working capital............................................. 4,500
Total assets................................................ 24,576
Long-term portion of debt and capital lease obligations..... 1,808
Redeemable convertible preferred stock...................... 35,261
Total stockholders' equity (deficit)........................ (27,825)
</TABLE>
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RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business, financial condition and results of operations could be seriously
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks and you may lose all or part of your
investment.
WE HAVE AN ACCUMULATED DEFICIT OF $30.7 MILLION AND MAY NOT ACHIEVE
PROFITABILITY
We have incurred significant losses since inception and expect to incur
losses in the future. As of January 31, 1999, we had an accumulated deficit of
$30.7 million. Although our revenues have grown in recent quarters, we cannot be
certain that we will be able to sustain these growth rates or that we will
realize sufficient revenues to achieve profitability. We also expect to incur
significant product development, sales and marketing and administrative expenses
and, as a result, we will need to generate significant revenues to achieve and
maintain profitability. Moreover, even if we do achieve profitability, we may
not be able to sustain or increase profitability. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We also may incur additional losses as a result of our limited operating
history. Specifically, Brocade has been operating less than four years.
Therefore, we cannot forecast future operating results based on our historical
results. We plan our operating expenses based in part on future revenue
projections. Our ability to accurately forecast our quarterly revenue is limited
for the reasons discussed below in "-- We Expect Our Quarterly Revenues and
Operating Results to Fluctuate for a Number of Reasons Which Could Cause Our
Stock Price to Fluctuate." Moreover, most of our expenses are fixed in the
short-term or incurred in advance of receipt of corresponding revenue. As a
result, we may not be able to decrease our spending to offset any unexpected
shortfall in our revenues. If this were to occur, we would expect to incur
significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
-- fluctuations in demand for our SilkWorm family of products and
services;
-- the timing of customer orders and product implementations,
particularly large orders from and product implementations of our
original equipment manufacturer customers;
-- our ability to develop, introduce, ship and support new products and
product enhancements;
-- announcements and new product introductions by our competitors;
-- the expected decline in the prices at which we can sell our SilkWorm
family of products to our customers;
-- our ability to obtain sufficient supplies of sole or limited sourced
components, including application specific integrated circuits, or
ASICs, gigabit interface converters, or GBICs, and power supplies, for
our SilkWorm family of products;
-- increases in the prices of the components we purchase;
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<PAGE> 7
-- our ability to attain and maintain production volumes and quality
levels for our SilkWorm family of products;
-- the mix of our SilkWorm and SilkWorm Express switches sold and the mix
of distribution channels through which they are sold;
-- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key original equipment
manufacturers and system integrators;
-- widespread adoption of SANs as an alternative to existing data storage
and management systems;
-- decisions by end-users to reallocate their information resources to
other purposes, including year 2000 preparedness; and
-- deferrals of customer orders in anticipation of new products, services
or product enhancements introduced by us or our competitors.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS
Our SilkWorm family of Fibre Channel switching products is used exclusively
in storage area networks, or SANs. Accordingly, widespread adoption of SANs as
an integral part of data-intensive enterprise computing environments is critical
to our future success. In addition, our success depends upon market acceptance
of our SAN switching solutions as an alternative to the use of hubs or other
interconnect devices in SANs. The markets for SANs and SAN switching products
have only recently begun to develop and are rapidly evolving. Because these
markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow to adopt a new approach, like SANs. Our success in
generating revenue in these emerging markets will depend, among other things, on
our ability to educate potential original equipment manufacturers and system
integrator customers, as well as potential end-users, about the benefits of SANs
and SAN switching technology and our ability to maintain and enhance our
relationships with leading original equipment manufacturers and system
integrators. In addition, our products are designed to conform to the Fibre
Channel interconnect protocol and certain other industry standards. Some of
these standards may not be widely adopted, and competing standards may emerge
that will be preferred by original equipment manufacturers or end-users.
WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE
In fiscal 1998, we derived 92% of our revenues from sales of our SilkWorm
family of products and the remainder from a technology license. We expect that
revenue from this product family will continue to account for a substantial
portion of our revenues for the foreseeable future. Therefore, widespread market
acceptance of these products is critical to our future success. Some of our
products have been only recently introduced and therefore, the demand and market
acceptance of our products is uncertain. Factors that may affect the market
acceptance of our products include market acceptance of SAN switching products,
the performance, price and total cost of ownership of our products, the
availability
6
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and price of competing products and technologies, and the success and
development of our original equipment manufacturers and system integrators. Many
of these factors are beyond our control.
Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high-quality,
cost-effective products, product enhancements and services on a timely basis and
by keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
1999. Our future revenue growth will be dependent on the success of these new
product launches. We have in the past experienced delays in product development
and such delays may occur in the future. In addition, as we introduce new or
enhanced products, we will have to manage successfully the transition from older
products in order to minimize disruption in our customers' ordering patterns,
avoid excessive levels of older product inventories and ensure that enough
supplies of new products can be delivered to meet our customers' demands. Our
failure to develop and introduce successfully new products and product
enhancements, which are not broadly accepted, would reduce our revenues.
WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND THE LOSS OF
ANY OF THEM COULD SIGNIFICANTLY REDUCE OUR REVENUES
We depend on a few key original equipment manufacturer customers. For
example, in the three months ended January 31, 1999, sales to Sequent and McDATA
accounted for 37% and 33% of our total revenues, respectively. We anticipate
that our operating results will continue to depend on sales to a relatively
small number of original equipment manufacturers. Therefore, the loss of any of
our key original equipment manufacturers, or a significant reduction in sales to
these original equipment manufacturers could significantly reduce our revenues.
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES
Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
THE LOSS OF SOLECTRON CORPORATION, OUR SOLE MANUFACTURER, OR THE FAILURE TO
FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR MANAGE SUCCESSFULLY OUR
RELATIONSHIP WITH SOLECTRON, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS
Solectron, a third party manufacturer for numerous companies, manufactures
all of our products at its Milpitas, California facility on a purchase order
basis. We currently do not have a long-term supply contract with Solectron.
Therefore, Solectron is not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order. We generally place orders with Solectron up to four months prior
to scheduled delivery of products to our customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate
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manufacturing capacity from Solectron to meet our customers' delivery
requirements or we may accumulate excess inventories.
We plan to regularly introduce new products and product enhancements, which
will require that we coordinate our efforts with those of our suppliers and
Solectron to rapidly achieve volume production. While we have not, to date,
experienced supply problems with Solectron, we have experienced delays in
product deliveries from one of our former contract manufacturers. If we should
fail to effectively manage our relationships with our suppliers and Solectron,
or if Solectron experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, our ability to ship products
to our customers could be delayed and our competitive position and reputation
could be harmed. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.
WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS INCLUDING ASICS AND POWER SUPPLIES
We currently purchase several key components from single or limited
sources. We purchase ASICs and power supplies from single sources, and printed
circuit boards and GBICs from limited sources. If we are unable to buy these
components on a timely basis we will not be able to manufacture our products. We
use a rolling six-month forecast based on anticipated product orders to
determine our component requirements. If we overestimate our component
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component requirements, we may have inadequate inventory,
which could interrupt our manufacturing. In addition, lead times for materials
and components we order vary significantly and depend on factors such as the
specific supplier, contract terms and demand for a component at a given time. We
also may experience shortages of certain components from time to time, which
also could delay our manufacturing.
THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE
The markets for our SAN switching products are competitive, and are likely
to become even more competitive. Increased competition could result in pricing
pressures, reduced sales, reduced margins, reduced profits, reduced market share
or the failure of our products to achieve or maintain market acceptance. Our
products face competition from multiple sources. Some of our competitors and
potential competitors have longer operating histories, greater name recognition,
access to larger customer bases, or substantially greater resources than we
have. As a result, they may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or customer requirements. For
all of the foregoing reasons, we may not be able to compete successfully against
our current and future competitors. See "Business -- Competition."
THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND
GROSS MARGINS
The average unit price of our products decreased 26% in fiscal 1998. We
anticipate that the average unit price of our products may continue to decrease
in the future in response to changes in product mix, competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. If we are unable to offset these factors by
increasing our sales volumes, our revenues will decline. In addition, to
maintain our gross margins, we must develop and introduce new products and
product enhancements, and we must continue to reduce the manufacturing cost of
our products.
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UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUES
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our new or enhanced
products. In addition, our products are combined with products from other
vendors. As a result, when problems occur, it may be difficult to identify the
source of the problem. These problems may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
Moreover, the occurrence of hardware and software errors, whether caused by our
or another vendor's SAN products, could delay or prevent the development of the
SAN market.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL
Our success depends to a significant degree upon the continued
contributions of our key management, engineering and sales and marketing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Gregory L. Reyes, our President
and Chief Executive Officer, Kumar Malavalli, our Vice President, Technology and
Paul R. Bonderson, Jr., our Vice President, Engineering. We do not have
employment contracts with, or key person life insurance on, any of our key
personnel. We also believe that our success depends to a significant extent on
the ability of our management to operate effectively, both individually and as a
group. In April 1999, we hired a new Chief Financial Officer, and certain other
members of our management team, including Mr. Reyes, have only recently joined
us.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance and operations personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area. In particular, we have
experienced difficulty in hiring qualified ASIC, software, system and test, and
customer support engineers and there can be no assurance that we will be
successful in attracting and retaining these individuals. The loss of the
services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers and sales personnel, could delay the development and
introduction of and negatively impact our ability to sell our products. In
addition, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive such claims in
the future as we seek to hire qualified personnel or that such claims will not
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.
WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH
We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places a significant
demand on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS
We plan to expand our international sales activities significantly. In
fiscal 1999 and 2000, we intend to focus on expanding our international sales
activities in Western Europe. Our international sales growth
9
<PAGE> 11
in these countries will be limited if we are unable to establish relationships
with international distributors, establish additional foreign operations, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Even if we are able to
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products.
Our international operations, including our sales activities in Western Europe,
are subject to a number of risks, including:
-- supporting multiple languages;
-- recruiting sales and technical support personnel with the skills to
support our products;
-- increased complexity and costs of managing international operations;
-- protectionist laws and business practices that favor local
competition;
-- dependence on local vendors;
-- multiple, conflicting and changing governmental laws and regulations;
-- longer sales cycles;
-- difficulties in collecting accounts receivable;
-- reduced or limited protections of intellectual property rights; and
-- political and economic instability.
To date, none of our international revenues and costs have been denominated
in foreign currencies. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and thus
less competitive in foreign markets. A portion of our international revenues may
be denominated in foreign currencies in the future, including the Euro, which
will subject us to risks associated with fluctuations in those foreign
currencies.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. See "Business -- Intellectual
Property."
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We were previously the
subject of a lawsuit alleging infringement of intellectual property rights.
Although this dispute was resolved and the lawsuit dismissed, and we are not
currently involved in any other intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual
10
<PAGE> 12
property. These claims and any resulting lawsuit could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:
-- stop selling, incorporating or using our products or services that use
the challenged intellectual property;
-- obtain from the owner of the infringed intellectual property right a
license to sell or use the relevant technology, which license may not
be available on reasonable terms, or at all; and
-- redesign those products or services that use such technology.
If we are forced to take any of the foregoing actions, we may be unable to
manufacture and sell our products, which would reduce our revenues.
WE ARE THE SUBJECT OF A PENDING LEGAL PROCEEDING
We have been sued by one of our former contract manufacturers in the Santa
Clara County, California Superior Court. We believe that we have strong defenses
against the claims alleged in the lawsuit. Accordingly, we intend to defend this
suit vigorously. However, the litigation process is inherently uncertain and we
may not prevail. Our defense of this litigation, regardless of its eventual
outcome, has been, and will likely continue to be, time-consuming, costly and a
diversion for our personnel. A failure to prevail could result in us having to
pay monetary damages of up to $2.9 million and reimburse the plaintiff for some
or all of its attorneys' fees. See "Business -- Pending Legal Proceeding."
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:
-- issue stock that would dilute our current stockholders' percentage
ownership;
-- incur debt; or
-- assume liabilities.
These purchases also involve numerous risks, including:
-- problems combining the purchased operations, technologies or products;
-- unanticipated costs;
-- diversion of management's attention from our core business;
-- adverse effects on existing business relationships with suppliers and
customers;
-- risks associated with entering markets in which we have no or limited
prior experience; and
-- potential loss of key employees of purchased organizations.
11
<PAGE> 13
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT COULD HARM OUR BUSINESS
The year 2000 computer issue creates risks for us. Failure of our products
to recognize correctly date information when the year changes to 2000 could
result in significant decreases in market acceptance of our products, increases
in warranty claims and legal liability for defective software. We have not
tested our products in every possible computer environment, and therefore such
products may not be fully year 2000 compliant. Year 2000 preparations by our
customers could also slow down purchases of our products.
Our internal year 2000 compliance review is focused on reviewing our
internal computer information and security systems for year 2000 compliance, and
developing and implementing remedial programs to resolve year 2000 issues in a
timely manner. Additionally, we are contacting our third party suppliers and
requesting their written assurances that their systems are year 2000 compliant.
To date our year 2000 costs have been primarily driven by the cost of our
personnel conducting the year 2000 compliance review. We estimate such costs to
date are $50,000.
If our suppliers, vendors, major distributors and partners fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a year 2000
problem occurs, it may be difficult to determine which vendor's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any year 2000 failures
will harm us.
We believe our year 2000 worst case scenario would be the failure of a sole
or limited source supplier to be year 2000 compliant. The failure of one of
these suppliers to be year 2000 compliant could seriously interrupt our
manufacturing process, which could substantially reduce our revenues.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation may reduce funds available to purchase our products. Therefore, some
customers may wait to purchase our products until after the year 2000, which may
reduce our revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Compliance."
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS
The market for SAN products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. All components of the SAN must utilize the
same standards in order to operate together. Our products comprise only a part
of the entire SAN and we depend on the companies that provide other components
of the SAN, many of whom are significantly larger than we are, to support the
industry standards as they evolve. The failure of these providers to support
these industry standards could adversely affect the market acceptance of our
products. In addition, in the United States, our products must comply with
various regulations and standards defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, products that we
develop will also be required to comply with standards established by
authorities in various countries. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.
12
<PAGE> 14
MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH THE
STOCKHOLDERS MAY NOT AGREE
Our management can spend the net proceeds from this offering in ways with
which the stockholders may not agree. We cannot assure you that our investments
and use of the net proceeds of this offering will yield favorable returns or
results. See "Use of Proceeds."
OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL EXERCISE SIGNIFICANT
CONTROL OVER BROCADE
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own, in the aggregate, approximately 51.4% of
our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent someone from acquiring or merging
with us. See "Principal Stockholders."
PROVISIONS IN OUR CHARTER DOCUMENTS, CUSTOMER AGREEMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF BROCADE AND MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
-- authorizing the issuance of preferred stock without stockholder
approval;
-- providing for a classified board of directors with staggered,
three-year terms;
-- prohibiting cumulative voting in the election of directors;
-- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
-- limiting the persons who may call special meetings of stockholders;
-- prohibiting stockholder actions by written consent; and
-- establishing advance notice requirements for nominations for election
to the board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us. Further, our agreements with certain
of our customers require us to give prior notice of a change of control of
Brocade and grant certain manufacturing rights following the change of control.
See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and
Certain Provisions of Our Certificate of Incorporation and Bylaws."
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above
13
<PAGE> 15
the initial public offering price. The market price of our common stock may
fluctuate significantly in response to the following factors, some of which are
beyond our control:
-- actual or anticipated fluctuations in our operating results;
-- changes in financial estimates by securities analysts;
-- changes in market valuations of other technology companies;
-- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
-- losses of major original equipment manufacturer customers;
-- additions or departures of key personnel; and
-- sales of common stock in the future.
In addition, the stock market has experienced extreme volatility that often
has been unrelated to the performance of particular companies. These market
fluctuations may cause our stock price to fall regardless of our performance.
You should read the "Underwriters" section for a more complete discussion
of the factors to be considered in determining the initial public offering price
of our common stock.
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements. See "Use of Proceeds," "Dilution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. All of the
3,250,000 shares sold in this offering will be freely tradeable, with the
22,031,181 other shares outstanding, based on the number of shares outstanding
as of January 31, 1999 being restricted securities as defined in Rule 144 of the
Securities Act of 1933,
14
<PAGE> 16
11,634,545 shares of which will be freely tradeable beginning 180 days after the
effective date of this offering, and the remainder of which will become freely
tradeable at various times thereafter. Sales of a substantial number of shares
of our common stock after this offering could cause our stock price to fall. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional stock. See "Shares Eligible for Future Sale."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $ in the book value per share
of our common stock from the price you pay for our common stock. This
calculation assumes that you purchase our common stock for $ per share. See
"Dilution."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined under "Risk Factors" and elsewhere in this
prospectus.
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<PAGE> 17
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,250,000 shares of
common stock we are offering will be approximately $26,102,500, or $30,182,875
if the underwriters exercise their over-allotment option in full, at an assumed
initial public offering price of $9.00 per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses. We
expect to use the net proceeds of this offering as follows:
-- to repay outstanding indebtedness under our bank credit facility and
our equipment loan agreement; and
-- for general corporate purposes, including capital expenditures and
working capital.
In addition, we may use a portion of the net proceeds for the acquisition
of businesses, products and technologies that are complementary to ours.
However, we have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any acquisition. Pending
such uses, we will invest the net proceeds of this offering in investment grade,
interest-bearing securities.
Borrowings under our credit facility bear interest at the bank's prime
rate, which was 7.8% per annum as of January 31, 1999, and indebtedness under
our equipment loan agreement bears interest at the bank's prime rate plus 1%. At
January 31, 1999, the principal amount of outstanding indebtedness under our
credit facility and our equipment loan agreement was $1.7 million and $2.7
million, respectively.
DIVIDEND POLICY
We have not paid any cash dividends since our inception, and we do not
intend to pay any cash dividends in the foreseeable future. In addition, the
terms of our credit agreements prohibit the payment of dividends on our capital
stock.
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<PAGE> 18
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
January 31, 1999:
-- on an actual basis;
-- on a pro forma basis to reflect the assumed exercise of warrants to
purchase 296,881 shares of preferred stock at an exercise price of
$6.78 per share prior to this offering and the subsequent conversion
of all outstanding shares of preferred stock into 14,623,614 shares of
common stock; and
-- on a pro forma as adjusted basis to reflect our reincorporation in
Delaware and the sale of the common stock in this offering at an
assumed initial public offering price of $9.00 per share and the
application of the net proceeds, after deducting estimated
underwriting discounts and commissions and our estimated offering
expenses.
The outstanding share information excludes 2,082,471 shares of common stock
issuable on exercise of options outstanding as of January 31, 1999 with a
weighted average exercise price of $1.95 per share, 287,788 shares of common
stock issuable upon exercise of warrants outstanding as of January 31, 1999 with
a weighted average exercise price of $1.37 per share, and 466,516 shares of
common stock reserved for additional option grants under our stock plans as of
January 31, 1999. In addition, subsequent to January 31, 1999, 1,000,000 shares
have been reserved under our stock plans. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes to the
financial statements. See "Use of Proceeds" and "Management -- Employee Benefit
Plans."
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Short-term debt........................................... $ 3,644 $ 3,644 $
======== ======== ========
Long-term portion of debt and capital lease obligations... $ 1,808 $ 1,808 $
Redeemable convertible preferred stock, no par value,
9,791,280 shares authorized, 9,235,448 issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted........ 35,261 --
Warrants to purchase redeemable convertible preferred
stock................................................... 648 324
Stockholders' equity (deficit):
Preferred stock, $.001 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding, pro
forma and pro forma as adjusted......................
Common stock, $.001 par value, 30,000,000 shares
authorized, 7,408,167 shares issued and outstanding,
actual; 50,000,000 shares authorized, 22,031,781
shares issued and outstanding, pro forma; 50,000,000
shares authorized, issued and outstanding,
pro forma as adjusted................................ 10,309 47,907
Additional paid-in capital.............................. -- --
Notes receivable from stockholders...................... (4,899) (4,899)
Deferred compensation................................... (2,566) (2,566)
Accumulated deficit..................................... (30,669) (30,669)
-------- -------- --------
Total stockholders' equity (deficit)................. (27,825) 9,773
-------- -------- --------
Total capitalization............................ $ 13,536 $ 15,549 $
======== ======== ========
</TABLE>
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<PAGE> 19
DILUTION
The pro forma net tangible book value of our common stock as of January 31,
1999, was approximately $9.8 million, or $.44 per share of common stock. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by
22,031,781 shares of common stock outstanding after giving effect to the assumed
exercise of warrants to purchase 296,881 shares of preferred stock at an
exercise price of $6.78 per share prior to this offering and the subsequent
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering. After giving effect to our sale of
3,250,000 shares of common stock in this offering at an assumed initial offering
price of $9.00 per share and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses, our net tangible
book value as of January 31, 1999, would have been $ million or $
per share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to purchasers of common stock in this
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value per share as of January
31, 1999............................................... $.44
Increase per share attributable to new investors..........
----
Pro forma net tangible book value per share after this
offering..................................................
-----
Dilution per share to new investors.........................
=====
</TABLE>
The following table sets forth on a pro forma basis as of January 31, 1999,
after giving effect to the assumed exercise of warrants to purchase 296,881
shares of preferred stock at an exercise price of $6.78 per share prior to this
offering, the subsequent conversion of all outstanding shares of preferred stock
into common stock upon completion of this offering, the differences between the
existing stockholders and the purchasers of shares in this offering, at the
assumed initial public offering price of $9.00 per share, with respect to the
number of shares purchased from us, the total consideration paid and the average
price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 22,031,781 87.1% $43,917,000 60.0% $1.99
New stockholders.......... 3,250,000 12.9 29,250,000 40.0 9.00
---------- ----- ----------- -----
Total........... 25,281,781 100.0% $73,167,000 100.0%
========== ===== =========== =====
</TABLE>
As of January 31, 1999, there were options outstanding to purchase a total
of 2,082,471 shares of common stock at a weighted average exercise price of
$1.95 per share. In addition, as of January 31, 1999, there were warrants
outstanding to purchase 287,788 shares of common stock on an as converted basis
at a weighted average exercise price of approximately $1.37 per share, which we
have assumed will not be exercised prior to this offering. To the extent
outstanding options or warrants are exercised, there will be further dilution to
new investors. See "Management -- Employee Benefit Plans" and notes 6 and 7 to
our financial statements.
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<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and other financial information
appearing elsewhere in this prospectus. The statement of operations data set
forth below for each of the years in the three-year period ended October 31,
1998 and the balance sheet data as of October 31, 1997 and 1998 are derived
from, and qualified by reference to, our audited financial statements appearing
elsewhere in this prospectus. The statement of operations data for the period
from inception on August 24, 1995 to October 31,1995 and the balance sheet data
as of October 31, 1995 and 1996 are derived from audited financial statements
not included herein. The statement of operations data for the three-month
periods ended January 31, 1998 and 1999 and the balance sheet data as of January
31, 1999 are derived from unaudited financial statements appearing elsewhere in
this prospectus which, in the opinion of our management, reflect all normal
recurring adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles.
Operating results for the three months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the full fiscal
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
-------------------------------------------- --------------------------
1995 1996 1997 1998 1998 1999
------ ------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue......................... $ -- $ -- $ 8,482 $ 22,414 $ 7,824 $ 6,429
License revenue......................... -- -- -- 1,832 26 1,578
------ ------- -------- -------- -------- -------
Total revenues................... -- -- 8,482 24,246 7,850 8,007
Cost of revenues.......................... -- -- 6,682 15,759 4,697 3,321
------ ------- -------- -------- -------- -------
Gross profit.............................. -- -- 1,800 8,487 3,153 4,686
------ ------- -------- -------- -------- -------
Operating expenses:
General and administrative.............. 52 575 1,464 3,813 639 741
Sales and marketing..................... -- 152 2,112 5,154 1,074 1,729
Research and development................ 124 3,091 7,666 14,744 2,838 2,905
Amortization of deferred compensation... -- -- -- 7 -- 1,157
------ ------- -------- -------- -------- -------
Total operating expenses......... 176 3,818 11,242 23,718 4,551 6,532
------ ------- -------- -------- -------- -------
Loss from operations...................... (176) (3,818) (9,442) (15,231) (1,398) (1,846)
Other income (expense).................... 10 (116) (177) 120 43 7
------ ------- -------- -------- -------- -------
Net loss.................................. $ (166) $(3,934) $ (9,619) $(15,111) $ (1,355) $(1,839)
====== ======= ======== ======== ======== =======
Basic net loss per share.................. $ -- $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
====== ======= ======== ======== ======== =======
Shares used in computing basic net loss
per share............................... -- 414 1,997 3,400 2,570 4,349
====== ======= ======== ======== ======== =======
Pro forma basic net loss per share
(unaudited)............................. $ (.84) $ (.10)
======== =======
Shares used in computing pro forma basic
net loss per share (unaudited).......... 17,915 18,973
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF
-------------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999
------ ------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................. $1,168 $ 700 $ 2,552 $ 10,420 $ 10,137
Working capital........................... 922 104 15,334 5,276 4,500
Total assets.............................. 1,549 2,605 26,100 21,301 24,576
Long-term portion of debt and capital
lease obligations....................... -- 874 1,954 2,209 1,808
Redeemable convertible preferred stock.... 1,411 4,613 30,359 35,261 35,261
Total stockholders' deficit............... (166) (3,957) (13,458) (27,355) (27,825)
</TABLE>
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<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes included elsewhere in this prospectus.
OVERVIEW
We are a provider of switching solutions for SANs. We sell our SAN
switching solutions through leading storage systems and server original
equipment manufacturers, including Compaq Computer, Dell Computer, McDATA
Corporation, Sequent Computer Systems and StorageTek. These original equipment
manufacturers and our system integrator customers combine our switching
solutions with other system elements and services for enterprise data centers.
From our inception in August 1995 through April 1997, our operating
activities related primarily to developing our research and development
capabilities, building an ASIC design infrastructure, developing, prototyping
and testing our SilkWorm products, staffing our administrative, marketing and
sales organizations and establishing relationships with original equipment
manufacturers. In the three months ended July 31, 1997, we commenced volume
shipments of our SilkWorm switch. Since our inception we have incurred
significant losses and as of January 31, 1999, we had an accumulated deficit of
$30.7 million.
Our revenue is derived primarily from sales of our SilkWorm family of
products. Additionally, we have recognized licensing revenue in connection with
the licensing of certain technology rights to a customer. In fiscal 1998, sales
to Sequent and McDATA accounted for 72% and 11% of our total revenues,
respectively, and in the three months ended January 31, 1999, Sequent and McDATA
accounted for 37% and 33% of our total revenues, respectively. These percentages
exclude deferred revenue, which is discussed further below. The level of sales
to any customer may vary from quarter to quarter. However, we expect that
significant customer concentration will continue for the foreseeable future.
We currently sell substantially all of our products through several major
original equipment manufacturers. The initial evaluation and product
qualification cycle with original equipment manufacturers typically takes six to
12 months and includes technical evaluation, integration, testing, product
launch planning and execution. Our sales strategy also includes recruiting
system integrators with a Fortune 500 data center presence and the technical
resources to design, implement and support SANs. To date, substantially all of
our sales have been in the United States. However, we have launched sales and
marketing efforts in Europe and have a distributor in Japan.
Product revenue is recognized when products are shipped to customers,
unless at the time of shipment product returns cannot be estimated or
significant support services are required to successfully launch the customer's
products. In the three months ended January 31, 1999, several of our customers
were implementing SAN solutions, including our product, for their end-users for
the first time. Given the recent adoption of the SAN model and Brocade's
solution by these original equipment manufacturers and because substantial
Brocade services were required to support these original equipment
manufacturers' product launches, the revenue related to shipments to these
original equipment manufacturers customers has been deferred. The deferred
revenue will be recognized on a customer-by-customer basis as each customer
successfully completes its product launch. Similarly, revenue is deferred for
new products that have not completed the beta test phase. For the three months
ended January 31, 1999, $3.4 million of revenue was deferred. It is expected
that this deferred revenue will be recognized in fiscal 1999. We believe that,
as the SAN market matures, this revenue deferral method for new customers may
not be necessary. We do not provide our customers with product return programs.
We provide a reserve
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<PAGE> 22
for warranty returns based on our warranty history. License revenue is
recognized when collection is reasonably assured. We do not anticipate
significant licensing revenues in the future.
From fiscal 1997 to fiscal 1998 our average unit selling price decreased
26.0% primarily due to the introduction of the SilkWorm Express, a lower port
count product. We expect continued declines in our average unit selling price
due to anticipated increases in per customer sales volume, the impact of
competitive pricing pressures and new product introductions.
Our gross margins will be affected by declines in average unit selling
prices, fluctuations in manufacturing volumes and component costs, the mix of
products sold and the introduction of new products. Additionally, our gross
margins may be impacted by the mix of distribution channels through which our
products are sold.
In July 1998, we outsourced our manufacturing and the majority of our
supply chain management operations. Accordingly, a significant portion of our
cost of revenues consists of payments to our contract manufacturer, Solectron.
We conduct quality assurance, manufacturing engineering, documentation control
and repairs at our facility in San Jose, California.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and human resources personnel,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
travel expenses. We believe that continued investment in sales and marketing is
critical to the success of our strategy to expand our relationships with leading
original equipment manufacturers and to maintaining our leadership position in
the SAN market. As a result, we expect these expenses to increase in absolute
dollars in the future.
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
prototyping expenses related to the design, development, testing and
enhancements of our ASICs and software and the costs of computer support
services. We believe that continued investment in research and development is
critical to our strategic product and cost-reduction objectives. As a result, we
expect these expenses to increase in absolute dollars in the future.
In fiscal 1998, we initiated a plan to reduce our operating expenses by
restructuring our operations. In connection with this plan, we recorded a $3.2
million restructuring charge allocated among various expense categories.
In connection with the grant of certain stock options to employees during
fiscal 1998 and the three months ended January 31, 1999, we recorded deferred
compensation of $307,000 and $3.4 million, respectively, representing the
difference between the deemed value of our common stock for accounting purposes
and the option exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders' equity and amortized
ratably over the vesting period of the applicable options. We expensed $1.2
million of deferred compensation during the three months ended January 31, 1999.
We will expense the balance ratably over the remainder of the vesting period of
the options. See note 6 to our financial statements.
As of January 31, 1999, we had operating loss carryforwards of
approximately $20.5 million for federal purposes and $6.5 million for state
purposes. The federal net operating loss carryforwards expire on various dates
between 2010 and 2018, and the state net operating loss carryforwards will begin
to
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<PAGE> 23
expire in 2003. We have provided a full valuation allowance against our deferred
tax assets, consisting primarily of net operating loss carryforwards, because of
the uncertainty regarding their realization.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
OCTOBER 31, JANUARY 31,
--------------- --------------
1997 1998 1998 1999
------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product revenue..................................... 100.0% 92.4% 99.7% 80.3%
License revenue..................................... -- 7.6 .3 19.7
------ ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0
Cost of revenues...................................... 78.7 65.0 59.8 41.5
------ ----- ----- -----
Gross margin.......................................... 21.3 35.0 40.2 58.5
------ ----- ----- -----
Operating expenses:
General and administrative.......................... 17.3 15.7 8.1 9.2
Sales and marketing................................. 24.9 21.3 13.7 21.6
Research and development............................ 90.4 60.8 36.2 36.3
Amortization of deferred compensation............... -- -- -- 14.4
------ ----- ----- -----
Total operating expenses....................... 132.6 97.8 58.0 81.5
------ ----- ----- -----
Loss from operations.................................. (111.3) (62.8) (17.8) (23.0)
Other income (expense)................................ (2.0) .5 .5 --
------ ----- ----- -----
Net loss.............................................. (113.3)% (62.3)% (17.3)% (23.0)%
====== ===== ===== =====
</TABLE>
THREE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1999
Revenues. Total revenues increased by 1.3% from $7.9 million for the three
months ended January 31, 1998 to $8.0 million for the three months ended January
31, 1999. This increase was due to license revenue of $1.6 million in the three
months ended January 31, 1999. There was no significant license revenue in the
comparable three month period in fiscal 1998 and we do not anticipate
significant licensing revenues in the future. This increase was substantially
offset by a decrease in product revenue of $1.4 million primarily due to the
deferral of $3.4 million of product revenue in connection with shipments to new
customers, In addition, product revenue was adversely affected by a decline in
average unit selling prices resulting from the introduction of the SilkWorm
Express, a lower port count product.
Gross profit. Gross profit increased from $3.2 million for the three months
ended January 31, 1998 to $4.7 million for the three months ended January 31,
1999. Gross margin increased from 40.2% for the three months ended January 31,
1998 to 58.5% for the three months ended January 31, 1999. The increases were
due to lower manufacturing costs and the recognition of $1.6 million in
non-recurring license revenue for the three months ended January 31, 1999, which
had no related direct cost of revenues.
General and administrative expenses. General and administrative expenses
increased by 16.0% from $639,000 for the three months ended January 31, 1998 to
$741,000 for the three months ended
22
<PAGE> 24
January 31, 1999. This increase was due primarily to increased legal expenses
related to pending litigation. See "Business -- Legal Proceeding."
Sales and marketing expenses. Sales and marketing expenses increased by
60.9% from $1.1 million for the three months ended January 31, 1998 to $1.7
million for the three months ended January 31, 1999. This increase was due
primarily to an increase in personnel. Sales and marketing personnel totalled 17
and 30 for the three months ended January 31, 1998 and 1999, respectively.
Research and development expenses. Research and development expenses
increased by 2.4% from $2.8 million for the three months ended January 31, 1998
to $2.9 million for the three months ended January 31, 1999. The increase
primarily resulted from the increased cost of prototype materials.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock option grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $1.2 million for the three months ended January 31, 1999.
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
Revenues. We shipped our first commercial product in the second quarter of
fiscal 1997, generating revenues of $8.5 million for the year. Total revenues
increased by 185.0% to $24.2 million in fiscal 1998 reflecting the ramp-up of
sales to a significant original equipment manufacturer customer, the
introduction of the SilkWorm Express product and the recognition of $1.8 million
in license revenue. Unit shipments of SilkWorm increased by 242.0% from fiscal
1997 to fiscal 1998. However, average unit selling prices decreased by 26.0% in
fiscal 1998, due primarily to the introduction of SilkWorm Express, a lower port
count product.
Gross Profit. Gross profit increased from $1.8 million in fiscal 1997 to
$8.5 million in fiscal 1998. Gross margin increased from 21.3% in fiscal 1997 to
35.0% in fiscal 1998. Fiscal 1997 cost of revenues included higher component and
manufacturing costs associated with the lower initial production volumes, as
well as overhead costs which were applied to a relatively low number of units
produced. In fiscal 1998, cost of revenues was also reduced as a result of the
decision to outsource all manufacturing activities during the year. In addition,
there were no significant costs associated with $1.8 million of license revenue
in fiscal 1998, resulting in an overall gross margin increase. However, this
increase was somewhat offset by a $1.3 million restructuring charge resulting
from the writeoff of certain inventory and equipment related to a change in
contract manufacturers.
General and administrative expenses. General and administrative expenses
increased from $575,000 for fiscal 1996 to $1.5 million for fiscal 1997 and to
$3.8 million for fiscal 1998. These increases were primarily due to increased
staffing and associated expenses necessary to manage and support our increased
scale of operations. Fiscal 1998 expenses were also affected by costs related to
a business restructuring which totaled $1.2 million, primarily related to the
termination of 20 employees, including severance arrangements for our former
Chief Executive Officer.
Sales and marketing expenses. Sales and marketing expenses increased from
$152,000 in fiscal 1996 to $2.1 million in fiscal 1997 and to $5.2 million in
fiscal 1998. The increases reflect the hiring of additional sales and marketing
personnel. Sales and marketing personnel totaled 12 and 24 at the end of fiscal
1997 and fiscal 1998, respectively.
Research and development expenses. Research and development expenses
increased from $3.1 million in fiscal 1996 to $7.7 million in fiscal 1997 and to
$14.7 million in fiscal 1998. These increases reflect significant research and
development efforts required to bring the SilkWorm and SilkWorm Express products
to market and to begin development of second generation products. The
23
<PAGE> 25
increase in fiscal 1998 expenses also reflects restructuring costs associated
with the cancellation of new product development and simulation projects.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock options grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $7,000 in fiscal 1998.
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<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations
data for each of the seven quarters ended January 31, 1999, as well as such data
expressed as a percentage of our total revenues for the quarters presented. This
unaudited quarterly information has been prepared on the same basis as our
audited financial statements and, in the opinion of our management, reflects all
normal recurring adjustments that we consider necessary for a fair presentation
of the information for the periods presented. Operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
-------- ----------- ----------- --------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue....................... $ 1,534 $ 6,347 $ 7,824 $ 5,134 $ 4,056 $ 5,400 $ 6,429
License revenue....................... -- -- 26 1,286 513 7 1,578
------- ------- ------- ------- ------- ------- -------
Total revenues...................... 1,534 6,347 7,850 6,420 4,569 5,407 8,007
Cost of revenues........................ 1,212 4,435 4,697 3,672 4,351 3,039 3,321
------- ------- ------- ------- ------- ------- -------
Gross profit............................ 322 1,912 3,153 2,748 218 2,368 4,686
------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and administrative............ 378 462 639 624 1,979 571 741
Sales and marketing................... 616 839 1,074 1,302 1,444 1,334 1,729
Research and development.............. 2,046 2,847 2,838 3,457 5,016 3,433 2,905
Amortization of deferred
compensation........................ -- -- -- -- -- 7 1,157
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 3,040 4,148 4,551 5,383 8,439 5,345 6,532
------- ------- ------- ------- ------- ------- -------
Loss from operations.................... (2,718) (2,236) (1,398) (2,635) (8,221) (2,977) (1,846)
Other income (expense).................. (50) (119) 43 120 114 (157) 7
------- ------- ------- ------- ------- ------- -------
Net loss................................ $(2,768) $(2,355) $(1,355) $(2,515) $(8,107) $(3,134) $(1,839)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
-------- ----------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue....................... 100.0% 100.0% 99.7% 80.0% 88.8% 99.9% 80.3%
License revenue....................... -- -- .3 20.0 11.2 .1 19.7
------- ------- ------- ------- ------- ------- -------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........................ 79.0 69.9 59.8 57.2 95.2 56.2 41.5
------- ------- ------- ------- ------- ------- -------
Gross margin............................ 21.0 30.1 40.2 42.8 4.8 43.8 58.5
------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and administrative............ 24.6 7.3 8.1 9.7 43.3 10.6 9.2
Sales and marketing................... 40.2 13.2 13.7 20.3 31.6 24.7 21.6
Research and development.............. 133.4 44.8 36.2 53.8 109.8 63.5 36.3
Amortization of deferred
compensation........................ -- -- -- -- -- .1 14.4
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 198.2 65.3 58.0 83.8 184.7 98.9 81.5
------- ------- ------- ------- ------- ------- -------
Loss from operations.................... (177.2) (35.2) (17.8) (41.0) (179.9) (55.1) (23.0)
Other income (expense).................. (3.2) (1.9) .5 1.8 2.5 (2.9) --
------- ------- ------- ------- ------- ------- -------
Net loss................................ (180.4)% (37.1)% (17.3)% (39.2)% (177.4)% (58.0)% (23.0)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 27
Revenues. Our total revenues increased each quarter from our initial
product introduction during the three months ended April 30, 1997 through the
three months ended January 31, 1998 when total revenues reached $7.9 million.
The substantial increase in total revenues for the three-month periods ended
October 31, 1997 and January 31, 1998 primarily resulted from purchases by an
original equipment manufacturer customer in connection with the customer's
product launch and hub replacement program. Total revenues decreased to $6.4
million and $4.6 million for the three-month periods ended April 30, and July
31, 1998 due to reduced purchases by the same customer because of its inventory
position. Since July 31, 1998, total revenues have increased each quarter,
primarily as a result of an expanded customer base.
Gross margin. Gross margin has generally increased each quarter since we
commenced volume shipments in the three months ended July 31, 1997. Gross margin
increased from 21.0% in the three months ended July 31, 1997 to 58.5% in the
three months ended January 31, 1999. These increases have been due to reduced
production costs on a per unit basis as manufacturing volumes increased, a
reduction in manufacturing costs due to increased use of outsourcing and
nonrecurring license revenue in the three months ended January 31, 1999. The
only exception to this trend was in the third quarter of fiscal 1998 when gross
margin decreased to 4.8%. This decrease was due primarily to a corporate
restructuring charge of $1.3 million associated with the outsourcing of
manufacturing which resulted in a reduction of internal manufacturing personnel
and the write-off of excess and obsolete inventory.
Operating expenses. Operating expenses increased each quarter until our
restructuring in the three months ended July 31, 1998. In connection with this
restructuring plan, we recorded a $1.9 million charge to operating expenses,
which included a $700,000 charge to research and development expenses and a $1.2
million charge to general and administrative expenses. The restructuring charge
included costs associated with a reduction of personnel in these areas, the
write-off of excess equipment and the write-off of other tangible and intangible
assets related to the cancellation of certain development and simulation
projects. As a result of these charges, total operating expenses declined in
absolute dollars for the three-month periods ended October 31, 1998 and January
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, for aggregate proceeds of approximately $35.8 million, capital
equipment lease lines and bank debt. During fiscal 1996, cash utilized by
operating activities was $3.4 million, compared to $7.3 million in fiscal 1997
and $11.6 million in fiscal 1998. The increases in cash utilized in fiscal 1997
and 1998 reflected the increased working capital required to fund expanding
operations and increases in inventory and accounts receivable. Capital
expenditures were $1.5 million in fiscal 1996, $3.4 million in 1997 and $3.8
million in 1998. These expenditures reflect our investments in computer
equipment, software development tools and facilities, which were required to
support our business expansion.
Our principal sources of liquidity as of January 31, 1999 consisted of
$10.1 million in cash and cash equivalents and our bank credit facility. The
credit facility includes a revolving line of credit providing borrowings up to
the lesser of $4.0 million or 80% of eligible accounts receivable and an
equipment loan agreement providing for financing up to $5.0 million. Borrowings
under the revolving line of credit bear interest at the bank's prime rate, which
was 7.8% at January 31, 1999, are secured by our accounts receivable and
inventory, and are payable in August 1999. Borrowings under the equipment loan
agreement bear interest at the bank's prime rate plus 1.0%, are secured by the
related capital equipment and are payable through June 30, 2002. The line of
credit and equipment loan contain provisions that prohibit the payment of cash
dividends and require the maintenance of specified levels of tangible net worth
and certain financial ratios measured on a monthly basis. As of January 31,
1999, there were borrowings under the revolving line of credit of $1.7 million
and under the equipment financing of
26
<PAGE> 28
$2.7 million. We intend to pay off our existing line of credit and equipment
loan with a portion of the net proceeds of this offering.
We believe the net proceeds of this offering, together with our existing
cash balances and credit facilities and cash flow expected to be generated from
future operations, will be sufficient to meet our capital requirements at least
through the next 12 months, although we could be required, or could elect, to
seek additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of our products. There can be no
assurances that additional equity or debt financing, if required, will be
available on acceptable terms or at all.
YEAR 2000 COMPLIANCE
Impact of the year 2000 computer problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
To date, we have experienced no year 2000 issues with any of our internal
systems or our products, and we do not expect to experience any.
Our year 2000 program. We have based our year 2000 compliance program on
the program adopted by the U.S. Government Accounting Office. Our program is
divided into six phases: awareness, assessment, renovation, validation,
implementation and monitoring. The program covers our information technology
systems, non-information technology systems and embedded technology. We have
completed the awareness phase, substantially completed the assessment phase and
are starting the renovation phase. We expect to be completed with the
implementation phase by the end of the summer of 1999.
State of readiness of our products. We have been testing our existing
products for use in the year 2000 and beyond, and believe that using our
products as documented should not cause any year 2000 related issues. While we
believe our products are year 2000 compliant, it is impractical for us to test
our products in every computer environment or with all available combinations of
our products with components supplied by our customers or other third party
suppliers. As a result, there may be situations where the combination of our
products working with components supplied by other third parties could result in
year 2000 issues.
State of readiness of our internal systems. Our business may be affected by
year 2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We are requesting written assurances from our third-party
vendors for all of our material systems that such systems are year 2000
compliant. To date, we have identified one internal system that will require an
upgrade to be year 2000 compliant and one of our enterprise systems that
utilizes a database system that will require an upgrade to be year 2000
compliant. These upgrades are currently available. In addition, several of our
administrative and engineering systems rely on an operating system that will
require an upgrade to be year 2000 compliant, which is currently available. Most
of our productivity systems and personal computers utilize Microsoft Windows 95
and 98 operating systems and Microsoft NT 4.0. While the Microsoft Windows 95
and 98 environments have available year 2000 upgrades, to date Microsoft has not
provided what we consider a useable year 2000 upgrade for the NT 4.0
environment. We believe that
27
<PAGE> 29
Microsoft will provide this upgrade in a timely manner to avoid any year 2000
problems. We believe we will be able implement all available upgrades by the end
of the summer 1999. No projects have been deferred due to the year 2000 issue.
State of readiness of our facilities. The operation of our facilities also
depends upon the computer-controlled systems of third parties such as suppliers
and service providers. We believe that absent a systemic failure outside our
control, such as a prolonged loss of electrical or telephone service, year 2000
problems of these third parties will not have a material impact on our
operations. Our facilities use limited embedded technology and the failure of
that technology is not expected to have a material impact on our operations.
State of readiness of key third parties. Our third party suppliers are
sensitive to the need to be year 2000 compliant. As part of the assessment phase
of our year 2000 program we are requesting written assurances from our third
party suppliers that they are year 2000 compliant. Some of our third party
suppliers have indicated that they are year 2000 compliant. However, others are
in a year 2000 compliance review process. Therefore, at this time they are not
in a position to provide us with year 2000 compliance assurance. If we identify
a material year 2000 compliance issue with a third party supplier, we will work
with that supplier to resolve the issue or source the parts or services from a
supplier that is year 2000 compliant.
Use of independent verification. We have not used external agencies or
partners to verify or validate year 2000 readiness. We do not feel that the
scope of our program warrants this time and expense.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediating our internal systems will exceed $250,000.
Worst case year 2000 scenario. While it is impossible to evaluate every
aspect of year 2000 compliance, we believe the worst case scenario related to
year 2000 compliance issues would be the failure of a sole or limited source
supplier to be year 2000 compliant. The failure of one of these suppliers to be
year 2000 compliant could seriously interrupt the flow of materials into the
manufacturing process and therefore delay the manufacture and sale of our
products. However, due to the general uncertainty inherent in the year 2000
computer problem resulting from the uncertainty of the year 2000 readiness of
third-party suppliers and vendors, we are unable to determine at this time
whether the consequences of year 2000 failures will have a material impact on
our business.
Additional risks. Any failure by us to make our products year 2000
compliant could result in a decrease in sales of our products, an increase in
allocation of resources to address year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such year 2000 problems. Failures of our internal systems could temporarily
prevent us from processing orders, issuing invoices, and developing products,
and could require us to devote significant resources to correcting such
problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We have not had significant software sales to date and do not expect
the adoption of SOP 98-9 to have a significant effect on our financial condition
or results of operations.
28
<PAGE> 30
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
29
<PAGE> 31
BUSINESS
OVERVIEW
We are the leading provider of Fibre Channel switching solutions for SANs,
which apply the benefits of a networked approach to the connection of computer
storage systems and servers. Our family of SilkWorm switches enables companies
to cost-effectively manage growth in their storage capacity requirements,
improve the performance between their servers and storage systems and increase
the size and scope of their SAN, while allowing them to operate data-intensive
applications, such as data backup and restore, and disaster recovery, on the
SAN. We sell our SAN switching solutions through leading storage systems and
server original equipment manufacturers, including Compaq Computer, Dell
Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. These
original equipment manufacturers and our system integrator customers combine our
switching solutions with other system elements and services for companies' data
processing centers.
INDUSTRY BACKGROUND
BUSINESS-CRITICAL DATA STORAGE REQUIREMENTS
The last decade has seen an explosion in the volume of business-critical
data that is being captured, processed, stored and manipulated in business
environments. This has fueled an increase in demand for data storage capacity.
According to International Data Corporation, an independent industry research
company, from 1994 to 2002, shipments of direct access storage capacity, which
excludes tape and optical storage, are expected to increase more than a
hundredfold. Efficient data storage and management is becoming one of the most
important aspects of business-critical decision making. Increased reliance on
applications ranging from business intelligence and decision support, data
warehousing and data mining of large databases, disaster tolerance and recovery,
enterprise software, and imaging and graphics have all contributed to this
trend. In addition, the development of Web-based business operations and
e-commerce in particular, has intensified the demand placed on data centers.
Customer interactions over the Web have increased operational focus on the
performance, scalability, management and flexibility of systems that use
business-critical data. This dependence on data for fundamental business
processes by employees, customers and suppliers has greatly increased the number
of input and output transactions, or I/Os, required of computer storage systems
and servers. In addition, the complexity of enterprise computing and storage is
further compounded by the use of multiple incompatible server operating systems,
such as the proliferation of Windows NT in traditional UNIX environments. As a
result, organizations are being forced to dedicate substantial financial and
personnel resources to manage and maintain the distributed storage capabilities
of their networks.
BOTTLENECK IN STORAGE AND SERVER CONNECTIONS
Despite the increased attention and resources which have been devoted to
data storage requirements, the technical capabilities of data storage systems
have not kept pace with increasing data management demands and with the
advancements in other networking technologies. In the 1980s, the near ubiquity
of PCs, workstations and servers required broader connectivity, resulting in the
development of local and wide area networks to support messaging between
computer systems. The data used by computers and servers connected to local and
wide area networks are typically located on computer storage systems and
servers, which store, process and manipulate data. The adoption of high speed
messaging technologies such as gigabit Ethernet and asynchronous transfer mode,
or ATM, increased local and wide area network transmission speeds by more than
1,000 times during the 1990s. However, storage-to-server data transmission
speeds increased by less than ten times during this period, creating a
bottleneck between the local or wide area network and business-critical storage
systems and servers.
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Traditionally, distributed systems have linked a single server with a
limited number of storage systems in close proximity. The Small Computer Systems
Interface, or SCSI, standard was adopted as the I/O interface standard for
storage-to-server and server-to-server connections in the 1980s. SCSI is a
parallel interface that permits throughput of 20 to 40 megabytes per second.
SCSI's throughput limitations have become much more pronounced as local and wide
area network transmission technologies have migrated from Ethernet, which
transfers data at 10 megabits per second, to gigabit Ethernet, which transfers
data at 1,000 megabits per second. In addition, SCSI allows a maximum
transmission distance of only 12 meters and supports just 32 devices on a single
bus. As a result, SCSI does not adequately support the increasing requirements
for speed, scalability and flexibility of today's data-intensive enterprises.
INTRODUCTION AND STANDARDIZATION OF FIBRE CHANNEL
In response to the demand for high-speed and high-performance
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol, an industry networking standard, was developed in the
early 1990s. The Fibre Channel interconnect standard received American National
Standards Institute, or ANSI, approval in 1994 and has subsequently earned broad
support from industry and independent testing laboratories. Fibre Channel
supports large data block transfers at gigabit speeds and is therefore well
suited for data transfers between storage systems and servers. It also supports
multiple protocols such as SCSI and Internet Protocol, or IP. Furthermore, it
provides transmission reliability with guaranteed delivery and transmission
distances of up to 10 kilometers. Fibre Channel complements and supports
advancements in local and wide area network technologies, such as gigabit
Ethernet and ATM, which are not effective for large block data-intensive
transfers.
ADVENT OF THE STORAGE AREA NETWORK
Fibre Channel has enabled the development of a storage area network, or
SAN, to meet the requirements of data centers and other data-intensive,
distributed computing environments. Similar to local and wide area networks, the
SAN applies the distributed computing model to computer storage systems and
servers and takes advantage of the inherent benefits of a networked approach.
These benefits include the decoupling of computer storage systems and servers,
increasing scalability and providing a higher level of connectivity than
currently exists in the SCSI environment. Additionally, the SAN provides
high-speed connectivity for data-intensive applications across multiple
operating systems, including UNIX and Windows NT. By bringing networking
technology into the data processing center, a SAN also provides increased
flexibility, fault tolerance, ease of management and lower total cost of
ownership. The SAN market is expected to grow substantially as organizations
embrace this emerging solution. According to the Gartner Group, an independent
industry research company, more than 70% of shared storage in networked
environments is projected to be reorganized into SANs by the year 2002.
The simplest SAN configuration is a loop topology, which is similar to
traditional SCSI-based distributed systems and interconnects multiple nodes over
a shared Fibre Channel networking device, such as a hub. A Fibre Channel hub can
support up to 126 devices, but the available bandwidth is shared among all the
devices, resulting in signal and performance degradation as the number of
devices in the loop increases. In addition, loop topologies suffer from limited
network management and fault isolation capabilities. For example, when a single
device is added to the loop, it will cause the loop to reset, resulting in
application disruption. The limitations of shared networks have been addressed
in local and wide area network environments by the development of switching
technologies that have yielded advancements in performance, scalability,
flexibility and management at competitive costs. In order for the SAN model to
become more widely adopted in data centers, today's enterprises must be able to
connect any device on the network to any other device on the network, or
any-to-any connectivity, without performance degradation in order to effectively
leverage distributed computer storage systems,
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servers, workstations and other resources. Guaranteed reliability and
availability are vital to the storage, processing and manipulation of
business-critical data. Networks require dedicated connections operating at high
performance levels to support large data transfer demands. Finally, data
processing centers are characterized by a high degree of change that must be
supported by a flexible network infrastructure.
THE BROCADE SOLUTION
We are the leading provider of Fibre Channel SAN switching solutions. We
combine advanced switching technologies with our Fibre Channel technology
leadership and systems expertise to provide the Brocade Fabric, comprised of
Fibre Channel switches, a proprietary switch operating system, management tools,
management services and ready-to-deploy configurations. Our products provide an
infrastructure backbone that allows our customers to concurrently run multiple
applications across the SAN, reducing congestion of local and wide area
networks. Our Brocade Fabric helps enterprises cost-effectively manage the
growth in storage capacity, improve server-to-storage and server-to-server
performance, and increase the size and scope of their SANs, while enabling
data-intensive applications, such as reliable backup and restore and disaster
recovery. Our solutions have the following key benefits:
Address the input/output bottleneck. Deployment of SANs based on our
Brocade Fabric not only enhances point-to-point bandwidth with Fibre Channel
connections, but helps solve the I/O bottleneck between data storage systems and
servers. Our SilkWorm family of Fibre Channel switches delivers full-duplex 1
gigabit per second performance at every port. In addition, unlike hubs or other
shared devices, our switches are designed to provide any-to-any connectivity and
to maintain 1 gigabit per second performance per port as additional devices are
added to the SAN. Our superior frame-forwarding capability provides end-users
with rapid data retrieval and allows a greater number of user transactions.
Provide SAN scalability. Our modular Fibre Channel switches, supporting
from two to 16 ports per switch, enable incremental growth by interconnecting or
cascading multiple switches for hundreds of connections in a fully meshed
configuration. Our Brocade Fabric enables companies to grow clusters of high
performance servers or provide multiple servers with high bandwidth connections
to multiple storage systems. Additionally, Fibre Channel allows connections up
to 10 kilometers, enabling companies to interconnect separate SAN clusters or
islands into a single SAN.
Enable SAN applications. The Brocade Fabric creates a SAN backbone for
data-intensive applications, enabling organizations to solve complex problems in
data processing centers. Our products allow all departments within an
organization to share data storage resources despite operating within a
computing environment that includes incompatible operating systems sharing
storage resources. The Brocade Fabric allows highly flexible configurations and
supports a wide range of data traffic, including high throughput and low latency
processing. For example, high throughput applications, such as data backup and
restore, and disaster recovery can be performed on the SAN, freeing up valuable
bandwidth on the local and wide area network and eliminating the need for
expensive backup servers. Additionally, companies utilizing the Brocade Fabric
for their e-commerce and other low latency transaction processing applications
can leverage hundreds of computer storage devices and servers.
Support a mission-critical data processing center. We have designed our
solutions to provide high levels of resiliency and availability with maximum
up-time for business-critical, data-intensive applications. Our switches have
auto-configuration and reconfiguration capabilities that incorporate redundant
and alternate data paths for frame forwarding, which enable our Brocade Fabric
to be self-healing. They also support up to eight parallel links to other
switches. As a result, any cable, port, switch or link failure can be isolated,
providing a resilient solution. This increases the availability and up-time of
the data processing center.
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Enhance SAN management. Our Brocade Fabric Operating System and our network
management tools enable our customers to centrally manage storage systems and
servers handling business-critical data. Our products deliver a rich set of SAN
management information that can be accessed both locally and remotely.
Data-intensive connections in the organization can be centrally managed to share
resources with other points on the network. All of these factors combine to help
organizations reduce the overall costs and increase the efficiency of their data
network.
THE BROCADE STRATEGY
Our objective is to maintain our position as the leading provider of SAN
switching solutions. The key elements of our strategy include the following:
Leverage our SAN switching market leadership. We believe we were the first
company to provide a comprehensive Fibre Channel fabric solution and that we are
the market leader based upon the number of switch ports shipped. We intend to
capitalize on our first mover advantage and in-depth customer and product
knowledge. We believe we are well positioned to anticipate the future
requirements of the SAN marketplace.
Capitalize on leadership in Fibre Channel technologies and standards. We
have been a leader in the development of Fibre Channel technologies and the
implementation of ANSI Fibre Channel standards. Our technology efforts are led
by some of the most widely recognized members of the Fibre Channel industry. In
addition, our technical personnel have substantial expertise in storage, file
system, routing algorithms and network management technologies. We have also
provided major contributions to many of the ANSI Fibre Channel standards that
have been developed to date. We believe that taking a continued proactive role
in this expanding market will enable us to extend our leading market position.
Leverage core architecture. We are leveraging our core switching expertise,
ASIC architectures, Brocade Fabric Operating System and Fibre Channel technology
to expand our family of SilkWorm products to address the expanding SAN market.
While to date we have focused on the workgroup and midrange segments of the SAN
market, we intend to leverage our leadership position in these segments to
broaden our reach into other segments of the SAN switch market as they emerge.
We expect that the demand for SAN switching solutions in entry level
applications will increase, particularly as Windows NT-based servers are
increasingly used in data processing centers. We are developing products
designed to address the specific needs of organizations that use Windows
NT-based servers in anticipation of this growth.
Continue to expand network of original equipment manufacturers and system
integrators. We intend to continue to expand our relationships with key computer
storage system and server original equipment manufacturers and system
integrators, both domestically and abroad. Currently, our major original
equipment manufacturers customers include Compaq Computer, Dell Computer,
McDATA, Sequent Computer Systems and StorageTek. These relationships allow us to
leverage the systems and services capabilities of these industry-leading
original equipment manufacturers. We have also recently entered into
relationships with system integrators including Cranel, Polaris, RAID Power,
Tokyo Electron Ltd. and TranSoft Networks. We expect that our relationships with
leading system integrators will allow us to penetrate the market opportunities
by leveraging the reach of these distribution channels.
Develop strategic partnerships. We are building strategic relationships
with Fibre Channel component and device vendors and storage management software
companies. By partnering with these organizations, we believe we can enhance SAN
applications and interoperability, thereby accelerating the time to market and
overall deployment and functionality of our products.
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CUSTOMERS
Our primary customers are original equipment manufacturers. The following
is a representative list of our original equipment manufacturer customers who
have purchased more than $500,000 worth of products since the beginning of
fiscal 1998:
<TABLE>
<S> <C>
Compaq Computer Sequent Computer Systems
Dell Computer StorageTek
McDATA
</TABLE>
Sequent and McDATA accounted for approximately 72% and 11%, respectively,
of our total revenues in the fiscal year ended October 31, 1998 and 37% and 33%
of our total revenues, respectively, for the three-month period ended January
31, 1999. Our total revenues do not include deferred revenue.
In the third quarter of fiscal 1998, we launched our system integrators
program. To date, we have entered into relationships with Cranel, Polaris, RAID
Power, Tokyo Electron Ltd. and TranSoft Networks.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization provides technical support to
our original equipment manufacturers and system integrators, enabling them to
provide technical support to their end-users. We prepare our original equipment
manufacturer and system integrator customers for product launch through a
comprehensive training program. In addition, we employ systems engineers for
pre- and post-sales support and technical support engineers for field support.
Our original equipment manufacturers and system integrator customers provide
primary technical support.
We have developed an extensive training course for our original equipment
manufacturer and system integrator customers. The curriculum includes Fibre
Channel architecture, SAN implementation and Brocade product training.
SALES AND MARKETING
Our sales and marketing strategy is focused on an indirect sales model
executed through original equipment manufacturers and system integrators. Our
distribution channels are supported by a sales and marketing organization
comprised of 32 individuals, including managers, sales representatives and
technical and administrative support personnel. We have entered into a
relationship with a distributor in Japan, and we expect to expand our
international sales activities. Our marketing effort is focused on developing
strategic partnerships and relationships with industry analysts, providing
customer sales support, managing new product planning and supporting industry
standard initiatives.
Original equipment manufacturers. We have established key relationships
with several storage systems and server original equipment manufacturers. Each
original equipment manufacturer provides installation, service and technical
support to its customers while we focus on high-level back-up support. In
addition to maintaining and enhancing our relationships with our existing
original equipment manufacturer customers, we intend to pursue relationships
with additional original equipment manufacturers that may offer products or
distribution channels that complement ours. We believe that these relationships
allow us to leverage the systems and services capabilities of our original
equipment manufacturers.
System integrators. We have recently launched our system integrator program
and have established several relationships within this channel. Although we have
not experienced significant volume from this channel to date, we believe
revenues from this channel may increase significantly in the future. Each
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system integrator provides installation, service and technical support to its
customers, while we focus on integration and technical back-up support. We
intend to continue to develop relationships with system integrators who may
offer products or distribution channels that complement ours.
PRODUCTS
Brocade provides the SilkWorm family of Fibre Channel switches, which
creates a switch interconnect, enabling any-to-any connectivity between storage
devices and servers. SilkWorm switches can be used individually for server
clustering or storage consolidation, or cascaded with other switches to form a
powerful networking infrastructure, the Brocade Fabric. Brocade's software
solutions provide network administrators with tools to manage the switches and
the SAN. Brocade also provides extensive Fabric services, in order to optimize
the Brocade Fabric for an enterprise's particular needs. Moreover, Brocade
SOLUTIONware provides instructions to enterprises on implementing SANs.
SILKWORM FAMILY OF SWITCHES
Our SilkWorm switches are a key element of a SAN. SilkWorm, introduced in
March 1997, is a configurable 16-port switch used to connect servers to storage
devices to create a SAN. File servers and storage devices can then access
information anywhere on the SAN. In April 1998, Brocade introduced SilkWorm
Express, an eight-port Fibre Channel switch.
The SilkWorm family of switches share a common platform designed to provide
the following features and benefits:
-- High throughput. Each port delivers a 1 gigabit per second,
full-duplex data rate regardless of network connectivity.
-- Hardware-based data path. SilkWorm reduces latency by eliminating
software processing from the path of data frames.
-- Management. SilkWorm supports customers' existing management
solutions, such as local and wide area networks, SCSI tools and web
tools.
-- In-order delivery of data frames. SilkWorm guarantees that frames are
delivered to a destination in the same order as received by the switch
from the originator.
-- Cut-through frame routing. Frames are sent without waiting for the
entire frame or for a response back from its destination, thereby
improving bandwidth utilization and minimizing transmission delays.
-- Cascading. SilkWorm may be connected to as many other SilkWorm
switches as there are available ports creating in a meshed topology,
enabling hundreds of connections and large SANs.
-- Flexible switch buffering. If the destination is busy, data frames are
stored by a SilkWorm switch for only as long as is necessary, thereby
moving data faster through the switch.
-- Path selection. SilkWorm identifies failures automatically and
immediately, and reroutes data to alternate paths, creating a highly
resilient network.
-- Registered state change notification. SilkWorm automatically detects
changes in configuration and port status to enable quick corrective
action.
-- Media independent. SilkWorm enables the SAN to support diverse media,
including fiberoptic connections up to 10 kilometers and copper
connections.
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-- Auto-configuration. SilkWorm enhances scalability by automatically
expanding the SAN as new devices are added or removed without
interrupting the operation of the rest of the network. SilkWorm
seamlessly incorporates more Brocade switches into the network,
thereby increasing aggregate bandwidth as connectivity increases;
network services automatically expand without additional system
resources.
BROCADE FABRIC OPERATING SYSTEM
The SilkWorm family of switches is supported by the Brocade Fabric
Operating System. The Brocade Fabric Operating System provides the intelligence
for the Brocade Fabric, provides services for the switch hardware, runs the
value-added Brocade Fabric services such as name service, which is used to
assist discovery of connected devices, monitors the status of the hardware and
fabric and notifies the host operating system as devices are added to or removed
from the Brocade Fabric.
The Brocade Fabric Operating System provides a common platform upon which
system services can be built. The Brocade Fabric Operating System is layered
with well-defined application interfaces, or APIs, that allow third parties,
such as data storage and data backup software vendors, to write applications
that leverage Brocade's Fabric Operating System. By incorporating API
technology, these third party vendors can develop applications, thereby
increasing the capabilities of the overall switch fabric solution.
FABRIC SERVICES
Fabric services are product features that increase the functionality of the
SAN. Our current Brocade Fabric Services include zoning and multicasting.
Brocade Zoning is an add-on software product that allows the creation of
multiple logical connectivity groups within a single SAN. By creating a zone,
the SAN provides the network with benefits that would otherwise only be possible
using multiple SANs. Through zoning, systems that have different operating
environments, such as UNIX and Window NT, can be isolated from each other
allowing both operating systems to co-exist on a single SAN. Zoning can be used
to create functional areas in the fabric and designate closed user groups for
greater security and control. Also, zoning facilitates time-sensitive functions,
such as creating a temporary zone used to backup storage devices that are
members of other zones. Brocade Zoning offers dynamic configuration and an
unlimited number of zones. Finally, Brocade Zoning allows devices to be a member
of more than one zone thereby increasing flexibility.
Brocade Multicasting enables up to 32 groups of devices to replicate data
in a one-to-one method or in a one-to-many method. By accomplishing this
replication through hardware, Brocade is able to maintain high throughput.
SOLUTIONWARE
Brocade's SOLUTIONware is a set of application notes that facilitates the
implementation of SAN solutions incorporating products and applications from
multiple vendors, including Brocade. These applications notes include specific
details including equipment requirements, software specifics, detailed
installation instructions and tested application software. This enables original
equipment manufacturers and system integrators to replicate high performance
solutions. Our first SOLUTIONware release, Brocade Tape Backup and Restore,
provides customers with a detailed road map to address their data backup needs
using Brocade's products.
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MANAGEMENT TOOLS
Brocade Web Tools is an add-on software product that helps to remotely
manage a SAN of our SilkWorm family of switches via the Internet or intranet.
The information technology administrator can log onto a switch from a host with
a java-based Web browser. From that switch, the administrator can monitor the
status and performance of any switch in the SAN.
TECHNOLOGY
FIBRE CHANNEL
Fibre Channel is an industry-standard, open protocol for server-to-storage
and server-to-server connectivity and data-intensive transfers. Fibre Channel
combines the high-speed I/O capabilities of a channel technology with the
increased functionality of a networking technology to seamlessly connect and
transfer data from one device to another.
Fibre Channel, which was designed for storage systems and is well suited
for SANs. It offers a single network for both server clustering and shared
storage. It accommodates both high throughput and low latency dependent traffic
required for large block data transfers and inter-processor communication
messages. We believe the following characteristics of Fibre Channel make it more
suitable for data-intensive and storage related applications than either gigabit
Ethernet or ATM, two widely used networking protocols:
-- Fibre Channel has an industry standard interconnect rate of 1 gigabit
per second per port that is expected to increase to 2 gigabits per
second in 1999 as compared to gigabit Ethernet's, 1 gigabit per second
and ATM's 622 megabits per second speeds;
-- Fibre Channel is designed to transmit large packets of information and
is therefore well-suited for data-intensive applications as compared
to gigabit Ethernet and ATM, which use smaller packets and are
designed for smaller but more frequent data transfers;
-- Fibre Channel relies more on hardware than software during data
transfers and therefore, is better suited to handle the higher speeds
and low latency required during data transfers;
-- In addition to supporting networking protocols including IP, Fibre
Channel also supports I/O storage protocols like SCSI;
-- Unlike gigabit Ethernet and ATM, which can lose or drop packets due to
congestion, Fibre Channel manages packet flow to ensure delivery; and
-- Fibre Channel relieves each port from the responsibility of station
management and instead delegates that responsibility to the
interconnect device. Therefore, each Fibre Channel port only has to
manage a single point-to-point connection between itself and an
interconnect device.
SILKWORM ARCHITECTURE
Brocade is focused on implementing Fibre Channel standards in the Brocade
Fabric. We utilize a layered architecture to provide a high performance,
flexible, and extensible solution. This architecture is comprised of media
interfaces, a switching platform, the Brocade Fabric Operating System and value-
added services.
-- Media interfaces. Media interfaces comprise the lowest layer of our
architecture. Fibre Channel standards specify numerous media
interfaces. The SilkWorm architecture supports removable gigabit
copper interfaces up to 13 meters, short wavelength laser interfaces
up to 500 meters and
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long wavelength laser interfaces up to 10 kilometers. Removable media
interfaces provide flexible product configurations and simple product
maintenance.
-- Switching platform. Our SilkWorm products are based on a central
memory time multiplexed switching architecture. The architecture is
implemented through the use of highly integrated ASICs. The use of
ASIC technology is required to provide the high bandwidth and low
latency necessary for Fibre Channel switching to cater to both high
throughput and low latency data transfer. The switching architecture
is non-blocking and utilizes cut through routing techniques to achieve
low latency. The data path of the architecture is completely
implemented in hardware and the CPU and operating system are not in
the data path.
-- Brocade Fabric Operating System. The architecture of the Brocade
Fabric Operating System is highly structured, modular, hardware
independent and layered with well-defined interfaces. This extensible
architecture is easy to maintain and upgrade with new features. The
base operating system is a UNIX-like realtime operating system with
extensive libraries and services. The layers of the Brocade Fabric
Operating System include hardware drivers, a board level support
package, a Fibre Channel layer, services and application program
interfaces.
-- Value added services. Value-added services comprise the top layer of
our architecture. Brocade value-added services include Brocade Zoning,
and multicasting. The Brocade value-added services run on top of the
Brocade Fabric Operating System through well-defined application
program interfaces.
MANUFACTURING
We currently use a third-party contract manufacturer, Solectron, to
manufacture our products. Solectron invoices Brocade based on prices and payment
terms agreed to by both parties and set forth in purchase orders issued by
Brocade. The pricing takes into account component costs, Solectron's
manufacturing costs and margin requirements. Although we use Solectron for final
turnkey product assembly, we maintain key component expertise internally. We
design and develop the key components of our products, including ASICs and
software, as well as certain details in the fabrication and enclosure of our
products. In addition, we determine the components that are incorporated in our
products and select the appropriate suppliers of the components.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single source
components include ASICs, power supplies and chassis, and our principal limited
source components include printed circuit boards and GBICs. See "Risk
Factors -- We Are Dependent on Sole Source and Limited Source Suppliers for
Certain Key Components Including ASICs and Power Supplies."
RESEARCH AND DEVELOPMENT
In fiscal 1998, and the three months ended January 31, 1999, our research
and development expenses were $14.7 million and $2.9 million, respectively. We
believe that our future success depends on our ability to continue to enhance
our existing products and to develop new products that maintain technological
competitiveness. We focus our product development activities on solving the
needs of SAN users. We work closely with our original equipment manufacturers
and system integrators to monitor changes in the market place. We design our
products around current industry standards and will continue to support emerging
standards that are consistent with our product strategy.
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Our products have been designed around a core system architecture, which
facilitates a relatively short product design and development cycle and reduce
the time to market for new products and features. We intend to continue to
leverage our architecture to develop and introduce additional products and
enhancements in the future.
There can be no assurance that our product development efforts will result
in commercially successful products or that our products will not be rendered
obsolete by changing technology or new product announcements by other companies.
See "Risk Factors -- We Currently Only Offer Our SilkWorm Product Family and
Must Develop New and Enhanced Products That Achieve Widespread Market
Acceptance."
COMPETITION
Although the competitive environment in the Fibre Channel switching market
has yet to develop fully, we anticipate that the current and potential market
for our products will be highly competitive, continually evolving and subject to
rapid technological change. New SAN products are being introduced by major
server and storage providers, and existing products will be continually
enhanced. We currently face competition from other manufacturers of SAN
switches, including Ancor Communications, Inc. We also face competition from
manufacturers of hubs, including Gadzoox Networks, Inc. and Vixel Corporation.
In addition, as the market for SAN products grows, we may face competition from
traditional networking companies and other manufacturers of networking equipment
who may enter the SAN market with their own switching products. It is also
possible that customers could develop and introduce products competitive with
our product offerings. We believe the competitive factors in this market segment
include product performance and features, product reliability, price, ability to
meet delivery schedules, customer service and technical support.
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional Brocade products or
persuade them to replace our products with their products. Such increased
competition may result in price reductions, lower gross margins and loss of our
market share. There can be no assurance that we will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. There can also be no
assurance that we will be able to compete successfully against current or future
competitors or that competitive pressures will not materially harm our business.
INTELLECTUAL PROPERTY
We rely on a combination of patents, trademarks, and trade secrets, as well
as confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. Despite
these precautions, there can be no assurance that the measures we undertake will
be adequate to protect our proprietary technology, or that they will preclude
competitors from independently developing products with functionality or
features similar to our products. There can be no assurance that the precautions
we take will prevent misappropriation or infringement of our technology. We have
filed 11 patent applications in the United States with respect to our technology
and
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are also seeking protection for the technology in selected international
locations. However, it is possible that patents may not be issued for these
applications. Our issued patents may not adequately protect our technology from
infringement or prevent others from claiming that our technology infringes that
of third parties. Failure to protect our intellectual property could materially
harm our business. In addition, our competitors may independently develop
similar or superior technology. It is possible that litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs and diversion of our
resources and could materially harm our business.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Infringement or
other claims could be asserted or prosecuted against us in the future, and it is
possible that past or future assertions or prosecutions could harm our business.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
delays in the development and release of our products, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
materially harm our business.
PENDING LEGAL PROCEEDING
In October 1998, we were sued by one of our former contract manufacturers,
Manufacturers' Services Central U.S. Operations, Inc. and Manufacturers'
Services Western U.S. Operations, Inc., in the Santa Clara County, California
Superior Court. The suit involves claims for approximately $900,000 for amounts
allegedly owed by us for circuit boards manufactured by MSC and previously
shipped to us, approximately $500,000 for circuit boards manufactured for us and
held by MSC, and approximately $1.5 million for raw material purchased by MSC
for inclusion in circuit boards to be manufactured for us. We do not dispute
that we owe MSC for the circuit boards previously shipped to us, but we contend
that the amount owed should be offset by approximately $600,000 for amounts due
to us under MSC's warranty, approximately $200,000 for the value of equipment
and electronic components consigned by us to MSC and approximately $150,000 in
other damages sustained by us related to MSC's performance during our
manufacturing relationship. We deny any liability for the circuit boards
manufactured by MSC but not shipped to us or for raw material purchased by MSC.
In December 1998, MSC obtained a writ of attachment against us for
approximately $1.4 million and related to the circuit boards manufactured by
MSC. We responded by posting a bond for this amount. The parties have exchanged
documents and conducted preliminary discovery. No trial date has been set.
We believe that we have strong defenses against MSC's lawsuit. Accordingly,
we intend to defend this suit vigorously. However, we may not prevail in this
litigation. The litigation process is inherently uncertain. Our defense of this
litigation, regardless of its eventual outcome, has been, and will likely
continue to be, time-consuming, costly and a diversion for our personnel. A
failure to prevail could result in us having to pay monetary damages to MSC and
reimburse MSC for some or all of its attorneys' fees, which could materially
harm our business.
EMPLOYEES
As of February 15, 1999, we had 110 full-time employees, 41 of whom were
engaged in research and development, 32 of whom were in sales and marketing and
37 of whom were in finance, administration and operations. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
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<PAGE> 42
FACILITIES
Our principal administrative, sales and marketing, education, customer
support and research and development facilities are located in a single office
building in San Jose, California. We currently occupy approximately 35,000
square feet of office space in the San Jose facility under the terms of a lease
that expires in November 2000. We believe our current facilities will be
adequate to meet our needs for the next 12 months. If our growth continues, we
will need larger facilities after that time. We cannot assure you that suitable
additional facilities will be available as needed on commercially reasonable
terms. We also lease office space for sales and marketing in Nashua, New
Hampshire and Irvine, California.
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<PAGE> 43
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of April 28, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gregory L. Reyes................. 36 President, Chief Executive Officer and Director
Paul R. Bonderson, Jr............ 46 Vice President, Engineering
Michael J. Byrd.................. 38 Vice President, Finance and Chief Financial Officer
Kumar Malavalli.................. 56 Vice President, Technology
Victor M. Rinkle................. 46 Vice President, Operations
Charles W. Smith................. 37 Vice President, Worldwide Sales
Peter J. Tarrant................. 39 Vice President, Marketing and Business Development
Seth D. Neiman(1)................ 44 Chairman of the Board
Neal Dempsey(1)(2)............... 58 Director
Mark Leslie(2)................... 53 Director
Larry W. Sonsini................. 58 Director
</TABLE>
- ---------------
(1) Member of audit committee.
(2) Member of compensation committee.
Gregory L. Reyes has served as our President and Chief Executive Officer
and a member of our board of directors since July 1998. From January 1995 to
June 1998, Mr. Reyes served as President, Chief Executive Officer and Chairman
of the board of directors of Wireless Access, Inc., a wireless data
communications products company. From January 1991 to January 1995, Mr. Reyes
served as Divisional Vice President and general manager of Norand Data Systems,
a data collection company. Mr. Reyes also serves as a director of Proxim, Inc.,
a wireless networking company. Mr. Reyes received a B.S. in Economics and
Business Administration from Saint Mary's College in Moraga, California.
Paul R. Bonderson, Jr. co-founded Brocade in August 1995 and has served as
Vice President, Engineering since August 1995. From March 1986 to August 1995,
Mr. Bonderson held several engineering positions at Sun Microsystems, Inc., most
recently as Director of Engineering. Mr. Bonderson received a B.S. in Electrical
Engineering from California Polytechnic State University, San Luis Obispo.
Michael J. Byrd joined Brocade in April and will become our Vice President,
Finance and Chief Financial Officer effective May 3, 1999. From February 1994 to
April 1999, Mr. Byrd served as Vice President and Chief Financial Officer of
Maxim Integrated Products. From 1982 to 1994, Mr. Byrd was with Ernst & Young,
where he held various positions, most recently as Partner. Mr. Byrd received a
B.S. in Business Administration from California Polytechnic State University,
San Luis Obispo.
Kumar Malavalli co-founded Brocade in August 1995 and has served as our
Vice President, Technology since October 1995. From July 1993 to October 1995,
Mr. Malavalli served as Manager of Architecture and Standards in the Canadian
Network Operation at Hewlett-Packard Company. Mr. Malavalli was a member of the
industry team that originated the Fibre Channel architecture, has helped guide
the technology through the industry standards committees and currently chairs
the ANSI T11 Technical Committee, which oversees all standards related to the
development of Fibre Channel. From 1993 to 1999, Mr. Malavalli was the chairman
of the Fibre Channel Association Technical
42
<PAGE> 44
Committee. Mr. Malavalli received both a B.S. in Physics and Mathematics and a
B.S. in Electrical Engineering from the University of Mysore, India.
Victor M. Rinkle has served as our Vice President, Operations since January
1998. From April 1989 to December 1997, Mr. Rinkle held several managerial
positions at Apple Computer, Inc., most recently as Vice President, Global
Supply Base Management. Mr. Rinkle received a B.B.A. in Marketing and Production
Logistics from the University of Houston.
Charles W. Smith has served as our Vice President, Worldwide Sales since
February 1997. From June 1996 to February 1997, Mr. Smith served as Director,
Corporate Account Sales at IBM. From July 1990 to February 1996, Mr. Smith held
various senior sales management positions at Conner Peripherals, Inc., a storage
solutions company, most recently as Vice President, US Sales, Western Region.
Mr. Smith received an A.S. in Aeronautics and Business from the College of San
Mateo and a B.S. in Business Management from San Jose State University.
Peter J. Tarrant has served as our Vice President, Marketing and Business
Development since December 1997. From October 1994 to December 1997, Mr. Tarrant
served as Vice President, Product Management and Vice President, Business
Development at Bay Networks, Inc., a computer networking company. From April
1990 to October 1994, Mr. Tarrant held several product management positions at
SynOptics, a predecessor of Bay Networks, Inc. most recently as Director,
Product Management. Mr. Tarrant received a B.Sc. in Electronic Engineering from
the University of Southampton, United Kingdom.
Seth D. Neiman has served as Chairman of the board of directors of Brocade
since August 1995. Mr. Neiman formerly served as our Chief Executive Officer
from August 1995 to June 1996. Since August 1994, Mr. Neiman has held various
positions at Crosspoint Venture Partners, a venture capital firm, and has been a
partner of Crosspoint since January 1996. From September 1991 to July 1994, Mr.
Neiman was Vice President of Engineering at Coactive Networks, a local area
networks company. Mr. Neiman also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Neiman received a
B.A. in Philosophy from Ohio State University.
Neal Dempsey has served as a director of Brocade since December 1996. Since
May 1989, Mr. Dempsey has been a General Partner of Bay Partners, a venture
capital firm. Mr. Dempsey also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Dempsey received a
B.A. in Business from the University of Washington.
Mark Leslie has served as a director of Brocade since January 1999. Mr.
Leslie has served as the Chief Executive Officer and a member of the board of
directors of VERITAS Software Corporation, a storage management software
company, since February 1990. Mr. Leslie also serves on the boards of directors
of VERITAS Software Corporation and Versant Object Technology, as well as on the
board of directors of a private company. Mr. Leslie received a B.A. in Physics
and Mathematics from New York University.
Larry W. Sonsini has served as a director of Brocade since January 1999.
Mr. Sonsini has been a partner of the law firm of Wilson Sonsini Goodrich &
Rosati, P.C., since 1973 and is currently the Chairman of the Executive
Committee of the firm. Mr. Sonsini serves on numerous advisory boards and
committees, including the SEC's Advisory Committee on Capital Formation and
Regulatory Processes, the ABA Committee on Federal Regulation of Securities and
the Legal Advisory Committee to the Board of Governors, New York Stock Exchange.
Mr. Sonsini serves on the boards of directors of Novell, Inc., Lattice
Semiconductor Corporation and Pixar Animation Studios, as well as on the boards
of directors of several private companies. Mr. Sonsini received an A.B. from the
University of California, Berkeley and an L.L.B. from Boalt Hall School of Law,
University of California, Berkeley.
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<PAGE> 45
BOARD OF DIRECTORS
Our board of directors currently consists of six authorized members. Upon
the completion of this offering, the terms of office of the board of directors
will be divided into three classes: Class I, whose term will expire at the
annual meeting of stockholders to be held in 2000; Class II, whose term will
expire at the annual meeting of stockholders to be held in 2001; and Class III,
whose term will expire at the annual meeting of the stockholders to be held in
2002. At each annual meeting of stockholders after the initial classification,
the successors to directors whose terms will then expire will be elected to
serve from the time of election and qualification until the third annual meeting
following election. This classification of the board of directors may have the
effect of delaying or preventing a change of control or management of Brocade.
See "Risk Factors -- Provisions in Our Charter Documents, Customer Agreements
and Delaware Law Could Prevent or Delay a Change of Control of Brocade and May
Reduce the Market Price of Our Common Stock." Each officer serves at the
discretion of the board of directors. There are no family relationships among
any of our directors or officers.
Board Committees. Our board of directors currently has two committees: an
audit committee and a compensation committee. The audit committee consists of
Mr. Neiman and Mr. Dempsey. The audit committee makes recommendations to our
board of directors regarding the selection of independent auditors, reviews the
results and scope of audit and other services provided by our independent
auditors and reviews the accounting principles and auditing practices and
procedures to be used for the financial statements of Brocade. The compensation
committee consists of Mr. Leslie and Mr. Dempsey. The compensation committee
makes recommendations to our board of directors regarding our stock plans and
the compensation of officers and other managerial employees.
Director Compensation. Directors currently do not receive any cash
compensation from Brocade for their services as members of our board of
directors, although we are authorized to pay members for attendance at meetings
or a salary in addition to reimbursement for expenses in connection with
attendance at meetings. Certain non-employee directors have received grants of
options to purchase shares of our common stock. See "Principal Stockholders."
Upon and following this offering, certain non-employee directors will receive
automatic option grants under our 1999 Director Option Plan. See "-- Employee
Benefit Plans -- 1999 Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been,
at any time since the formation of Brocade, an officer or employee of Brocade.
No member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information reasonably available to
them. Consequently, a director will not be personally liable to us or our
stockholders for monetary damages or breach of fiduciary duty as a director,
except for liability for:
-- any breach of the director's duty of loyalty to us or our
stockholders;
-- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
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<PAGE> 46
-- unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; or
-- any transaction from which the director derived an improper personal
benefit.
Our certificate of incorporation also allows us to indemnify our officers,
directors and other agents to the full extent permitted by Delaware law. We have
entered into indemnification agreements with each of our directors and officers
that will give them additional contractual reassurances regarding the scope of
indemnification and that may provide additional procedural protection. The
indemnification agreements require actions such as:
-- indemnifying officers and directors against certain liabilities that
may arise because of their status as officers or directors;
-- advancing expenses, as incurred, to officers and directors in
connection with a legal proceeding, subject to certain limited
exceptions; or
-- obtaining directors' and officers' insurance.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in Brocade may be adversely
affected to the extent we pay the costs of settlement or damage awards against
our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
45
<PAGE> 47
EXECUTIVE COMPENSATION
The following table sets forth information for fiscal 1998, concerning the
compensation paid to our Chief Executive Officer, our former Chief Executive
Officer and our four other most highly compensated executive officers whose
total salary and bonus for such fiscal year exceeded $100,000, collectively
referred to below as the Named Executive Officers. The entries under the column
heading "Other Compensation" in the table represent the cost of term life
insurance for each Named Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) ($)
--------------------------- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Gregory L. Reyes
President and Chief Executive Officer(1).............. $ 60,606 $ -- 1,535,662 $ 480
Bruce L. Bergman
President and Chief Executive Officer(1).............. 225,000 -- -- 1,620
Kumar Malavalli
Vice President, Technology............................ 162,840 13,027 -- 1,188
Paul R. Bonderson, Jr.
Vice President, Engineering........................... 161,927 12,375 -- 1,188
Victor M. Rinkle
Vice President, Operations............................ 115,340 39,375 200,000 990
Charles W. Smith
Vice President, Worldwide Sales....................... 118,500 -- 35,000 87,306(2)
</TABLE>
- -------------------------
(1) Mr. Bergman served as our President and Chief Executive Officer until June
1998. Mr. Reyes became our President and Chief Executive Officer effective
July 1998 at an annual salary of $200,000.
(2) Also includes amounts earned by Mr. Smith as commissions.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information for each grant of stock
options during fiscal 1998, to each of the Named Executive Officers. All of
these options granted by us were granted under the 1995 Equity Incentive Plan,
the 1998 Equity Incentive Plan or the 1998 Executive Equity Incentive Plan and
have a term of 10 years, subject to earlier termination in the event the
optionee's services to Brocade cease. See "-- Employee Benefit Plans" for
descriptions of the material terms of these options. Each of these options has
been exercised in conjunction with a promissory note and a stock pledge
agreement. See "Certain Transactions" for descriptions of these exercises.
During fiscal 1998, we granted options to purchase a total of 3,154,912
shares of common stock under the 1995 Equity Incentive Plan, the 1998 Equity
Incentive Plan and the 1998 Executive Equity Incentive Plan. Options were
granted at an exercise price equal to the fair market value of our common stock,
as determined in good faith by our board of directors. Our board of directors
determined the fair market value based on:
-- our financial results and prospects;
-- the share price derived for arms-length transactions; and
-- evaluations conducted by valuation experts.
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<PAGE> 48
Potential realizable values for the following table are:
-- net of exercise price before taxes;
-- based on the assumption that our common stock appreciates at the
annual rate shown, compounded annually, from the date of grant until
the expiration of the ten-year term; and
-- based on the assumption that the option is exercised at the exercise
price and sold on the last day of its term at the appreciated price.
These numbers are calculated based on Securities and Exchange Commission
requirements and do not reflect our projection or estimate of future stock price
growth. No stock appreciation rights were granted during the fiscal year.
Each of the options listed in the table below has been exercised, but the
shares purchased under those options are subject to repurchase by us at the
original exercise price paid per share upon the optionee's cessation of service
prior to vesting of such shares. The repurchase right lapses and the optionee
vests as to 25% of the option shares upon completion of one year of service from
the date of grant and the balance in a series of equal monthly installments over
the next three years of service thereafter. In the event of a termination
without cause or constructive termination other than for cause at any time
during the first year following a change of control, these options will fully
vest. See "-- Change of Control and Severance Arrangements."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER TOTAL ANNUAL RATES OF
OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER OPTION TERM
OPTIONS IN FISCAL SHARE EXPIRATION -----------------------
NAME GRANTED 1998 ($/SHARE) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Reyes........................ 1,535,662 48.7% $2.25 10/08/08 $2,172,982 $5,506,762
Bruce L. Bergman........................ -- -- -- -- -- --
Kumar Malavalli......................... -- -- -- -- -- --
Paul R. Bonderson, Jr................... -- -- -- -- -- --
Victor M. Rinkle........................ 200,000 6.3 2.25 02/25/08 283,003 717,184
Charles W. Smith........................ 35,000 1.1 2.25 10/08/08 49,525 125,507
</TABLE>
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<PAGE> 49
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information with respect to the Named
Executive Officers concerning exercisable and unexercisable options held as of
October 31, 1998. Each of the options listed in the table below has been
exercised, but any shares purchased under those options will be subject to
repurchase by us at the original exercise price paid per share, upon the
optionee's cessation of service prior to the vesting of the shares. The heading
"Vested" refers to shares no longer subject to repurchase; the heading
"Unvested" refers to shares subject therefore to repurchase as of October 31,
1998. The value of in-the-money options is based on an assumed offering price of
$9.00 per share and net of the option exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OCTOBER 31, 1998 OPTIONS AT OCTOBER 31, 1998
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Reyes............. -- -- -- 1,535,662 -- $10,365,719
Bruce L. Bergman............. -- -- -- -- -- --
Kumar Malavalli.............. -- -- -- -- -- --
Paul R. Bonderson, Jr. ...... -- -- -- -- -- --
Victor M. Rinkle............. -- -- -- 200,000 -- 1,350,000
Charles W. Smith............. 25,000 $30,000(1) 47,917 112,083 $415,003 901,247
</TABLE>
- -------------------------
(1) Based on a price of $1.80 per share, the fair market value of our common
stock at January 13, 1998, as determined by our board of directors, minus
the exercise price.
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS
Options granted to certain of our officers and directors under our 1995
Equity Incentive Plan and 1998 Equity Incentive Plan will vest fully in the
event that these individuals are terminated without cause or are constructively
terminated at any time during the first year following a change of control of
Brocade.
Mr. Reyes's option agreement under the 1998 Equity Incentive Plan provides
that if, during the first year of his employment, he is terminated other than:
-- constructively or without cause during the first year following a
change of control; or
-- for cause,
Mr. Reyes will vest as to 191,958 shares plus a number of shares equal to 31,993
multiplied by the number of full months of his service to us. If Mr. Reyes is
terminated any time after the first year of his employment, other than:
-- constructively or without cause during the first year following a
change of control; or
-- for cause,
Mr. Reyes will vest as to 191,958 shares in addition to any shares that have
vested under the normal four-year vesting schedule contemplated by the
agreement. Moreover, upon a change of control, one-half of Mr. Reyes's unvested
shares vest in addition to any shares that have vested under the normal
four-year vesting schedule contemplated by the agreement, and if Mr. Reyes is
constructively terminated or terminated without cause during the first year
following the change of control, then all of his unvested shares subject to this
option will vest.
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<PAGE> 50
Mr. Reyes's option agreement under the 1998 Executive Equity Incentive Plan
provides that if he is terminated at any time on or after May 13, 2001, other
than:
-- constructively or without cause during the first year following a
change of control; or
-- for cause,
then, in addition to any shares that have vested under the normal four-year
vesting schedule contemplated by the agreement, 191,958 additional shares will
vest, less the number of shares that may vest as a result of his termination
under the 1998 Equity Incentive Plan as described above. In addition, upon a
change of control, one-half of Mr. Reyes's unvested shares vest in addition to
any shares that have vested under the normal four-year vesting schedule
contemplated by the agreement, and if Mr. Reyes is constructively terminated or
terminated without cause during the first year following the change of control,
then, all of his unvested shares subject to this option will vest.
In addition, pursuant to a letter agreement, if Mr. Reyes is constructively
terminated or terminated without cause upon a change of control, he will receive
a severance payment of one year of his base salary plus his expected bonus for
the then current fiscal year under the 1999 Key Employee Incentive Program, as
described below.
We have entered into a Confidential Agreement and General Release of Claims
with Mr. Bergman, effective as of September 23, 1998, that outlines the terms
governing Mr. Bergman's termination as our President and Chief Executive
Officer, as a member of our board of directors and as a consultant to Brocade.
In exchange for and pursuant to the agreement, we agreed to provide Mr. Bergman
with the following severance benefits for one year following his termination
date:
-- base salary at his then current rate;
-- existing employee health benefits insurance; and
-- continued vesting of 16,115 shares per month of Mr. Bergman's unvested
shares of our common stock, until the complete vesting of his 773,528
total shares occurs.
The agreement also includes a release of claims relating to or arising from Mr.
Bergman's relationship with Brocade and the continued obligation of
confidentiality with regard to our proprietary information.
1999 KEY EMPLOYEE INCENTIVE PROGRAM
We have adopted the 1999 Key Employee Incentive Program, an executive bonus
program, pursuant to which selected key employees of Brocade are eligible for
quarterly and annual cash bonuses based upon achieving specified individual and
company-wide objectives, including revenue targets.
For Mr. Smith, bonuses are not based on the 1999 Key Employee Incentive
Program, but rather on the achievement of sales revenue and other specified
sales objectives.
EMPLOYEE BENEFIT PLANS
Upon the completion of this offering, our 1995 Equity Incentive Plan, our
1998 Equity Incentive Plan and our 1998 Executive Equity Incentive Plan will be
combined and continue as our 1999 Stock Plan. No additional options will be
granted under the 1995 Equity Incentive Plan, the 1998 Equity Incentive Plan or
the 1998 Executive Equity Incentive Plan after the completion of this offering.
However, the terms and conditions of the options granted previously under these
plans will continue to govern those outstanding options. Therefore, descriptions
of these plans, in addition to a description of the 1999 Stock Plan, are
provided below.
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<PAGE> 51
Amended 1995 Equity Incentive Plan
Our Amended 1995 Equity Incentive Plan was adopted by our board of
directors in August 1995, was subsequently approved by our stockholders, and has
been amended from time to time. The 1995 Plan provides for the grant of
incentive stock options, within the meaning of Section 422 of the Internal
Revenue Code of 1986, to employees and for the grant of nonstatutory stock
options to employees, non-employee directors and consultants. A total of
3,807,000 shares of common stock has been reserved for issuance under the 1995
Plan.
The 1995 Plan is administered by our board of directors or a committee of
the board. Subject to the provisions of the 1995 Plan, our board of directors or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:
-- the number of shares of common stock covered by the option;
-- when the option becomes exercisable;
-- the per share option exercise price which, in the case of incentive
stock options, must be at least 100% of the fair market value of a
share of common stock as of the date of grant; in the case of options
granted to persons who own 10% or more of the total combined voting
power of Brocade or any parent or subsidiary of Brocade, must be at
least 110% of the fair market value of a share of common stock as of
the date of grant; and, in the case of nonstatutory stock options,
must be at least 85% of the fair market value of a share of common
stock as of the date of the grant; and
-- the duration of the option, which may not exceed 10 years, or five
years for incentive stock options granted to 10% stockholders.
Generally, options granted under the 1995 Plan vest over four years and are
non-transferable other than by will or the laws of descent and distribution. In
the event of certain changes in control of Brocade, the acquiring or successor
corporation may assume or substitute for options outstanding under the 1995
Plan, or such options shall terminate. Certain options granted to certain of our
officers provide for partial acceleration upon a change of control of Brocade.
See "-- Change of Control and Severance Arrangements."
1998 Equity Incentive Plan
Our 1998 Equity Incentive Plan was adopted by our board of directors in
February 1998 and subsequently approved by the stockholders. The 1998 Plan
provides for the grant of incentive stock options, within the meaning of Section
422, of the Code to employees and for the grant of nonstatutory stock options to
employees, non-employee directors and consultants. A total of 3,200,000 shares
of common stock has been reserved for issuance under the 1998 Plan.
The 1998 Plan is administered by our board of directors or a committee of
the board. Subject to the provisions of the 1998 Plan, our board of directors or
committee has the authority to select the persons to whom options are granted
and determine the terms of each option, including:
-- the number of shares of common stock covered by the option;
-- when the option becomes exercisable;
-- the per share option exercise price which, in the case of incentive
stock options, must be at least 100% of the fair market value of a
share of common stock as of the date of grant; in the case of options
granted to 10% stockholders, must be at least 110% of the fair market
value of a share of
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<PAGE> 52
common stock as of the date of grant; and, in the case of nonstatutory
stock options, must be at least 85% of the fair market value of a
share of common stock as of the date of the grant; and
-- the duration of the option, which may not exceed 10 years, or five
years for incentive stock options granted to 10% stockholders.
Generally, options granted under the 1998 Plan vest over four years and are
non-transferable other than by will or the laws of descent and distribution. In
the event of certain changes in control of Brocade, the acquiring or successor
corporation may assume or substitute for options outstanding under the 1998
Plan, or such options shall terminate. Certain options granted to certain of our
officers provide for partial acceleration upon a change of control of Brocade.
See "-- Change of Control and Severance Arrangements."
1998 Executive Equity Incentive Plan
Our 1998 Executive Equity Incentive Plan was adopted by our board of
directors in October 1998. The 1998 Executive Plan provides for the grant of
nonqualified stock options to executives. A total of 300,000 shares of common
stock has been reserved for issuance under the 1998 Executive Plan.
The 1998 Executive Plan is administered by the board of directors or a
committee of the board. Subject to the provisions of the 1998 Executive Plan,
the board or committee has the authority to select the persons to whom options
are granted and determine the terms of each option, including:
-- the number of shares of common stock covered by the option;
-- when the option becomes exercisable;
-- the per share option exercise price, which must be at least 85% of the
fair market value of a share of common stock as of the date of grant;
and
-- the duration of the option, which may not exceed 10 years from the
date an option is granted.
In the event of certain changes in control of Brocade, the acquiring or
successor corporation may assume or substitute for options outstanding under the
1998 Executive Plan, or such options shall terminate. Certain options granted to
officers of Brocade provide for partial acceleration upon a change in control of
Brocade.
To date, there has been only one option grant under the 1998 Executive
Plan, to Mr. Reyes, for all of the options currently outstanding under the 1998
Executive Plan. Such option vests as to 31,993 shares on November 13, 2001, and
as to 31,993 shares upon the expiration of each full month elapsed thereafter.
Mr. Reyes's option under the 1998 Executive Plan also provides for partial or
full acceleration under certain circumstances. See "-- Change of Control and
Severance Arrangements."
1999 Stock Plan
Our 1999 Stock Plan was adopted by our board of directors in March 1999 and
will be effective upon the completion of this offering, subject to stockholder
approval. The 1999 Plan provides for the grant of incentive stock options,
within the meaning of Section 422 of the Code, to employees. The 1999 Plan has
provisions for compliance with the $1,000,000 limit set by the Internal Revenue
Service.
Initially, 7,607,000 shares of common stock will be reserved for issuance
under the 1999 Plan. These shares consist of the total number of shares
currently reserved under the 1995 Plan, the 1998 Plan, the
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<PAGE> 53
1998 Executive Plan and 300,000 newly reserved shares. An annual increase will
be added on the first day of our fiscal year beginning in 1999 equal to the
lesser of:
-- 5,000,000 shares;
-- 5% of the outstanding shares on that date; or
-- a lesser amount determined by the board of directors.
The 1999 Plan will be administered by our board of directors or a committee
of the board. Subject to the provisions of the 1999 Plan, the board or committee
will have the authority to select the persons to whom options are granted and
determine the terms of each option, including:
-- the number of shares of common stock covered by the option;
-- when the option becomes exercisable;
-- the per share option exercise price which must be at least 100% of the
fair market value of a share of common stock as of the date of grant,
and which, in the case of options granted to 10% stockholders, must be
at least 110% of the fair market value of a share of common stock as
of the date of grant; and
-- the duration of the option, which may not exceed 10 years, or five
years for options granted to 10% stockholders.
Generally, options granted under the 1999 Plan will vest over four years,
and will be non-transferable other than by will or the laws of descent and
distribution. In the event of certain changes in control of Brocade, the
acquiring or successor corporation may assume or substitute for options
outstanding under the 1999 Plan, or such options shall terminate.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted in March 1999 and will be
effective upon the completion of this offering, subject to stockholder approval.
Initially, 200,000 shares of common stock will be reserved for issuance under
the Purchase Plan. An annual increase will be added on the first day of our
fiscal year beginning in 2000 equal to the lesser of:
-- 2,500,000 shares;
-- 2.5% of the outstanding shares on that date; or
-- a lesser amount determined by the board of directors.
The Purchase Plan, which is intended to qualify under Section 423 of the
Code, will be administered by the board of directors or by a committee of the
board. Our employees, including officers and directors of Brocade who are also
employees, or any subsidiary designated by the board of directors for
participation in the Purchase Plan are eligible to participate in the Purchase
Plan if they are customarily employed for more than 20 hours per week and more
than five months per year. The Purchase Plan will be implemented by consecutive
offering periods generally six months in duration. However, the first offering
period under the Purchase Plan will commence on the effective date of this
offering and terminate on or before November 30. The board of directors may
change the dates or duration of one or more offering periods.
The Purchase Plan permits our eligible employees to purchase shares of
common stock through payroll deductions at 85% of the lower of the fair market
value of the common stock on the first day of
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<PAGE> 54
the offering period or a specified exercise date. Participants generally may not
purchase shares on any exercise date or stock, to the extent that, immediately
after the grant, the participant would own stock or options to purchase stock
totaling 5% or more of the total combined voting power of all stock of Brocade,
or greater than $25,000 worth of our stock in any calendar year. In addition, no
more than 3,000 shares may be purchased by any participant during any offering
period. In the event of a sale or merger of Brocade, the board may accelerate
the exercise date of the current purchase period to a date prior to the change
of control, or the acquiring corporation may assume or replace the outstanding
purchase rights under the Purchase Plan.
1999 Director Option Plan
Our 1999 Director Option Plan was adopted in March 1999 and will be
effective upon the completion of this offering, subject to stockholder approval.
Initially, a total of 200,000 shares of common stock will be reserved for
issuance under the Director Plan. Non-employee directors are entitled to
participate in the 1999 Director Option Plan. However, Mr. Leslie and Mr.
Sonsini will be excluded from receiving option grants under the Director Plan
for three years.
The Director Plan provides for the automatic grant of 2,500 shares of
common stock to each non-employee director on the date on which such person
first becomes a non-employee director. After the first 2,500 share option is
granted to the non-employee director, he or she shall automatically be granted
an option to purchase 2,500 shares each quarter of each year, provided that he
or she shall have served on the board for at least the preceding month. Each
option shall have a term of 10 years. Each option granted under the Director
Plan will be fully vested and 100% exercisable on the date of grant. The
exercise price of all options shall be 100% of the fair market value per share
of the common stock, generally determined with reference to the closing price of
the common stock as reported on the Nasdaq National Market on the date of grant.
In the event of a merger, or the sale of substantially all of the assets of
Brocade and if the option is not assumed or substituted, the option will
terminate unless exercised. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a director
of Brocade, or within 12 months after such director's termination by death or
disability, but not later than the expiration of the option's ten-year term.
401(k) Plan
Brocade provides a tax-qualified employee savings and retirement plan which
covers our eligible employees. Pursuant to the 401(k) Plan, employees may elect
to reduce their current annual compensation up to the lesser of 20% or the
statutorily prescribed limit, which was $10,000 in calendar year 1999, and have
the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Sections 401(a) and 401(k) of the Code, so that
contributions by us or our employees to the 401(k) Plan, and income earned on
Plan contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions will be deductible by Brocade when made. The
trustee of the 401(k) Plan invests the assets of the 401(k) Plan in the various
investment options as directed by the participants.
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<PAGE> 55
CERTAIN TRANSACTIONS
Since Brocade's inception in August 1995, there has not been nor is there
currently proposed any transaction or series of similar transactions to which
Brocade was or is to be a party in which the amount involved exceeds $60,000 and
in which any director, executive officer, holder of more than 5% of the common
stock of Brocade or any member of the immediate family of any of the foregoing
persons had or will have a direct or indirect material interest other than (1)
compensation agreements and other arrangements, which are described where
required in "Management," and (2) the transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
Common Stock. On August 25, 1995, we issued the following shares of common
stock at a price of $0.10 per share to our founders, all of which were purchased
with promissory notes subsequently forgiven and ratified by our board of
directors on April 24, 1997.
<TABLE>
<CAPTION>
PURCHASER SHARES OF COMMON STOCK
--------- ----------------------
<S> <C>
Kumar Malavalli................................... 182,000
Paul R. Bonderson, Jr............................. 227,500
Seth D. Neiman.................................... 113,750
</TABLE>
Series A Preferred Stock. On August 28, 1995, Brocade sold 1,425,000 shares
of its Series A Preferred Stock for $1.00 per share. The purchasers of the
Series A Preferred Stock were:
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES A STOCK
--------- ------------------------
<S> <C>
Crosspoint 1993 Entrepreneurs Fund................. 43,094
Crosspoint Venture Partners 1993................... 1,381,906
</TABLE>
Crosspoint 1993 Entrepreneurs Fund and Crosspoint Venture Partners 1993 are
affiliated entities and together are considered a greater than 5% stockholder of
Brocade. Mr. Neiman, a director of Brocade, is a partner of Crosspoint 1993
Entrepreneurs Fund and Crosspoint Venture Partners 1993. Mr. Neiman disclaims
beneficial ownership of the securities held by such entities, except for his
proportional interest in the entities.
Series B Preferred Stock. On June 17, 1996, Brocade sold 816,250 shares of
its Series B Preferred Stock for $4.00 per share. The purchasers of the Series B
Preferred Stock included, among others:
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES B STOCK
--------- ------------------------
<S> <C>
Crosspoint Venture Partners 1993................... 56,250
MDV IV Entrepreneurs' Network Fund, L.P. .......... 25,000
Mohr, Davidow Ventures IV.......................... 600,000
TPK Unitrust....................................... 25,000
</TABLE>
MDV IV Entrepreneurs' Network Fund, L.P. and Mohr, Davidow Ventures IV are
affiliated entities and together are considered a greater than 5% stockholder of
Brocade. Andreas V. Bechtolsheim, a greater than 5% stockholder of Brocade, is
the trustee of TPK Unitrust.
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<PAGE> 56
Series C Preferred Stock. On December 6, 1996, Brocade sold 3,333,333
shares of its Series C Preferred Stock for $3.00 per share. The purchasers of
the Series C Preferred Stock included, among others:
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES C STOCK
--------- ------------------------
<S> <C>
Bay Partners SBIC, L.P. ................................... 666,667
Andreas V. Bechtolsheim.................................... 1,000,000
Crosspoint 1993 Entrepreneurs' Fund........................ 8,854
Crosspoint Venture Partners 1993........................... 283,932
MDV IV Entrepreneurs' Network Fund, L.P. .................. 13,164
Mohr, Davidow Ventures IV, L.P............................. 315,959
TPK Unitrust............................................... 13,164
</TABLE>
Mr. Dempsey, a director of Brocade, is a general partner of Bay Partners
SBIC, L.P. Mr. Dempsey disclaims beneficial ownership of the securities held by
such entity, except for his proportional interest in the entities.
Series D Preferred Stock. On September 29, 1997, November 17, 1997 and
December 3, 1997, Brocade sold 3,660,900 shares of its Series D Preferred Stock
for $5.78 per share. The holders of the Series D Preferred Stock include, among
others:
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES D STOCK
--------- ------------------------
<S> <C>
Bay Partners SBIC, L.P. ................................... 129,758
Andreas V. Bechtolsheim.................................... 105,650
Crosspoint Venture Partners LS Fund 1997................... 570,821
Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank
America Trust & Banking Corporation (Cayman) Limited..... 77,509
Weiss, Peck & Greer Venture Associates IV, L.P. ........... 596,453
WPG Information Sciences Entrepreneur Fund, L.P. .......... 20,762
WPG Enterprise Fund III, L.P. ............................. 537,111
</TABLE>
Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America Trust &
Banking Corporation (Cayman) Limited, Weiss, Peck & Greer Venture Associates IV,
L.P., WPG Information Sciences Entrepreneur Fund, L.P. and WPG Enterprise Fund
III, L.P. are affiliated entities and together are considered a greater than 5%
stockholder of Brocade.
Also on September 29, 1997, in connection with our Series D Preferred Stock
financing, we issued the following warrants to purchase our Series D Preferred
Stock at an exercise price of $6.78 per share:
<TABLE>
<CAPTION>
WARRANTS TO PURCHASE
PURCHASER SERIES D STOCK
--------- --------------------
<S> <C>
Bay Partners SBIC, L.P. ................................... 11,418
Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank
America Trust & Banking Corporation (Cayman) Limited..... 7,750
Weiss, Peck & Greer Venture Associates IV, L.P. ........... 59,645
WPG Information Sciences Entrepreneur Fund, L.P. .......... 2,076
WPG Enterprise Fund III, L.P. ............................. 53,711
</TABLE>
LOANS TO CERTAIN EXECUTIVE OFFICERS
On April 11, 1997, we loaned $30,000 to Charles W. Smith, our Vice
President, Worldwide Sales, secured by a stock pledge agreement, in connection
with his purchase of 100,000 shares of our common
55
<PAGE> 57
stock for $.30 per share. This note accrues interest at the rate of 6.5% per
annum, compounded semi-annually, and is due on February 27, 2001. On January 13,
1998, we loaned $15,000 to Mr. Smith, secured by a stock pledge agreement, in
connection with his purchase of 25,000 shares of our common stock for $.60 per
share. This note accrues interest at the rate of 6.5% per annum, compounded
semi-annually, and is due on January 13, 2003. On December 26, 1998, we loaned
$78,750 to Mr. Smith, secured by a stock pledge agreement, in connection with
his purchase of 35,000 shares of our common stock for $2.25 per share. This note
accrues interest at the rate of 5% per annum, compounded semi-annually, and is
due on January 15, 2003. On January 25, 1999, we loaned $78,750 to Mr. Smith,
secured by a stock pledge agreement, in connection with his purchase of 35,000
shares of our common stock for $2.25 per share. This note accrues interest at
the rate of 5% per annum, compounded semi-annually, and is due on December 31,
2003. The principal amounts and accrued interest on all notes remain
outstanding.
On April 11, 1997, we loaned $45,000 to B. Carl Lee, our former Vice
President, Finance and Chief Financial Officer, secured by a stock pledge
agreement, in connection with his purchase of 150,000 shares of our common stock
for $0.30 per share. This note accrues interest at the rate of 6.5% per annum,
compounded semi-annually, and is due on December 2, 2001. On December 31, 1998,
we loaned $112,500 to Mr. Lee, secured by a stock pledge agreement, in
connection with his purchase of 50,000 shares of our common stock for $2.25 per
share. This note accrues interest at the rate of 6.5% per annum, compounded
semi-annually, and is due on December 31, 2003. The principal amounts and
accrued interest on both notes remain outstanding.
On January 26, 1998, we loaned $360,000 to Peter J. Tarrant, our Vice
President, Marketing and Business Development, secured by a stock pledge
agreement, in connection with his purchase of 200,000 shares of our common stock
for $1.80 per share. This note accrues interest at the rate of 6.5% per annum,
compounded semi-annually, and is due on January 26, 2003. The principal amount
and accrued interest on this note remain outstanding.
On December 8, 1998, we loaned $647,853.75 to Gregory L. Reyes, our
President and Chief Executive Officer, secured by a stock pledge agreement, in
connection with his purchase of 287,935 shares of our common stock for $2.25 per
share. This note accrues interest at the rate of 4.47% per annum, compounded
semi-annually, and is due one year after the date of this offering. Also on
December 8, 1998, we loaned $2,807,385.75 to Mr. Reyes, secured by a stock
pledge agreement, in connection with his purchase of 1,247,727 shares of our
common stock for $2.25 per share. This note accrues interest at the rate of
4.47% per annum, compounded semi-annually, and is due one year after the date of
this offering. The principal amounts and accrued interest on both notes remain
outstanding.
On December 24, 1998, we loaned $450,000 to Victor M. Rinkle, our Vice
President, Operations, secured by a stock pledge agreement, in connection with
his purchase of 200,000 shares of our common stock for $2.25 per share. This
note accrues interest at the rate of 6.5% per annum, compounded semi-annually,
and is due on December 24, 2004. The principal amount and accrued interest on
this note remain outstanding.
On April 1, 1999, we loaned $1,650,000 to Michael J. Byrd, our new Vice
President, Finance and Chief Financial Officer. The loan is secured by a stock
pledge agreement, in connection with his purchase of 330,000 shares of our
common stock pursuant to a nonqualified stock option for $5.00 per share. The
note accrues interest at the rate of % per annum, compounded semi-annually and
is due on April 1, 2006.
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<PAGE> 58
STOCK OPTION GRANTS AND LOAN TO CERTAIN DIRECTORS
On January 6, 1999, we granted to Mark Leslie, a director of Brocade, an
option to purchase 121,856 shares of our common stock at $2.25 per share that
vests over four years. On January 28, 1999, we loaned $274,176 to Mr. Leslie,
secured by a stock pledge agreement, in connection with his purchase of 121,856
shares of our common stock for $2.25 per share. This note accrues interest at
the rate of 4.59% per annum, compounded semi-annually, and is due on January 28,
2000. The principal amount and accrued interest on this note remain outstanding.
On January 29, 1999, we granted to Larry W. Sonsini, a director of Brocade,
a fully vested stock option to purchase 121,856 shares of our common stock for
$5.00 per share. Mr. Sonsini is also a partner of Wilson Sonsini Goodrich &
Rosati, P.C., a law firm, to whom we have paid legal fees in connection with
this offering.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and officers. Such indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. See
"-- Limitation of Liability and Indemnification."
CONFLICT OF INTEREST POLICY
Brocade believes that all transactions with affiliates described above were
made on terms no less favorable to Brocade than could have been obtained from
unaffiliated third parties. Brocade's policy is to require that a majority of
the independent and disinterested outside directors on our board of directors
approve all future transactions between Brocade and its officers, directors,
principal stockholders and their affiliates. Such transactions will continue to
be on terms no less favorable to Brocade than it could obtain from unaffiliated
third parties.
57
<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of our common stock as of January 31, 1999, and as adjusted
to reflect the sale of the shares of common stock in this offering by:
-- each person who is known by Brocade to beneficially own more then 5%
of our common stock;
-- each of the Named Executive Officers;
-- each of our directors; and
-- all officers and directors as a group.
Unless otherwise indicated, the address of each listed stockholder is c/o
Brocade Communications Systems, Inc., 1901 Guadalupe Parkway, San Jose, CA
95131. The number and percentage of shares beneficially owned are based on
21,734,900 shares of common stock outstanding as of January 31, 1999, assuming
conversion of all outstanding shares of preferred stock into common stock, and
25,281,781 shares of common stock outstanding after the completion of this
offering, assuming the Underwriters' over-allotment option to purchase 487,500
shares of common stock is not exercised. Beneficial ownership is determined
under the rules and regulations of the Securities and Exchange Commission.
Shares of common stock subject to options or warrants that are currently
exercisable or exercisable within 60 days of January 31, 1999 are deemed to be
outstanding and beneficially owned by the person holding the options or warrants
for the purpose of computing the number of shares beneficially owned and the
percentage ownership of that person. The shares subject to options or warrants
held by a person are not deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Except as indicated in the
footnotes to this table, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of Brocade's common stock shown as beneficially owned by them.
Percentage ownership figures after the offering do not include shares that may
be purchased by each person in the offering. Entries denoted by an asterisk
represent an amount less than 1%.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
----------------------
NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING
------------------------------------ ----------------------------- ---------- ---------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Gregory L. Reyes(1)............................... 1,535,662 7.1% 6.1%
Bruce L. Bergman(2)............................... 773,528 3.6 3.1
Kumar Malavalli(3)................................ 728,000 3.3 2.9
Paul R. Bonderson, Jr.(4)......................... 910,000 4.2 3.6
Victor M. Rinkle(5)............................... 200,000 * *
Charles W. Smith(6)............................... 195,000 * *
Neal Dempsey(7)................................... 807,843 3.7 3.2
c/o Bay Partners Inc.
10600 N. De Anza Blvd., Suite 100
Cupertino, CA 95054
Mark Leslie(8).................................... 121,856 * *
Seth D. Neiman(9)................................. 7,131,107 32.8 28.2
Larry W. Sonsini(10).............................. 121,856 * *
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
----------------------
NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING
------------------------------------ ----------------------------- ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Crosspoint Venture Partners(11)................... 6,676,107 30.7 26.4
2925 Woodside Road
Woodside, CA 94062
Mohr, Davidow Ventures IV(12)..................... 1,579,123 7.3 6.2
2774 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94028
Weiss, Peck & Greer(13)........................... 1,355,017 6.2 5.3
555 California Street,
Suite 3130
San Francisco, CA 94104
Attn: Christopher J. Schaepe
Andreas V. Bechtolsheim(14)....................... 1,168,814 5.4 4.6
1140 Hamilton Avenue
Palo Alto, CA 94301
All Executive Officers and Directors
as a group (12 persons)(15)..................... 12,924,852 59.1 50.9
</TABLE>
- -------------------------
(1) Includes 1,535,662 shares subject to a right of repurchase in favor of
Brocade which lapses over time. Includes 1,500,110 shares held by Gregory
Reyes and Penny Reyes as Community Property. Also includes 17,776 shares
held by Gregorio Reyes, Trustee of the Rebecca Mary Reyes 1997 Trust UTA
Dated August 15, 1997 and 17,776 shares held by Gregorio Reyes, Trustee of
the Gregory Louis Reyes, Jr. 1996 Trust UTA Dated April 30, 1996.
(2) All shares listed are held by The Bergman Family Trust. Includes 96,691
shares subject to a right of repurchase in favor of Brocade which lapses
over time.
(3) Includes 106,167 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(4) All shares listed are held by The Bonderson Family Living Trust Dated June
28, 1994. Includes 132,708 shares subject to a right of repurchase in favor
of Brocade which lapses over time.
(5) Includes 150,000 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(6) Includes 139,271 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(7) Mr. Dempsey is a general partner of Bay Partners SBIC, L.P. and is a
director of Brocade. Includes 796,425 shares held by Bay Partners SBIC,
L.P. and 11,418 shares subject to warrants held by Bay Partners SBIC, L.P.,
which are exercisable within 60 days of January 31, 1999. Mr. Dempsey
disclaims beneficial ownership of shares held by this entity, except to the
extent of his proportional interest arising from his partnership interest
in Bay Partners SBIC, L.P.
(8) Represents 121,856 shares subject to a right to repurchase in favor of
Brocade which lapses over time. Includes 8,888 shares held directly by Seth
Leslie and 8,888 shares held directly by Joshua Leslie, of which Mr. Leslie
disclaims beneficial ownership.
(9) Mr. Neiman is a partner of Crosspoint Venture Partners and the Chairman of
the board of directors of Brocade. Includes 25,289 shares subject to a
right of repurchase in favor of Brocade which lapses over time. Includes
20,000 shares held by The Alexandra Grace Speeth Neiman 1996
59
<PAGE> 61
Trust and 20,000 shares held by The Morgan Olivia Speeth Neiman 1996 Trust,
of which Mr. Neiman disclaims beneficial ownership. Also includes 5,811,556
shares held by Crosspoint Venture Partners 1993, 570,821 shares held by
Crosspoint Venture Partners LS Fund 1997 and 293,730 shares held by
Crosspoint 1993 Entrepreneurs Fund. Mr. Neiman disclaims beneficial
ownership of shares held by these entities, except for his proportional
interest arising from his partnership interest in Crosspoint Venture
Partners.
(10) Represents 121,856 shares issuable upon exercise of an option held by Mr.
Sonsini exercisable within 60 days of January 31, 1999.
(11) Represents 5,811,556 shares held by Crosspoint Venture Partners 1993,
570,821 shares held by Crosspoint Venture Partners LS Fund 1997 and 293,730
shares held by Crosspoint 1993 Entrepreneurs Fund. Mr. Neiman is a partner
of Crosspoint Venture Partners and has dispositive and voting power for
these shares.
(12) Represents 1,515,959 shares held by Mohr, Davidow Ventures IV and 63,164
shares held by MDV IV Entrepreneurs' Network Fund, L.P. Jonathan D. Feiber
is a member of Mohr Davidow Ventures IV and has dispositive and voting
power for these shares.
(13) Includes 596,453 shares held by Weiss, Peck & Greer Venture Associates IV,
L.P., 537,111 shares held by WPG Enterprise Fund III, L.P., 77,509 shares
held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America
Trust & Banking Corporation (Cayman) Limited and 20,762 shares held by WPG
Information Sciences Entrepreneur Fund, L.P. Also includes 59,645 shares
subject to warrants held by Weiss, Peck & Greer Venture Associates IV,
L.P., 53,711 shares subject to warrants held by WPG Enterprise Fund III,
L.P., 7,750 shares subject to warrants held by Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Bank America Trust & Banking Corporation
(Cayman) Limited and 2,076 shares subject to warrants held by WPG
Information Sciences Entrepreneur Fund, L.P., each of which is exercisable
within 60 days of January 31, 1999. Christopher J. Schaepe is a Managing
Member of Weiss, Peck & Greer and has dispositive and voting power for
these shares.
(14) Includes 63,164 shares held by TPK Unitrust, of which Mr. Bechtolsheim is
the trustee.
(15) Includes 2,575,352 shares subject to a right of repurchase in favor of
Brocade which lapses over time. Also includes 11,418 shares subject to a
warrant and 121,856 shares subject to options, each of which is exercisable
within 60 days of January 31, 1999.
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The following is a summary of the material provisions of the common stock
and the preferred stock contained in Brocade's certificate of incorporation and
bylaws.
COMMON STOCK
As of January 31, 1999, there were 7,408,167 shares of common stock
outstanding held of record by 112 stockholders. Subject to preferences that may
be applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled the following rights:
-- to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time
may determine;
-- one vote for each share held on all matters submitted to a vote of
stockholders; and
-- upon liquidation, dissolution or winding-up of Brocade, to share
ratably in all assets remaining after payment of liabilities and the
liquidation of any preferred stock.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment therefor, duly and validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The board of directors is authorized, without action by the stockholders,
to designate and issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions thereon.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under certain circumstances, have
the effect of delaying, deferring or preventing a change in control of Brocade.
We have no current plans to issue any shares of preferred stock.
WARRANTS
In December 1995, we issued a warrant to an equipment lease financing
company to purchase 35,444 shares of our Series A Preferred Stock with an
exercise price of $1.00 per share, in consideration for equipment leases and a
loan. In October 1996, we issued a warrant to the same equipment lease financing
company to purchase 15,753 shares of our Series A Preferred Stock with an
exercise price of $4.50 per share, also in consideration for equipment leases
and a loan. In September 1996, we issued a warrant to the same equipment lease
financing company to purchase 17,500 shares of our Series B Preferred Stock at
an exercise price of $4.00 per share. These warrants will remain outstanding
after the completion of this offering and will become exercisable for our common
stock.
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<PAGE> 63
In August 1996, we issued a warrant to a real property lessor to purchase
3,000 shares of our Series C Preferred Stock with an exercise price of $3.00 per
share. This warrant will remain outstanding after the completion of this
offering and will become exercisable for our common stock.
In April 1997, we issued a warrant to a sublessor of real property to
purchase 20,000 shares of our Series C Preferred Stock with an exercise price of
$3.00 per share. This warrant will remain outstanding after the completion of
this offering and will become exercisable for our common stock.
In May 1997, we issued a warrant to a bank to purchase 25,000 shares of our
Series C Preferred Stock with an exercise price of $3.00 per share. This warrant
will remain outstanding after the completion of this offering and will become
exercisable for our common stock.
In September 1997, we issued warrants to certain investors in our Series D
Preferred Stock financing to purchase that number of shares equal to 10% of the
number of shares purchased by each respective investor in the financing, for a
total of 296,881 shares, at an exercise price of $6.78 per share. These warrants
terminate upon our initial public offering, and will all be exercised prior to
the effective date.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of approximately 14,623,614 shares of
common stock and warrants to acquire 264,788 shares of common stock will be
entitled to rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreements between us and the holders of
such registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock therein. Additionally, certain of such holders are also entitled to
certain demand registration rights pursuant to which they may require us on up
to two occasions to file a registration statement under the Securities Act at
our expense with respect to our shares of common stock, and we are required to
use our best efforts to effect such registration. Moreover, holders may require
us to file an unlimited number of additional registration statements on Form S-3
at our expense. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and our
right not to effect a requested registration within six months following an
offering of our securities, including the offering made here. In addition, the
holders of registration rights have agreed not to exercise such rights for at
least 180 days after the offering without the prior written consent of Morgan
Stanley & Co. Incorporated.
DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of Brocade by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of Brocade to first negotiate with us. We believe that the
benefits of increased protection of Brocade's potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure Brocade outweighs the disadvantages of discouraging such proposals,
including proposals that are priced above the then current market value of our
common stock, because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested
62
<PAGE> 64
stockholder for a period of three years following the date such stockholder
became an interested stockholder, unless:
-- prior to such date the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
-- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
-- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least 66 2/3% of the outstanding voting stock that is not owned
by the interested stockholder.
Section 203 defines business combination to include:
-- any merger or consolidation involving the corporation and the
interested stockholder;
-- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
-- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
-- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder;
or
-- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by
or through the corporation. In general, section 203 defines an
interested stockholder as any entity or person beneficially owning 15%
or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such
entity or person.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of the offering, our board of directors will be divided into three
classes, with each class serving staggered three-year terms and that certain
amendments of the certificate of incorporation and of the bylaws require the
approval of holders of at least 66 2/3% of the voting power of all outstanding
stock. These provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of Brocade.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, South St. Paul,
Minnesota 55075-0738, and its telephone number at this location is (651)
450-4189.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
common stock. Future sales of substantial amounts of common stock in the public
market could adversely affect the market price of the common stock.
Upon completion of this offering, we will have outstanding 25,281,781
shares of common stock, assuming the issuance of 3,250,000 shares of common
stock offered hereby and no exercise of options after . Of these shares, the
3,250,000 shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act, provided, however,
that if shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act, their sales of shares would be subject to certain
limitations and restrictions that are described below.
The remaining 22,031,781 shares of common stock held by existing
stockholders were issued and sold by us in reliance on exemptions from the
registration requirements of the Securities Act. All of these shares will be
subject to "lock-up" agreements described below on the effective date of the
offering. Upon expiration of the lock-up agreements 180 days after the effective
date of the offering, 11,634,545 shares will become eligible for sale, subject
in most cases to the limitations of Rule 144. In addition, holders of stock
options could exercise such options and sell certain of the shares issued upon
exercise as described below.
<TABLE>
<CAPTION>
DAYS AFTER DATE OF APPROXIMATE SHARES
THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT
- ------------------ ------------------------ -------
<S> <C> <C>
On Effectiveness 3,250,000 Shares sold in the offering
90 Days 0 Shares saleable under Rule 144
180 Days 11,634,545 Lock-up released; shares salable under Rules 144 and
701
</TABLE>
As of January 31, 1999, there were a total of 984,190 shares of common
stock subject to outstanding options under our 1995 Equity Incentive Plan,
87,068 of which were vested. As of January 31, 1999, there were a total of
1,098,281 shares of common stock subject to outstanding options under our 1998
Equity Incentive Plan, 130,515 of which were vested. As of January 31, 1999, no
shares of common stock were subject to outstanding options under our 1998
Executive Equity Incentive Plan. However, all of these shares are subject to
lock-up agreements. Immediately after the completion of the offering, Brocade
intends to file registration statements on Form S-8 under the Securities Act to
register all of the shares of common stock issued or reserved for future
issuance under our 1999 Stock Plan, 1999 Director Option Plan and 1999 Employee
Stock Purchase Plan. On the date 180 days after the effective date of the
offering, a total of 600,748 shares of common stock subject to outstanding
options will be vested. After the effective dates of the registration statements
on Form S-8, shares purchased upon exercise of options granted pursuant to the
1999 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock Purchase Plan
generally would be available for resale in the public market.
Our officers, directors and substantially all other stockholders have
agreed with Morgan Stanley & Co. Incorporated not to sell or otherwise dispose
of any of their shares for a period of 180 days after the date of the offering.
Morgan Stanley & Co. Incorporated, however, may in its sole discretion, at any
time without notice, release all or any portion of the shares subject to these
lock-up agreements. All of our stockholders have also agreed with Brocade not to
sell or otherwise dispose of any of their shares for a period of 180 days after
the effective date of the offering.
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<PAGE> 66
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of:
-- 1% of the number of shares of common stock then outstanding, which
will equal approximately 252,818 shares immediately after this
offering; or
-- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain other requirements
regarding the manner of sale, notice filing and the availability of current
public information about us.
RULE 144(k)
Under Rule 144(k), a person who is not deemed to have been one of Brocade's
"affiliates" at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an "affiliate," is
entitled to sell such shares without complying with the manner of sale, notice
filing, volume limitation or notice provisions of Rule 144. Therefore, unless
otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
RULE 701
In general, under Rule 701, any Brocade employee, director, officer,
consultant or advisor who purchases shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of the offering is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with certain restrictions, including the holding period, contained in
Rule 144.
The Securities and Exchange Commission has indicated that Rule 701 will
apply to typical stock options granted by an issuer before it becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, along with
the shares acquired upon exercise of such options, including exercises after the
date of this prospectus. Securities issued in reliance on Rule 701 are
restricted securities and, subject to the contractual restrictions described
above, beginning 90 days after the date of this prospectus, may be sold by
persons other than "affiliates," as defined in Rule 144, subject only to the
manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without
compliance with its one year minimum holding period requirement.
65
<PAGE> 67
UNDERWRITERS
Under the terms and subject to the conditions contained in the underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as
representatives, have severally agreed to purchase, and Brocade has agreed to
sell to them, severally, the respective number of shares of common stock set
forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
BT Alex. Brown Incorporated.................................
Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated..............................................
---------
Total............................................. 3,250,000
=========
</TABLE>
The underwriters are offering the shares subject to their acceptance of the
shares from Brocade and subject to prior sale. The underwriting agreement
provides that the obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered hereby are subject to the
approval of certain legal matters by their counsel and to certain other
conditions. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any such shares are taken.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page of this prospectus and part to certain dealers at a price that represents a
concession not in excess of $ a share under the public offering
price. Any underwriter may allow, and the dealers may reallow, a concession not
in excess of $ a share to other underwriters or to certain other
dealers. After the initial offering of the shares of common stock, the offering
price and other selling terms may from time to time be varied by the
representatives of the underwriters.
Brocade has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to 487,500 additional shares of
common stock at the public offering price set forth on the cover page of this
prospectus, less underwriting discounts and commissions. The underwriters may
exercise this option solely for the purpose of covering over-allotments, if any,
made in connection with the offering of the shares of common stock offered by
the prospectus. To the extent this option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of additional shares of common stock as the number set forth
next to each underwriter's name in the preceding table bears to the total number
of shares of common stock set forth next to the names of all underwriters in the
preceding table.
At the request of Brocade, the underwriters have reserved up to five
percent of the shares of common stock to be issued by Brocade and offered hereby
for sale, at the initial public offering price, to various business associates
and related persons of Brocade. No officer, director or employee of Brocade will
receive any of these shares. The number of shares of common stock available for
sale to the general public will be reduced to the extent these individuals
purchase such reserved shares. Any reserved shares which are not so purchased
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
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<PAGE> 68
Each of Brocade and the officers, directors and stockholders of Brocade has
agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, or otherwise during the period
ending 180 days after the date of this prospectus, it will not:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any
securities convertible into or exercisable or exchangeable for common
stock; or
-- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock, whether any such transaction described above is to be
settled by delivery of common stock or such other securities, in cash
or otherwise.
The foregoing restrictions shall not apply to:
-- the sale of any shares to the underwriters pursuant to the
underwriting agreement; or
-- transactions relating to shares of common stock or other securities
acquired in open market transactions after the date of this
prospectus.
The underwriters have informed Brocade that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
Approval of the common stock has been sought for quotation on the Nasdaq
National Market under the symbol "BRCD."
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the common stock, the underwriters may bid for, and purchase, shares of
common stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing the
common stock in the offering if the syndicate repurchases previously distributed
shares of common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities and may
end any of these activities at any time.
Brocade and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the shares of
common stock. Consequently, the initial public offering price for the shares of
common stock will be determined by negotiations between us and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be our record of operations,
our current financial position and future prospects, the experience of our
management, the economics of the SAN industry in general, the general condition
of the equity securities markets, sales, earnings and certain other financial
and operating information of Brocade in recent periods, the price-earnings
ratios, price-sales ratios, market prices of securities and certain financial
and operating information of companies engaged in activities similar to those of
Brocade. The estimated initial public offering price range set forth on the
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<PAGE> 69
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation. Larry
W. Sonsini, a director of Brocade and a partner of Wilson Sonsini Goodrich &
Rosati, beneficially owns 121,856 shares of our common stock. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Gray Cary Ware & Freidenrich LLP.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
CHANGE IN INDEPENDENT ACCOUNTANTS AND FISCAL YEAR END
Effective October 1997, Arthur Andersen LLP was engaged as our independent
accountants and replaced PricewaterhouseCoopers LLP who was dismissed as our
independent accountants. Also at that time, we changed our fiscal year from
December 31 to October 31. The decision to change independent accountants was
approved by our board of directors. Prior to October 1997,
PricewaterhouseCoopers LLP issued a report on the periods from inception through
December 31, 1996. This report contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principle. In connection with the audit for the periods ended
December 31, 1996, there were no disagreements with PricewaterhouseCoopers LLP
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make
reference thereto in their report on the financial statements for such periods.
PricewaterhouseCoopers LLP has not audited or reported on any of the financial
statements or information included in this prospectus. Prior to October 1997, we
had not consulted with Arthur Andersen LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our financial
statements.
68
<PAGE> 70
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act for the shares of common stock in
this offering. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule that were filed with the
registration statement. For further information with respect to Brocade and our
common stock, we refer you to the registration statement and the exhibits and
schedule that were filed with the registration statement. Statements contained
in this prospectus about the contents of any contract or any other document that
is filed as an exhibit to the registration statement are materially complete. A
copy of the registration statement and the exhibits and schedule that were filed
with the registration statement may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or
any part of the registration statement may be obtained from the Securities and
Exchange Commission upon payment of the prescribed fee. The Securities and
Exchange Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
site is http://www.sec.gov.
Upon completion of this offering, Brocade will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
of 1934, and, in accordance with the requirements of the Securities Exchange Act
of 1934, will file periodic reports, proxy statements and other information with
the Securities and Exchange Commission. These periodic reports, proxy statements
and other information will be available for inspection and copying at the
regional offices, public reference facilities and web site of the Securities and
Exchange Commission referred to above.
Our principal offices are located at 1901 Guadalupe Parkway, San Jose,
California 95131 and our telephone number is (408) 487-8000. We maintain a
worldwide web site at http://www.brocade.com. The reference to our web address
does not constitute incorporation by reference of the information contained in
that site.
Brocade, SilkWorm, SilkWorm Express and Brocade's logo are trademarks of
Brocade, some of which may be registered or are pending registration in certain
jurisdictions. All other brand names, logos and trademarks appearing in this
prospectus are the property of their respective holders.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 72
BROCADE COMMUNICATIONS SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statements of Redeemable Convertible Preferred Stock and
Shareholders' Equity (Deficit)............................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 73
After the reincorporation discussed in Note 10 to Brocade Communications
Systems, Inc. financial statements, we expect to be in a position to render the
following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Brocade Communications Systems, Inc.:
We have audited the accompanying balance sheets of Brocade Communications
Systems, Inc. (a California corporation) as of October 31, 1998 and 1997 and the
related statements of operations, redeemable convertible preferred stock and
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brocade Communications
Systems, Inc. as of October 31, 1998 and 1997 and the results of its operations
and its cashflows for each of the three years in the period ended October 31,
1998 in conformity with generally accepted accounting principles.
San Jose, California
November 24, 1998
(except with respect to the matters
discussed in Note 10, as to which the
date is March , 1999)
F-2
<PAGE> 74
BROCADE COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
1999
OCTOBER 31, PRO FORMA
------------------- JANUARY 31, SHAREHOLDERS'
1997 1998 1999 EQUITY (NOTE 6)
-------- -------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,552 $ 10,420 $ 10,137
Short-term investments.................................... 15,920 -- --
Accounts receivable, net of allowance for doubtful
accounts of $100, $285 and $260, respectively........... 2,646 3,430 6,028
Inventories............................................... 471 1,744 2,528
Prepaid expenses and other current assets................. 342 220 491
-------- -------- --------
Total current assets........................................ 21,931 15,814 19,184
Property and equipment, net................................. 3,922 5,323 5,248
Other assets................................................ 247 164 144
-------- -------- --------
$ 26,100 $ 21,301 $ 24,576
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit........................... $ 500 $ 1,672 $ 1,700
Current portion of debt................................... 367 1,231 1,231
Current portion of capital lease obligations.............. 679 784 713
Accounts payable.......................................... 3,292 3,247 4,863
Accrued liabilities....................................... 1,716 3,061 2,786
Deferred revenue.......................................... 43 543 3,391
-------- -------- --------
Total current liabilities.......................... 6,597 10,538 14,684
-------- -------- --------
Long-term liabilities:
Long-term portion of debt................................. 694 1,731 1,443
Long-term portion of capital lease obligations............ 1,260 478 365
Commitments and contingencies (Note 4)
Redeemable convertible preferred stock, no par value,
aggregate liquidation preference of $35,850:
Authorized -- 9,791,280 shares at January 31, 1999 and
pro forma
Issued and outstanding (Series A, B, C and
D) -- 8,370,431 shares at October 31, 1997; and
9,235,483 shares at October 31, 1998 and January 31,
1999; no shares issued and outstanding pro forma...... 30,359 35,261 35,261
Warrants to purchase redeemable convertible preferred
stock................................................... 648 648 648
-------- -------- --------
Total long term liabilities........................ 32,961 38,118 37,717
-------- -------- --------
Shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 30,000,000 shares at January 31, 1999 and
pro forma
Issued and outstanding -- 4,913,383 shares at October
31, 1997; 5,194,765 shares at October 31, 1998;
7,408,167 shares at January 31, 1999; and 22,031,781
shares outstanding pro forma.......................... 424 2,225 10,309 $ 47,907
Deferred compensation....................................... (88) (300) (2,566) (2,566)
Notes receivable from shareholders.......................... (75) (450) (4,899) (4,899)
Accumulated deficit......................................... (13,719) (28,830) (30,669) (30,669)
-------- -------- -------- --------
Total shareholders' equity (deficit)............... (13,458) (27,355) (27,825) $ 9,773
-------- -------- -------- --------
$ 26,100 $ 21,301 $ 24,576
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 75
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................. $ -- $ 8,482 $ 22,414 $ 7,824 $ 6,429
License revenue............................. -- -- 1,832 26 1,578
------- ------- -------- ------- -------
Total revenues......................... -- 8,482 24,246 7,850 8,007
Cost of revenues............................ -- 6,682 15,759 4,697 3,321
------- ------- -------- ------- -------
Gross profit........................... -- 1,800 8,487 3,153 4,686
------- ------- -------- ------- -------
Operating expenses:
General and administrative.................. 575 1,464 3,813 639 741
Sales and marketing......................... 152 2,112 5,154 1,074 1,729
Research and development.................... 3,091 7,666 14,744 2,838 2,905
Amortization of deferred compensation....... -- -- 7 -- 1,157
------- ------- -------- ------- -------
Total operating expenses............... 3,818 11,242 23,718 4,551 6,532
------- ------- -------- ------- -------
Loss from operations........................ (3,818) (9,442) (15,231) (1,398) (1,846)
Other income (expense)...................... (116) (177) 120 43 7
------- ------- -------- ------- -------
Net loss.................................... $(3,934) $(9,619) $(15,111) $(1,355) $(1,839)
======= ======= ======== ======= =======
Basic net loss per share.................... $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
======= ======= ======== ======= =======
Shares used in computing basic net loss per
share..................................... 414 1,997 3,400 2,570 4,349
======= ======= ======== ======= =======
Pro forma basic net loss per share
(unaudited)............................... $ (.84) $ (.10)
======== =======
Shares used in computing pro forma basic net
loss per share (unaudited)................ 17,915 18,973
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE
--------------------------- ---------------- STOCK FROM ACCUMULATED
SHARES AMOUNT WARRANTS SHARES AMOUNT COMPENSATION SHAREHOLDERS DEFICIT
------ ------- -------- ------ ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1995........... 1,425 $ 1,411 -- 2,093 $ 52 $ -- $ (52) $ (166)
Issuance of warrants related to
leases............................... -- -- 188 -- -- -- -- --
Exercise of options.................... -- -- -- 1,562 48 -- -- --
Issuance of Series B Redeemable
Convertible Preferred Stock, net of
issuance costs of $63................ 816 3,202 -- -- -- -- -- --
Forgiveness of notes receivable from
founders............................. -- -- -- -- -- -- 52 --
Stock in exchange for services......... -- -- -- 66 13 -- -- --
Issuance of common stock to officer.... -- -- -- 773 151 (132) -- --
Deferred compensation.................. -- -- -- -- -- 11 -- --
Net loss............................... -- -- -- -- -- -- -- (3,934)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1996........... 2,241 4,613 188 4,494 264 (121) -- (4,100)
Exercise of options.................... -- -- -- 384 90 -- -- --
Issuance of stock for notes receivable
from shareholders.................... -- -- -- 250 75 -- (75) --
Repurchase of common stock............. -- -- -- (215) (5) -- -- --
Issuance of Series C Redeemable
Convertible Preferred Stock, net of
issuance costs of $49................ 3,333 9,952 -- -- -- -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $42................ 2,796 15,794 -- -- -- -- -- --
Issuance of warrants related to leases
and notes payable.................... -- -- 135 -- -- -- -- --
Issuance of warrants................... -- -- 325 -- -- -- -- --
Deferred compensation.................. -- -- -- -- -- 33 -- --
Net loss............................... -- -- -- -- -- -- -- (9,619)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1997........... 8,370 30,359 648 4,913 424 (88) (75) (13,719)
Exercise of options.................... -- -- -- 201 55 -- -- --
Compensation charges................... -- -- -- -- 1,067 88 -- --
Deferred compensation.................. -- -- -- -- 307 (307) -- --
Amortization of deferred
compensation......................... -- -- -- -- -- 7 -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $98................ 865 4,902 -- -- -- -- -- --
Issuance of stock for notes receivable
from shareholders.................... -- -- -- 225 375 -- (375) --
Stock in exchange for services......... -- -- -- 18 41 -- -- --
Repurchase of common stock............. -- -- -- (162) (44) -- -- --
Net loss............................... -- -- -- -- -- -- -- (15,111)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1998........... 9,235 35,261 648 5,195 2,225 (300) (450) (28,830)
Exercise of options (unaudited)........ -- -- -- 236 135 -- -- --
Issuance of stock for notes receivable
from shareholders (unaudited)........ -- -- -- 1,977 4,449 -- (4,449) --
Compensation charges (unaudited)....... -- -- -- -- 77 -- -- --
Deferred compensation (unaudited)...... -- -- -- -- 3,423 (3,423) -- --
Amortization of deferred compensation
(unaudited).......................... -- -- -- -- -- 1,157 -- --
Net loss (unaudited)................... -- -- -- -- -- -- -- (1,839)
----- ------- ---- ----- ------- ------- ------- --------
Balances at January 31, 1999
(unaudited).......................... 9,235 $35,261 $648 7,408 $10,309 $(2,566) $(4,899) $(30,669)
===== ======= ==== ===== ======= ======= ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS
EQUITY
(DEFICIT)
------------
<S> <C>
Balances at October 31, 1995........... $ (166)
Issuance of warrants related to
leases............................... --
Exercise of options.................... 48
Issuance of Series B Redeemable
Convertible Preferred Stock, net of
issuance costs of $63................ --
Forgiveness of notes receivable from
founders............................. 52
Stock in exchange for services......... 13
Issuance of common stock to officer.... 19
Deferred compensation.................. 11
Net loss............................... (3,934)
--------
Balances at October 31, 1996........... (3,957)
Exercise of options.................... 90
Issuance of stock for notes receivable
from shareholders.................... --
Repurchase of common stock............. (5)
Issuance of Series C Redeemable
Convertible Preferred Stock, net of
issuance costs of $49................ --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $42................ --
Issuance of warrants related to leases
and notes payable.................... --
Issuance of warrants................... --
Deferred compensation.................. 33
Net loss............................... (9,619)
--------
Balances at October 31, 1997........... (13,458)
Exercise of options.................... 55
Compensation charges................... 1,155
Deferred compensation.................. --
Amortization of deferred
compensation......................... 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $98................ --
Issuance of stock for notes receivable
from shareholders.................... --
Stock in exchange for services......... 41
Repurchase of common stock............. (44)
Net loss............................... (15,111)
--------
Balances at October 31, 1998........... (27,355)
Exercise of options (unaudited)........ 135
Issuance of stock for notes receivable
from shareholders (unaudited)........ --
Compensation charges (unaudited)....... 77
Deferred compensation (unaudited)...... --
Amortization of deferred compensation
(unaudited).......................... 1,157
Net loss (unaudited)................... (1,839)
--------
Balances at January 31, 1999
(unaudited).......................... $(27,825)
========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(3,934) $ (9,619) $(15,111) $(1,355) $(1,839)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 246 1,020 2,374 494 427
Loss on disposition of equipment.......................... -- 73 -- -- --
Noncash compensation expense.............................. 11 33 1,202 71 1,234
Forgiveness of founders' notes receivable................. 52 -- -- -- --
Changes in assets and liabilities
Accounts receivable..................................... -- (2,646) (784) 587 (2,598)
Inventories............................................. -- (471) (1,273) (993) 894
Prepaid expenses and other assets....................... (40) (140) 205 (51) (1,929)
Accounts payable........................................ 12 3,023 (45) (46) 1,616
Accrued liabilities..................................... 260 1,452 1,845 340 2,573
------- -------- -------- ------- -------
Net cash provided by (used in) operating activities... (3,393) (7,275) (11,587) (953) 378
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,518) (3,423) (3,775) (1,624) (352)
Proceeds from disposition (purchases) of short-term
investments............................................. -- (15,920) 15,920 15,920 --
------- -------- -------- ------- -------
Net cash provided by (used in) investing activities... (1,518) (19,343) 12,145 14,296 (352)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings................................. -- 500 1,672 -- 28
Line of credit repayments................................. -- -- (500) -- --
Payments on capitalized lease obligations................. (155) (504) (677) (169) (184)
Proceeds from capital lease financing..................... 1,340 1,258 -- -- --
Proceeds from notes payable............................... -- 1,091 2,594 -- --
Repayments of notes payable............................... -- (30) (693) (92) (288)
Proceeds from issuance of redeemable convertible preferred
stock and warrants...................................... 3,202 26,070 4,902 4,911 --
Proceeds from issuance of common stock.................... 56 90 56 12 135
Repurchase of common shares............................... -- (5) (44) -- --
------- -------- -------- ------- -------
Net cash provided by (used in) financing activities... 4,443 28,470 7,310 4,662 (309)
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (468) 1,852 7,868 18,005 (283)
Cash and cash equivalents, beginning of period.............. 1,168 700 2,552 2,552 10,420
------- -------- -------- ------- -------
Cash and cash equivalents, end of period.................... $ 700 $ 2,552 $ 10,420 $20,557 $10,137
======= ======== ======== ======= =======
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 109 $ 351 $ 557 $ 112 $ 136
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 78
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF BROCADE
Brocade Communications Systems, Inc. (Brocade) was incorporated on August
24, 1995 and provides network switches for deployment in storage area networks
("SANs"). Brocade's primary product line, SilkWorm, operates at gigabit speeds
and is based on the Fibre Channel protocol. A SAN provides a networking
environment for connecting a data center's servers and storage systems.
During fiscal 1997 and 1998, Brocade sold its products and services to
original equipment manufacturers located in the United States. Brocade is
subject to a number of business risks including, but not limited to, ability to
obtain adequate financing to support growth, dependence on key individuals, key
suppliers of integral component parts, competition from substitute products and
larger companies and the need for the continued successful development,
manufacturing, marketing and selling of its SAN switching products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Data
The unaudited interim financial statements for the three months ended
January 31, 1999 and 1998 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
For purposes of the statements of cash flows, cash and cash equivalents
consist of investments with original maturities of less than three months,
primarily commercial paper.
During 1997, Brocade classified its short-term investments as
held-to-maturity and carried them at amortized cost. At October 31, 1997, the
fair value of Brocade's investments approximated amortized cost and, as such,
unrealized holding gains and losses were insignificant. The fair value of
Brocade's investments was determined based on quoted market prices at the
reporting date for those instruments.
Concentrations of Credit Risk
Financial instruments that potentially subject Brocade to a concentration
of credit risk principally consist of accounts receivable. Brocade generally
does not require collateral on accounts receivable, as the majority of Brocade's
customers are large, well established companies. Brocade provides reserves for
credit losses and product sales returns.
F-7
<PAGE> 79
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At October 31, 1997 and 1998 and January 31, 1999, approximately 99%, 76%
and 53%, respectively, of accounts receivable was concentrated with four
customers, as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JANUARY 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer A............................................ 83% 45% 21%
Customer B............................................ 1% 11% 5%
Customer C............................................ 15% 20% 4%
Customer D............................................ -- -- 23%
</TABLE>
Inventories
Inventories are stated at the lower of cost or market, using the first in,
first out method. Inventory costs include material, labor and overhead.
Inventories consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JANUARY 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $158 $1,203 $ 238
Work-in-process....................................... 75 6 10
Finished goods........................................ 238 535 2,280
---- ------ ------
$471 $1,744 $2,528
==== ====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation for all property
and equipment is computed using the straight-line method over the estimated
useful lives of the assets, generally three to four years. Leasehold
improvements are depreciated over the shorter of their useful lives or the term
of the lease. Property and equipment consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JANUARY 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment............................. $ 4,617 $ 8,186 $ 8,514
Leasehold improvements.............................. 196 345 369
Furniture and fixtures.............................. 377 434 434
Less: Accumulated depreciation and amortization..... (1,268) (3,642) (4,069)
------- ------- -------
$ 3,922 $ 5,323 $ 5,248
======= ======= =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$2.6 million and $2.0 million, respectively, at January 31, 1999, and
approximately $2.6 million and $1.8 million, respectively, at October 31, 1998.
F-8
<PAGE> 80
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," Brocade capitalizes eligible computer software development
costs upon the establishment of technological feasibility, which it has defined
as completion of designing, coding and testing activities. For the years ended
October 31, 1997 and October 31, 1998, and the three-month periods ended January
31, 1998 and 1999, the amount of costs eligible for capitalization, after
consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying statements of operations.
Accrued Liabilities
Accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------- JANUARY 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranty.................................. $ 750 $1,350 $1,220
Payroll, bonus, vacation.......................... 474 628 930
Deferred revenue.................................. 293 543 3,391
Accrued restructuring (see Note 5)................ -- 421 77
Sales tax......................................... -- 125 14
Other............................................. 242 537 545
------ ------ ------
$1,759 $3,604 $6,177
====== ====== ======
</TABLE>
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. This accounting
standard permits the use of either a fair value based method or the method
defined in Accounting Principles Board Opinion 25, "Accounting for Stock Issued
to Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the valuation method provided in APB 25 are
required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value based method. Brocade has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB 25, and accordingly, it has included the pro forma disclosures
required under SFAS No. 123 in Note 7.
Revenue Recognition
Product revenue is generally recognized when products are shipped. Revenue
recognition is deferred for shipments to new customers where product returns
cannot be reasonably estimated or significant support services are required to
successfully launch the customer's product. These revenues are recognized when
the customer has successfully integrated and launched its products and Brocade
has met its support obligation. Allowances for warranty costs, credit losses and
estimated future returns are
F-9
<PAGE> 81
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
provided for upon shipment. License revenue is related only to technology
associated with certain application-specific integrated circuits ("ASICs") and
is recognized when designs and specifications are delivered and collection is
reasonably assured. Deferred revenues for the quarter ended January 31, 1999
were approximately $3.4 million.
During fiscal 1997 and 1998, and the three month periods ended January 31,
1998 and 1999, approximately 91%, 89%, 98% and 76%, respectively, of Brocade's
total revenues were derived from sales of its SilkWorm(R) product. The
percentage of sales to significant customers is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
----------- THREE MONTHS ENDED JANUARY 31,
1997 1998 1998 1999
---- ---- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A....................................... 67% 72% 92% 37%
Customer B....................................... 27% 11% 3% 33%
</TABLE>
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Share," ("SFAS No. 128") for all periods
presented. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued or granted
for nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if such stock had been outstanding for all periods
presented. To date, Brocade has not had any issuances or grants for nominal
consideration.
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Basic pro forma net loss
per common share, as presented in the statements of operations, has been
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible preferred stock (using
the if-converted method) from the original date of issuance.
F-10
<PAGE> 82
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, -------------------------
-------------------------------- JANUARY 31, JANUARY 31,
1996 1997 1998 1998 1999
------- ----------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss.................................... $(3,934) $(9,619) $(15,111) $(1,355) $(1,839)
------- ------- -------- ------- -------
Basic and diluted:
Weighted average shares of common stock
outstanding............................... 3,169 4,594 5,174 4,973 6,189
Less: Weighted average shares subject to
repurchase................................ (2,755) (2,597) (1,774) (2,403) (1,840)
------- ------- -------- ------- -------
Weighted average shares used in computing
basic and diluted net loss per common
share..................................... 414 1,997 3,400 2,570 4,349
======= ======= ======== ======= =======
Basic and diluted net loss per common
share..................................... $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
======= ======= ======== ======= =======
Pro forma:
Net loss.................................. $(15,111) $(1,839)
======== =======
Shares used above......................... 3,400 4,349
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited)............................ 14,218 14,327
-------- -------
Pro forma adjustment to reflect assumed
exercise and conversion of preferred
stock warrants to purchase 296,881
common shares at an exercise price of
$6.78 per share (unaudited)............ 297 297
-------- -------
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)............................ 17,915 18,973
======== =======
Pro forma basic and diluted net loss per
common share (unaudited)............... $ (.84) $ (.10)
======== =======
</TABLE>
Brocade has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per common share were
10,895,629, 17,561,773, 19,506,313, 18,370,231, and 19,582,674 for the years
ended October 31, 1996, 1997 and 1998 and the three months ended January 31,
1998 and 1999, respectively. See Notes 6 and 7 for further information on these
securities.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 was adopted by
Brocade beginning on November 1, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. Comprehensive loss for each of the three years
F-11
<PAGE> 83
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ended October 31, 1998 and the three month periods ended January 31, 1998 and
1999 approximated net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information."
("SFAS No. 131"). SFAS No. 131 was adopted by Brocade beginning on November 1,
1997. SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. Brocade
is organized and operates as one operating segment, the design, development
manufacturing, marketing and selling of SAN security products. Service revenues
to date have not been significant. Brocade operates in one geographic area, the
United States. Major customers are discussed above.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. Brocade adopted SOP 98-1 beginning
on November 1, 1998. The adoption did not have a material impact on Brocade's
financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Brocade has not had significant software sales to date and
management does not expect the adoption of SOP 98-9 to have a significant effect
on our financial condition or results of operations.
3. LINE OF CREDIT AND DEBT
In June 1997, Brocade entered into a revolving line of credit agreement
with a bank under which it can borrow up to $4,000,000. The line of credit bears
interest at the bank's prime rate (7.8% at January 31, 1999) and expires in
August 1999. At January 31, 1999 there were borrowings of $1,700,000 outstanding
under the line of credit agreement. The line of credit agreement is secured by
accounts receivable and inventory and contains certain financial covenants
measured on a monthly basis.
As of January 31, 1999, Brocade had borrowed $2,674,000 from the same bank
under an equipment loan agreement. The equipment loan agreement provides for
borrowings of up to $5,000,000. Borrowings are secured by the related capital
equipment, bear interest at the bank's prime rate plus 1.0% (8.8% at January 31,
1999) and are payable through June 30, 2002. As of January 31, 1999, principal
payments of approximately $587,000, $783,000, $783,000 and $521,000,
respectively, were due in fiscal years ending October 31, 1999, 2000, 2001 and
2002.
F-12
<PAGE> 84
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LINE OF CREDIT AND DEBT (CONTINUED)
Notes payable as of October 31, 1997 and 1998 and the three-month period
ended January 31, 1999 consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------- JANUARY 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank........................................ $1,061 $2,962 $2,674
Less: Current portion....................................... 367 1,231 1,231
------ ------ ------
Long-term portion........................................... $ 694 $1,731 $1,443
====== ====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Brocade leases its facilities under operating lease agreements expiring
through November 2000. The leases require that Brocade pay all costs of
maintenance, utilities, insurance and taxes. Rent expense for the years ended
October 31, 1996, 1997 and 1998, and the three-month period ended January 31,
1999 was $110,509, $495,475, $804,057 and $191,584 respectively.
Brocade leases computers, office equipment and furniture under long-term
lease agreements that are classified as capital leases. The leases expire
through January 2001 and require a final buyout payment at the end of the lease
term.
Future minimum lease payments, including the buyout payments, at January
31, 1999 were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED OCTOBER 31, LEASES LEASES
---------------------- --------- -------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 589 $ 694
2000........................................................ 847 476
2001........................................................ -- 42
------ ------
Total minimum lease payments................................ $1,436 1,212
====== ======
Less imputed interest (15.27% -- 17.65%).................... (134)
Present value of payments under capital leases.............. 1,078
Less current portion........................................ (713)
------
Long-term lease obligations................................. $ 365
======
</TABLE>
Brocade's former contract manufacturer has filed suit against Brocade,
alleging that Brocade is liable for breaching certain contracts with the
contract manufacturer. The suit claims damages in excess of $3.0 million plus
interest, an unspecified amount of consequential and incidental damages, costs
and attorneys' fees. Brocade has filed a cross complaint against the contract
manufacturer for various credits Brocade claims on its account with the contract
manufacturer. It is management's opinion that any liability on Brocade's account
is limited to accrued and unpaid invoices totaling approximately $1,400,000 and
that this $1,400,000 is subject to the various offsets Brocade claims in its
cross-complaint.
F-13
<PAGE> 85
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Brocade is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.
5. RESTRUCTURING OF OPERATIONS
In the third quarter of 1998, Brocade initiated a plan to restructure its
operations to reduce its break even revenue level. In connection with this plan,
Brocade recorded a $3.2 million charge to operating expenses as follows: $1.3
million is included in costs of revenue, $700,000 is included in research and
development expense and $1.2 million is included in general and administrative
expense in the 1998 statement of operations. The restructuring charge includes
$1.7 million of employee related expenses for 20 employee terminations,
including severance of Brocade's former Chief Executive Officer, $1.2 million
for the write-off of excess equipment and inventory related to discontinued and
newly established contract manufacturer arrangements, and $300,000 for
write-offs of other tangible and intangible assets related to cancelled new
product development and simulation projects. As of January 31, 1999, Brocade had
incurred costs totaling $3.1 million related to the restructuring. The remaining
actions are expected to be completed within one year from the date the
restructuring plan was initiated. Accrued liabilities at January 31, 1999
include $77,000 in remaining but unpaid employee related expenses.
6. PREFERRED STOCK
Redeemable Convertible Preferred Stock
In August 1995, Brocade issued 1,425,000 shares of its Series A Redeemable
Convertible Preferred Stock ("Series A"). In June 1996, Brocade issued 816,250
shares of its Series B Redeemable Convertible Preferred Stock ("Series B"). In
December 1996, Brocade issued 3,333,333 shares of its Series C Redeemable
Convertible Preferred Stock ("Series C"). In fiscal years 1997 and 1998, Brocade
issued 2,795,848 shares and 865,052 shares, respectively, of its Series D
Redeemable Convertible Preferred Stock ("Series D"). The rights with respect to
Series A, Series B, Series C and Series D are as follows:
Redemption. At the request of the holders of the majority of voting power
of the then outstanding preferred stock any time after August 28, 2002, Brocade
shall, to the extent funds are legally available, redeem the preferred stock in
increments over a three-year period. In such event, Brocade shall pay $1.00 per
share for Series A, $4.00 per share for Series B, $3.00 per share for Series C
and $5.78 for Series D plus any declared but unpaid dividends.
Voting. Each share of Series A, Series B, Series C and Series D has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible.
Dividends. Holders of Series A, Series B, Series C and Series D are
entitled to receive noncumulative dividends when and as declared by the Board of
Directors at a rate of $0.08, $0.32, $0.24 and $0.46 per share, respectively,
per annum. After payment of such dividends, any additional dividends declared
will be paid to the holders of common stock and preferred stock in such amount
as they would be entitled to receive if their shares had been converted into
shares of common stock. No dividends have been declared.
F-14
<PAGE> 86
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK (CONTINUED)
Liquidation. In the event of any liquidation, dissolution or winding up of
Brocade, including a merger or sale of all or substantially all of the assets,
the holders of Series A, Series B, Series C and Series D are entitled to receive
pari passu a distribution of $1.00, $4.00, $3.00 and $5.78 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of common stock. The remaining assets, if
any, shall be distributed ratably among the holders of the common stock, Series
A, Series B, Series C and Series D, based on the number of shares held (assuming
conversion of the Series A, Series B, Series C and Series D).
Conversion. Each share of Series A, Series B, Series C and Series D is
convertible into common stock, at the holder's option or upon the consent of the
holders of a majority of the then outstanding Series A, Series B, Series C and
Series D shares voting as a single class. The Series A, Series B, Series C and
Series D shares are initially convertible into common stock at a ratio of four
for one, two for one, one for one and one for one, respectively. The conversion
rates are protected by certain anti-dilution provisions. No adjustment in the
future conversion price of Series A, Series B, Series C or Series D shall be
made for the issuance of additional shares of common stock other than for a
common stock split, dividend, or distribution unless at the time of issuance of
the common stock the price per share for additional shares of common stock
issued is less than the conversion price in effect for the Series A, Series B,
Series C and Series D, respectively. The Series A, Series B, Series C and Series
D shares will automatically convert into common stock upon the closing of a
public offering having an aggregate public offering price of at least
$10,000,000.
Warrants
Since inception, Brocade has issued warrants to purchase an aggregate of
51,197, 17,500 and 48,000 shares of Series A, Series B and Series C,
respectively. These warrants were issued in connection with equipment and
facilities lease agreements. Exercise prices range from $1.00 to $4.50 per
share. The warrants are exercisable at various dates through 2002.
In connection with the initial sale and issuance of Series D, investors
were issued warrants to purchase 10% of the number of Series D shares purchased
by each investor at an exercise price of $6.78 per share. The total number of
shares of Series D purchasable upon exercise of these warrants was 296,881.
Pro Forma Shareholders' Deficit
In January 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public offering
("IPO"). If the IPO is consummated under the terms presently anticipated, (1)
all of the currently outstanding preferred stock will be converted into
14,326,733 shares of common stock upon the closing of the IPO and (2) warrants
to purchase 296,881 shares of Series D with an exercise price of $6.78 per share
will be exercised and converted into 296,881 shares of common stock prior to the
effective date of the IPO. The effect of the conversion and exercise of warrants
has been reflected as unaudited pro forma shareholders' equity in the
accompanying balance sheet as of January 31, 1999.
F-15
<PAGE> 87
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK
At January 31, 1999, Brocade had reserved the following shares of
authorized but unissued shares of common stock for future issuance:
<TABLE>
<S> <C>
Conversion of outstanding Series A.......................... 5,700,000
Conversion of outstanding Series B.......................... 1,632,500
Conversion of outstanding Series C.......................... 3,333,333
Conversion of outstanding Series D.......................... 3,660,900
Conversion of warrants outstanding.......................... 584,669
Stock option plan........................................... 2,548,987
----------
17,460,389
==========
</TABLE>
Deferred Compensation
In connection with the grant of certain stock options to employees during
the year ended October 31, 1998 and the three months ended January 31, 1999,
Brocade recorded deferred compensation of $307,266 and $3,423,145, respectively,
representing the difference between the deemed value of the common stock for
accounting purposes and the option exercise price of such options at the date of
grant. Such amount is presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable options.
Approximately $7,000 and $1.2 million was expensed during the year ended October
31, 1998 and the three months ended January 31, 1999, respectively, and the
balance will be expensed ratably over the period the options vest. Compensation
expense is decreased in the period of forfeiture for any accrued but unvested
compensation arising from the early termination of an option holder's services.
No compensation expense related to any other periods presented has been
recorded.
Stock Options
Brocade, under various stock option plans (the "Plans"), grants stock
options for shares of common stock to employees, directors and consultants of
Brocade. In accordance with the Plans, the stated exercise price shall not be
less than 85% of the estimated fair market value of common stock on the date of
grant. Incentive Stock Options ("ISOs") may not be granted at less than 100% of
the estimated fair market value of the common stock and stock options granted to
a person owning more than 10% of the combined voting power of all classes of
stock of Brocade must be issued at 110% of the fair market value of the stock on
the date of grant. The Plans provide that the options shall be exercisable over
a period not to exceed ten years, and the options generally vest over a period
of four years. The options typically vest 25% one year after the date of grant
and the remaining shares vest in equal monthly amounts over the following 36
months.
At January 31, 1999, an aggregate of 466,516 shares were available for
future option grants under all of the Plans.
F-16
<PAGE> 88
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK (CONTINUED)
Brocade accounts for the Plans under APB No. 25 whereby the difference
between the exercise price and the fair value at the date of grant is recognized
as compensation expense. Had compensation expense for the stock option plans
been determined consistent with SFAS No. 123, net losses would have increased to
the following pro forma amounts, (in thousands except per share data):
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED OCTOBER 31, ENDED
------------------------------ JANUARY 31,
1996 1997 1998 1999
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss as reported........................ $(3,934) $(9,619) $(15,111) $(1,839)
Net loss Pro Forma.......................... $(3,945) $(9,666) $(15,522) $(2,068)
Net loss per share as reported.............. $ (4.44) $ (.42)
Net loss per share Pro Forma................ $ (4.57) $ (.48)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998, 1997, 1996 and the three month period ended
January 31, 1999, respectively: risk-free interest rate of 5.58 to 5.86, 5.71 to
6.63, 5.54 to 6.50 and 4.38 to 5.00 percent; expected dividend yields of zero
percent for all four periods; expected life of .5 years beyond vesting for all
four periods; and expected volatility of .0001% percent for all periods except
the three months ended January 31, 1999, for which a volatility factor of 60%
was used.
The following table summarizes stock option plan activity under all of the
Plans:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
JANUARY 31, 1999 OCTOBER 31, 1998
---------------------------- ---------------------------
(UNAUDITED)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....... 3,501,622 $1.85 1,075,167 $ .33
Granted.............................. 854,512 $2.64 3,134,912 $2.19
Exercised............................ (2,213,402) $2.07 (425,570) $1.04
Cancelled............................ (60,261) $1.20 (282,887) $1.14
----------- ----------
Outstanding at period end.............. 2,082,471 $1.95 3,501,622 $1.85
=========== ==========
Exercisable at end of period........... 189,227 $3.68 465,807 $1.52
Weighted fair value per share.......... $ .7842 $ .3023
=========== ==========
</TABLE>
F-17
<PAGE> 89
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....... 584,000 $ .19 -- --
Granted.............................. 1,335,500 $ .34 2,149,400 $ .09
Exercised............................ (630,666) $ .26 (1,565,400) $ .03
Cancelled............................ (213,667) $ .22 -- --
----------- ----------
Outstanding at year end................ 1,075,167 $ .33 584,000 $ .19
=========== ==========
Exercisable at end of year............. 36,234 $ .22 -- --
Weighted fair value per share.......... $ .0522 $ .0100
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ --------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
JANUARY 31, 1999 REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER PRICE
- -------------------------------------- --------- --------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.20 - $1.80......................... 619,690 7.82 $ .71 52,715 $1.02
$2.25 - $5.00......................... 1,462,781 9.57 $2.48 136,512 $4.71
--------- -------
$0.20 - $5.00......................... 2,082,471 9.05 $1.95 189,227 $3.68
========= =======
</TABLE>
At January 31, 1999, 2,324,679 shares issued upon exercise of stock options
with a weighted average exercise price of $1.86 and 264,122 shares issued to
founders with a weighted average exercise price of $.025 were subject to
repurchase by Brocade.
F-18
<PAGE> 90
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Brocade accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). A valuation allowance has been recorded for the total deferred tax assets
as a result of uncertainties regarding realization of the assets based upon the
limited operating history of Brocade, the lack of profitability to date and the
uncertainty of future profitability. The components of net deferred tax assets
are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JANUARY 31,
1997 1998 1999
------- -------- -----------
<S> <C> <C> <C>
Net operating loss carryforwards....................... $ 4,600 $ 8,100 $ 7,300
Tax credit carryforwards............................... 700 1,400 1,500
Capitalized startup costs.............................. 300 300 300
Reserves and accruals.................................. 300 2,200 3,100
Capitalized research expenditures...................... -- 700 800
------- -------- -------
Total deferred tax assets.................... 5,900 12,700 13,000
Valuation allowance.................................... (5,900) (12,700) (13,000)
------- -------- -------
Net deferred tax assets.............................. $ -- $ -- $ --
======= ======== =======
</TABLE>
As of January 31, 1999, Brocade had federal net operating loss
carryforwards of approximately $20.5 million and state net operating loss
carryforwards of approximately $6.5 million. The federal net operating loss and
other tax credit carryforwards expire on various dates beginning on 2010 through
2018. The state net operating loss carryforwards will expire beginning in 2003.
Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
9. RELATED PARTY TRANSACTIONS
In April 1997, Brocade sold 250,000 shares of its common stock to officers
of Brocade in consideration for full recourse promissory notes in the amount of
$75,000. Should the officers terminate employment, these shares are subject to a
right of repurchase by Brocade. The right of repurchase lapses over a four year
period. The notes bear interest at 6.5% and mature at various dates through
December 2001.
In January 1998, Brocade sold 225,000 shares of its common stock to
officers of Brocade in consideration for full recourse promissory notes in the
amount of $375,000. Should the officers terminate employment, these shares are
subject to a right of repurchase by Brocade. The right of repurchase lapses over
a four year period. The notes bear interest at 6.5% and mature at various dates
through December 2002.
F-19
<PAGE> 91
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT
Reincorporation, Amendment to the Articles of Incorporation
In March 1999, Brocade's Board of Directors authorized the reincorporation
of Brocade in the State of Delaware. This reincorporation is to be effective
prior to Brocade's initial public offering. Upon reincorporation, Brocade will
be authorized to issue 50,000,000 shares of common stock, $.001 par value and
5,000,000 shares of undesignated preferred stock, $.001 par value.
1999 Stock Plan
In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan
(the "1999 Plan"), subject to shareholder approval. The 1999 Plan provides for
the grant of incentive stock options to employees. A total of 300,000 shares of
common stock have been reserved for issuance under the 1999 Plan.
1999 Employee Stock Purchase Plan
In March 1999, the Board of Directors approved the adoption of Brocade's
1999 Employee Stock Purchase Plan (the "Purchase Plan"), subject to shareholder
approval. A total of 200,000 shares of common stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan permits eligible employees
to purchase shares of common stock through payroll deductions at 85% of the fair
market value of the common stock, as defined in the Purchase Plan.
1999 Director Option Plan
In March 1999, the Board of Directors approved the 1999 Director Option
Plan (the "Director Plan"), subject to shareholder approval. The Director Plan
provides for the grant of common stock to non-employee directors. A total of
200,000 shares of common stock have been reserved for issuance under the
Director Plan.
Existing Stock Option Plans
In March 1999, the Board of Directors approved 300,000 additional shares of
common stock to be reserved for issuance under the 1998 Equity Incentive Plan.
Brocade granted approximately 182,000 options to purchase common stock under
various stock option plans during the period from February 1, 1999 to March 10,
1999.
F-20
<PAGE> 92
APPENDIX -- DESCRIPTION OF GRAPHICS
GATEFOLD
Graphic: Illustration of the Brocade Fabric.
Caption: Current problem: Bottleneck in One-to-One Storage and Server
Connectivity.
Caption: The Brocade Solution: The BROCADE Fibre Channel Switched Fabric
enables Any-to-Any Storage and Server Area Networking (SAN)
Credits: Logos of the following companies: Compaq, Dell, StorageTek, McDATA,
Cravel, Sequent
<PAGE> 93
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 94
[BROCADE LOGO]
<PAGE> 95
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses to be paid by the Registrant,
other than underwriting discounts and commissions, in connection with this
offering. All amounts shown are estimates except for the registration fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 11,510
NASD filing fee............................................. 5,000
Nasdaq National Market listing fee.......................... 90,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 200,000
Director and officer liability insurance.................... 275,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 28,490
----------
$1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to officers,
directors and other corporate agents under certain circumstances and subject to
certain limitations. The Registrant's Certificate of Incorporation and Bylaws
provide that the Registrant shall indemnify its directors, officers, employees
and agents to the full extent permitted by the Delaware General Corporation Law,
including in circumstances in which indemnification is otherwise discretionary
under Delaware law. In addition, the Registrant intends to enter into separate
indemnification agreements with its directors, officers and certain employees
which would require the Registrant, among other things, to indemnify them
against certain liabilities which may arise by reason of their status as
directors, officers or certain other employees. The Registrant also intends to
maintain director and officer liability insurance, if available on reasonable
terms.
These indemnification provisions and the indemnification agreement to be
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
II-1
<PAGE> 96
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, we have issued and sold and issued the following
unregistered securities:
1. On August 25, 1995, we sold 523,250 shares of our common stock to
Kumar Malavalli, Paul R. Bonderson, Jr. and Seth D. Neiman, the founders of
the Company, for an aggregate purchase price of $52,325.
2. From inception through March 10, 1999, we granted stock options to
purchase an aggregate of 7,656,468 shares of our common stock at exercise
prices ranging from $.025 to $5.00 per share to employees, consultants,
directors and other service providers pursuant to our 1995 Equity Incentive
Plan, our 1998 Equity Incentive Plan and our 1998 Executive Equity
Incentive Plan.
3. From inception through March 10, 1999, we issued and sold an
aggregate of 4,887,825 shares of our common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $5,384,992 pursuant to exercise of options
granted under our 1995 Equity Incentive Plan, our 1998 Equity Incentive
Plan and our 1998 Executive Equity Incentive Plan.
4. On August 28, 1995, we sold 1,425,000 shares of Series A Preferred
Stock for $1.00 per share to a group of private investors for an aggregate
purchase price of $1,425,000.
5. On December 26, 1995, we issued two warrants to an equipment lease
financing company to purchase 15,753 and 35,444 shares of our Series A
Preferred Stock at exercise prices of $4.50 and $1.00 per share,
respectively.
6. On June 5, 1996, we sold 386,764 shares of our common stock, for
$.05 per share to Bruce L. Bergman, the former President and Chief
Executive Officer of Brocade, for an aggregate purchase price of
$19,338.20.
7. On June 17, 1996, we sold 816,250 shares of our Series B Preferred
Stock for $4.00 per share to a group of private investors for an aggregate
purchase price of $3,265,000.
8. On July 16, 1996, we issued 32,813 shares of Common Stock at $.05
per share to a then-current officer of Brocade as partial commission in
connection with the Series B Preferred Stock financing.
9. On September 11, 1996, we issued a warrant to an equipment lease
financing company to purchase 17,500 shares of our Series B Preferred Stock
at an exercise price of $4.00 per share.
10. On August 26, 1996, in connection with the lease of office space,
we issued a warrant to a real property lessor to purchase 3,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
11. On December 6, 1996, we sold 3,333,333 shares of our Series C
Preferred Stock at $3.00 per share to a group of private investors for an
aggregate purchase price of $9,999,999.
12. On May 6, 1997, in connection with a sublease agreement, we issued
a warrant to a sublessor of real property to purchase 20,000 shares of our
Series C Preferred Stock at an exercise price of $3.00 per share.
13. On June 13, 1997, in connection with a combined line of credit and
equipment lease, we issued a warrant to a bank to purchase 25,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
II-2
<PAGE> 97
14. On September 29, 1997, November 17, 1997 and December 3, 1997, we
sold 3,660,900 shares of our Series D Preferred Stock for $5.78 per share
to a group of private investors for an aggregate purchase price of
$21,160,002. In addition, in connection with the Series D financing, we
issued warrants to purchase an aggregate of 296,881 shares of our Series D
Preferred Stock at an exercise price of $6.78 per share.
15. On July 13, 1998, we issued 18,000 shares of Common Stock at $2.25
per share as partial compensation for the recruitment of the Company's new
president.
16. On April 1, 1999, we issued and sold an aggregate of 330,000
shares of our common stock at an exercise price of $5.00 per share to an
officer pursuant to a nonqualified stock option.
For additional information concerning these equity investment transactions,
reference is made to the information contained under the caption "Certain
Transactions" in the form of prospectus included herein.
The sales of the above securities were deemed to be exempt from
registration in reliance on Rule 701 promulgated under Section 3(b) under the
Securities Act as transactions pursuant to a compensatory benefit plan or a
written contract relating to compensation, or in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving any public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and other instruments issued in such transactions. All recipients
either received adequate information about Brocade or had access, through
employment or other relationships, to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Articles of Incorporation of the
Registrant.
3.2** Form of Amended and Restated Certificate of Incorporation to
be effective on the closing of the offering made pursuant to
this Registration Statement.
3.3** Bylaws of the Registrant.
3.4** Bylaws of the Registrant to be effective upon the closing of
the offering made pursuant to this Registration Statement.
4.1 Form of Registrant's Common Stock certificate.
4.2** Warrant to purchase shares of Series A Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.3** First Amended and Restated Warrant to purchase shares of
Series A Preferred Stock of the Registrant issued to Venture
Lending & Leasing, Inc.
4.4** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.5** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Mason Calle De Luna L.P.
4.6** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Symmetricom, Inc.
4.7** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Imperial Bank.
</TABLE>
II-3
<PAGE> 98
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
4.8** Seventh Amended and Restated Investors' Rights Agreement
dated December 3, 1997.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and executive
officers.
10.2** 1995 Equity Incentive Plan and forms of agreements
thereunder.
10.3** 1998 Equity Incentive Plan and forms of agreements
thereunder.
10.4** 1998 Executive Equity Incentive Plan and forms of agreements
thereunder.
10.5** 1999 Employee Stock Purchase Plan.
10.6** 1999 Director Option Plan and form of agreement thereunder.
10.7** 1999 Stock Plan and forms of agreements thereunder.
10.8** Sublease between Symmetricom, Inc. and the Registrant dated
May 6, 1997.
10.9** Security and Loan Agreement between the Registrant and
Imperial Bank dated June 19, 1997.
10.10** Amendment to Loan Documents between the Registrant and
Imperial Bank dated January 30, 1998.
10.11** Second Amendment to Loan Documents between the Registrant
and Imperial Bank dated August 17, 1998.
10.12** Third Amendment to Loan Documents between the Registrant and
Imperial Bank dated December 15, 1998.
10.13** Master Equipment Lease Agreement between Venture Lending &
Leasing, Inc. and the Registrant dated September 5, 1996.
10.14**+ Master Purchase Agreement between Dell Products L.P. and the
Registrant dated November 1, 1998.
10.15**+ Purchase Agreement between Sequent Computer Systems, Inc.
and the Registrant.
10.16**+ Supplement No. 1 to Purchase Agreement between Sequent
Computer Systems, Inc. and the Registrant dated September
26, 1997.
10.17+ OEM Agreement between Storage Technology Corporation and the
Registrant dated May 1, 1998.
10.18*+ Acknowledgement between Wind River Systems, Inc. and the
Registrant, dated April 22, 1999.
10.19** Confidential Agreement and General Release of Claims between
Bruce J. Bergman, The Bergman Family Trust and the
Registrant dated September 23, 1998.
10.20* Letter Agreement with Michael J. Byrd dated April 5, 1999.
16.1** Letter of PricewaterhouseCoopers LLP, Independent
Accountants.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2* Consent of Counsel (included in Exhibit 5.1.).
24.1** Power of Attorney (see page II-6 of the Registration
Statement).
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(b) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts....... S-2**
</TABLE>
II-4
<PAGE> 99
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions described in Item 14 above
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 100
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Jose, County of Santa Clara, State of California, on the 28th day of
April 1999.
BROCADE COMMUNICATIONS SYSTEMS, INC.
By: /s/ GREGORY L. REYES
------------------------------------
Gregory L. Reyes
President and Chief Executive
Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board April 28, 1999
------------------------------------------
Seth D. Neiman
/s/ GREGORY L. REYES President and Chief Executive Officer April 28, 1999
------------------------------------------ (Principal Executive Officer)
Gregory L. Reyes
/s/ B. CARL LEE Vice President, Finance and Chief April 28, 1999
------------------------------------------ Financial Officer (Principal
B. Carl Lee Financial and Accounting Officer)
Director
------------------------------------------
Neal Dempsey
* Director April 28, 1999
------------------------------------------
Mark Leslie
* Director April 28, 1999
------------------------------------------
Larry W. Sonsini
</TABLE>
* Power of Attorney
By: /s/ GREGORY L. REYES
--------------------------------------------------
Gregory L. Reyes
II-7
<PAGE> 101
After the reincorporation discussed in Note 10 to Brocade Communications
Systems, Inc.'s financial statements, we expect to be in a position to render
the following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders
of Brocade Communications Systems, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Brocade Communications Systems, Inc. included in
this Registration Statement and have issued our report thereon dated November
24, 1998. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
S-1
<PAGE> 102
BROCADE COMMUNICATIONS SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN B COLUMN C COLUMN D COLUMN E
----------- ---------- ---------- ---------
COLUMN A BALANCE AT CHARGED TO BALANCE
- -------------------------------------------- BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- -------------------------------------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1996:
Allowance for returns and doubtful
accounts.................................. $ -- $ -- $ -- $ --
Year ended October 31, 1997:
Allowance for returns and doubtful
accounts.................................. $ -- $ 100,000 $ -- $100,000
Year ended October 31, 1998:
Allowance for returns and doubtful
accounts.................................. $100,000 $ 185,000 $ -- $285,000
Three-Month Period Ended January 31, 1999:
Allowance for returns and doubtful
accounts.................................. $285,000 $ -- $ 25,000 $260,000
Year ended October 31, 1998:
Restructuring Accrual....................... $ -- $3,200,000 $2,779,000(1) $421,000
Three-Month Period ended January 31, 1999:
Restructuring accrual....................... $421,000 $ -- $ 344,000(1) $ 77,000
</TABLE>
- -------------------------
(1) These amounts include $700,000 in cash severance payments, $1,000,000 in non
cash compensation charges related to stock severance arrangements and
$1,400,000 in asset writeoffs.
S-2
<PAGE> 103
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Articles of Incorporation of the
Registrant.
3.2** Form of Amended and Restated Certificate of Incorporation to
be effective on the closing of the offering made pursuant to
this Registration Statement.
3.3** Bylaws of the Registrant.
3.4** Bylaws of the Registrant to be effective upon the closing of
the offering made pursuant to this Registration Statement.
4.1 Form of Registrant's Common Stock certificate.
4.2** Warrant to purchase shares of Series A Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.3** First Amended and Restated Warrant to purchase shares of
Series A Preferred Stock of the Registrant issued to Venture
Lending & Leasing, Inc.
4.4** Warrant to purchase shares of Series B Preferred Stock of
the Registrant issued to Venture Lending & Leasing, Inc.
4.5** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Mason Calle De Luna L.P.
4.6** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Symmetricom, Inc.
4.7** Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Imperial Bank.
4.8** Seventh Amended and Restated Investors' Rights Agreement
dated December 3, 1997.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** Form of Indemnification Agreement to be entered into by the
Registrant with each of its directors and executive
officers.
10.2** 1995 Equity Incentive Plan and forms of agreements
thereunder.
10.3** 1998 Equity Incentive Plan and forms of agreements
thereunder.
10.4** 1998 Executive Equity Incentive Plan and forms of agreements
thereunder.
10.5** 1999 Employee Stock Purchase Plan.
10.6** 1999 Director Option Plan and form of agreement thereunder.
10.7** 1999 Stock Plan and forms of agreements thereunder.
10.8** Sublease between Symmetricom, Inc. and the Registrant dated
May 6, 1997.
10.9** Security and Loan Agreement between the Registrant and
Imperial Bank dated June 19, 1997.
10.10** Amendment to Loan Documents between the Registrant and
Imperial Bank dated January 30, 1998.
10.11** Second Amendment to Loan Documents between the Registrant
and Imperial Bank dated August 17, 1998.
10.12** Third Amendment to Loan Documents between the Registrant and
Imperial Bank dated December 15, 1998.
10.13** Master Equipment Lease Agreement between Venture Lending &
Leasing, Inc. and the Registrant dated September 5, 1996.
10.14**+ Master Purchase Agreement between Dell Products L.P. and the
Registrant dated November 1, 1998.
10.15**+ Purchase Agreement between Sequent Computer Systems, Inc.
and the Registrant.
10.16**+ Supplement No. 1 to Purchase Agreement between Sequent
Computer Systems, Inc. and the Registrant dated September
26, 1997.
</TABLE>
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.17+ OEM Agreement between Storage Technology Corporation and the
Registrant dated May 1, 1998.
10.18*+ Acknowledgement between Wind River Systems, Inc. and the
Registrant, dated April 22, 1999.
10.19** Confidential Agreement and General Release of Claims between
Bruce J. Bergman, The Bergman Family Trust and the
Registrant dated September 23, 1998.
10.20* Letter Agreement with Michael J. Byrd dated April 5, 1999.
16.1** Letter of PricewaterhouseCoopers LLP, Independent
Accountants.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1.).
24.1** Power of Attorney (see page II-6 of the Registration
Statement).
27.1** Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
<PAGE> 1
Exhibit 4.1
BROCADE COMMUNICATIONS SYSTEMS, INC.
Number Shares
INCORPORATED UNDER THE LAWS CUSIP 111621 10 8
OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
[BACKGROUND ILLUSTRATION]
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Certificate of
Incorporation, as amended, and the Bylaws of the Corporation, as amended
(copies of which are on file at the office of the Transfer Agent), to all of
which the holder of this Certificate by acceptance hereof assents. This
Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
/s/ /s/
--------------------------------- ------------------------------------
Vice President, Finance and Chief President and Chief Executive
Financial Officer Office
COUNTERSIGNED AND REGISTERED:
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
By
----------------------------------
Authorized Signature
<PAGE> 2
BROCADE COMMUNICATIONS SYSTEMS, INC.
The Corporation will furnish upon request and without charge to each
shareholder the powers, designations, preferences and relative, participating,
optional and other special rights of each class of stock and series within a
class of stock of the Corporation, as well as the qualifications, limitations
and restrictions relating to those preferences and/or rights. A shareholder may
make the request to the Corporation or to the Transfer Agent and Registrar.
The following abbreviations, when used in the Inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIT GIFT MIN ACT--___CUSTODIAN___
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act_________________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, ____________________ hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE ____________________________________________
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF
ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Shares of the Common Stock represented by the within Certificate, and does
hereby irrevocably constitute and appoint ________________________________
_________________________________________ Attorney to transfer the said stock on
the books to the within-named Corporation with full power of substitution in the
premises.
Dated ____________________ X_______________________________________
(SIGNATURE)
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
NOTICE: UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
X_______________________________________
(SIGNATURE)
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM) PURSUANT
TO S.E.C. Rule 17Ad-15.
SIGNATURE(S) GUARANTEED BY:
______________________________________
<PAGE> 1
EXHIBIT 10.17
OEM AGREEMENT
This OEM Agreement (hereinafter, "Agreement") is effective as of May 1,
1998, by and between Brocade Communications Systems, Inc., a corporation
organized under the laws of the State of California, with its principal place of
business at 1901 Guadalupe Parkway, San Jose, California 95131 (hereinafter,
"Brocade") and Storage Technology Corporation (including its subsidiaries and
affiliates), a company organized under the laws of the state of Delaware, with
its principal place of business at 2270 South 88%gth%g Street, Louisville,
Colorado 80022 (hereinafter, "OEM"). This Agreement will be administered on
behalf of OEM by the Storage Tek Network Systems Group, with its principal place
of business at 7600 Boone Avenue North, Minneapolis, Minnesota 55428. All
primary correspondence to OEM with respect to this Agreement shall be sent to
the Minnesota address.
RECITALS
WHEREAS, Brocade manufactures certain equipment useful for gigabit data
communication interconnect products such as hubs, switches and transceivers
which contain hardware components and software programs compatible with such
equipment, and which Brocade is willing to provide to OEM on the terms and
conditions set forth herein; and
WHEREAS, OEM shall combine such equipment with other equipment, software
programs and/or services so as to add Significant Value to Brocade's equipment
to create OEM Products and to market the OEM Products on a "turnkey" basis;
NOW, THEREFORE, the parties hereto, for consideration mutually
exchanged, agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the definitions below apply to
the respective capitalized terms;
(a) "End-User" A prospective customer of OEM or OEM's distribution
channels to whom OEM Products are offered and/or sold for use in
the regular course of such customer's business.
(b) "End-User License Agreement" The form of OEM's license agreement
set forth in Exhibit C and attached hereto, under which OEM
grants an End-User a license to use the Software in conjunction
with the Product as part of an OEM Product.
(c) "OEM Products" Certain storage interconnect solutions and
transceivers manufactured and sold by OEM consisting of
combinations of the Products with other substantial value added
equipment and software independently developed or procured by
OEM, to be offered by OEM, together with related services,
directly or indirectly to End-Users, on a turnkey basis.
<PAGE> 2
(d) "Products" Brocade's products and services set forth in the then
current version of Exhibit A and attached hereto, including all
model conversions, elements and accessories, whether
incorporated into OEM Products or used as spares in support of
OEM Products. All Products sold to OEM shall be newly
manufactured products, not containing used materials, unless
specifically agreed in advance by OEM and Brocade.
(e) "Significant Value" The value added by the OEM through product
enhancements, either hardware or software, tradename and
significant sales/service leverage or also by other means
approved, in advance and in writing, by Brocade.
(f) "Software" The computer software incorporated within the Product
which provides the basic operating environment for the Product.
2. TERM. This Agreement shall commence on the date set forth above and shall
remain in full force and effect for a period of [*], unless earlier
terminated as provided herein. Thereafter, this Agreement shall automatically
renew for successive one (1) year periods unless either party notifies the other
party at least sixty (60) days prior to expiration of the Term. Notwithstanding
the foregoing, this Agreement shall remain in full force and effect and shall
apply to any accepted purchase order (hereinafter, "Order(s)") issued during the
Term of this Agreement and until the obligations of each party, under such
Orders, have been fulfilled.
3. OEM'S RESPONSIBILITIES. In consideration for the rights and licenses granted
to OEM hereunder, OEM shall:
(a) Combine the Product with other equipment and/or computer
software programs independently developed or procured by OEM so
as to create OEM Products;
(b) Market, sell and deliver OEM Products directly or indirectly to
End-Users;
(c) Provide a copy of the appropriate End-User License Agreement,
when applicable, to all customers and prospective customers as
part of any OEM Products. The End-User License Agreement
provided by OEM shall be at least as protective of Brocade's
interests as Brocade's License Agreement;
(d) Provide technical support for OEM Products directly or
indirectly to End-Users, including all necessary maintenance,
training, and support to enable proper operation of the OEM
Products;
(e) Order, pay for, take delivery of and accept Products; and
(f) Protect Brocade's proprietary rights in the Software;
4. FORECAST. On the first working day of each month, OEM shall provide Brocade
with a written minimum [*] rolling non-binding forecast of expected
monthly purchases of
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 3
Products. If OEM fails to timely provide Brocade with the forecast, Brocade
reserves the right to extend the lead time for shipment of Products.
5. PRODUCT PRICES AND PAYMENT TERMS.
(a) Prices for all Products are set forth in the then current version of
Exhibit B and attached hereto. All freight, insurance, taxes, duties or other
shipping expenses shall be borne by OEM. All prices, charges, and fees quoted by
Brocade are in United States Dollars and all amounts to be paid by OEM shall be
paid in United States Dollars.
(b) Payment terms are [*] from the Invoice date. Invoices will be
forwarded at the time of shipment. Amounts not paid [*] after the invoice date
are subject to a late payment charge of the lesser of one and one-half percent
(1.5%) or the maximum rate permitted by law, which shall be enforced if
delinquency in payment is not promptly brought current upon notice by Brocade,
or in the event of a continued pattern of delayed payments. OEM shall pay all of
Brocade's collection costs and expenses to enforce and preserve Brocade's rights
under this Section.
[*]
6. ORDER, DELIVERY, AND ADMINISTRATION.
(a) OEM shall initiate purchases of Products under this Agreement by
issuing Orders to Brocade either in hard copy form, by fax, or by electronic
data interchange (hereinafter, "EDI"). OEM's Orders shall be governed only by
the terms and conditions of this Agreement. Any additional terms and conditions
contained on any Order or other OEM document are of no force or effect, and
Brocade hereby gives notice of objection to such additional terms.--
(b) Orders are for the purpose of identifying types and quantities of
Products to be shipped and requesting delivery times. Each Order placed by the
OEM must include quantity, price, shipping instructions, agreed designated
destination and billing addresses, part or model number, and desired delivery
date, which date shall be no later than 120 days after the date of the Order.
OEM shall forward all Orders to Brocade's principal office or as otherwise
instructed by Brocade. Brocade reserves the right, in its sole discretion, to
accept or reject, in whole or in part, any or all Orders placed by OEM that are
not in compliance with this Agreement. Brocade shall use reasonable commercial
efforts to notify OEM of the acceptance or rejection of an Order within [*]
after receipt of the Order. Brocade shall use reasonable commercial efforts
to meet such dates, but Brocade will not be liable for late delivery. If
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 4
delivery is delayed beyond [*] OEM shall have the right to cancel an unshipped
Order, or portion thereof, without penalty. With OEM's prior approval, Brocade
may make partial deliveries of Orders. Such deliveries will be invoiced and paid
when due, without regard for subsequent deliveries.
(c) All shipments shall be made [*] Shipments shall be sent to
designated locations mutually acceptable to Brocade and OEM. Title in and the
right of possession to such Products passes to OEM upon [*]. OEM is responsible
for obtaining any insurance for the Products and for filing all claims with the
carrier, or insurer, for damages or loss in transit.
7. PRODUCT DISCONTINUATION AND CHANGES.
(a) Discontinuation of Products. Brocade may, from time to time, in its
discretion, discontinue the offering of any Product by providing an End of Life
notice (hereinafter "EOL") to OEM, effective [*] after written notice to OEM of
such discontinuation. Such EOL notice will notify OEM of any special conditions,
such as time frames for placing final Purchase Orders and accepting delivery
thereof, and minimum order quantities, applicable to Brocade's acceptance of
final Purchase Orders for certain EOL Products. EOL Product Purchase Orders are
non-cancelable and are, if canceled by OEM, subject to a cancellation charge
equal to the value of the EOL Products canceled. EOL Purchase Orders for EOL
Products shall be considered as being in addition to Purchase Orders placed
against forecasted requirements. Products shall be delivered within [*] after
receipt of an EOL Purchase Order.
(b) Changes to Products. Brocade reserves the right to introduce
modifications to the Products, so long as the product specifications are not
adversely affected. Brocade will use reasonable commercial efforts to inform OEM
of significant product changes prior to their implementation in units shipped to
OEM. It is recognized by the parties that there may be optional changes
requested by either OEM or by Brocade which are not required to make the
Products conform to their specifications. The cost of implementing such changes,
if any, (including kits and labor) on previously delivered units shall be borne
by OEM. Brocade shall not change any elements affecting the OEM's unique image
associated with the Products, including OEM's logo, labeling or packaging,
without OEM's prior approval.
(c) In the event that changes that may affect the form, fit, function,
[*] Brocade shall first obtain OEM's approval, which shall not be unreasonably
withheld. After mutual agreement that any such changes are to be made, Brocade
shall promptly ensure that such changes ("Mandatory Engineering Changes") are
included at no additional charge to OEM in all Products which are not yet
delivered to OEM. OEM may also request that Brocade incorporate such changes to
Products previously delivered under the warranty provisions of Section 11.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 5
8. CANCELLATION AND RESCHEDULING
(a) OEM may cancel or reschedule the quantity on any Order previously
accepted by Brocade by sending written notice to Brocade, subject to the
following limitations. Each Order may be rescheduled only once. Any rescheduling
may not delay delivery for more than [*] but in no event beyond the Term of
this Agreement, Cancellation requests for quantities on Orders that have already
been rescheduled will be subject to charges and limitations based upon the
original scheduled delivery date, which may preclude a cancellation due to the
[*] limitation. The following charge will apply:
<TABLE>
<CAPTION>
Number of Days prior to Cancellation charges Rescheduling charges
scheduled delivery per unit per unit
<S> <C> <C> <C>
91 days or more [*] [*]
61-90 days
31-60 days
0-30 days
</TABLE>
(b) Cancellation and/or rescheduling charges, [*] are subject to [*]
terms from the date of OEM's request subject to such charges.
9. INSPECTION, ACCEPTANCE, RETURN, AND SPARING.
(a) OEM shall promptly inspect all Products shipped to OEM upon receipt
thereof and may reject any item that falls substantially to conform to the then
current specifications. To reject a Product, OEM shall, within [*] after receipt
of the Products notify Brocade of any defect or deficiency and request a Return
Material Authorization number (hereinafter "RMA"). If no notice is given within
that time, then the Products shall be deemed accepted and thereafter are
returnable only for warranty repair. Products which fail upon initial
installation at End-User locations may be deemed by OEM as "DOA", so long as
such initial failures are reported by OEM not later than [*] from the date of
shipment by Brocade. Brocade shall use commercially reasonable efforts to
provide replacements for DOA units on an expedited basis to be received at the
Continental US location specified by the OEM within [*] of receipt of the
returned DOA units. Brocade shall have the right to utilize the [*] spare
inventory (as defined in section 9(d)) for fulfillment of this DOA replacement,
which does not waive Brocade's obligation for maintaining the [*] spares
inventory.
(b) Within [*] of receiving an RMA number, which shall be issued by
Brocade within two (2) business days of OEM's request, OEM shall return rejected
or DOA Product(s), freight prepaid and properly insured, in the original
shipping carton, or in other suitable protective packaging if the original
carton is no longer available, FOB destination with the RMA number displayed on
the outside of the carton, to the address and by the shipping means, as
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 6
specified by Brocade in the RMA. Product returns will not be accepted by Brocade
without an RMA number.
(c) If Brocade confirms the defect, Brocade shall, at Brocade's option
and expense, either repair or replace the Product or issue credit to OEM.
Brocade shall reimburse OEM for the shipping charges to return properly rejected
Product and for the shipment of the replacement Product; otherwise OEM shall be
responsible for all shipping charges.
(d) Brocade [*] of spare parts which are specified and paid for by the
OEM. The procedures for maintaining, configuring, testing, and shipping of
spares will be defined in the technical support procedures. Maintenance of the
level of [*] spare inventory is the responsibility of the OEM.
10. TECHNICAL SUPPORT.
The parties agree to negotiate in good faith to develop and honor the terms of
mutually acceptable technical support procedures which shall define the
responsibilities of each party with respect to end user support, including
provisions to address continuously available emergency support, appropriate
levels of support and means of communicating issues between the parties, and
problem tracking and escalation procedures.
11. WARRANTY LIMITATION.
(a) BROCADE WARRANTS AND REPRESENTS TO THE OEM THAT THE PRODUCTS
DELIVERED TO OEM BY BROCADE WILL PERFORM SUBSTANTIALLY IN ACCORDANCE WITH
BROCADE'S PUBLISHED PRODUCT SPECIFICATIONS FOR A PERIOD OF [*] FROM THE DATE OF
SHIPMENT ("WARRANTY PERIOD"). TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW,
BROCADE DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT
NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE. THIS LIMITED WARRANTY PROVIDES THE OEM WITH SPECIFIC LEGAL RIGHTS IN
ADDITION TO OTHER LEGAL RIGHTS WHICH VARY FROM STATE TO STATE.
(b) During the Warranty Period Brocade shall, at its sole option and
expense, repair or replace any hardware Product, or part or component thereof,
which Brocade determines was defective in material or workmanship. Products
shipped as exchanged units under this Section 11, (i) may be newly manufactured,
(ii) may be assembled from new or serviceable used parts that are equivalent to
new parts in performance, or (iii) may have been previously installed, but in
other respects meets the Product specifications.
(c) OEM shall request and receive an RMA number, which shall be issued
by Brocade within two (2) business days of OEM's request, for repair of Product
prior to return for repair. OEM shall use reasonable commercial efforts to
return Product with defects covered by the foregoing warranty to Brocade, [*]
pursuant to the shipping and other requirements specified by Brocade in its RMA,
within [*] of issuance of the RMA number. Brocade shall use reasonable
commercial efforts to ship repaired/replacement Product
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 7
within [*] but in no event later than [*] of receipt of the defective units.
Repair or replacement of the Product does not extend the Warranty Period.
(d) OEM's sole and exclusive remedy for breach of any of the foregoing
warranties shall be to seek repair or replacement of the affected Product, and,
if such repair or replacement is not effected after reasonable notice and
opportunity for remedial action by Brocade, to obtain repayment of any amounts
paid to Brocade for that Product.
(e) This warranty does not apply to any Product which (i) has been
altered, except by Brocade or at Brocade's direction, (ii) has been improperly
handled, installed, operated or packaged, or (iii) has been damaged by accident,
misuse, negligence, or external factors such as failure or fluctuation of
electrical power or air conditioning which subjects Products to conditions
beyond their specification, fire, flood, or failures induced by interconnection
with non-Brocade products.
(f) During the Term of this Agreement, any repair or reconditioning of
any Product not covered by warranty shall be subject to Brocade's then standard
out of warranty prices, terms, and conditions.
(g) Brocade and OEM agree to work together to minimize no-trouble-found
(NTF) returns to Brocade by identifying and correcting the root cause. If the
NTF returns exceed 5% of all returns, and if OEM is not participative or
effective at problem resolution, and Brocade gives OEM thirty day written
notice, Brocade may invoke the NTF charges as defined in Exhibit B.
12. LIMITATION OF LIABILITY.
(a) Brocade's entire liability, for any and all damages, arising out of
or relating to this agreement or the products, shall in no event exceed [*].
(b) Notwithstanding any other provision in this Agreement to the
contrary, neither party shall be liable for any incidental, indirect, special or
consequential damages, including loss of profits, revenue, data or use, or cost
of procuring substitute services or goods, incurred by either party or any third
party, whether in an action in contract or tort or an action based on a warranty
claim, even if the other party, or any other person, has been advised of the
possibility of such damages and notwithstanding any failure of essential purpose
of any limited remedy provided herein.
13. INTELLECTUAL PROPERTY INDEMNIFICATION.
(a) Brocade will defend, at its expense, any suit or proceeding brought
against the OEM to the extent that such action is based on a claim that Products
manufactured or developed and supplied by Brocade to the OEM hereunder
constitute a direct infringement of any duly [*]. Brocade will pay all damages
and costs finally awarded against the OEM in any such action which are
attributable to such claim, provided that Brocade is promptly informed in
writing and furnished a copy of each communication, notice or other action
relating to the alleged infringement and is given the authority, information and
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 8
assistance necessary to defend or settle such claim. OEM shall have the right,
at its expense, to participate in any such claim or action.
(b) Brocade will not be obligated to defend or be liable for costs and
damages if the infringement arises out of compliance with the OEM's
specifications or from a combination with or an addition to Products not
manufactured or developed by Brocade, modifications of the Products after
delivery by Brocade or the use of such Products beyond that established or
approved in writing by Brocade. Should the Products delivered by Brocade become,
or in Brocade's opinion be likely to become, the subject of a claim of
infringement of any duly [*] then Brocade may, at its option, (i) procure for
the OEM the right to use such Products free of any liability or infringement or
(ii) replace such Products with non-infringing substitutes or modify such
Products to be non-infringing, (in either case with no material degradation in
performance) or (iii) if neither (i) nor (ii) is available, [*] accept the
return of such Products.
14. TERMINATION.
(a) Either party may terminate this Agreement for a material breach of
this Agreement if the defaulting party has not cured such breach within thirty
(30) days after receipt of notice that it has breached a provision of this
Agreement and/or such defaulting party has not begun substantial efforts to cure
any such breach which requires more than thirty (30) days to correct.
(b) Either party may terminate this Agreement, effective immediately and
without liability, upon written notice to other party if the other party (i)
becomes insolvent, (ii) declares bankruptcy, (iii) becomes the subject of any
proceeding seeking relief, reorganization or rearrangement under the laws
relating to insolvency, (iv) makes an assignment for the benefit of its
creditors, or (v) commences the liquidation, dissolution or winding up of its
business.
15. PROPRIETARY RIGHTS.
(a) Brocade retains all of its right, title and interest in and to all
patents, copyrights, trademarks, tradesecrets, mask works and other intellectual
property embodied in the Products (for purposes of this Section, "Intellectual
Property") including any improvements or enhancements to the Products. OEM may
not copy, reproduce, distribute, (except as set explicitly forth in this
Agreement), reverse engineer, decompile or disassemble the Products or
Intellectual Property, as the case may be. No rights or licenses, with respect
to the Products or Intellectual Property, are granted or deemed granted
hereunder, except as explicitly set forth in this Agreement. All Product(s)
incorporated into OEM Products shall be marked with such copyright, patent,
proprietary legends, restrictions or other notices as Brocade may reasonably
require to protect its interests or Brocade's suppliers' interests therein.
(b) OEM retains all proprietary rights in and to all designs,
engineering details, schematics, drawings, specifications, software, business
data and other similar data which may
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 9
be provided to Brocade unless OEM specifically requests changes to be
incorporated in Brocade's standard product. Brocade shall not sell Products
containing unique elements, features, or characteristics developed by OEM or
based specifically upon OEM's specifications to any third party without OEM's
written consent.
(c) Each party agrees (i) to hold the other party's confidential
information in strict confidence, (ii) not to disclose such confidential
information to any third parties, and (iii) not to use any confidential
information for any purpose except for the business purpose.
16. SOFTWARE LICENSE. Notwithstanding anything to the contrary contained herein,
title to all Software shall remain with Brocade or its suppliers, as applicable.
Brocade hereby grants to OEM a nonexclusive, nontransferable right and license
to distribute copies of the applicable Software solely in conjunction with the
distribution of the Products, as part of OEM Products, to End-Users during the
term of this Agreement. No modification or preparation of derivative works of
the Software whatsoever is permitted. The Software is provided and is authorized
to be installed, executed and used only in machine-readable, object code form.
17. RESTRICTED MANUFACTURING RIGHTS.
(a) Events. The rights described in Section 17(b) shall become effective
during the term of this Agreement for a specific Product when:
(a1) OEM has given notice to Brocade of its intent to establish
a funded escrow account for the Product accompanied by payment of
fees as detailed in Exhibit D, Restricted Manufacturing Rights Fees
and Requirements, and either
(a2) Brocade becomes bankrupt or insolvent, becomes the subject
of any proceedings seeking relief or reorganization which are not
stayed within ninety (90) days, or makes an assignment for the
benefit of creditors; or
(a3) otherwise, only after [*] and then only upon the occurrence
of situation (i) below and at least one or more of the situations
(i) through (iv):
(i) Brocade fails to deliver at least [*] of the scheduled
delivery quantities during any [*] and such default has
not been cured within [*] after receipt of written
notification from OEM, except for events of Force
Majeure or allocation which are reasonably beyond the
control of Brocade, including, but not limited to,
scarcity of parts or components within the industry
and/or such increased market demand that would
necessitate allocation of Product; or
(ii) OEM has placed Brocade on "Stop Ship" as provided is
Section 19(b) for a Manufacturing Quality problem (as
distinct from a Design problem) and Brocade has failed
to cure such event within sixty (60) days after receipt
of OEM's Stop Ship notice; or
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 10
(iii) One-hundred-eighty (180) days after the time when Brocade
provides an EOL notice pursuant to Section 7(a), then
Brocade and OEM agree to negotiate in good faith to
support OEM's existing long-term obligations, this support
to include the necessary and foreseeable EOL purchases and
the thresholds for invoking (this) Restricted
Manufacturing Rights section; or
(iv) Brocade is merged or consolidated with or into a
competitor of OEM ("Competitor") or enters into a
cooperative arrangement with a Competitor which is the
functional equivalent of such an acquisition or merger or
consolidation; and thereafter Brocade fails to deliver at
least [*] of the scheduled delivery quantities during any
[*] period; and such reduced deliveries have not been
cured within [*] after written notification from OEM.
(b) Rights Granted. Brocade hereby grants to OEM, which shall become
effective on the occurrence of the appropriate events set forth in Section
17(a), parts (a2) or (a3), a non-exclusive, [*] non-transferable, right and
license to manufacture or have manufactured such Product and related parts
thereof, as necessary for sale of OEM Products as defined in Section 1c herein,
in consideration of the payment by OEM of a mutually agreed-upon royalty, not to
exceed thirty-three-percent (33%) of the then-current OEM Price of the said
Product, but only until such time as Brocade may give reasonable assurance to
OEM that Brocade has cured the default condition that gave rise to granting the
rights here before stated. No such royalty as described above in this paragraph
shall be due in the case that this paragraph is invoked because of the
bankruptcy or insolvency of Brocade as defined in Section 17(a),part (a2) above.
18. INSTALLATION SUPPORT. Upon OEM's written request, Brocade will, at no charge
for Brocade's employee's time, assist in installing Products purchased hereunder
at the first two (2) customer sites, charging only for reasonable travel and
living expenses.
19. QUALITY ASSURANCE.
(a) In an effort to maintain the quality of the manufacturing and other
processes related to the Products, Brocade agrees to not make a material move in
its current manufacturing facilities without the prior written consent of OEM,
which consent shall not be unreasonably withheld. Brocade shall maintain an
effective quality control system which shall ensure that the entire process of
design, manufacture and repair, including packaging and shipping, is maintained
under continuous control. Brocade's systems shall ensure that all Product
specifications and test specifications for the Products are satisfied, including
workmanship standards. Upon request, Product specifications and test
specification shall be made available to OEM. Brocade shall develop and
implement continuous quality improvement methodologies to monitor, control, and
improve its processes and Products, including obtaining and maintaining
appropriate ISO 9000 certifications, including ISO 9002 at Brocade's
manufacturing partners' facilities.
(b) Brocade and OEM agree to work together to ensure a "Plug-and-Play"
rate of greater than or [*] for the Products over the term of this Agreement.
Upon any occurrence of a "Plug-and-Play" failure, OEM and Brocade will work
together to promptly identify and correct
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 11
the root cause of the failure. If a subsequent failure is reported prior to
resolution of the preceding occurrence OEM reserves the right to place Brocade
on a "Stop Ship" and Brocade shall not resume shipments to OEM until Brocade and
OEM have identified the cause of the quality problem and have agreed upon a
course of action to correct such problem. If resolution of the problem is not
resolved within [*] of the "Stop Ship", OEM may cancel any undelivered
quantities on Orders for Products without payment of cancellation charges per
Section 8(a).
20. RELIABILITY. Brocade's Products are designed for long life and robustness
and should generally perform to their specifications for up to five years (the
"Service Life"). If the Products fail to meet their reliability standards by
more than [*] during their Service Life, as measured by mutually agreeable
means, Brocade shall use all reasonable commercial efforts to implement
appropriate corrective actions as may be necessary in order to achieve such
reliability standards.
In addition, if OEM experiences an actual field failure rate on a population of
Products that fails to meet their reliability standards of such Products by more
than [*] and which causes additional service requirements on the part of OEM
over and above those assumed in the Product specifications, then Brocade shall
extend the original Warranty Period of such population of units to [*] (or such
longer period as may mutually agreed based upon the specific circumstance) as
compensation for OEM's additional service expenditures.
21. DOCUMENTATION. Brocade hereby grants to OEM, without additional charge, the
right to reproduce, copy, display, translate, modify and private label any
documents/manuals of the general categories (unless specifically prohibited) of
(i) Product description, (ii) installation, maintenance, reference, or
diagnostics, or (iii) user guides, for use by OEM or OEM's customers to sell and
maintain the Products when sold or provided in conjunction with OEM Products and
further grants to OEM the right to grant its subsidiaries and distributors
appropriately restricted rights to copy such documentation solely for use in
selling and maintaining OEM Products at OEM's End-Users. All such documentation
shall bear OEM's trade name, trademark and logo (and shall not bear any evidence
of Brocade's trade name, trademark, or logo or other ownership rights, unless
distributed in a completely unmodified form from that originally supplied by
Brocade), and shall also contain a restrictive legend regarding distribution and
copying rights furnished by OEM. Use of OEM's trade name, trademark or logo
shall not diminish Brocade's right, title or interest in any documentation owned
by Brocade or Brocade's suppliers. OEM hereby agrees to assist in the
enforcement and protection of Brocade's rights, title, or interests thereto.
22. GENERAL PROVISIONS.
(a) Force Majeure. Neither party shall be liable for its inability to
perform due to causes beyond its reasonable control such as acts of God, fire,
theft, war, riot, embargoes, civil insurrections, labor or transportation
strikes, flood, earthquake, volcanic eruption, shortages of material or energy,
acts of civil, military or government authorities, acts of public enemy,
terrorist acts or sabotage. If either party's performance is to be delayed by
any such
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 12
contingencies, that party's performance shall be extended for a reasonable
period of time provided the delayed party gives prompt notice to the other party
of such delays.
(b) Independent Contractors. Brocade and OEM are independent
contractors. Neither party has the authority, express or implied, to assume or
create any obligations, responsibility or liability on behalf of the other party
nor to bind the other party in any manner.
(c) Confidentiality. Both parties agree to keep the information
contained in this Agreement confidential and not to disclose any of the terms
and conditions of this Agreement, to any third parties, without the prior
written consent of the other party.
(d) Survivability. In the event that this Agreement expires or is
terminated for any reason by either party hereto, each party's duties and
obligations that by their nature would normally extend beyond the term of this
Agreement, shall do so.
(c) Responsibility for Taxes. Taxes imposed with respect to the
transactions contemplated hereunder (with the exception of income taxes or other
taxes imposed upon Brocade and measured by the gross or net income of Brocade),
shall be the responsibility of OEM.
(f) Export Regulations. The parties hereto acknowledge and agree to
comply with the laws and regulations of the United States which restrict the
export of commodities and technical data of United States origin.
(g) Notice. All notices, Orders, acceptances of Orders given under this
Agreement shall be made in writing and will be effective (i) when delivered, if
delivered in person, (ii) during the business day of receipt (or the next
business day if not received during a normal business hour), if by telecopy and
confirmed with the receiving party by telephone, or (iii) three (3) days after
depositing same in the U.S. mail as registered mail, return receipt requested,
postage prepaid and addressed to the other party at the address of the other
party set forth on the first page hereof or at such other address as may be
specified to the other party via notice in accordance with this Section (g).
(h) Assignment. Either party may delegate or assign any of its rights,
duties, or obligations under this Agreement provided prior written notice is
given to the other party.
(i) Severability. If any provision of this Agreement is declared invalid
or unenforceable by a court of competent jurisdiction, it is mutually agreed
that this Agreement shall endure except for the part declared invalid or
unenforceable by order of such court and the parties shall negotiate, in good
faith, a substitute, valid, and enforceable provision which most nearly effects
the parties' intent in entering into this Agreement.
(j) Waiver. The failure or delay of either party to require performance
by the other party hereto, or to enforce its rights under any provision of this
Agreement, shall not affect the rights with respect to such provision unless and
until such performance has been waived in writing by such party.
<PAGE> 13
(k) Inventory. OEM shall stock inventory of Products and
replacement/spare units sufficient to fulfill its obligations under this
Agreement.
(l) Insurance. At its sole cost and expense, Brocade shall carry and
maintain Commercial and General Liability Insurance covering all operations of
Brocade, including but not limited to products, completed operations, and
contractual liability, against claims for personal and bodily injury and
property damage with a combined single limit of [*].
(m) Compliance with Law. The parties hereto shall comply with all laws
applicable to the manufacture and sale of the Products or OEM Products,
including, by way of example and not limitation, Executive Order 1126 as amended
by Executive Order 11375 (non-discrimination in employment) and the U.S. Clean
Air Act of 1990. Brocade shall use reasonable efforts to give OEM as much notice
as is practicable in the event Brocade uses ozone depleting chemicals in the
manufacture of the Products. OEM reserves the right to reject any Products
manufactured utilizing or containing such materials if OEM has not been
previously notified of the same.
(n) Governing Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of California.
(o) Audit Rights. OEM may, upon five (5) business days' prior notice,
audit Brocade's manufacturing sites to review Brocade's manufacturing processes,
statistical process control records, quality assurance procedures, packaging and
shipping procedures and other related procedures, functions or facilities of
Brocade which produce Products bought by OEM under the terms of this Agreement,
but only to the extent such audit does not unreasonably disrupt Brocade's
business in which case the parties shall mutually agree upon a more reasonable
time period for such audit.
(p) Regulatory Responsibility. The responsibility to obtain and maintain
regulatory approvals for the Products shall remain with Brocade.
(q) Statute of Limitations. No action, regardless of form, arising from
the transactions under this Agreement, may be brought by either party more than
three (3) years after the cause of the action has accrued.
(r) Training. At times and places to be mutually agreed upon, Brocade
will offer OEM training courses for OEM's personnel. Brocade shall provide such
courses [*] associated with any Brocade [*] materials consumed by OEM's
attendees at such training classes. OEM shall pay all expenses of its personnel
for travel, food, and lodging. Additional training courses will be provided upon
reasonable request at a rate of [*] to cover instruction costs. Enrollment
in training classes will be limited to a maximum of [*].
(s) Brocade warrants that the Item will operate without error or
interruption related to date data in the same manner in the 21st Century as
it does in the 20th Century so as not to cause
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 14
abnormal output or incorrect values, unless Product's operation is dependent
upon and noncompliance is caused by other Products over which Brocade has no
control.
(t) Entire Agreement. This Agreement, including the Exhibits attached
hereto, constitutes the entire agreement between the parties and no
modifications or waiver of any of the provisions or any future representation,
promise or addition shall be binding upon the parties unless agreed to in
writing. This Agreement supersedes and cancels any prior discussions,
understandings or agreements, whether written or verbal, in their entirety.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed by their authorized representatives as set forth below:
BROCADE CORPORATION [OEM]
By: /s/ Signature Illegible By: /s/ Signature Illegible
--------------------------- ----------------------------
Title: CEO Title: VP, Gn Mgr. S
------------------------ ---------------------------
Date: 5/28/98 Date: 5/29/98
------------------------- ---------------------------
<PAGE> 15
EXHIBIT A
PRODUCTS
<TABLE>
<CAPTION>
Brocade Model # OEM Part # Description
<S> <C> <C>
B1630-STK 8912998101 Silk Worm II "Privatized" Per Storage Tek Specification
Base unit, not orderable.
X1003 8912998201 G Port Card (two ports, no GBICs)
X1015 8912999201 FL Port Card (two ports, no GBICs)
X1017 8912998401 Copper GBIC
X1006 8912998301 Short Wave Optical GBICX10118912998501 Slide
Rack Kit
</TABLE>
OEM may order Products from Brocade in a number of pre-defined configurations
which are defined in the pricing table in Exhibit B.
<TABLE>
<CAPTION>
Qty. of Qty. of
G Ports FL Ports
Base Unit Cards Cards
Models (8912998101) (8912998201) (8912999201) Description
- ------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
SNFCS41 1 6 2 Switch, 12 G Ports & 4 FL Ports
SNFCS42 1 4 4 Switch, 8 G Ports & 8 FL Ports
SNFCS43 1 2 6 Switch, 4 G Ports & 12 FL Ports
</TABLE>
<TABLE>
<CAPTION>
Qty. of Copper Qty. of Short Wave
GBICs Optical GBICs
Features (8912998201) (8912998201) Description
- -------- ------------ ------------ -----------
<S> <C> <C> <C>
SNFCS4x-GB01 12 4 12 Copper & 4 Short Wave Laser
GBIC Option
SNFCS4x-GB02 8 8 8 Copper & 8 Short Wave Laser
GBIC Option
SNFCS4x-GB03 4 12 4 Copper & 12 Short Wave Laser
GBIC Option
SNFCS4x-GB05 0 16 16 Short Wave Laser GBIC Option
</TABLE>
"x" = 1, 2, or 3; Per STK Standards, a Feature is an 11 alpha-numeric character
string, the first seven of which are the Base Model into which the Feature may
be installed. Technically, we have 12 Features defined for the GBIC's.
<PAGE> 16
RELIABILITY STANDARDS
<TABLE>
<CAPTION>
Brocade Product OEM Part # Description [*]
<S> <C> <C> <C>
B1630-STK 8912998101 Silkworm II "Privatized" [*]
No Port cards [*]
No GBICs. [*]
X1003 8912998201 G Port Card, No GBIC. [*]
X1015 8912999201 FL Port Card, No GBICs. [*]
X1017 8912998401 Copper GBIC. [*]
X1006 8912998301 Short Wave Optical GBIC [*]
</TABLE>
[*]
* At 40 Degrees C., Sea Level
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 17
EXHIBIT B
PRICE LIST
OEM may order Products from Brocade in a number of pre-defined configurations
which are defined in the following table with each configuration priced
separately.
<TABLE>
<CAPTION>
Description STK Model Brocade Price
-------------- ---------- Part Number -------
----------
<S> <C> <C> <C>
SilkWorm II, 12 G Ports, 4 FL Ports SNFCS41 SK-1630-0001 [*]
GBICs Set, 12 Cu, 4 SWL SNFCS41-GB01 SK-1630-0002 [*]
GBICs Set, 8 Cu, 8 SWL SNFCS41-GB02 SK-1630-0003 [*]
GBICs Set, 4 Cu, 12 SWL SNFCS41-GB03 SK-1630-0004 [*]
GBICs Set, 0 Cu, 16 SWL SNFCS41-GB05 SK-1630-0005 [*]
SilkWorm II, 8 G Ports, 8 FL Ports SNFCS42 SK-1630-0006 [*]
GBICs Set, 12 Cu, 4 SWL SNFCS42-GB01 SK-1630-0007 [*]
GBICs Set, 8 Cu, 8 SWL SNFCS42-GB02 SK-1630-0008 [*]
GBICs Set, 4 Cu, 12 SWL SNFCS42-GB03 SK-1630-0009 [*]
GBICs Set, 0 Cu, 16 SWL SNFCS42-GB05 SK-1630-0010 [*]
SilkWorm II, 4 G Ports, 12 FL Ports SNFCS43 SK-1630-0011 [*]
GBICs Set, 12 Cu, 4 SWL SNFCS43-GB01 SK-1630-0012 [*]
GBICs Set, 8 Cu, 8 SWL SNFCS43-GB02 SK-1630-0013 [*]
GBICs Set, 4 Cu, 12 SWL SNFCS43-GB03 SK-1630-0014 [*]
GBICs Set, 0 Cu, 16 SWL SNFCS43-GB05 SK-1630-0015 [*]
</TABLE>
* Includes Web Tools Software bundle at no extra charge.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 18
<TABLE>
Field Replaceable Units (FRUs) Pricing:
<S> <C> <C>
X1006 GBIC, short wave length [*]
X1017 GBIC, copper [*]
X1011 Slide RackMount Kit [*]
</TABLE>
Warranty Advanced Exchange Product Price: [*] plus receipt of return unit
within [*]. Out of Warranty Repair Price:
Switch: [*]
SFL/G Port Card: [*]
GBIC swl: [*]
GBIC copper: [*]
No Trouble Found (NTF) Charges: [*]
Switch: [*]
FL/G Port Card: [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 19
EXHIBIT C
END-USER LICENSE AGREEMENT
The form(s) of the End-User License(s) that are applicable will be supplied as
an amendment replacing this Exhibit C.
Both parties will negotiate the language of the End-User License as referenced
in Section 1(b).
<PAGE> 20
EXHIBIT D
RESTRICTED MANUFACTURING RIGHTS FEES AND REQUIREMENTS
The parties hereto agree to negotiate a separate written agreement ("Escrow
Agreement") with Brocade's designated "Escrow Agent" upon written request of
OEM. Such agreement shall provide for OEM to pay all costs, fees and charges of
the Escrow Agent for performing its functions as escrow agent.
Upon fulfillment of the obligations of Section 17(a1) by OEM, and within thirty
(30) days of execution of the Escrow Agreement, Brocade shall promptly deposit
with Escrow Agent, if not previously provided, all such Brocade information that
exists that would be required to support the manufacture, sale, and support of
the Product or Products which OEM specifies.
Nothing herein shall require that Brocade create any additional documentation or
information beyond that which Brocade has already created and normally makes
available to have the Product or Products manufactured for its own resale
purposes.
Brocade shall also, in a timely manner, keep such information deposited with the
Escrow Agent current by supplying all related Product ECOs, process changes,
specifications, etc., so long as OEM has paid to Brocade the appropriate fees
and maintains with the Escrow Agent a current relationship.
Fees payable to Brocade for Escrow Services related to Manufacturing
Rights
<TABLE>
<S> <C>
1. Initial Escrow Deposit Fee (one time, per Product) [*]
2. Escrow Account Administration and Maintenance
ECO Deposit Fee (per ECO package) [*]
Clerical (one hour minimum) [*]
Consultation [*]
Outside costs [*]
</TABLE>
Initial Escrow Deposit Fee(s) and Account Administration and Maintenance fees
shall be invoiced and paid in advance, in minimum increments of [*].
Brocade may exercise reasonable practices to group or accumulate ECOs and/or
related information for deposit with the Escrow Agent so as to minimize costs
for both Brocade and OEM.
* Certain information on this page has been omitted and filed
separately with the Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
San Jose, California
April 27, 1999
