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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1999
REGISTRATION NO. 333-74711
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 5
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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DELAWARE 3577 77-0409517
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</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)
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COPIES TO:
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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
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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.
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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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
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Common Stock ($.001 par value).............................. $63,537,500 $17,664
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(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
(2) Includes $11,510 previously paid.
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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 May 20, 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 $15 AND $17 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.
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PRICE $ A SHARE
------------------------
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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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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............................ 29
</TABLE>
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PAGE
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Management.......................... 41
Certain Transactions................ 53
Principal Stockholders.............. 57
Description of Capital Stock........ 60
Shares Eligible for Future Sale..... 63
Underwriters........................ 65
Legal Matters....................... 67
Experts............................. 67
Change in Independent Accountants
and Fiscal Year End............... 67
Where You May Find Additional
Information....................... 68
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 73,699
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, based on revenue and number of ports shipped,
of products, commonly called switches, that are connected to computers and
storage devices, which are devices such as disk drives and tape drives, that
computers use to save information. Our products allow simultaneous communication
on demand between these devices. Our products, connected to computers and
storage devices, create what is commonly referred to as a storage area network
or SAN. Our products utilize the Fibre Channel protocol, which is a standard for
the transfer of information between computers and storage devices defined by the
American National Standards Institute or ANSI.
Our family of SilkWorm switches enables a company to:
- easily increase the size and scope of its SAN thereby enabling it to
cost-effectively manage the growth of its storage systems;
- improve the data transfer speed between the computers that run a
company's critical software programs and its storage systems; and
- run simultaneous applications such as duplicating or backing up important
business data on the SAN without affecting other applications the
computer network is running.
We sell our products to companies that integrate our products with products
of other manufacturers and sell the combined products to their own customers,
called system integrators. We also sell our products to companies that combine
our products with their own products and sell the combined product under their
own brand, called original equipment manufacturers. Our customers include Compaq
Computer, Dell Computer, McDATA Corporation, Sequent Computer Systems and
StorageTek.
Over the past decade, the number of users and the volume of critical
business data that is being captured, processed, stored and manipulated on
computer networks have exploded. The congestion caused by users trying to access
large amounts of data has created a bottleneck between the computer and its
storage systems. The Fibre Channel interconnect protocol was developed in the
early 1990s to address the need to increase the speed and performance of
communications between computers and between computers and their storage
devices. Fibre Channel has earned broad support from leaders in the computer and
storage industries.
Our SilkWorm family of products includes our Brocade Fabric Operating
System, SAN management tools, fabric services and ready-to-deploy switch
configurations. Our products offer the following benefits:
Address the input/output bottleneck. Our products are designed to allow
simultaneous communication between computers and between computers and storage
devices on the SAN at gigabit speeds.
Provide scalability to SAN. By adding additional switches to a SAN, our
products can be used to increase the size and scope of the SAN, enabling
companies to cost-effectively manage the growth of their storage systems. In
addition, our products can be used to connect separate SANs into a single large
SAN to enable companies to share distributed data.
Provide high levels of resiliency and availability. We have designed our
products to meet the needs of companies that desire continuous computer
availability by minimizing maintenance down-time and maximizing the availability
of the system to its users.
Enable SAN applications. Our products allow our customers to run
simultaneous applications such as duplicating or backing up important business
data on the SAN without affecting other applications the computer network is
running.
Enhance SAN management. Our Brocade Fabric Operating Systems is designed
for ease of use and implementation to reduce the overall costs and improve the
efficiency of managing the SAN.
We intend to capitalize on our market leadership in SAN switching solutions
and our Fibre Channel technical expertise to leverage our core technologies and
products to address the evolving SAN market. In addition to focusing on our
distribution relationships with leading computer and storage systems original
equipment manufacturers, we have recently launched our system integrator
program. Furthermore, we intend to continue building relationships with leading
technology partners.
3
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THE OFFERING
Common stock offered................ 3,250,000 shares
Common stock to be outstanding after
this offering....................... 25,685,291 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 April 30, 1999 and excludes 2,427,397
shares of common stock issuable upon exercise of options outstanding as of April
30, 1999 with a weighted average exercise price of $2.65 per share, 287,788
shares of common stock issuable upon exercise of warrants outstanding as of
April 30, 1999 with a weighted average exercise price of $1.37 per share, and
348,080 shares of common stock reserved for additional option grants under our
stock plans as of April 30, 1999, and assumes no exercise of the underwriters'
over-allotment option.
We are a Delaware corporation. 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)
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SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
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1995 1996 1997 1998 1998 1999
----- ------- -------- -------- ------- -------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ -- $ -- $ 8,482 $ 24,246 $14,270 $18,547
Gross profit............................... -- -- 1,800 8,487 5,901 9,789
Loss from operations....................... (176) (3,818) (9,442) (15,231) (4,033) (2,723)
Net loss................................... (166) (3,934) (9,619) (15,111) (3,870) (2,687)
Pro forma basic net loss per share......... $ (.84) $ (.14)
Shares used in per share calculations...... 17,915 19,193
</TABLE>
The following table presents summary balance sheet data as of April 30,
1999, which has been adjusted to reflect the assumed exercise of warrants to
purchase 73,699 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 $16.00 per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses, and
the application of the estimated net proceeds. See "Use of Proceeds" and
"Capitalization."
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AS OF APRIL 30, 1999
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ACTUAL AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,668 $52,846
Working capital............................................. 5,061 51,753
Total assets................................................ 27,450 71,628
Long-term portion of debt and capital lease obligations..... 1,525 232
Redeemable convertible preferred stock...................... 37,016 --
Total stockholders' equity (deficit)........................ (28,301) 56,700
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4
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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 $31.5 MILLION AND MAY NOT ACHIEVE
PROFITABILITY
We have incurred significant losses since inception and expect to incur
losses in the future. As of April 30, 1999, we had an accumulated deficit of
$31.5 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 and the six months ended April 30, 1999, 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
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ownership of our products, the availability 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 six months ended April 30, 1999, sales to Sequent, McDATA and
Data General accounted for 31%, 25% and 15% 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. In addition, we license certain
software that is incorporated into our Brocade Fabric Operating System from Wind
River Systems, Inc. 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 50.1% 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;
and
-- prohibiting stockholder actions by written consent.
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 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;
13
<PAGE> 15
-- 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
22,435,291 other shares outstanding, based on the number of shares outstanding
as of April 30, 1999, being restricted securities as defined in Rule 144 of the
Securities Act of 1933, approximately 10,949,935 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."
14
<PAGE> 16
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 $13.79 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 $16.00 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.
15
<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 $47,485,000, or $54,739,000
if the underwriters exercise their over-allotment option in full, at an assumed
initial public offering price of $16.00 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 8.5% per annum as of April 30, 1999, and indebtedness under our
equipment loan agreement bears interest at the bank's prime rate plus 1%. At
April 30, 1999, the principal amount of outstanding indebtedness under our
credit facility and our equipment loan agreement was approximately $1.2 million
and $2.6 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
April 30, 1999:
-- on an actual basis;
-- on a pro forma basis to reflect the assumed exercise of warrants to
purchase 73,699 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 14,623,614 shares of
common stock and our reincorporation in Delaware; and
-- on a pro forma as adjusted basis to reflect the sale of the common
stock in this offering at an assumed initial public offering price of
$16.00 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 2,427,397 shares of common stock
issuable upon exercise of options outstanding as of April 30, 1999 with a
weighted average exercise price of $2.65 per share, 287,788 shares of common
stock issuable upon exercise of warrants outstanding as of April 30, 1999 with a
weighted average exercise price of $1.37 per share, and 348,080 shares of common
stock reserved for additional option grants under our stock plans as of April
30, 1999. 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 APRIL 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Short-term portion of debt and capital lease
obligations............................................. $ 3,139 $ 3,139 $ 625
======== ======== ========
Long-term portion of debt and capital lease obligations... $ 1,525 $ 1,525 $ 232
Redeemable convertible preferred stock, no par value,
9,791,280 shares authorized, 9,458,665 issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted........ 37,016 -- --
Warrants to purchase redeemable convertible preferred
stock................................................... 405 405 405
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, 7,811,677 shares issued and outstanding,
actual; 50,000,000 shares authorized, 22,435,291
shares issued and outstanding, pro forma; 50,000,000
shares authorized, 25,685,291 issued and outstanding,
pro forma as adjusted................................ 13,765 22 26
Additional paid-in capital.............................. -- 51,259 98,740
Notes receivable from stockholders...................... (6,549) (6,549) (6,549)
Deferred stock compensation............................. (4,000) (4,000) (4,000)
Accumulated deficit..................................... (31,517) (31,517) (31,517)
-------- -------- --------
Total stockholders' equity (deficit)................. (28,301) 9,215 56,700
-------- -------- --------
Total capitalization............................ $ 10,645 $ 11,145 $ 57,337
======== ======== ========
</TABLE>
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<PAGE> 19
DILUTION
The pro forma net tangible book value of our common stock as of April 30,
1999, was approximately $9.2 million, or $.41 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
22,435,291 shares of common stock outstanding after giving effect to the assumed
exercise of warrants to purchase 73,699 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 $16.00
per share and after deducting the estimated underwriting discounts and
commissions and our estimated offering expenses, our net tangible book value as
of April 30, 1999, would have been $56.7 million or $2.21 per share. This
represents an immediate increase in net tangible book value of $1.80 per share
to existing stockholders and an immediate dilution in net tangible book value of
$13,79 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............. $16.00
Pro forma net tangible book value per share as of April
30, 1999............................................... $ .41
Increase per share attributable to new investors.......... 1.80
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.21
------
Dilution per share to new investors......................... $13.79
======
</TABLE>
The following table sets forth on a pro forma basis as of April 30, 1999,
after giving effect to the assumed exercise of warrants to purchase 73,699
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 $16.00 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............. 22,435,291 87% $46,243,000 47% $2.06
New stockholders.................. 3,250,000 13 52,000,000 53 16.00
---------- ----- ----------- -----
Total................... 25,685,291 100% $98,243,000 100%
========== ===== =========== =====
</TABLE>
As of April 30, 1999, there were options outstanding to purchase a total of
2,427,397 shares of common stock at a weighted average exercise price of $2.65
per share. In addition, as of April 30, 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 six months ended
April 30, 1998 and 1999 and the balance sheet data as of April 30, 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 six months ended April 30, 1999 are not necessarily
indicative of the results that may be expected for the full fiscal year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
-------------------------------------------- --------------------------
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 $ 12,958 $16,969
License revenue......................... -- -- -- 1,832 1,312 1,578
------ ------- -------- -------- -------- -------
Total revenues................... -- -- 8,482 24,246 14,270 18,547
Cost of revenues.......................... -- -- 6,682 15,759 8,369 8,758
------ ------- -------- -------- -------- -------
Gross profit.............................. -- -- 1,800 8,487 5,901 9,789
------ ------- -------- -------- -------- -------
Operating expenses:
General and administrative.............. 52 575 1,464 3,813 1,263 1,415
Sales and marketing..................... -- 152 2,112 5,154 2,376 4,086
Research and development................ 124 3,091 7,666 14,744 6,295 5,634
Amortization of deferred compensation... -- -- -- 7 -- 1,377
------ ------- -------- -------- -------- -------
Total operating expenses......... 176 3,818 11,242 23,718 9,934 12,512
------ ------- -------- -------- -------- -------
Loss from operations...................... (176) (3,818) (9,442) (15,231) (4,033) (2,723)
Other income (expense).................... 10 (116) (177) 120 163 36
------ ------- -------- -------- -------- -------
Net loss.................................. $ (166) $(3,934) $ (9,619) $(15,111) $ (3,870) $(2,687)
====== ======= ======== ======== ======== =======
Basic net loss per share.................. $ -- $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56)
====== ======= ======== ======== ======== =======
Shares used in computing basic net loss
per share............................... -- 414 1,997 3,400 2,857 4,757
====== ======= ======== ======== ======== =======
Pro forma basic net loss per share
(unaudited)............................. $ (.84) $ (.14)
======== =======
Shares used in computing pro forma basic
net loss per share (unaudited).......... 17,915 19,193
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF
-------------------------------------- APRIL 30,
1995 1996 1997 1998 1999
------ ------- -------- -------- -----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments....... $1,168 $ 700 $ 2,552 $ 10,420 $ 8,668
Working capital......................................... 922 104 15,334 5,276 5,061
Total assets............................................ 1,549 2,605 26,100 21,301 27,450
Long-term portion of debt and capital lease
obligations........................................... -- 874 1,954 2,209 1,525
Redeemable convertible preferred stock.................. 1,411 4,613 30,359 35,261 37,016
Total stockholders' deficit............................. (166) (3,957) (13,458) (27,355) (28,301)
</TABLE>
19
<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 April 30, 1999, we had an accumulated deficit of
$31.5 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 six months ended April 30, 1999, Sequent, McDATA and
Data General accounted for 31%, 25% and 15% 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
twelve 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 Western 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 six months ended April 30, 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. As of April 30, 1999, $3.9 million
of revenue was deferred. It is expected that this deferred revenue will be
recognized in the second half of 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
for warranty returns based on our warranty history. License revenue is related
only to technology associated with certain ASICs and is recognized when designs
and specifications are delivered and collection is reasonably assured. We do not
anticipate significant technology licensing revenues in the future.
20
<PAGE> 22
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 may 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, we
recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998
and the six months ended April 30, 1999, 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 amortized $1.4
million of deferred compensation during the six months ended April 30, 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 October 31, 1998, we had operating loss carryforwards of
approximately $22.1 million for federal purposes and $10.0 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 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.
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
OCTOBER 31, APRIL 30,
--------------- --------------
1997 1998 1998 1999
------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product revenue..................................... 100.0% 92.4% 90.8% 91.5%
License revenue..................................... -- 7.6 9.2 8.5
------ ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0
Cost of revenues...................................... 78.7 65.0 58.6 47.2
------ ----- ----- -----
Gross margin.......................................... 21.3 35.0 41.4 52.8
------ ----- ----- -----
Operating expenses:
General and administrative.......................... 17.3 15.7 8.9 7.6
Sales and marketing................................. 24.9 21.3 16.7 22.0
Research and development............................ 90.4 60.8 44.1 30.4
Amortization of deferred compensation............... -- -- -- 7.4
------ ----- ----- -----
Total operating expenses....................... 132.6 97.8 69.7 67.4
------ ----- ----- -----
Loss from operations.................................. (111.3) (62.8) (28.3) (14.6)
Other income (expense)................................ (2.0) .5 1.1 .1
------ ----- ----- -----
Net loss.............................................. (113.3)% (62.3)% (27.2)% (14.5)%
====== ===== ===== =====
</TABLE>
SIX MONTHS ENDED APRIL 30, 1998 AND 1999
Revenues. Total revenues increased by 30.0% from $14.3 million for the six
months ended April 30, 1998 to $18.5 million for the six months ended April 30,
1999. The increase was due primarily to increased unit sales of our products
through an increased customer base. In the six months ended April 30, 1998, one
customer, Sequent, accounted for 83% of our total revenues. In the six months
ended April 30, 1999, three customers, Sequent, McDATA and Data General
accounted for 31%, 25% and 15%, respectively, of our total revenues. Total
revenues for the six months ended April 30, 1999 excludes $3.9 million in
deferred revenue in connection with shipments to new customers.
Gross profit. Gross profit increased from $5.9 million for the six months
ended April 30, 1998 to $9.8 million for the six months ended April 30, 1999.
Gross margin increased from 41.3% for the six months ended April 30, 1998 to
52.7% for the six months ended April 30, 1999. The increases were due to lower
component and manufacturing costs, the allocation of fixed manufacturing costs
over a greater revenue base and software revenue. In addition, during the six
months ended April 30, 1998, our gross margin was adversely affected by a
write-off of obsolete inventory.
General and administrative expenses. General and administrative expenses
increased by 12.0% from $1.3 million for the six months ended April 30, 1998 to
$1.4 million for the six months ended April 30, 1999. This increase was due to
higher employment costs in the six months ended April 30, 1999.
Sales and marketing expenses. Sales and marketing expenses increased by
71.9% from $2.4 million for the six months ended April 30, 1998 to $4.1 million
for the six months ended April 30, 1999. This increase was due primarily to an
increase in personnel.
22
<PAGE> 24
Research and development expenses. Research and development expenses
decreased by 11.7% from $6.3 million for the six months ended April 30, 1998 to
$5.6 million for the six months ended April 30, 1999. The decrease primarily
resulted from lower outside engineering and prototyping costs. In addition,
research and development costs for the six months ended April 30, 1998 included
costs associated with a development project which was subsequently abandoned in
connection with the restructuring of our business in July 1998.
Amortization of deferred compensation. During fiscal 1998 and the six
months ended April 30, 1999, we recorded total deferred compensation of $5.4
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 $1.4 million for the six months ended April 30, 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 write-off 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.
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 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, we recorded
deferred compensation of $307,000 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.
23
<PAGE> 25
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations
data for each of the eight quarters ended April 30, 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, APRIL 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- ----------- ----------- --------- -------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue......... $ 1,534 $ 6,347 $ 7,824 $ 5,134 $ 4,056 $ 5,400 $ 6,429 $10,540
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 10,540
Cost of revenues.......... 1,212 4,435 4,697 3,672 4,351 3,039 3,321 5,437
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.............. 322 1,912 3,153 2,748 218 2,368 4,686 5,103
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and
administrative........ 378 462 639 624 1,979 571 741 674
Sales and marketing..... 616 839 1,074 1,302 1,444 1,334 1,729 2,357
Research and
development........... 2,046 2,847 2,838 3,457 5,016 3,433 2,905 2,729
Amortization of deferred
compensation.......... -- -- -- -- -- 7 1,157 220
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 3,040 4,148 4,551 5,383 8,439 5,345 6,532 5,980
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations...... (2,718) (2,236) (1,398) (2,635) (8,221) (2,977) (1,846) (877)
Other income (expense).... (50) (119) 43 120 114 (157) 7 29
------- ------- ------- ------- ------- ------- ------- -------
Net loss.................. $(2,768) $(2,355) $(1,355) $(2,515) $(8,107) $(3,134) $(1,839) $ (848)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
-----------------------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30,
1997 1997 1998 1998 1998 1998 1999 1999
-------- ----------- ----------- --------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue......... 100.0% 100.0% 99.7% 80.0% 88.8% 99.9% 80.3% 100%
License revenue......... -- -- .3 20.0 11.2 .1 19.7 --
------- ------- ------- ------- ------- ------- ------- ------
Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues.......... 79.0 69.9 59.8 57.2 95.2 56.2 41.5 51.6
------- ------- ------- ------- ------- ------- ------- ------
Gross margin.............. 21.0 30.1 40.2 42.8 4.8 43.8 58.5 48.4
------- ------- ------- ------- ------- ------- ------- ------
Operating expenses:
General and
administrative........ 24.6 7.3 8.1 9.7 43.3 10.6 9.2 6.4
Sales and marketing..... 40.2 13.2 13.7 20.3 31.6 24.7 21.6 22.4
Research and
development........... 133.4 44.8 36.2 53.8 109.8 63.5 36.3 25.9
Amortization of deferred
compensation.......... -- -- -- -- -- .1 14.4 2.1
------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses............ 198.2 65.3 58.0 83.8 184.7 98.9 81.5 56.8
------- ------- ------- ------- ------- ------- ------- ------
Loss from operations...... (177.2) (35.2) (17.8) (41.0) (179.9) (55.1) (23.0) (8.4)
Other income (expense).... (3.2) (1.9) .5 1.8 2.5 (2.9) -- .3
------- ------- ------- ------- ------- ------- ------- ------
Net loss.................. (180.4)% (37.1)% (17.3)% (39.2)% (177.4)% (58.0)% (23.0)% (8.1)%
======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
24
<PAGE> 26
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 exceptions to this trend were in the third quarter of fiscal 1998 when
gross margin decreased to 4.8% and in the second quarter of fiscal 1999 when
gross margin decreased to 48.4%. The decrease in gross margin in the three
months ended July 31, 1998 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. The decrease in gross margin from 58.5% in the three
months ended January 31, 1999 to 48.4% in the three months ended April 30, 1999
was primarily the result of no technology licensing revenue in the three months
ended April 30, 1999.
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. Subsequent to the restructuring, total operating expenses, excluding
amortization of deferred compensation, were $5.3 million and $5.4 million in the
three-month periods ended October 31, 1998 and January 31, 1999, respectively.
These quarterly operating expense levels were consistent with the operating
expense levels in the three months ended April 30, 1998. Operating expenses,
excluding amortization of deferred compensation increased to $5.8 million in the
three months ended April 30, 1999 primarily due to an increase in sales and
marketing personnel.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, for net proceeds of approximately $37.0 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,
$11.6 million in fiscal 1998 and $1.3 million in the six months ended April 30,
1999. The increases in cash utilized reflect the increased working capital
required to fund expanding operations and increases in inventories and accounts
receivable. Capital expenditures were $1.5 million in fiscal 1996, $3.4 million
in 1997, $3.8 million in 1998 and $1.0 million in the six months ended April 30,
1999. 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 April 30, 1999 consisted of $8.7
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
25
<PAGE> 27
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 8.5%
at April 30, 1999, are secured by our accounts receivable and inventories, 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 April 30, 1999,
there were borrowings under the revolving line of credit of $1.2 million and
under the equipment financing of $2.6 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
26
<PAGE> 28
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 usable year 2000 upgrade for the NT 4.0 environment. We believe that
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 in 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
27
<PAGE> 29
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.
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.
28
<PAGE> 30
BUSINESS
OVERVIEW
We are the leading provider, based on revenue and the number of ports
shipped, 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. Sequent, McDATA
and Data General accounted for approximately 31%, 25% and 15%, respectively, of
our total revenues for the six months ended April 30, 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 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
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channel to date, we believe revenues from this channel may increase
significantly in the future. Each 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.
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-- Media independent. SilkWorm enables the SAN to support diverse media,
including fiberoptic connections up to 10 kilometers and copper
connections.
-- 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. In addition, we
license certain software from Wind River Systems, Inc. that is incorporated into
our Brocade Fabric Operating System. 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 six months ended April 30, 1999, our research and
development expenses were $14.7 million and $5.6 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
currently have 2 design patents and 8 pending patent applications in the United
States,
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4 utility applications and 4 provisional applications with respect to our
technology. 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.
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., collectively referred to as MSL, in the
Santa Clara County, California Superior Court. The suit involves claims by MSL
for approximately $900,000 for amounts allegedly owed by us for circuit boards
manufactured by MSL and previously shipped to us, approximately $500,000 for
circuit boards manufactured for us and held by MSL and approximately $1.5
million for raw material purchased by MSL for inclusion in circuit boards to be
manufactured for us. We do not dispute that we owe MSL 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 for circuit boards purchased by
us from MSL under warranty, by approximately $200,000 for the value of equipment
and raw electronic components consigned by us to MSL and by approximately
$150,000 for other damages sustained by us related to MSL's performance during
our manufacturing relationship. We deny any liability for the circuit boards
manufactured by MSL but not shipped to us and for raw material inventory
purchased by MSL.
In December 1998, MSL obtained a writ of attachment against us related to
the circuit boards manufactured by MSL for approximately $1.4 million. We
responded by posting a bond for this amount. The parties have exchanged
documents and conducted preliminary discovery. MSL and Brocade participated in
non-binding mediation on March 10, 1999; however, the parties did not settle
this dispute.
Following the mediation, the parties agreed that Brocade would make a
payment of $392,000 to MSL for circuit boards previously shipped to Brocade and
that MSL would sell to Brocade circuit boards previously manufactured but not
shipped to Brocade. The parties also agreed that upon this payment by Brocade,
the bond of $1.4 million would be reduced by the amount paid by Brocade to MSL.
At this time, the parties are finalizing a stipulation related to Brocade's
payment.
No trial date has been set. A case management conference is scheduled for
June 15, 1999 and the court should set a trial date at the case management
conference.
We believe that we have strong defenses against MSL'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
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<PAGE> 41
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 MSL,
which could materially harm our business.
EMPLOYEES
As of April 30, 1999, we had 123 full-time employees engaged in research
and development, sales and marketing and 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.
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> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of April 30, 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
November 1997, Mr. Reyes served as Chairman of the board of directors, and from
January 1995 to June 1998, served as President and Chief Executive Officer 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 1999 and became our Vice President,
Finance and Chief Financial Officer effective May 3, 1999. From February 1994 to
April 1999, Mr. Byrd served as Vice President, Finance and Chief Financial
Officer of Maxim Integrated Products, Inc., a designer, developer and
manufacturer of linear and mixed-signal integrated circuits. From 1982 to 1994,
Mr. Byrd held various positions at Ernst & Young, 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.
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<PAGE> 43
From 1993 to 1999, Mr. Malavalli was the chairman of the Fibre Channel
Association Technical 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 board of directors
of 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> 44
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 in 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" and
"Certain Transactions -- Stock Option Grants and Loan to Certain Directors."
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
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<PAGE> 45
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;
-- 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
intend to enter 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.
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<PAGE> 46
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 $100,000, collectively
referred to below as the Named Executive Officers. The entries under the column
heading "Other Compensation" in the table represent the cost of term life
insurance for each Named Executive Officer.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION($)
--------------------------- ---------- --------- ------------ ---------------
<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> 47
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
with us prior to vesting of the 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. 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> 48
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 with us 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 to repurchase as of October 31, 1998. The
value of in-the-money options is based on an assumed offering price of $16.00
per share and net of the option exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OCTOBER 31, 1998 OPTIONS AT OCTOBER 31, 1998
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Reyes............. -- $ -- -- 1,535,662 $ -- $21,115,353
Bruce L. Bergman............. -- -- -- -- -- --
Kumar Malavalli.............. -- -- -- -- -- --
Paul R. Bonderson, Jr. ...... -- -- -- -- -- --
Victor M. Rinkle............. -- -- -- 200,000 -- 2,750,000
Charles W. Smith............. 25,000 30,000(1) 47,917 112,083 750,422 1,685,828
</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, and net
of the option exercise price.
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS
Options granted to certain of our officers and directors under our 1995
Equity Incentive Plan, 1998 Equity Incentive Plan and 1998 Executive 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.
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:
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<PAGE> 49
-- 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. This agreement 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.
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.
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.
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<PAGE> 50
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 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
49
<PAGE> 51
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
was approved by our stockholders in April 1999, and will be effective upon the
completion of this offering. 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 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.
50
<PAGE> 52
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 was
approved by our stockholders in April 1999, and will be effective upon the
completion of this offering. 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 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.
51
<PAGE> 53
1999 DIRECTOR OPTION PLAN
Our 1999 Director Option Plan was adopted in March 1999 and was approved by
our stockholders in April 1999, and will be effective upon the completion of
this offering. 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.
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.
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> 54
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.
53
<PAGE> 55
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
54
<PAGE> 56
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 5.21% per annum, compounded semi-annually,
and is due on April 1, 2006.
On April 21, 1999, we loaned $100,000 to Paul R. Bonderson, Jr., our Vice
President, Engineering. The loan is secured by a stock pledge agreement. This
note accrues interest at the rate of 5.21% per annum, compounded semi-annually,
and is due on April 21, 2004.
55
<PAGE> 57
STOCK OPTION GRANTS AND LOAN TO CERTAIN DIRECTORS
On January 6, 1999, we granted to Mark Leslie, a director of Brocade, a
fully vested stock option to purchase 121,856 shares of our common stock at
$2.25 per share. 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 at
$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 intend to enter 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.
56
<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of our common stock as of April 30, 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
22,361,592 shares of common stock outstanding as of April 30, 1999, assuming
conversion of all outstanding shares of preferred stock into common stock, and
25,685,291 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 April 30, 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 6.9% 6.0%
Bruce L. Bergman(2)............................... 773,528 3.5 3.0
Kumar Malavalli(3)................................ 606,000 2.7 2.4
Paul R. Bonderson, Jr.(4)......................... 900,000 4.0 3.5
Victor M. Rinkle(5)............................... 200,000 * *
Charles W. Smith(6)............................... 192,000 * *
Neal Dempsey(7)................................... 807,843 3.6 3.1
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 31.9 27.8
Larry W. Sonsini(10).............................. 121,856 * *
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
57
<PAGE> 59
<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 29.9 26.0
2925 Woodside Road
Woodside, CA 94062
Mohr, Davidow Ventures IV(12)..................... 1,579,123 7.1 6.1
2774 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94028
Weiss, Peck & Greer(13)........................... 1,355,017 6.1 5.3
555 California Street,
Suite 3130
San Francisco, CA 94104
Attn: Christopher J. Schaepe
Andreas V. Bechtolsheim(14)....................... 1,168,814 5.2 4.6
1140 Hamilton Avenue
Palo Alto, CA 94301
ALL EXECUTIVE OFFICERS AND DIRECTORS
as a group (12 persons)(15)..................... 12,919,852 57.4 50.1
</TABLE>
- -------------------------
(1) Includes 1,500,110 shares held by Gregory Reyes and Penny Reyes as
community property, all of which are subject to a right of repurchase in
favor of Brocade which lapses over time. 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 32,230
shares subject to a right of repurchase in favor of Brocade which lapses
over time.
(3) Includes 60,666 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 75,833 shares subject to a right of repurchase in favor
of Brocade which lapses over time.
(5) Includes 137,500 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(6) Includes 131,458 shares subject to a right of repurchase in favor of
Brocade which lapses over time. Also includes 10,000 shares held by Charles
Whitney Smith and Helen Clute Smith Irrevocable Trust for the benefit of
Chelsea Marcelle Smith and Alexander Joseph Smith Dated April 30, 1999, of
which Mr. Smith is a trustee.
(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 April 30, 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) 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.
58
<PAGE> 60
(9) Mr. Neiman is a partner of Crosspoint Venture Partners and the Chairman of
the board of directors of Brocade. Includes 14,368 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 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 April 30, 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 656,098 shares held by Weiss, Peck & Greer Venture Associates IV,
L.P., 590,822 shares held by WPG Enterprise Fund III, L.P., 85,259 shares
held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America
Trust & Banking Corporation (Cayman) Limited and 22,838 shares held by WPG
Information Sciences Entrepreneur Fund, L.P. 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 2,415,498 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 April 30, 1999.
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<PAGE> 61
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 April 30, 1999, there were 7,811,677 shares of common stock
outstanding held of record by 165 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 to 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 239,788
shares of our common stock.
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<PAGE> 62
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 3,000 shares of our common stock.
In May 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 20,000 shares of our common stock.
In June 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 25,000 shares of 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 as of April 30, 1999, warrants
for 223,182 shares have been exercised and we have assumed that the remaining
warrants for 73,699 shares will be exercised prior to the closing of our initial
public offering.
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
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<PAGE> 63
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, certain of our officers or stockholders
holding a majority of our outstanding voting securities. 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> 64
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 25,685,291
shares of common stock, assuming the issuance of 3,250,000 shares of common
stock offered hereby and no exercise of options after April 30, 1999. 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 22,435,291 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, 10,949,935 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 salable under Rule 144
180 Days 10,949,935 Lock-up released; shares salable under Rules 144 and
701
</TABLE>
As of April 30, 1999, there were a total of 902,525 shares of common stock
subject to outstanding options under our 1995 Equity Incentive Plan, 141,737 of
which were vested. As of April 30, 1999, there were a total of 1,524,872 shares
of common stock subject to outstanding options under our 1998 Equity Incentive
Plan, 156,361 of which were vested. As of April 30, 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 586,621
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> 65
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 256,853 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.
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<PAGE> 66
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 9.9% 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> 67
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
cover page of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
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<PAGE> 68
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.
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<PAGE> 69
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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<PAGE> 71
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> 72
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 cash flows for each of the three years in the period ended October 31,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
(except with respect to the matters
discussed in Note 10, as to which the
date is May 14, 1999)
F-2
<PAGE> 73
BROCADE COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 30,
1999
OCTOBER 31, PRO FORMA
------------------- APRIL 30, SHAREHOLDERS'
1997 1998 1999 EQUITY (NOTE 6)
-------- -------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,552 $ 10,420 $ 8,668
Short-term investments.................................... 15,920 -- --
Accounts receivable, net of allowance for doubtful
accounts of $100, $285 and $289, respectively........... 2,646 3,430 8,454
Inventories............................................... 471 1,744 2,758
Prepaid expenses and other current assets................. 342 220 1,986
-------- -------- --------
Total current assets........................................ 21,931 15,814 21,866
Property and equipment, net................................. 3,922 5,323 5,452
Other assets................................................ 247 164 132
-------- -------- --------
$ 26,100 $ 21,301 $ 27,450
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit........................... $ 500 $ 1,672 $ 1,200
Current portion of debt................................... 367 1,231 1,314
Current portion of capital lease obligations.............. 679 784 625
Accounts payable.......................................... 3,292 3,247 6,236
Accrued liabilities....................................... 1,225 3,061 3,529
Deferred revenue.......................................... 534 543 3,901
-------- -------- --------
Total current liabilities.......................... 6,597 10,538 16,805
-------- -------- --------
Long-term liabilities:
Long-term portion of debt................................. 694 1,731 1,293
Long-term portion of capital lease obligations............ 1,260 478 232
Commitments and contingencies (Note 4)
Redeemable convertible preferred stock, no par value,
aggregate liquidation preference of $37,362:
Authorized -- 9,791,280 shares at April 30, 1999 and pro
forma
Issued and outstanding (Series A, B, C and
D) -- 8,370,431 shares at October 31, 1997; 9,235,483
shares at October 31, 1998; 9,458,665 shares at April
30, 1999; and no shares issued and outstanding pro
forma................................................. 30,359 35,261 37,016
Warrants to purchase redeemable convertible preferred
stock................................................... 648 648 405
-------- -------- --------
Total long-term liabilities........................ 32,961 38,118 38,946
-------- -------- --------
Shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 30,000,000 shares at April 30, 1999 and
pro forma
Issued and outstanding -- 4,913,383 shares at October
31, 1997; 5,194,765 shares at October 31, 1998;
7,811,677 shares at April 30, 1999; and 22,435,291
shares outstanding pro forma.......................... 424 2,225 13,765 $ 51,281
Deferred stock compensation................................. (88) (300) (4,000) (4,000)
Notes receivable from shareholders.......................... (75) (450) (6,549) (6,549)
Accumulated deficit......................................... (13,719) (28,830) (31,517) (31,517)
-------- -------- -------- --------
Total shareholders' equity (deficit)............... (13,458) (27,355) (28,301) $ 9,215
-------- -------- -------- --------
$ 26,100 $ 21,301 $ 27,450
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 74
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................. $ -- $ 8,482 $ 22,414 $12,958 $16,969
License revenue............................. -- -- 1,832 1,312 1,578
------- ------- -------- ------- -------
Total revenues......................... -- 8,482 24,246 14,270 18,547
Cost of revenues............................ -- 6,682 15,759 8,369 8,758
------- ------- -------- ------- -------
Gross profit........................... -- 1,800 8,487 5,901 9,789
------- ------- -------- ------- -------
Operating expenses:
General and administrative.................. 575 1,464 3,813 1,263 1,415
Sales and marketing......................... 152 2,112 5,154 2,376 4,086
Research and development.................... 3,091 7,666 14,744 6,295 5,634
Amortization of deferred compensation....... -- -- 7 -- 1,377
------- ------- -------- ------- -------
Total operating expenses............... 3,818 11,242 23,718 9,934 12,512
------- ------- -------- ------- -------
Loss from operations........................ (3,818) (9,442) (15,231) (4,033) (2,723)
Other income (expense)...................... (116) (177) 120 163 36
------- ------- -------- ------- -------
Net loss.................................... $(3,934) $(9,619) $(15,111) $(3,870) $(2,687)
======= ======= ======== ======= =======
Basic net loss per share.................... $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56)
======= ======= ======== ======= =======
Shares used in computing basic net loss per
share..................................... 414 1,997 3,400 2,857 4,757
======= ======= ======== ======= =======
Pro forma basic net loss per share
(unaudited)............................... $ (.84) $ (.14)
======== =======
Shares used in computing pro forma basic net
loss per share (unaudited)................ 17,915 19,193
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 75
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)........ 338 285
Issuance of Series D Redeemable
Convertible Preferred Stock
(unaudited).......................... 223 1,755 (243) -- -- -- -- --
Issuance of stock for notes receivable
from shareholders (unaudited)........ -- -- -- 2,307 6,099 -- (6,099) --
Compensation charges (unaudited)....... -- -- -- -- 80 -- -- --
Deferred compensation (unaudited)...... -- -- -- -- 5,077 (5,077) -- --
Amortization of deferred compensation
(unaudited).......................... -- -- -- -- -- 1,377 -- --
Repurchase of common stock
(unaudited).......................... -- -- -- (28) (1) -- -- --
Net loss (unaudited)................... -- -- -- -- -- -- -- (2,687)
----- ------- ----- ----- ------- ------- ------- --------
Balances at April 30, 1999
(unaudited).......................... 9,458 $37,016 $ 405 7,812 $13,765 $(4,000) $(6,549) $(31,517)
===== ======= ===== ===== ======= ======= ======= ========
<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)........ 285
Issuance of Series D Redeemable
Convertible Preferred Stock
(unaudited).......................... --
Issuance of stock for notes receivable
from shareholders (unaudited)........ --
Compensation charges (unaudited)....... 80
Deferred compensation (unaudited)...... --
Amortization of deferred compensation
(unaudited).......................... 1,377
Repurchase of common stock
(unaudited).......................... (1)
Net loss (unaudited)................... (2,687)
--------
Balances at April 30, 1999
(unaudited).......................... $(28,301)
========
</TABLE>
See accompanying notes.
F-5
<PAGE> 76
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
----------------------------- -----------------
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) $(3,870) $(2,687)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 246 1,020 2,374 1,101 919
Loss on disposition of equipment.......................... -- 73 -- -- --
Noncash compensation expense.............................. 11 33 1,202 150 1,457
Forgiveness of founders' notes receivable................. 52 -- -- -- --
Changes in assets and liabilities
Accounts receivable..................................... -- (2,646) (784) 1,287 (5,024)
Inventories............................................. -- (471) (1,273) (4,711) (1,014)
Prepaid expenses and other assets....................... (40) (140) 205 2 (1,734)
Accounts payable........................................ 12 3,023 (45) 598 2,989
Accrued liabilities..................................... 10 1,167 1,836 1,014 468
Deferred revenue........................................ 250 285 9 (223) 3,358
------- -------- -------- ------- -------
Net cash used in operating activities................. (3,393) (7,275) (11,587) (4,652) (1,268)
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,518) (3,423) (3,775) (3,206) (1,048)
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 12,714 (1,048)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings................................. -- 500 1,672 -- --
Line of credit repayments................................. -- -- (500) -- (472)
Payments on capital lease obligations..................... (155) (504) (677) (332) (405)
Proceeds from capital lease financing..................... 1,340 1,258 -- -- --
Proceeds from notes payable............................... -- 1,091 2,594 1,087 247
Repayments of notes payable............................... -- (30) (693) -- (602)
Proceeds from issuance of redeemable convertible preferred
stock and warrants...................................... 3,202 26,070 4,902 4,902 1,512
Proceeds from issuance of common stock.................... 56 90 56 12 285
Repurchase of common stock................................ -- (5) (44) -- (1)
------- -------- -------- ------- -------
Net cash provided by financing activities............. 4,443 28,470 7,310 5,669 564
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (468) 1,852 7,868 13,731 (1,752)
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 $16,283 $ 8,668
======= ======== ======== ======= =======
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 109 $ 351 $ 557 $ 261 $ 245
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 77
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.
Brocade sells its products and services primarily 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, dependence on 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 six months ended April
30, 1998 and 1999 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
F-7
<PAGE> 78
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
credit losses and product sales returns. At October 31, 1997 and 1998 and April
30, 1999, approximately 99%, 76% and 58%, respectively, of accounts receivable
was concentrated with four customers.
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,
------------------ APRIL 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $158 $1,203 $1,074
Work-in-process....................................... 75 6 86
Finished goods........................................ 238 535 1,598
---- ------ ------
$471 $1,744 $2,758
==== ====== ======
</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 amortized 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,
------------------ APRIL 30,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment............................. $ 4,617 $ 8,186 $ 9,147
Leasehold improvements.............................. 196 345 363
Furniture and fixtures.............................. 377 434 503
Less: Accumulated depreciation and amortization..... (1,268) (3,642) (4,561)
------- ------- -------
$ 3,922 $ 5,323 $ 5,452
======= ======= =======
</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 $1.8 million, respectively, at October 31, 1998.
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 six months ended April 30, 1998
and 1999, the amount of costs eligible for capitalization, after consideration
of factors such as realizable value, were not material and,
F-8
<PAGE> 79
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
---------------- APRIL 30,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranty.................................. $ 751 $1,350 $1,323
Payroll, bonus, vacation.......................... 474 628 1,388
Accrued restructuring (see Note 5)................ -- 421 77
Other............................................. -- 662 741
------ ------ ------
$1,225 $3,061 $3,529
====== ====== ======
</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 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 as of
April 30, 1999 were approximately $3.9 million.
F-9
<PAGE> 80
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
During fiscal 1997 and 1998, and the six months ended April 30, 1999,
approximately 100%, 92%, and 92%, respectively, of Brocade's total revenues were
derived from sales of its SilkWorm product. The percentage of sales to
significant customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, SIX MONTHS
------------ ENDED
1997 1998 APRIL 30, 1999
---- ---- --------------
(UNAUDITED)
<S> <C> <C> <C>
Customer A.................................................. 67% 72% 31%
Customer B.................................................. 27% 11% 25%
Customer C.................................................. -- 1% 15%
</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> 81
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED OCTOBER 31, ---------------------
-------------------------------- APRIL 30, APRIL 30,
1996 1997 1998 1998 1999
------- ----------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss....................................... $(3,934) $(9,619) $(15,111) $(3,870) $(2,687)
------- ------- -------- ------- -------
Basic and diluted:
Weighted average shares of common stock
outstanding.................................. 3,169 4,594 5,174 5,095 6,826
Less: Weighted average shares subject to
repurchase................................... (2,755) (2,597) (1,774) (2,239) (2,069)
------- ------- -------- ------- -------
Weighted average shares used in computing basic
and diluted net loss per common share........ 414 1,997 3,400 2,857 4,757
======= ======= ======== ======= =======
Basic and diluted net loss per common share.... $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56)
======= ======= ======== ======= =======
Pro forma:
Net loss..................................... $(15,111) $(2,687)
======== =======
Shares used above............................ 3,400 4,757
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock (unaudited)... 14,218 14,362
-------- -------
Pro forma adjustment to reflect assumed
exercise and conversion of preferred stock
warrants to purchase 296,881 common shares
in 1998 and 73,699 common shares in 1999
at an exercise price of $6.78 per share
(unaudited)............................... 297 74
-------- -------
Shares used in computing pro forma basic and
diluted net loss per common share
(unaudited)............................... 17,915 19,193
======== =======
Pro forma basic and diluted net loss per
common share (unaudited).................. $ (.84) $ (.14)
======== =======
</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, and 20,035,513 for the years ended October
31, 1996, 1997 and 1998 and the six months ended April 30, 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 ended
October 31, 1998 and the six months ended April 30, 1998 and 1999 approximated
net loss.
F-11
<PAGE> 82
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 the 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 (8.5% at April 30, 1999) and expires in August
1999. At April 30, 1999 there were borrowings of $1.2 million outstanding under
the line of credit agreement. The line of credit agreement is secured by
accounts receivable and inventories and contains certain financial covenants
measured on a monthly basis.
As of April 30, 1999, Brocade had approximately $2.6 million due to 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% and
are payable through June 30, 2002. As of April 30, 1999, principal payments of
approximately $520,000, $783,000, $783,000 and $521,000, respectively, were due
in fiscal years ending October 31, 1999, 2000, 2001 and 2002.
Notes payable as of October 31, 1997 and 1998 and April 30, 1999 consisted
of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------- APRIL 30,
1997 1998 1999
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank..................................... $1,061 $ 2,962 $ 2,607
Less: Current portion.................................... (367) (1,231) (1,314)
------ ------- -------
Long-term portion........................................ $ 694 $ 1,731 $ 1,293
====== ======= =======
</TABLE>
F-12
<PAGE> 83
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 was $110,509, $495,475 and $804,057
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 October
31, 1998 were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED OCTOBER 31, LEASES LEASES
---------------------- --------- -------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 792 $ 926
2000........................................................ 847 476
2001........................................................ -- 42
------ ------
Total minimum lease payments................................ $1,639 1,444
====== ======
Less: Imputed interest (15.27% -- 17.65%)................... (182)
Present value of payments under capital leases.............. 1,262
Less: Current portion....................................... (784)
------
Long-term capital lease obligations......................... $ 478
======
</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 $900,000 and
that this $900,000 is subject to the various offsets Brocade claims in its
cross-complaint.
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. The Plan was developed by
management and approved by the Board of Directors with the expectation that
changes in certain programs and arrangements, with related head count
reductions, would immediately reduce operating expenses and improve cash flows.
Accordingly, in quarters subsequent to July 31, 1998, costs were more reasonable
in relation to current revenue levels. The Plan included the termination of the
former Chief Executive Officer for $1.1 million, the cancellation and
abandonment of two research and development projects, one to develop a 64-port
fibre channel switch and another to develop storage area network simulation for
a total of $300,000, a change in contract manufacturer arrangements for $1.2
million, and a reduction in labor force throughout the Company for
F-13
<PAGE> 84
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RESTRUCTURING OF OPERATIONS (CONTINUED)
$550,000. In connection with this plan, Brocade recorded the $3.2 million charge
to operating expenses as follows: $1.3 million is included in cost 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 (8 manufacturing employees, 4 research and
development employees and 8 employees from other departments in the Company),
including severance of Brocade's former Chief Executive Officer, $1.2 million
for the write-off of excess or abandoned equipment (specifically tooling and
fixtures) and inventories related to discontinued and newly established contract
manufacturer arrangements, and $300,000 for write-offs of other abandoned
tangible and intangible assets and facilities in Southern California related to
cancelled new product development and simulation projects. Employees were
formally notified of their termination beginning on July 31, 1998 and continuing
through August 4, 1998. The lay-offs of 17 employees were immediate. The
remainder of the layoffs occurred through January 31, 1999. As of April 30,
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
April 30, 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, 1998 and the six
months ended April 30, 1999 Brocade issued 2,795,848 shares, 865,052 shares and
223,182 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.
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
F-14
<PAGE> 85
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. PREFERRED STOCK (CONTINUED)
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.
During the six months ended April 30, 1999, there were 223,182 of these warrants
exercised at an exercise price of $6.78 per share.
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
14,549,915 shares of common stock upon the closing of the IPO and (2) warrants
to purchase 73,699 shares of Series D with an exercise price of $6.78 per share
will be exercised and converted into 73,699 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 April 30, 1999.
F-15
<PAGE> 86
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK
At April 30, 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.......................... 3,884,082
Conversion of warrants outstanding.......................... 361,487
Stock option plans.......................................... 2,775,477
----------
17,686,879
==========
</TABLE>
Deferred Compensation
In connection with the grant of certain stock options to employees during
the year ended October 31, 1998 and the six months ended April 30, 1999, Brocade
recorded deferred compensation of approximately $307,000 and $5.1 million,
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 $1.4 million was expensed during the year ended October
31, 1998 and the six months ended April 30, 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 April 30, 1999, an aggregate of 348,080 shares were available for future
option grants under all of the Plans.
F-16
<PAGE> 87
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>
SIX
MONTHS
YEAR ENDED OCTOBER 31, ENDED
------------------------------ APRIL 30
1996 1997 1998 1999
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss as reported........................ $(3,934) $(9,619) $(15,111) $(2,687)
Net loss Pro Forma.......................... $(3,945) $(9,666) $(15,522) $(3,098)
Net loss per share as reported.............. $ (4.44) $ (.56)
Net loss per share Pro Forma................ $ (4.57) $ (.65)
</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 1996, 1997, 1998 and the six months ended April
30, 1999, respectively: risk-free interest rate of 5.54 to 6.50, 5.71 to 6.63,
5.58 to 5.86 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
six months ended April 30, 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>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1996 OCTOBER 31, 1997
---------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... -- -- 584,000 $ .19
Granted............................. 2,149,400 $ .09 1,315,500 $ .34
Exercised........................... (1,565,400) $ .03 (630,666) $ .26
Cancelled........................... -- -- (213,667) $ .22
----------- -----------
Outstanding at end of year............ 584,000 $ .19 1,055,167 $ .33
=========== ===========
Exercisable at end of year............ -- -- 36,234 $ .22
Weighted fair value per share......... $ .0100 $ .0522
=========== ===========
</TABLE>
F-17
<PAGE> 88
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
OCTOBER 31, 1998 APRIL 30, 1999
---------------------------- ----------------------------
(UNAUDITED)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of period.... 1,055,167 $ .33 3,522,914 $1.85
Granted............................. 3,154,912 $2.19 1,686,612 $3.88
Exercised........................... (425,570) $1.04 (2,645,034) $2.41
Cancelled........................... (261,595) $1.06 (137,095) $1.71
----------- -----------
Outstanding at end of period.......... 3,522,914 $1.85 2,427,397 $2.65
=========== ===========
Exercisable at end of period.......... 465,807 $1.52 298,098 $3.22
Weighted fair value per share......... $ .3023 $ 1.46
=========== ===========
</TABLE>
During the six months ended April 30, 1999, the Board of Directors granted
options to purchase 330,000 shares at a price of $5.00 per share. These grants
were not part of the above plans and are included in the stock option table
above.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ --------------------
(UNAUDITED)
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
APRIL 30, 1999 REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER PRICE
- -------------------------------------- --------- --------- -------------- -------- ---------
<S> <C> <C> <C> <C> <C>
$0.200 - $1.800....................... 570,077 7.60 $0.73 73,044 $1.01
$2.250 - $7.000....................... 1,857,320 9.49 $3.24 225,054 $3.93
--------- -------
$0.200 - $7.000....................... 2,427,397 9.05 $2.65 298,098 $3.22
========= =======
</TABLE>
At April 30, 1999, 2,545,770 shares issued upon exercise of stock options
with a weighted average exercise price of $2.33 and 150,944 shares issued to
founders with a weighted average exercise price of $.025 were subject to
repurchase by Brocade.
F-18
<PAGE> 89
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,
-------------------
1997 1998
------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 4,600 $ 8,100
Tax credit carryforwards.................................... 700 1,400
Capitalized startup costs................................... 300 300
Reserves and accruals....................................... 300 2,200
Capitalized research expenditures........................... -- 700
------- --------
Total deferred tax assets................................. 5,900 12,700
Less: Valuation allowance................................... (5,900) (12,700)
------- --------
Net deferred tax assets................................... $ -- $ --
======= ========
</TABLE>
As of October 31, 1998, Brocade had federal net operating loss
carryforwards of approximately $22.1 million and state net operating loss
carryforwards of approximately $10.0 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
During fiscal 1997, fiscal 1998, and the six months ended April 30, 1999,
Brocade sold 250,000, 225,000 and 2.3 million shares, respectively, of its
common stock to officers and a director of Brocade in consideration for full
recourse promissory notes in the aggregate amount of $6.5 million. 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 various rates ranging from 4.47% to 6.5% per annum and mature
at various dates through April 2006.
F-19
<PAGE> 90
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS
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 was effective May 14,
1999. In connection with the reincorporation, Brocade is 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 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"), and Brocade's
shareholders approved the Purchase Plan in April 1999. 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 Stock Plan
In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan
(the "1999 Plan") and Brocade's shareholders approved the 1999 Plan in April
1999. 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 Director Option Plan
In March 1999, the Board of Directors approved the 1999 Director Option
Plan (the "Director Plan") and Brocade's shareholders approved the Director Plan
in April 1999. 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.
F-20
<PAGE> 91
(THIS PAGE INTENTIONALLY LEFT BLANK)
<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
[BROCADE LOGO]
<PAGE> 94
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........................................ $ 17,664
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................................ 250,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 22,336
--------
$875,000
========
</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> 95
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 April 30, 1999, we granted stock options to
purchase an aggregate of 7,976,424 shares of our common stock at exercise
prices ranging from $.025 to $7.00 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 April 30, 1999, we issued and sold an
aggregate of 4,531,523 shares of our common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $5,375,591 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 and October 3, 1996, we issued two warrants to
an equipment lease financing company to purchase 35,444 and 15,753 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> 96
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 of which 223,182
have been exercised as of April 30, 1999.
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 $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.
4.8** Seventh Amended and Restated Investors' Rights Agreement
dated December 3, 1997.
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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.
10.21+** OEM and License Agreement between Brocade Communications
Systems, Inc. and McDATA Corporation, dated April 27, 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>
- -------------------------
** 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>
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.
II-4
<PAGE> 98
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> 99
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 20th day of May
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 May 20, 1999
------------------------------------------
Seth D. Neiman
/s/ GREGORY L. REYES President and Chief Executive Officer May 20, 1999
------------------------------------------ (Principal Executive Officer)
Gregory L. Reyes
/s/ MICHAEL J. BYRD Vice President, Finance and Chief May 20, 1999
------------------------------------------ Financial Officer (Principal
Michael J. Byrd Financial and Accounting Officer)
Director
------------------------------------------
Neal Dempsey
* Director May 20, 1999
------------------------------------------
Mark Leslie
* Director May 20, 1999
------------------------------------------
Larry W. Sonsini
</TABLE>
* Power of Attorney
By: /s/ GREGORY L. REYES
--------------------------------------------------
Gregory L. Reyes
II-6
<PAGE> 100
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> 101
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 YEAR EXPENSES DEDUCTIONS OF YEAR
- -------------------------------------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended October 31, 1996:
Allowance for doubtful accounts............. $ -- $ -- $ -- $ --
Year ended October 31, 1997:
Allowance for doubtful accounts............. $ -- $ 100,000 $ -- $100,000
Year ended October 31, 1998:
Allowance for returns and doubtful
accounts.................................. $100,000 $ 185,000 $ -- $285,000
Year ended October 31, 1998:
Restructuring Accrual....................... $ -- $3,200,000 $2,779,000(1) $421,000
</TABLE>
(1) This amount includes $300,000 in cash severance payments, $1,000,000 in
noncash compensation charges related to stock severance arrangements and
$1,500,000 in asset write-offs.
S-2
<PAGE> 102
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> 103
<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.
10.21**+ OEM and License Agreement between Brocade Communications
Systems, Inc. and McDATA Corporation, dated April 27, 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>
- -------------------------
** 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 10.14
This Master Purchase Agreement (this "Agreement") by and between Brocade
Communications Systems, Inc. ("BROCADE(R)"), a corporation registered in
California and located for the purposes of this Agreement at 1901 Guadalupe
Parkway, San Jose, California 95131 and Dell Products L.P., a Texas limited
partnership ("Dell") located at One Dell Way, Round Rock, Texas 78682, is
effective as of November 1, 1998 ("Effective Date"). Dell Computer Corporation
("DCC") and any of its corporate subsidiaries or Affiliates may purchase
Products (as defined hereafter) and enjoy the benefits of this Agreement, but
all liabilities and obligations incurred by Dell, DCC, or any of DCC's
subsidiaries or Affiliates under this Agreement will be the sole responsibility
of Dell. This Master Purchase Agreement and its Schedules are hereinafter
collectively referred to as the "Agreement."
1.0 Introduction
This Agreement sets forth the only terms and conditions under which Dell shall
purchase products from BROCADE. For the purpose of this Agreement, products
include any software and/or documentation that accompany the products
(hereinafter collectively referred to as "Products"). The terms and conditions
of this Agreement shall apply to all purchase orders ("Dell PO(s)") issued by
Dell for the purchase of Products. In the event of any conflict between the
terms of Dell PO(s) or BROCADE order acknowledgment(s) and this Agreement, the
terms of this Agreement will prevail. Any additional terms contained in Dell
PO(s) or BROCADE order acknowledgment(s) shall not be binding unless accepted by
the other party in writing.
2.0 Term and Termination
The initial term of this Agreement shall be three (3) years beginning on the
Effective Date. This Agreement will automatically renew for additional one-year
terms unless one party informs the other of its intent to let the Agreement
expire at least one hundred and twenty (120) days before the end of the then
current term. Either party may terminate this Agreement upon written notice
based on the material breach of the other party, provided that the party alleged
to be in material breach receives thirty (30) days written notice stating the
cause and an additional thirty (30) days to cure.
3.0 Price
3.1 The initial price for each Product purchased hereunder shall be agreed to by
the parties and included in the applicable Schedule. The unit price for each
Product will be reviewed on a quarterly basis or as otherwise required by Dell
as a result of competitive pressures in quarterly business review meetings
("QBRs"). Product prices shall not be increased unless mutually agreed to by the
parties. If prices are changed, the applicable Schedule shall be updated to
reflect the new price. Worldwide prices will be negotiated between BROCADE and
Dell Worldwide Procurement at Dell's corporate headquarters in Austin, Texas.
3.2 Dell expects material cost reductions to be worked aggressively by BROCADE.
BROCADE shall review with Dell, on an ongoing basis, a value chain analysis for
each Product and all costs associated with manufacturing each Product. Brocade
shall deliver to Dell an [*] for each [*] sold to Dell under this Agreement.
Each such [*] shall be deemed to be Brocade's Confidential Information in
accordance with the terms of the Non-Disclosure Agreement in effect between the
parties ("NDA Agreement"). Notwithstanding the foregoing, Brocade expressly
authorizes Dell to provide Solectron (and any other contract manufacturer for
the Products utilized by Brocade during the term of this Agreement) with copies
of such [*] for the sole purpose of discussing [*] with Solectron (and any other
contract manufacturer for the Products utilized by Brocade during the term of
this Agreement); provided, that Dell shall ensure that any such disclosure (and
the discussions relating thereto) are protected by a non-disclosure agreement
that is substantially as protective of BROCADE's rights in such information as
the NDA Agreement. Dell and Brocade agree to [*] all [*] realized through either
BROCADE's or Dell's efforts. The [*] will be effective upon realization of the
new [*] of the [*] and as Product is consumed from the [*] on a first-in
first-out (FIFO) basis. All prices shall be in United States dollars. Prices set
forth in this Agreement include all charges for Product(s) except for [*]
charges. Dell shall pay all such [*] charges to the extent such charges are
listed as a separate line item in BROCADE's invoices. Dell shall not be
responsible for any duties, fees, taxes or other charges (i) that BROCADE fails
to disclose on its on invoices for Product(s), (ii) which are imposed on
BROCADE's net income, or (iii) for which Dell has submitted an appropriate
exemption certificate or other equivalent documentation for taxing jurisdictions
outside of the United States ("Exemption Documentation"). Dell shall pay BROCADE
all additional taxes that result from any failure by Dell to provide appropriate
Exemption Documentation. Additionally, it is necessary for Dell to determine its
business exposure resulting from the volatility of some foreign
2 of 16
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 2
currencies. The currency content from the various elements of Product cost are
required. To the extent available from BROCADE's third party contract
manufacturer, this currency content shall be broken out by labor, material,
overhead and profit as a percentage of the total Product cost. BROCADE shall use
commercially reasonable efforts to provide a complete currency content analysis
for 'A' items on a quarterly basis.
A typical example of a currency analysis for a component purchased from a Korean
company, manufactured in Taiwan, using Japanese, Korean and Malaysian components
might show foreign content in at least four (4) currencies, as follows:
<TABLE>
<CAPTION>
Element Currency Content
- ------- ----------------
<S> <C>
Material Japanese yen (15%), Korean Won (12%) and Malaysian Ringgit (32%)
Labor and Overhead New Taiwan Dollar (12%)
Profit Korean Won (55%)
</TABLE>
3.3 BROCADE represents and warrants that the prices for Products shall not be
less favorable than prices applicable to sales by BROCADE to any other customer
purchasing like quantities of substantially comparable products. If at any time
during the term of this Agreement BROCADE accords to any other such customer
more favorable prices, BROCADE shall immediately offer to sell the Products to
Dell at equivalent prices accorded to such other customer.
4.0 Payment
4.1 Payment for Dell PO(s) with Dell's European Manufacturing Facility ("EMF")
will be made [*] end of month from the later of the date of BROCADE'S invoice or
receipt of the Products by Dell.
4.2 For Dell PO(s) issued by all other Dell manufacturing locations, payment
will be made [*] from the later of the date of BROCADE'S invoice or receipt of
Products by Dell.
4.3 In the event taxes are required to be withheld by any foreign taxing entity
on payments due BROCADE, Dell will deduct such taxes from any amount owed
BROCADE and pay them to the appropriate taxing authority. Dell will provide
BROCADE a receipt for such taxes.
4.4 All will be in U.S. dollars unless the parties otherwise agree.
5.0 Delivery of Products
5.1 The parties recognize that Products may be provided to Dell in two ways: (1)
from an [*] or (2) directly to Dell without use of [*]. The parties recognize
that some terms and conditions will be the same in both situations and others
terms may vary depending on the method by which Dell receives the Products. The
parties, therefore, agree that the applicable provisions shall be as follows:
5.2 Provisions applicable to Products whether or not [*] is used:
5.2.1 [*] BROCADE agrees to fill all accepted Dell POs and will use commercially
reasonable efforts to reduce the lead-time for Products during the term of this
Agreement. Time is of the essence for all deliveries. BROCADE shall not ship
Products to Dell that were manufactured in locations not approved in advance and
in writing by Dell.
5.2.2 BROCADE will handle, pack, mark, and ship the Products in accordance with
Dell's packing and labeling specifications as set forth in Schedules D, E and F
attached hereto (and as modified by Dell from time to time). Dell may inspect
each delivery of Products and perform those tests it deems necessary to
determine if the Products are acceptable. Dell shall inspect the Products within
thirty (30) days of delivery to Dell. Dell shall be deemed to have accepted the
Products only in the event that Dell: (i) fails to accept or reject the Products
on or before the expiration of the thirty (30) day inspection period, (ii)
explicitly accepts the Products in writing, or (iii) delivers the Products to
any customer. Dell's acceptance of any Products shall in no way be construed as
a representation by Dell that Dell has completely tested the Products or that
such Products comply with their specifications or conform to any other
warranties made by BROCADE under this Agreement. Dell's acceptance of any
Product shall in no way negate any warranty provided under this Agreement or
affect any other provision of this Agreement. Dell's remedy in the event of
non-acceptance is a warranty return for credit. Except as expressly set forth in
this Agreement, any
3 of 16
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
<PAGE> 3
expenditures or commitments by BROCADE in anticipation of Dell's requirements
shall be at BROCADE'S sole risk and expense.
5.3 Delivery to Dell [*]:
5.3.1 Unless Dell specifically requests that Product be delivered directly to
Dell, all Products delivered under this Agreement to Dell shall [*] BROCADE
agrees to establish [*] requested by Dell as volume thresholds per location are
met as agreed by the parties. In advance of establishing [*] to handle inventory
requirements for AMF. In advance of establishing [*] BROCADE has agreed to
support inventory requirements for these regions from the [*] is to be used to
support particular [*] held by BROCADE.
5.3.2 Delivery shall take place Deliver Duty Unpaid ("DDU") (Incoterms 1990) [*]
upon withdrawal of Product(s) by Dell from [*] with the exception of [*]
Deliveries to Dell's manufacturing location from [*] shall take place [*].
5.3.3 BROCADE agrees to maintain [*] in quantities equal to [*] unless otherwise
agreed to in writing by the applicable Dell region. For the first four (4) weeks
of operation, the [*]. After four (4) weeks of operation, [*]. The parties will
work together to determine the appropriate [*] required for End of Life ("EOL")
situations. BROCADE agrees to replenish the [*] in accordance with Section 6.1,
and additionally will make commercially reasonable efforts to ensure the
required [*] is on hand at all times. Dell and BROCADE will meet periodically
for an [*]. At this meeting [*] at both Dell and BROCADE will be reviewed, along
with any changes in Dell [*].
5.3.4 On approximately a monthly basis, Dell will provide rolling six (6) month
forecasts of projected purchases of Products for AMF, EMF, APCC, CCC and
possibly other [*] locations, but any such forecasts provided by Dell are for
planning purposes only and do not constitute a commitment of any type by Dell.
No later than [*] after receipt of the Dell six (6) month forecast, BROCADE
agrees to [*] for a rolling six (6) month period (current month plus five). [*]
In the event that the Dell forecast is in apparent conflict with the Dell orders
received by BROCADE (including reschedule and cancellation signals), the parties
agree to meet promptly upon BROCADE's request to discuss the apparent conflict
with the intent of resolving the inconsistency. Such meeting shall include the
Dell commodity manager or appropriate functional equivalent.
5.3.5 Dell will transmit Dell PO(s) by facsimile or other agreed upon means, on
a monthly basis, to cover Dell's forecasted requirements for the next [*]. Such
Dell PO(s) will be continually updated to reflect Dell's next [*] forecast. All
orders shall be in writing, shall reference this Agreement and shall contain (as
a minimum) the following information: price, part number, quantity of each
Product required, delivery date and [*]. BROCADE will send Dell an
acknowledgement within [*] of receipt of the Dell PO. In order to request
particular shipments of Product(s) [*] Dell shall issue written orders
authorizing BROCADE to [*] Dell's transmission of a [*] is BROCADE'S only
authorization to deliver Products to Dell and invoice Dell for the part numbers
and quantities set forth in the [*]. Title and risk of loss for all Products
shall remain with BROCADE until the Products are [*].
5.4 Delivery directly to Dell without using [*]. If Dell authorizes BROCADE
to deliver Product directly from BROCADE to Dell without using [*] the
following terms shall apply:
4 of 16
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
<PAGE> 4
5.4.1 Dell will transmit a Dell PO by facsimile or other agreed upon means, on a
monthly basis, to cover Dell's forecasted requirements for the next [*]. All
orders shall be in writing, shall reference this Agreement and shall contain (at
a minimum) the following information: price, part number, quantity of each
Product required, delivery date and [*] BROCADE will send Dell an
acknowledgement within [*] of receipt of the Dell PO. BROCADE will then schedule
delivery of each Product to the [*] on the delivery date listed in the Dell PO.
Delivery will not be deemed to be complete until Products have been actually
delivered to the [*] BROCADE shall not make deliveries more than [*] earlier
than the delivery date listed in the Dell PO. If Products are delivered more
than [*] early, Dell may: [*]. If only a portion of the Products are available
for shipment to meet the delivery date, BROCADE will notify Dell and ship the
available Products unless otherwise directed by Dell. [*]
5.4.2 Dell's transmission of a Dell PO is BROCADE'S only authorization to
deliver Products to Dell and invoice Dell for the part numbers and quantities
set forth in the Dell PO. Dell's obligation to furnish Dell POs in advance of
delivery does not affect, in any way, [*] on a line item basis, as set forth in
Section 6.0 of this Agreement. [*]
6.0 Reschedule and Cancellation
6.1 Reschedule In (Increase). Dell shall be permitted to increase the quantities
scheduled to be delivered [*] without cost or liability for quantities of
Product(s) as set forth in the tables below, with the limitation that each line
item on an individual Dell PO may be subject to increase only [*]. Both parties
acknowledge that the SilkWorm(TM) Express product will be used for early
time-to-market, and will be short lived. The expected launch date for
SilkWorm(TM) Express is January 15, 1999, [*]. For the SilkWorm(TM) Express
Product, increase of orders by Dell shall be permitted as follows:
<TABLE>
<CAPTION>
Days from planned
delivery to [*] Increase Amount
<S> <C>
0 - 30 [*]
31 - 45
46 - 60
61 - 90
91+
</TABLE>
[*] increase of orders by Dell shall be permitted as follows:
<TABLE>
<CAPTION>
Days from planned
delivery to [*] Increase Amount
<S> <C>
0 - 14 [*]
15 - 30
31 - 60
61 - 90
91+
</TABLE>
By way of example, if on January 1 Dell wanted to increase the quantities
scheduled to be delivered on January 31 (31 days notice), BROCADE agrees to
increase the originally scheduled delivery quantity by a minimum of [*]
Throughout this Agreement, any reference to days means calendar days unless
otherwise specified.
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<PAGE> 5
6.2 Reschedule Out (Push Out). Dell shall be permitted to extend the delivery
date for orders without cost or liability for quantities of Product(s) as set
forth in the tables below, with the limitation that (a) for the SilkWorm(TM)
Express product, delivery dates for each line item on an individual Dell PO may
be [*] and (b) for all other products, delivery dates for each line item on an
individual Dell PO may be [*].
For the SilkWorm(TM) Express Product, Dell may extend delivery dates for orders
as follows:
<TABLE>
<CAPTION>
Days from planned
delivery to [*] Reschedule Amount
<S> <C>
0 - 30 [*]
31 - 45
46 - 60
61 - 90
91+
</TABLE>
[*] Dell may extend delivery dates for orders as follows:
<TABLE>
<CAPTION>
Days from planned
delivery to [*] Reschedule Amount
<S> <C>
0 - 14 [*]
15 - 30
31 - 60
61+
</TABLE>
6.3 Cancellation:
6.3.1 Dell may cancel Dell PO(s), in whole or in part. Dell's liability, if
any, for Dell POs cancelled under the terms of this Agreement shall be limited
to BROCADE's [*] for the percentage of Product(s) applicable as set forth below.
[*] BROCADE must document BROCADE'S [*] as a result of Dell's cancellation to be
entitled to [*]. Furthermore, for the SilkWorm(TM) Express Product, the costs
should be [*].
<TABLE>
<CAPTION>
Days from planned Cancellation
delivery to [*] Amount
<S> <C>
0 - 30 [*]
31 - 45
46 - 60
61 - 90
91+
</TABLE>
[*] cancellation of orders by Dell shall be permitted as follows:
<TABLE>
<CAPTION>
Days from planned Cancellation
delivery to [*] Amount
<S> <C>
0 - 30 [*]
31 - 60
61+
</TABLE>
6.3.2 If Dell terminates individual Dell PO(s) in whole or in part because
BROCADE'S quality does not meet the agreed to Quality Goals (as defined in
Section 12.1) set forth in Schedule B, Dell may terminate any or all outstanding
Dell PO(s) without liability or charge.
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<PAGE> 6
6.3.3 BROCADE acknowledges and agrees that the liabilities set forth herein
represent Dell's sole liability for the cancellation of Dell PO(s) in accordance
with the terms of this Agreement and represents the sole and exclusive remedies
of BROCADE for cancellation of Dell PO(s) in accordance with the terms of this
Agreement.
7.0 Software, Documentation and Trademarks
7.1 BROCADE agrees to provide Dell with Product documentation for use in the
sale and support of Products that Dell is purchasing ("Documentation"). The
BROCADE Documentation (in English) shall be provided in hard copy and FrameMaker
source format unless otherwise requested by Dell. Dell may modify, reproduce and
distribute the Documentation in hard copy or softcopy form as well as in
electronic form on Dell's website or bulletin boards in connection with the sale
and support of the Product. BROCADE agrees to provide updates as they become
available, in the same format. If Dell modifies and introduces errors into such
Documentation, BROCADE has no liability for such errors.
7.2 Software License
7.2.1 BROCADE hereby grants to Dell a non-exclusive, worldwide, revocable except
as expressly provided in Section 7.2.4, royalty-free right and license, under
all copyrights, patents, patent applications, trade secrets and other necessary
intellectual property rights of BROCADE, to (i) use, execute, and display all
device drivers, firmware and software of BROCADE used in the operation and
support of the Product, [*] or backup copies of the same (collectively the
"Software"), in object code form, in conjunction with, or for use with Products,
(ii) distribute or license the Software, in object code form, as part of, in
conjunction with, or for use with Products sold or leased by Dell to end users,
and (iii) authorize, license and sublicense third parties to do any, some or all
of the foregoing. Dell shall distribute the Software to end users pursuant to
Dell's end user license agreement, attached hereto as Schedule I, as updated by
Dell from time to time.
7.2.2 Dell shall have no right to (i) modify or adapt the Software for other
products or create derivative works of the Software, (ii) decompile, reverse
engineer, or disassemble the Software for purposes of designing similar
products, or (iii) use or distribute the Software other than in connection with
the use or distribution of the Products.
7.2.3 Dell agrees that the foregoing licenses do not grant any title or other
right of ownership to the Software and that BROCADE owns and shall continue to
own all right, title and interest in and to the Software.
7.2.4 Upon any termination or expiration of this Agreement, Dell's rights set
forth in this Section 7.2 shall terminate except as follows: (i) end users shall
be permitted continued use of the Software in conjunction with the operation of
the Products so long as they are not in breach of Dell's end user license
agreement attached hereto as Schedule I, and (ii) Dell shall retain a
nonexclusive, worldwide license to use and execute the then-current version of
the Software internally (in object code form only) for the sole purpose of
assisting Dell end users with the maintenance of the Products purchased from
Dell.
7.3 During the term of this Agreement, BROCADE grants to Dell a nonexclusive,
worldwide, royalty-free and non-transferable license to use the BROCADE
trademarks, service marks and trade names used by BROCADE in connection with the
advertising, promotion and distribution of the Products ("Marks"). This license
does not include the right to sublicense the use of the Marks. Dell shall use
reasonable efforts to ensure that Dell's use of the Marks is in compliance with
BROCADE's trademark usage guidelines, as provided to Dell by BROCADE from time
to time. In addition, Dell agrees that the nature and quality of any materials
created or distributed by Dell bearing the Marks shall be of a similar quality
as that of Dell's other products. Upon BROCADE's written request, Dell shall
supply BROCADE with specimens of any requested materials bearing the Marks. If
BROCADE reasonably determines that any materials bearing the Marks fail to
conform to such quality standards, BROCADE shall promptly so notify Dell and
Dell and BROCADE shall mutually agree upon a plan of corrective action. Dell
acknowledges that BROCADE is the sole and exclusive owner of the Marks, and Dell
agrees that it will do nothing inconsistent with such ownership, either during
the term of this Agreement or afterwards. Dell's use of the Marks shall inure to
the benefit of and be on behalf of BROCADE. Upon termination or expiration of
this Agreement for any reason, Dell immediately will cease use of the Marks,
except as necessary (i) to distribute and service remaining Products as provided
for under this Agreement, or (ii) for Dell to exercise the rights granted in
Section 16 of this Agreement.
8.0 Product Withdrawal
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<PAGE> 7
8.1 Except for the transition from the SilkWorm(TM) Express Product to [*]
BROCADE will provide Dell with at least one hundred and eighty (180) days prior
written notice for all Products prior to the last date of manufacture of a
Product; PO(s) may be placed up to [*] prior to such last date of manufacture.
For the transition from the SilkWorm(TM) Express Product to [*] BROCADE will
provide Dell with at least [*] prior written notice prior to the last date of
manufacture of the SilkWorm(TM) Express Product; PO(s) may be placed up to [*]
prior to such last date of manufacture. For purposes of this Section 8.1, the
"Rescheduling In" provisions at Section 6.1 shall not apply in the final [*] of
the written notice period. However, BROCADE agrees to use commercially
reasonable efforts to support any Dell upside requirements during this period.
Subject to Product availability, BROCADE will accept Dell PO(s) for Products to
be withdrawn [*] Dell agrees to use commercially reasonable efforts to qualify
and release the [*].
8.2 Spare parts and repair capability for the Products shall be retained by
BROCADE for [*] from the last date of manufacture. If spares or
repairs are not available during such [*] period, BROCADE will use
best commercial efforts to provide similar product with equivalent or better
functionality. BROCADE shall allow Dell to make a final last time spares buy in
order to provide support for such Products. [*]
9.0 Warranties
9.1 BROCADE represents and warrants on an ongoing basis that:
(a) Dell will acquire good and marketable title to the Products, and that all
Products will be free and clear of all liens, claims, encumbrances and
other restrictions;
(b) all Products will be new and unused unless Dell requests Refurbished
Products in writing. If Dell requests Refurbished Products, the Refurbished
Products will be provided to Dell clearly marked as such ("Refurbished
Products" shall mean Products that contain used or repaired parts);
(c) all Products will be [*] and will conform to BROCADE'S Product
specifications (attached as Schedule H) and specifications provided by Dell
attached as Schedules D (packaging), E (labeling) and F (barcode labeling),
: (i) for a period of [*] from the date of delivery to Dell for the Gigabit
Interface Converter components ("GBICs") of Products, or as extended
thereafter in accordance with BROCADE's warranty terms with any qualified
supplier of GBICs, and (ii) for a period of [*] from the date of delivery
to Dell for all other Products and components. [*] BROCADE agrees to use
first-in first-out (FIFO) method for finished goods. The foregoing
warranties do not cover BROCADE Products that were subjected to misuse,
abuse, improper repair, or unusual physical or electrical stress;
(d) it has all the necessary rights and licenses in the Products necessary to
allow Dell to distribute and resell Products without restriction or
additional charge;
(e) the Products shall be able to accurately process date data (including, but
not limited to, calculating, comparing, and sequencing) between the
twentieth and twenty-first centuries; and
(f) BROCADE's own internal systems including, but not limited to, manufacturing
systems shall be able to accurately process date data (including, but not
limited to, calculating, comparing, and sequencing) between the twentieth
and twenty-first centuries.
9.2 If Dell determines that any Product unit does not conform to the foregoing
warranties ("Non-complying Product"), BROCADE will provide, within [*] of
receipt of Non-complying Product, (i) an initial failure analysis of the
Non-complying Brocade manufactured Product, and/or (ii) failure verification of
a GBIC product. For line rejects or failures identified by Dell at its
distribution centers or manufacturing locations, Dell [*] of the Non-complying
Products. [*] shall be applied no later than [*] after Dell's notice of
noncompliance, and will take [*] from Dell or the BROCADE RMA. For Non-complying
Product which has been sent to a customer, BROCADE shall (at Dell's sole option)
either (a) repair or replace such Product with new or Refurbished Product within
[*]
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following receipt by BROCADE for return to Dell for service spares, or (b) [*]
of the Non-complying Products [*]. In the event Dell requests the return of
repaired or reworked Products, BROCADE shall ensure that such Products are
clearly marked as repaired or reworked, and separated from new Product. In order
to facilitate the return of such Non-complying Products, BROCADE will issue
Return Material Authorizations ("RMAs") in [*] for each Dell manufacturing
facility. When a manufacturing facility has [*] BROCADE will issue [*] of Dell's
request (limited to business days). In addition to BROCADE'S obligation to
conduct an initial failure analysis, BROCADE agrees to [*]. BROCADE also agrees
to provide a failure analysis of the defective Product unit to the component
level within [*] of receipt of the Product unit, with a goal of providing such
component level analysis within [*]. Non-complying Products may be returned to
BROCADE by Dell or Dell's service partners. If the parties determine that there
are excessive No Trouble Found returns from Dell's service partners, Dell and
BROCADE agree to address this issue.
9.3 Dell agrees to use commercially reasonable efforts to verify field failures
before returning Non-complying Product to BROCADE for repair or replacement. The
parties will work together to ensure that Dell and its service providers have
the tools and expertise required to investigate and troubleshoot failures in the
field. In the event that BROCADE has reasonable cause to believe that Dell's
verification process has allowed an excessive number of No Trouble Found ("NTF")
Products to be returned to BROCADE, then BROCADE shall contact Dell and Dell
agrees to examine its process and shall work to reduce NTF Products. BROCADE
shall notify Dell in the event that NTF returns exceed [*] of all Product(s)
purchased by Dell within [*] and provide Dell with copies of all test reports
and documentation related to BROCADE's testing of such Product(s). Dell shall
have [*] from the date such notice and documentation is provided to Dell to
examine test reports and documentation related to NTF returns and to cure any
such excessive NTF returns. Dell agrees to pay all undisputed NTF charges as set
out in Schedule A for subsequent NTF rates exceeding [*] over a given [*]
period. Disputed NTF charges shall be submitted to the dispute resolution
procedures as stated in Section 19.1.
9.4 All Non-complying Products returned by Dell to BROCADE will be shipped at
BROCADE'S risk and expense including packing and freight charges to and from
BROCADE. Non-complying Product will be returned by Dell in appropriate packaging
to protect the Product.
9.5 [*]
9.5.1 [*] is defined as: (1) a [*] requiring the dispatch of (a) any
BROCADE-supplied switch assembly (less GBICs) at a rate of [*] or greater of new
[*] during the [*] days after [*]; or (b) any FRU (field replaceable unit) other
than the switch assembly at a rate of either [*] or greater of new [*] during
the [*] days after [*] or (2) a Product [*] equal to or [*] of BROCADE's [*]
occurring during any [*] period of Dell's in-warranty installed base. For any of
the above, isolated occurrences [*] will not constitute a [*] but will be
evaluated and addressed mutually by BROCADE and Dell. If a [*] is declared
pursuant to this section, BROCADE agrees to [*] consumed field service spares
within [*] of [*] report. The foregoing shall not apply to [*] attributable to
GBICs; provided, however, that BROCADE agrees to use all reasonable efforts to
work with its GBIC supplier(s) to determine the cause of [*] which trigger the
terms of this Section 9.5.1. and to agree on a plan of [*] therefor. BROCADE's
compliance with the obligations imposed under the foregoing sentence shall
constitute a material term of this Agreement.
9.5.2. {*] may be identified by Dell, Dell's designated service provider, or
BROCADE's test procedures or may appear as customer-reported [*]. BROCADE and
Dell will promptly and cooperatively attempt to determine [*] of the [*] and
[*]. If [*] is determined, then BROCADE and Dell will cooperate in good faith
on a [*].
9.5.3. In the event of a [*] Dell may [*] Products without [*] until [*] is
determined. If the [*] is due to confirmed (by Dell or BROCADE) Product or FRU
[*] during Dell's warranty, BROCADE shall [*] all related material,
transportation and field replacement labor [*] associated with [*] including, as
applicable, Product [*]. BROCADE shall render
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<PAGE> 9
rework and/or replacement services equivalent to services described herein for
Dell's in-warranty product, [*].
9.6 During the term of this Agreement, any repair and reconditioning of any
product not covered by warranty shall be subject to BROCADE's then-standard out
of warranty prices, terms, and conditions as set forth in Schedule A.
9.7 THE FOREGOING WARRANTIES, TERMS OR CONDITIONS ARE EXCLUSIVE AND ARE IN LIEU
OF ALL OTHER WARRANTIES, TERMS OR CONDITIONS, EXPRESS OR IMPLIED, EITHER IN FACT
OR BY OPERATION OF LAW, STATUTORY OR OTHERWISE, INCLUDING WARRANTIES OF
MERCHANTABILITY, NONINFRINGEMENT, AND FITNESS FOR A PARTICULAR PURPOSE.
10.0 Indemnification
10.1 BROCADE agrees to defend, indemnify and hold harmless Dell, DCC, DCC's
subsidiaries or Affiliates and their respective directors, officers, employees,
agents, customers and distributors from and against any and all claims, actions,
demands, legal proceedings, liabilities, damages, losses, judgments, authorized
settlements, costs and expenses, including, without limitation, reasonable
attorney's fees, arising out of or in connection with any claims or actions by
third parties alleging:
(i) infringement by BROCADE and/or Product(s) of a copyright, patent, trademark,
trade secret or other intellectual property right of any third party;
(ii) that a Product provided under this Agreement has caused bodily injury
(including death) or has damaged real or tangible personal property;
(iii) a cause of action arising out of or relating to BROCADE'S provision of
repaired Products that contain used or refurbished parts that are not clearly
and conspicuously labeled as such;
(iv) a cause of action based on any violation by BROCADE of any governmental
laws, rules, ordinances or regulations; and/or
(v) a cause of action by or on behalf of BROCADE'S subcontractors, materialmen,
suppliers, employees or agents.
"Affiliate" means, with respect to any party, any other party that, directly or
indirectly controls or is controlled by or is under common control with such
party. For purposes of this definition, "control" shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of
management or policies of such party, whether through the ownership of voting
securities or by contract or agency or such similar arrangement.
10.2 In the event of any such claims, BROCADE's indemnity option is contingent
upon Dell's obligation to: (1) promptly notify BROCADE, (2) cooperate with
BROCADE in the defense thereof, and (3) not settle any such claims without
BROCADE'S prior written consent, which BROCADE shall not unreasonably withhold
unless such settlement could expose BROCADE to additional liability to Dell or
third parties or otherwise adversely affect the operation of BROCADE's business.
10.3 In addition to BROCADE'S obligations and liabilities above, if an
infringement claim is made or appears likely to be made about a Product, BROCADE
shall, at BROCADE's option, either procure for Dell the right to continue to
market the Product, modify the Product so that it is no longer infringing or
replace it with a non-infringing Product. If the parties determine that none of
these alternatives is commercially reasonable, Dell will return any Products in
inventory freight collect to BROCADE's designated location for a credit or
refund of the purchase price.
10.4 THE FOREGOING PROVISIONS OF THIS SECTION 10.0 STATE DELL'S SOLE AND
EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT BY THE PRODUCTS OF ANY THIRD PARTY
PROPRIETARY RIGHTS OF ANY KIND.
11.0 Liability
EXCEPT FOR BROCADE'S OBLIGATIONS AND LIABILITIES UNDER SECTION 10.0
("INDEMNIFICATION"), OR BREACH BY EITHER PARTY OF CONFIDENTIALITY UNDER THE NDA,
NEITHER PARTY SHALL BE LIABLE FOR ANY LOST PROFITS, LOST SAVINGS OR ANY OTHER
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<PAGE> 10
INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON A
BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCTS LIABILITY OR
OTHERWISE, UNDER ANY PART OF THIS AGREEMENT EVEN IF ADVISED OR AWARE OF THE
POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR BROCADE'S OBLIGATIONS AND LIABILITIES
UNDER SECTION 10.0 ("INDEMNIFICATION") OR BREACH OF CONFIDENTIALITY UNDER THE
NDA, EITHER PARTY'S TOTAL LIABILITY TO THE OTHER UNDER THIS AGREEMENT FROM ALL
CAUSES OF ACTION OF ANY KIND WILL BE LIMITED TO THE GREATER OF [*] BY DELL TO
BROCADE PRIOR TO THE DATE SUCH CAUSE OF ACTION ACCRUED. IN THE EVENT BROCADE
UNDERGOES A CHANGE OF CONTROL (AS DESCRIBED IN SECTION (15), BROCADE'S TOTAL
LIABILITY LIMIT SHALL BE INCREASED TO THE GREATER OF [*] BY DELL TO BROCADE
PRIOR TO THE DATE SUCH CAUSE OF ACTION ACCRUED.
12.0 Quality, Product Safety, Regulatory Compliance and Engineering Changes
12.1 [*] BROCADE agrees to meet or exceed the quality requirements set forth
herein and in the applicable Schedule (the "Quality Goals"), except with respect
to GBICs. If BROCADE fails to achieve the Quality Goals, BROCADE shall promptly
put into place a corrective action plan to be agreed upon with Dell to bring
quality performance back in line with the Quality Goals. In the event that
BROCADE fails to meet the Quality Goals, after written notice to BROCADE with a
[*] cure period, Dell may cancel any outstanding orders without penalty,
notwithstanding any other provision in this Agreement. If BROCADE fails to meet
the Quality Goals due to BROCADE fault, then BROCADE and Dell will agree [*]
relating to repair or replacement for Product outside of such Quality Goals;
provided however that nothing in this Section shall in any way derogate the
warranty provision at Section 9 or the [*] at Section 9.5. With respect to
GBICs, in the event of a non-compliance with the Quality Goals, BROCADE agrees
to use all reasonable efforts to work with its GBIC supplier(s) to determine the
cause of such non-compliance under the terms of this Section 12.1 and to agree
on a plan of corrective action therefor. [*].
12.2 In the event either BROCADE or Dell becomes aware of any information which
reasonably supports a conclusion that a hazard may exist in any Product and the
defect could cause death or bodily injury to any person or property damage (a
"Hazard"), the party becoming aware of this information shall notify the other
of the Hazard. Whenever possible, notification to the other party shall precede
notice to any governmental agency, unless required by law. BROCADE and Dell
shall promptly exchange all relevant data and then, if practical, as promptly as
possible, meet to review and discuss the information, tests, and conclusions
relating to the alleged Hazard. At this meeting the parties shall discuss the
bases for any action, including a recall, and the origin or causation of the
alleged Hazard. [*] Each party shall, on request, provide to the other
reasonable assistance in (i) determining how best to deal with the Hazard; and
(ii) preparing for and making any presentation before any governmental agency
which may have jurisdiction over Hazards involving Products.
12.3 BROCADE is responsible for obtaining and maintaining all U.S. and foreign
regulatory approvals for the Product(s), as specified by Dell in Schedule G and
as required for BROCADE's standard products. Additionally, BROCADE will assist
Dell in addressing problems with its Products that contribute to a Dell system's
failure to meet any regulatory requirement due to BROCADE Products being
integrated into the Dell system.
12.4 Engineering Changes
12.4.1 BROCADE agrees to notify Dell of all Product changes. BROCADE shall
provide [*] notice of changes that affect the Product's (including Software or
drivers) form, fit or function to allow Dell to evaluate such changes. Dell
shall respond to such proposed changes within [*] of receiving notice from
BROCADE. In the event that Dell fails to respond within such period, BROCADE
should use commercially reasonable efforts to contact appropriate
representatives at Dell to determine Dell's response and otherwise may deem such
changes to be accepted by Dell. Notwithstanding the foregoing, any changes that
materially affect the Products (including Software or drivers) form, fit or
function require Dell's written consent in the form of an agreed to Engineering
Change Order ("ECO").
12.4.2 BROCADE may issue notice of "Mandatory Changes," which are changes
required to satisfy governmental standards, for safety, or to guarantee
continuity of supply. BROCADE will make all commercially reasonable
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<PAGE> 11
efforts to provide Dell with [*] prior written notice of Mandatory
Changes prior to implementing such changes, and will notify Dell not more than
[*] after BROCADE becomes aware of the need to make a
proposed change (with the exception of potential safety and hazard issues which
require immediate notification). [*]
13.0 Compliance
13.1 Since Dell transacts business with the United States government,
BROCADE must comply with applicable laws and Federal Acquisition
Regulations ("FAR") clauses. BROCADE therefore represents and warrants
that it will comply with the following FAR clauses, and other
provisions of the Code of Federal Regulations, as applicable, which
are hereby incorporated by reference into this Agreement:
(1) FAR 52.222-26 "Equal Opportunity" (except for subparagraph (c))
(2) FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam
Era Veterans"
(3) FAR 52.222-26 "Affirmative Action for Handicapped Workers"
(4) FAR 52.219-8 "Utilization of Small, Small Disadvantaged and
Women-Owned Small Business Concerns"
(5) 40 C.F.R. Section 60-1.4(a) "Equal Opportunity Clause'
(6) 40 C.F.R. Section 60-1.7 "Reports and other Required Information"
(7) 40 C.F.R. Section 60-1.40 "Affirmative Action Compliance Program"
In addition, BROCADE represents and warrants that it will comply with all
applicable requirements of 33 U.S.C. Section 1251 "Federal Water Pollution
Control Act" and 42 U.S.C. Section 7401 "Clean Air Act". BROCADE represents and
warrants that none of the items listed in paragraph (a) of FAR 52.209-5
"Certificate Regarding Debarment, Suspension, Proposed Debarment and Other
Responsibility Matters" exist with respect to BROCADE or any of BROCADE's
"principals" as that term is defined by FAR 52.209-5. BROCADE further represents
and warrants that it will comply with the prohibition on the use of convict
labor as set forth in FAR 52.222-3 "Convict Labor."
In the event that Dell licenses any Software to the U.S. Government, Dell shall
identify such Software to the Government as "commercial computer software"
developed exclusively at private expense, and, in accordance with FAR Section
12.212 or Defense FAR Supplement Section 227.7202, as applicable, Dell shall
license the Software to the Government in accordance with the terms of the End
User license attached as Schedule I ("Software License Agreement").
13.2 The parties, at their expense, will comply with all applicable laws, orders
and regulations of any governmental authority with jurisdiction over their
activities in connection with this Agreement and will furnish to each other any
information required to enable a party to comply with applicable laws related to
the Products.
13.3 In the event that Dell licenses any Software to the U.S. Government, Dell
shall identify such Software to the Government as "commercial computer software"
developed exclusively at private expense, and, in accordance with FAR Section
12.212 or Defense FAR Supplement Section 227.7202, as applicable, Dell shall
license the Software to the Government in accordance with the terms of the End
User license attached as Schedule I ("Software License Agreement").
14.0 Import/Export Requirements
14.1 BROCADE will certify to, and mark Products and packaging with, the country
of origin for each Product so as to satisfy the requirements of customs
authorities of the country of receipt and any other applicable laws. If any
Products are imported, Dell will be the importer of record. BROCADE and Dell
shall comply with all import and export laws and regulations and maintain
appropriate import and export documentation. At Dell's request, BROCADE shall
make available for inspection and audit all import and export documentation for
Product(s) sold under this Agreement. At Dell's request, BROCADE shall also
provide an appropriate Export Control Classification Number ("ECCN") for all
Product(s) sold hereunder.
14.2 BROCADE shall not, directly or indirectly, export, re-export or tranship
Products in violation of any applicable U.S. export control laws and regulations
or any other applicable export control laws promulgated and administered by the
government of any country having jurisdiction over the parties or the
transactions contemplated herein.
15.0 Assignment and Merger
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Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
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<PAGE> 12
[*] either party may assign this Agreement to a successor entity in the event of
a Change of Control. A 'Change of Control' shall mean any of the following
events: (i) the direct or indirect sale or exchange of all or substantially all
of the stock of a corporation (or partnership interests of a partnership) where
the stockholders of such corporation (or partners of such partnership) before
such sale or exchange do not retain, directly or indirectly, at least a majority
of the beneficial interest in the voting stock or other interest of the
successor entity; (ii) a merger in which the shareholders or partners of a
corporation or partnership before the merger do not retain, directly or
indirectly, at least a majority of the beneficial interest in the voting stock
or other interest of the successor entity; or (iii) the sale, exchange, or
transfer of all or substantially all of a corporation's or partnership's assets
(other than a sale, exchange, or transfer to one or more entities where the
shareholders of the corporation or partners of the partnership before such sale,
exchange or transfer retain, directly or indirectly, at least a majority of the
beneficial interest in the voting interests in the entity to which the assets
were transferred). Subject to this Section 15.0, this Agreement will bind and
inure to the benefit of the parties and their respective successors and
permitted assigns.
16.0 Right to [*]
16.1 Upon the occurrence of a [*] (as set forth in Section 16.2 of this
Agreement), BROCADE hereby grants Dell the [*] the then-current Products being
purchased by Dell at the time of the [*] (including the "Cocoon, Jr." (SilkWorm
2400) Product) [*] from BROCADE's [*] for the remainder of the then-current
term of this Agreement (or in the event of a termination of the Agreement under
Section 2.0 by Dell for material breach by BROCADE, the remainder of the
then-current term assuming no termination had occurred) and [*] as provided for
in this Agreement. In addition, upon the occurrence of a [*] and Dell's written
notice to BROCADE that Dell intends to [*] Product(s) [*] from BROCADE's [*]
BROCADE shall immediately provide notice to BROCADE's [*] allowing such [*] to
[*] to Dell under the terms of this Section 16.0. Within [*] after the date of
this Agreement with respect to [*] and prior to contracting with any new or
additional [*] for Products, BROCADE shall enter into a written agreement with
any such [*] that will [*] to such [*] necessary to effectuate the intent of
this Section 16.0. In the event that BROCADE fails to do so, the parties
expressly agree that Dell may provide a copy of this Agreement to any such [*]
and such [*] shall be entitled to rely on this Section 16.0 as representing
BROCADE's [*] of Products [*] to Dell without the [*] of any further [*] by
BROCADE. BROCADE shall consult with Dell prior to contracting with a new or
additional [*] for Products. In addition, BROCADE shall give Dell at least [*]
prior written notice if BROCADE plans to begin [*] any Product(s) itself rather
than using a [*] so that the parties may review whether to modify Dell's rights
under this Section 16.
16.2 For purposes of this Section 16.0, a [*] shall mean any one or more of the
following circumstances:
(a) BROCADE notifies Dell of its intention to [*] sale or support of the
applicable Product without providing Dell the notice required by this Agreement,
(b) BROCADE is insolvent or has a petition brought by or against it under
the insolvency laws of any jurisdiction; if BROCADE makes an assignment for the
benefit of creditors; or if a receiver, trustee or similar agent is appointed
with respect to any property or business of BROCADE,
(c) any material breach by BROCADE of the terms of this Agreement which is
not cured by BROCADE within [*] after receipt of written notice of such
default, or
(d) a [*] occurs with respect to BROCADE. For example, a [*] shall
include, but not be limited to, an event whereby BROCADE directly or indirectly
[*]
(i) [*]
(ii) any [*] or [*] that generates its sales predominantly through
sales to end users; or
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
13 of 16
<PAGE> 13
(iii) any [*] or [*] that has an expressed strategy to attach its [*]
products to Dell [*] or
(iv) any entity that has expressed an intent to exit the original equipment
manufacturer (OEM) [*] business.
17.0 Capacity Constraints
On a quarterly basis, or as requested by Dell, BROCADE agrees to provide ramping
and capacity plans ("Capacity Plan") to Dell (in a format acceptable to Dell) to
ensure continuity of supply. This Capacity Plan shall include percent available
capacity and utilization. In the event that BROCADE's total manufacturing
production exceeds [*] of available capacity, BROCADE agrees to put in place the
additional manufacturing capacity required to achieve and maintain a [*]
manufacturing upside capability to the current Dell forecast [*].
18.0 New Products
18.1 During the term of this Agreement, BROCADE agrees to offer to sell to Dell
all standard products developed, manufactured, distributed or sold by BROCADE to
(or for) any other customer. If Dell agrees to purchase such products, such sale
will be pursuant to the terms and conditions of this Agreement (to the extent
that such products are similar to products covered by this Agreement). [*] In
the event BROCADE and Dell co-develop a product, a separate contract addendum is
required, specifying points of ownership and limitations to distribution.
18.2 Prior to offering for sale any new Standard Product, BROCADE will [*]
consult with Dell and allow Dell to place Dell PO(s) for such new Standard
Product [*]. Prior to the addition of a new Standard Product to a Schedule, the
parties will mutually agree on a new product program schedule which will include
the appointment of business and technical contacts for each party to monitor
compatibility issues and product release issues with Dell systems. BROCADE
agrees that Dell will receive [*] of all new products that are added to this
Agreement pursuant to BROCADE'S standard [*]. As used herein, "Standard Product"
shall mean and include all products of BROCADE which are being developed or have
been developed for the purpose of distributing and selling such products to
customers except those products for which NRE funds, technology, or other
development contributions are made by a third party for the specific purpose of
developing such product.
18.3 Prior to the general availability of Dell's systems containing any new
BROCADE product, BROCADE shall provide mutually agreed upon training to Dell for
sales, customer support and technical support at prices as stated in Schedule A.
18.4 BROCADE agrees to include Dell systems as mutually agreed in test and
development for all applicable new products. Dell will be consulted and given
the opportunity to provide input in all hardware and software technology
roadmaps for all applicable new products.
18.5 Except for SilkWorm(TM) Express, BROCADE shall provide to Dell the
applicable manufacturing, customer, and field diagnostics for Dell's testing and
evaluation at least [*] prior to Dell's shipment of a new Product.
For SilkWorm(TM) Express, BROCADE shall provide such information to Dell as soon
as possible.
19.0 General
19.1 In the event a dispute or claim between the parties on any matter is not
resolved by the parties within [*] of an initial notice from either party to the
other party regarding the dispute, the dispute or claim shall be escalated first
to the OEM Business Manager of Dell ESG Storage and the Director of OEM Sales of
BROCADE. If these individuals are unable to resolve the dispute or claim within
[*] of such escalation, resolution of the dispute or claim shall be escalated to
the Director of OEM Business of Dell ESG Storage and the Vice President of
Worldwide Sales of BROCADE, who shall have [*] to resolve such dispute or claim
before action is brought by either party. Either party may initiate the
escalation procedure of this Section by written notice to the other party which
notice shall be without prejudice to the invoking party's rights to any other
remedy permitted hereunder. The parties will use commercially reasonable efforts
to arrange meetings or telephone conferences, as needed, at mutually convenient
times and places, to facilitate negotiations between the parties. Unless
otherwise
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
14 of 16
<PAGE> 14
agreed in writing, the parties shall be required to invoke the escalation
procedures of this Section prior to the initiation of a lawsuit against the
other party relating to this Agreement, except if the rights of such party would
be materially prejudiced by delay in the filing of such lawsuit.
19.2 Nothing in this Agreement shall prevent Dell, DCC or any of DCC's
Affiliates or subsidiaries from purchasing or obtaining products similar to the
Products from any other supplier, including competitors of BROCADE.
19.3 The provisions of Sections 7.2.4, 8.0 "Product Withdrawal", 9.0
"Warranties", 10.0 "Indemnification", 11.0 "Liability", 12.2, and 12.3, 16.0
[*] "New Products" and 19.0 General", shall survive any termination or
expiration of this Agreement and shall continue to bind the parties and their
permitted successors and assigns.
19.4 Except as expressly permitted herein, neither party will use the name of
the other or quote the opinion of any employee of the other in any advertising
or otherwise without first obtaining the prior written consent of the other;
such consent shall not be unreasonably withheld.
19.5 Any confidential information that will be disclosed by either party related
to this Agreement shall be disclosed pursuant to the terms and conditions of the
98060301 Non-disclosure Agreement between the parties. The terms and conditions
of this Agreement shall be deemed to be confidential information.
Notwithstanding the terms of the Non-disclosure Agreement, (i) BROCADE agrees
that Dell may provide information related to BROCADE'S technology roadmaps to
certain Dell customers provided such Dell customers have executed a
non-disclosure agreement with Dell that requires the customer not to disclose
the information to a third party, and (ii) Dell agrees that BROCADE may disclose
information relating to this Agreement, including without limitation, a copy of
this Agreement (which has had the pricing and other strategic terms redacted) to
third parties as required by law or as is necessary to comply with disclosure
requirements of the Securities Exchange Commission. BROCADE shall use reasonable
efforts to protect the confidentiality of specific information before public
disclosures under subsection (ii) are made, including making appropriate
redactions to any information provided. BROCADE agrees to provide Dell with
reasonable advance notice of any such disclosure and to confer with Dell in good
faith regarding the scope of such disclosure.
19.6 BROCADE will maintain accurate and legible records and will grant to Dell
reasonable access to and copies of, any information reasonably requested by Dell
with respect to BROCADE'S performance under this Agreement (including quality
programs and test documentation). BROCADE'S obligation to maintain records under
this provision is limited to BROCADE'S maintaining records in accordance with
BROCADE'S normal course of business. This provision does not impose any
obligation on BROCADE to institute new or different document retention
procedures. BROCADE represents that it is BROCADE'S standard practice to
maintain its records for a period of [*]. Dell may send a representative in its
place with BROCADE'S consent and BROCADE agrees not to unreasonably withhold
such consent.
19.7 Except as may be otherwise provided in this Agreement, the rights or
remedies of the parties hereunder are not exclusive, and either party shall be
entitled alternatively or cumulatively, subject to the other provisions of this
Agreement, and as allowed by the applicable laws governing this Agreement, to
any other remedy available at law or in equity.
19.8 Neither party is an agent or employee of the other or has any authority to
assume or create any obligation or liability of any kind on behalf of the other.
19.9 No waiver of any term or condition is valid unless in writing and signed by
authorized representatives of both parties, and will be limited to the specific
situation for which it is given. No amendment or modification to this Agreement
shall be valid unless set forth in writing and signed by authorized
representatives of both parties. No other action or failure to act (including
inspection, failure to inspect, acceptance of late deliveries, or acceptance of
or payment for any Products) will constitute a waiver of any rights.
19.10 This agreement will be governed by the laws of the state of Texas, U.S.A.
The parties expressly disclaim the applicability of the United Nations
Convention on the International Sale of Goods. Any cause of action brought by
BROCADE against Dell under this Agreement shall be filed by BROCADE in and
submitted to the jurisdiction of a federal or state court in Travis County,
Texas. Any cause of action brought by Dell against BROCADE under this Agreement
shall be filed by Dell in and submitted to the jurisdiction of a federal or
state court in Santa Clara, California.
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
15 of 16
<PAGE> 15
19.11 Any notice required or permitted by this Agreement shall be in writing and
delivered by certified or registered mail, return receipt requested, postage
prepaid and addressed as follows or to such other addresses as may be designated
by notice from one party to the other, all such notices being effective on the
date received or, if mailed as set above, three (3) days after the date of
mailing:
If to Dell:
Dell Products L.P.
One Dell Way
Round Rock, Texas 78682
Attention: Vice President, Worldwide Procurement
cc: General Counsel
If to BROCADE:
BROCADE Communications Systems, Inc.
1901 Guadalupe Parkway
San Jose, California 95131
Attention: Chief Financial Officer
19.12 Whenever possible, each provision of this Agreement will be interpreted in
such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement is found to violate a law, it will be severed from
the rest of the Agreement and ignored and a new provision deemed added to this
Agreement to accomplish to the extent possible, the intent of the parties as
evidenced by the provision so severed. The term "including" means "including
without limitation." The headings used in this Agreement have no legal effect.
19.13 Neither party will be liable for any delay in performing under this
Agreement to the extent such delay is caused by government action, inclement
weather, fire, explosion, floods, riots, civil disturbance, earthquakes, other
natural disasters or other similar reasons where failure to perform is beyond
the control and not caused by the negligence of the non-performing party. Such
delay, however, shall only be excused for the period during which such condition
continues.
19.14 Dell does not guarantee that its marketing, if any, of the Product(s) will
be successful. There is no minimum purchase obligation under this Agreement.
Dell may distribute/sell the Products on a standalone basis or in conjunction
with a system sale or lease.
19.15 This Agreement, its attached Schedules and Specifications set forth the
entire agreement and understanding of the parties relating to the subject matter
contained herein, and merges all prior discussions and agreements, both oral and
written, between the parties. Each party agrees that use of pre-printed forms,
such as purchase orders or acknowledgments, is for convenience only and all
terms and conditions stated thereon, except for information requested or allowed
by this Agreement, are void and of no effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives as of the day and year first written
herein.
BROCADE: DELL:
By: /s/ GREG REYES By: /s/ MICHAEL LAMBERT
-------------------------------- ---------------------------------
Greg Reyes Michael Lambert
Title: President and CEO Title: Senior Vice President,
Systems Group Enterprise
Date: 1-17-99 Date: 12/18/98
----------------------------- -------------------------------
16 of 16
<PAGE> 16
SCHEDULE A TO AGREEMENT NUMBER BRO-001
PRODUCT DESCRIPTION AND PRICING
<PAGE> 17
SCHEDULE A TO AGREEMENT NO. BRO-001
REV. 12.9.1.
Product Description and Pricing
<TABLE>
<CAPTION>
PRODUCT BROCADE PART NUMBER DELL PART NUMBER DESCRIPTION PRICE
- ------- ------------------- ---------------- ----------- -----
<S> <C> <C> <C> <C>
1. SilkWorm Express DL-0880-0002 5829D-X00-01 6FL port, 2G port, 4 SWL GBIC, ICu GBIC with Web
Tools and Zoning enabled [*]
2. SilkWorm Express DL-0880-0003 7829D-X00-01 6FL port, 2G port, 5 Cu GBIC with Web Tools and
Zoning enabled [*]
3. SilkWorm Express-FRU DL-0880-0004 6410P-X00-00 6FL port, 2G port, O GBIC with Web Tools and Zoning
enabled [*]
4. Cu GBIC - FRU DL-1017 TBD 1 Cu GBIC, 1 extraction tool, single pack [*]
5. SWL GBIC - FRU DL-1006 TBD 1 SWL Optical GBIC, 1 extraction tool, single pack [*]
6. FL Port Card - FRU X1015-04 TBD FL Port Card, O GBIC, single pack [*]
7. G Port Card - FRU X1003-03 TBD G Port Card, O GBIC, single pack [*]
8. Cu GBIC - FRU TBD TBD 4 Cu GBIC, 1 extraction tool, four pack [*]
9. SWL GBIC - FRU TBD TBD 4 SWL Optical GBIC, 1 extraction tool, four pack [*]
[*] TBD TBD TBD
[*]
</TABLE>
OUT OF WARRANTY REPAIR:
- -----------------------
FL Port Card [*]
G Port Card [*]
SilkWorm Express-less GBIC [*]
1. CPU Board [*]
2. Mother board [*]
3. Enclosure/power supply [*]
4. Hourly rate [*] (subject to change based on current standard
rates) [*]
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
<PAGE> 18
CHARGES FOR EXCESSIVE UNDISPUTED NTF (NO-TROUBLE-FOUND) RETURNS:
[*] per switch (8 hours testing [*]) if Brocade returns
retested Product to Dell. If Dell returns NTF Product for credit, the NTF charge
will be [*] plus the difference between the then-current price of a switch
(credit return) and the price of the switch FRU (without GBICs).
WARRANTY ADVANCE EXCHANGE PRICE:
[*] (return unit must be received by Brocade within [*]
PRODUCT LEADTIME:
Leadtime for Product, including FRUs is [*] ARO, if forecasted, [*]
without forecast.
[*]
NOTE:
Pricing to be reviewed by the parties on at least a [*] basis. This
Schedule will be revised accordingly to reflect current pricing, products and/or
services offered.
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 19
SCHEDULE A.1
[*]
<TABLE>
<CAPTION>
Per Unit
# OF PALLETS # of Units [*] [*] [*] [*] [*] [*] Total cost
- ------------ ---------- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 16 [*] [*] [*] [*] [*] [*] [*] [*]
2 32 [*] [*] [*] [*] [*] [*] [*] [*]
3 48 [*] [*] [*] [*] [*] [*] [*] [*]
4 64 [*] [*] [*] [*] [*] [*] [*] [*]
5 80 [*] [*] [*] [*] [*] [*] [*] [*]
6 96 [*] [*] [*] [*] [*] [*] [*] [*]
7 112 [*] [*] [*] [*] [*] [*] [*] [*]
8 128 [*] [*] [*] [*] [*] [*] [*] [*]
9 144 [*] [*] [*] [*] [*] [*] [*] [*]
10 160 [*] [*] [*] [*] [*] [*] [*] [*]
11 176 [*] [*] [*] [*] [*] [*] [*] [*]
12 192 [*] [*] [*] [*] [*] [*] [*] [*]
13 208 [*] [*] [*] [*] [*] [*] [*] [*]
14 224 [*] [*] [*] [*] [*] [*] [*] [*]
15 240 [*] [*] [*] [*] [*] [*] [*] [*]
</TABLE>
[*]
DEFINITIONS:
[*]
[*]
[*]
[*]
*Certain information on this page has been omitted and filed
separately with the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the
omitted portions.
3
<PAGE> 20
IN WITNESS WHEREOF, the parties hereto have caused this Schedule A to be
executed by their duly authorized representatives as of the day and year first
written herein.
BROCADE: DELL:
BROCADE: DELL:
By: /s/ GREG REYES By: /s/ MICHAEL LAMBERT
-------------------------------- ---------------------------------
(Authorized Signature) (Authorized Signature)
Title: President and CEO Title: Senior Vice President,
Systems Group Enterprise
Date: 1-17-99 Date: 12/18/98
----------------------------- -------------------------------
<PAGE> 21
SCHEDULE B TO AGREEMENT NUMBER BRO-001
FIBRE CHANNEL SWITCH PRODUCT QUALITY PLAN
<PAGE> 22
DELL
FC SWITCH
PRODUCT
QUALITY PLAN
Revision 0.2
Prepared by
Tim Killworth
11/11/98
TABLE OF CONTENTS
1
<PAGE> 23
<TABLE>
<S> <C> <C>
1.0 FC SWITCH QUALITY PLAN REVISION HISTORY ........................... 4
2.0 REVIEW AND SIGNATURES.............................................. 4
Area .............................................................. 4
3.0 INTRODUCTION ...................................................... 4
4.0 QUALITY GOALS FY99 ................................................ 5
5.0 APPLICABLE DOCUMENTS AND AMENDMENTS ............................... 5
6.0 QUALITY PROGRAM MANAGEMENT ........................................ 5
6.1 Organization ............................................... 5
6.2 Quality Planning ........................................... 5
6.2.1 Design .............................................. 5
6.2.1.1 Development ................................ 5
6.2.1.2 Prototype .................................. 5
6.2.2 Production .......................................... 6
6.2.2.1 Eval Test .................................. 6
6.2.2.2 Pilot ...................................... 6
6.2.2.3 Launch ..................................... 6
6.3 Metric Goals and Analysis .................................. 6
6.4 Training/Certifications .................................... 6
7.0 CONTROL OF PURCHASES .............................................. 6
7.1 Procurement Control ........................................ 6
7.1.1 General Comments .................................... 6
7.1.2 Development ......................................... 6
7.1.3 Prototype ........................................... 7
7.2 Approved Suppliers ......................................... 7
7.3 Incoming Quality Assurance ................................. 7
7.3.1 First Article Inspection ............................ 7
7.3.2 IQA Instructions .................................... 7
8.0 DESIGN AND MANUFACTURING CONTROL .................................. 7
8.1 Process Capability ......................................... 7
8.2 Commodity Analysis ......................................... 7
8.3 Pilot build ................................................ 7
8.4 Cycle time improvements .................................... 8
</TABLE>
2
<PAGE> 24
<TABLE>
<S> <C> <C>
8.5 Work Instruction Review .................................... 8
8.6 Quality Levels ............................................. 8
8.7 Defect Containment ......................................... 8
8.8 Escalation Path ............................................ 8
8.9 Defect Root Cause analysis ................................. 8
8.10 Preventative Corrective Actions ............................ 8
8.11 Material Review Board (MRB) ................................ 8
8.12 Out of Box Experience (OBE) ................................ 8
8.13 Stop Build/Ship Criteria ................................... 9
8.14 Statistical Process Control and Analysis ................... 9
8.15 Tooling/Test Equipment ..................................... 9
8.16 PM/Calibration Process ..................................... 9
8.17 Design Changes ............................................. 9
9.0 RISKS ............................................................. 9
9.1 DFMEA Issues ............................................... 9
9.2 PFMEA Issues ............................................... 9
9.3 System Management Issues ................................... 10
</TABLE>
3
<PAGE> 25
FC SWITCH QUALITY PLAN
1.0 FC SWITCH QUALITY PLAN REVISION HISTORY
<TABLE>
<CAPTION>
REVISION BY DATE DESCRIPTION
- -------- -- ---- -----------
<S> <C> <C> <C>
0.0 Tim Killworth 10-21-98 Initial Draft
0.1 Tim Killworth 11/11/98 Added FY 00 quarterly measurement TBD to section
4.0 and added page breaks
0.2 Tim Killworth 11/16/98 Added FY00 Q1 & Q2 measurements to section 4.0
</TABLE>
2.0 REVIEW AND SIGNATURES
<TABLE>
<CAPTION>
Area Signature
- ---- ---------
<S> <C>
WW Enterprise System Group (ESG) Randy Printz
Storage Division - Quality Mgr.
WW Enterprise System Group (ESG) Randy Printz
Storage Division - NPO/Quality/Program Mgr.
</TABLE>
3.0 INTRODUCTION
This Quality plan is a structured method of defining and establishing the steps
necessary to assure that a product meets or exceeds the customer's expectations.
The main topics will be used in the overall product schedule to assure systemic
quality implementation. The Quality plan also provides a summary description of
the systems used in minimizing process and product variations while maintaining
focus on improving the business objectives of Initial Field Incident Rate
(IFIR), Defects per Hundred Units (DPHU) and overall customer satisfaction. A
cross functional team approach is used with members from all strategic
disciplines; including the supplier.
4
<PAGE> 26
4.0 QUALITY GOALS FY99
<TABLE>
<CAPTION>
FC Switch: FY 99-Q4 FY00-Q1 FY00-Q2 FY00-Q3 FY00-Q4
- ---------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
IFIR: [*] [*] [*] TBD TBD
</TABLE>
5.0 APPLICABLE DOCUMENTS AND AMENDMENTS
ISO 9001 and 9002.
6.0 QUALITY PROGRAM MANAGEMENT
6.1 Organization
The Storage Systems organization operates under the direction of the
Enterprise Systems Group, and Regional Business units. To ensure
appropriate attention, metric responsibilities for the regions are
shared at Enterprise Systems Group (ESG) Storage Division level while
the individual regions are ultimately responsible for monitoring trends
and improvements. All improvements are shared on a world wide scope.
6.2 Quality Planning
The Quality Planning Process is designed to assure a comprehensive and
critical review of the engineering requirements and other related
technical information. At this process stage, a preliminary feasibility
analysis will be made to assess the potential problems that occur during
manufacturing and field deployment. The scope of this plan will assume
that Dell will receive the fully configured and assembled product marked
with the Dell logo and packed in Dell boxes as designated in the
business agreement. The supplier will ensure product integrity. Dell
will ship the already boxed units.
6.2.1 Design
6.2.1.1 Development
Review concept to estimate impact on IFIR relating to
prior programs. Identify any new key products and process
characteristics and performance tracking systems. Assist
supplier in performing benchmark studies and initiate
DFMEA and DFM/DFS where applicable.
6.2.1.2 Prototype
Improve metric targets from lessons learned. Finalize
performance tracking methodology. Initiate PFMEA using the
previous DFMEA as a baseline. Identify gages/test
equipment. Initiate preliminary process capability study.
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
5
<PAGE> 27
6.2.2 Production
6.2.2.1 Eval Test
Characterize special product and processes for the
testing, quality, and defect reporting/prevention
systems. Issue control plan to document these and quantify
test performance. Finalize process capability study.
6.2.2.2 Pilot
Plan for production system integration. Schedule time,
hardware and testing requirements including compatibility
will Dell products and software.
6.2.2.3 Launch Risks identified in the D/PFMEA have been
assessed. Metrics have been adjusted accordingly. Quality
Measurement System improvements identified.
6.3 Metric Goals and Analysis
Metrics for IFIR, and M&W will be established by the Quality function of
the ESG Storage Division organization. These will take in account
similarities from historical products along with variables relating to
new technology and lessons learned improvements.
6.4 Training/Certifications
New technologies and special processes will be targeted for training.
JIT training will be scheduled with Customer Support, Field Service,
manufacturing and Engineering. Specialized positions necessary for the
product may be established with necessary training and position
certifications provided to the personnel. Training for third party
maintainers for on-site installation and implementation is necessary.
7.0 CONTROL OF PURCHASES
7.1 Procurement Control
7.1.1 General Comments
Supplier Quality responsibility for FC Switch (all regions) will
be supported out of World Wide Supplier Quality Engineering,
which is under the direction of Procurement and will assume
responsibility Secondary Storage in Q3, FY 1999. World Wide
Suppler Quality Engineering Charter of Expectations that define
quality system, manufacturing, and test process requirements are
flowed down to the supplier. The Supplier shall comply with all
the requirements contained in the Charter of Expectations. Review
the drawings and specifications then formulate the supplier
quality system requirements invoked at the supplier and provide a
level of control class/type of commodity. Ex: design change
submittal, test procedures, Pareto listings, inspection plans,
etc.
7.1.2 Development
Review concept to estimate impact on IFIR and DPHU relating to
prior programs. Identify any new key products and process
characteristics and performance tracking systems. Perform
benchmark studies. Assist suppliers with DFMEA and DFM/DFS
6
<PAGE> 28
7.1.3 Prototype
Improve metric targets from lessons learned. Finalize performance
tracking methodology. Assist suppliers with PFMEA. Identify
gages/test equipment.
7.2 Approved Suppliers
Facility and system conformance/capability studies performed Supplier
Survey performed after approval of business contract. Quality system and
document assurance of delivered product quality. Maintain approved
status; periodic quality system audits.
7.3 Incoming Quality Assurance
7.3.1 First Article Inspection
First Article Inspection shall be performed by the Supplier on
all or any parts integrated into the top level assembly and
including Top Level Assembly. Additionally, WWSQE will review
first article documentation and perform a complete first article
inspection of the top level assembly to verify a compliance with
engineering intent and processes. Quality Engineering will
identify candidates for FAI. An inspection plan will document the
necessary inspection criteria. Any inspection discrepancies will
be coordinated with Design Engineering and the supplier. All
discrepancies will be resolved prior to launch.
7.3.2 IQA Instructions
Incoming Inspection Plan will document the part's inspection plan
and level. This will determine whether the part should be dock to
stock, FAI, etc.
8.0 DESIGN and MANUFACTURING CONTROL
* All items listed under the section DESIGN AND MANUFACTURING CONTROL [*]
* Supplier shall also adhere to stipulations specified in the WWSQE Charter of
Expectations
8.1 Process Capability
Processes will be reviewed for capabilities to support the new products.
A PFMEA will be based on the DFMEA previously used in the design phase.
Capability analysis will include but not limited to: WI, bitmaps,
hardware flow, Doc Box kiting, MRB and overall system routing with the
overall goal directed to process improvements. This will be used as one
of the basis for the metrics forecasting models.
8.2 Commodity Analysis
Each major part will be reviewed for impact to production flow,
installation process, failure rates and special handling processes. This
will be used as one of the basis for the metrics forecasting models.
8.3 Pilot build
Select quantities and configurations are built and tested using the
manufacturing environment. This type of build is used to verify the
readiness of the manufacturing process. All failures during this phase
will be applied to the DFMEA or PFMEA for analysis to determine root
cause, C/A or risk assessment.
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
7
<PAGE> 29
8.4 Cycle time improvements
Key time related processes will be monitored for baselines. Benchmark
studies from other LOBs will be reviewed. Select processes or steps
will be the focus for performance improvements. Ex: RMA cycle time,
Testing time.
8.5 Work Instruction Review
Instruction for activities affecting the product quality will be
reviewed for scope, content and context. This will include text and
bitmap based instructions for accomplishing inspection and managing
hardware activities. Responsibility of implementation and control is
documented in the ISO procedures.
8.6 Quality Levels
Key metrics are monitored for adverse trends. Daily and weekly failures
are monitored for early warning trends. Over the day, three failures of
the same type will cause the issue to escalate per the escalation
process.
8.7 Defect Containment
To prevent further Line Rejects, steps will be taken to isolate or
contain the circumstance/part that caused the reject. This will include
the following processes: Stop Build, Stock Purge, MRB impound, etc. The
scope includes visibility in all stock, revolver, and supplier
locations; including materials in transit.
8.8 Escalation Path
Steps are in place in the event adverse trends are seen or if more than
three repeat failures occur in the same day. The first level is to
contact Manufacturing Quality Engineering. Circumstances will be
analyzed to decide further escalation. Depending on root cause, the
second escalation level is to contact Storage Systems Quality
Engineering. They will direct a detailed analysis to address containment
and further problem solving steps. The final escalation is to issue a
stop ship/build.
8.9 Defect Root Cause analysis
Analysis for individual commodities have different documented trigger
points. System failure rates will be tracked and monitored on a weekly
basis by Storage Systems Quality Engineering. When the analysis extends
to a vendor provided item (i.e. HD's), Supplier Quality Engineering
involves the supplier, assuring root cause analysis occurs at the
earliest point.
8.10 Preventative Corrective Actions
Corrective action implementation is dependent on recurring defect trends
and the defect's severity. Once root cause has been established,
prevention steps are identified, reviewed by Quality Engineering,
documented, and implemented. Periodic review assures the action's
effectiveness or need for more.
8.11 Material Review Board (MRB)
The MRB is responsible to assure nonconforming hardware is segregated
from normal production materials. Discrepant material found during the
manufacturing cycle is to be conspicuously tagged for subsequent MRB
impound. The MRB will evaluate and disposition the discrepancies.
8.12 Out of Box Experience (OBE)
A sampling of units will be unpacked after being received by Dell for
inspection purposes. Documented OBE procedures will specify the steps
necessary for the inspected systems. In the event of a finding, closed
loop corrective actions will occur.
8
<PAGE> 30
8.13 Stop Build/Ship Criteria
During the root cause analysis, if a defective condition will adversely
the customer's quality level, a decision for containment is made.
Manufacturing, Quality and management considers the defect's impact and
reaches a consensus for hardware disposition. Stop ship deals with
defects that can be contained via the manufacturing process; stop ship
addresses all stock, both work in process and at the revolver.
8.14 Statistical Process Control and Analysis
The majority of tests will be one hundred percent in accordance with the
automated testing process. SPC is used to specify control limits on
these test processes and help identify instances for further
investigation.
8.15 Tooling/Test Equipment
Hardware necessary for product verification will be controlled to reduce
process variability. This will include screen stations, flash stations,
network connections, Final Test and Hi-Pot stations. Location monitoring
will establish trends for process improvements. Calibration schedules
will be maintained for specific equipment and calibrations maintained by
Process Engineering.
Computer software will be maintained by Quality/Test and Manufacturing
Engineering. Code certification and control will be the responsibility
of Test Engineering.
8.16 PM/Calibration Process
Systems requiring periodic adjustments or susceptible to performance
degradation will be assigned a schedule for periodic maintenance.
Systems requiring close tolerance activities, i.e. torque or voltage
measurements, will be calibrated and identified with a calibration
label. Optimum recalibration frequencies will be assigned along with
recall dates. Recalibration dates will be reviewed by manufacturing and
audited by Quality.
8.17 Design Changes
The supplier will ensure advance notification to Dell of design changes
consistent with the business contract.
8.18 Failure/Corrective Analysis
The supplier will ensure returned failure/corrective analysis within the
time specified in the business contract.
9.0 RISKS
9.1 DFMEA Issues
Any issues remaining unresolved or not forwarded to the PFMEA will be
assigned a rating according to the standard FMEA process. Trend analysis
will determine need to forward lessons learned into future products.
These will be documented during the product's post mortem.
9.2 PFMEA Issues
Any issues remaining unresolved will be assigned a rating according to
the standard FMEA process. Trend analysis will determine need to forward
lessons learned into future products. These will be documented during
the product's post mortem.
9
<PAGE> 31
9.3 System Management Issues
System issues will be documented during the product's post mortem.
Analysis will determine need to forward lessons learned into future
products.
10
<PAGE> 32
SCHEDULE C TO AGREEMENT NUMBER BRO-001
DELL SERVICE OEM REQUIREMENTS
PROJECT: FIBRE CHANNEL SWITCH
<PAGE> 33
DELL SERVICE OEM
REQUIREMENTS
PROJECT: FC-Switch
Date: November 19, 1998
Revision 1.2
Furnished By:
Rob Tahamtan
DELL Customer Service and Support Engineering
(512) 728-0364
[email protected]
<PAGE> 34
DELL Service OEM Requirements
The following is a conceptual framework regarding service requirements for
Product(s). DELL and BROCADE agree to meet and work cooperatively to identify
additional items and further define the service requirements below. To the
extent any of the provisions below conflict with the Agreement, the Agreement
shall take precedence.
1 BROCADE FIELD SERVICE COMMITMENT
1.1 BROCADE shall provide a [*] from date of BROCADE shipment to
DELL, return to factory warranty on all parts and labor on
FC-Switch with exception of GBICs. GBICs warranty is limited
to [*] from date of BROCADE shipment to DELL. BROCADE shall
also provide to DELL a pass-through warranty as defined in
Section "9" of the Agreement.
1.1.1 All FRUs are new or remanufactured Products.
1.2 BROCADE shall provide replacement parts -including: hardware,
firmware, software, training material, diagnostics and
technical support as described in section 4.0 - for [*] from
the last date of manufacture, as stated in Section "8.2" of
the Agreement.
1.3 BROCADE shall provide worldwide technical support through
identified personnel via BROCADE's paging system. (See Section
4.0)
1.4 BROCADE shall provide master copy of service installation and
trouble-shooting guides, included in DELL User's Guide, to
DELL for all Product(s) sold to/by DELL as normally available
from BROCADE. It is DELL's responsibility to supply Service
manuals to DELL Service Providers (DSPs)
1.5 BROCADE shall provide listing of recommended field replaceable
parts on Products sold to DELL.
1.5.1 BROCADE shall provide estimated repair times (or
MTTR) for the FRU list. These estimates should cover
the time required to replace each FRU and verify the
fix.
<TABLE>
<CAPTION>
FRU MTTR
--- ----
<S> <C>
CU-GBIC or SW-GBIC [*]
Switch (excluding GBICs) [*]
</TABLE>
*Certain information on this page has been omitted and filed separately with the
Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
<PAGE> 35
1.6 BROCADE shall provide timely Product updates (firmware,
release notes, and technical bulletins) to DELL by permitting
DELL access to BROCADE's web site.
1.7 BROCADE shall provide user-friendly diagnostics, as mutually
agreed up on, to DELL. DELL may distribute these diagnostics
to DSPs.
1.7.1 Diagnostics should reflect DELL name or no reference
to either company.
1.7.2 BROCADE grants DELL the right to use FC-Switch
embedded diagnostics [*].
1.7.3 BROCADE shall make available the "Web Tools" and
"Zoning" software Products, and other software
Products as mutually agreed, to DELL as licensable
Products.
1.7.4 DELL has selected not to license the optional SES
Product.
1.8 BROCADE shall provide sustaining engineering for all BROCADE
Product(s) sold to DELL for the specified warranty period of
the Products.
1.9 BROCADE shall provide a detailed RMA process/procedures for
defective/returned Product. DELL shall return defective parts
for credit for the then-current purchase price during warranty
period without verification by DELL Service Logistics. (See
Section 9.0 of the Agreement).
1.10 BROCADE shall provide DELL Level III engineers with access to
the BROCADE service web site for immediate access to current
information pertaining to BROCADE's serviceability, Product
updates, software updates, upgrades and patches. BROCADE shall
inform DELL Level III personnel of software updates and
upgrades via an email. It is DELL's responsibility to obtain
the software from the BROCADE web site.
1.11 Provided that DELL POs are received [*] prior to RTS, BROCADE
shall deliver to DELL all requested FRUs [*] prior to DELL's
RTS. If DELL POs are not placed within this specified lead
time, BROCADE shall make commercially reasonable efforts to
supply FRUs within the requested time frame.
1.12 BROCADE shall provide FRUs, which shall be priced as defined
in Schedule "A" of the Agreement. (Emergency expedited FRUs
shall be provided at additional cost.)
1.12.1 DELL requests FRUs to be individually packaged and
labeled in accordance with DELL packaging
specification, as outlined in Schedule "D" to the
Agreement.
1.12.2 Orders for FRUs shall receive the same priority and
lead time as orders for manufacturing.
*Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 36
1.13 BROCADE shall use commercially reasonable resources to
resolve/cure all quality problems discovered by DELL or DELL
customers in a timely manner. (See Section 4.5) These problems
shall be restricted to DELL tested and DELL released
configurations.
1.14 BROCADE shall provide DELLsupport/services as specified in the
Escalation Section of this document, Section 4.
1.15 BROCADE defines roles of technical support engineers as
described in the table below.
Level One Level 1 support is the first line, direct
Technical Support End User contact, most likely via a
Engineer telephone call handling group provided by
DELL.
- Level One support includes:
- First contact direct DELL/End User
interaction
- Information collection and analysis
- Identification of whether the problem
is known and has a known solution
- Troubleshooting and problem
reproduction
- Problem report administration and
tracking
DELL end user customers do not contact
BROCADE directly for questions related to
BROCADE's Products.
Level Two Level 2 support is "technical support"
Technical Support provided by DELL personnel. Level 2 is
Engineer typically where the Product "experts"
reside and serve as the escalation point
for Level 1. Level 2 is expected to
resolve all known problems, installation
and configuration issues, assist in
firmware or driver updates at the End
User site, search BROCADE posted
Technical Notes and other technical
information supplied that shall assist
in providing problem resolutions. All
pertinent data should be entered in the
DELL problem tracking database.
Should the Level 2 analyst be unable to
resolve a problem, either because of
lack of expertise, exhausted
troubleshooting knowledge, or expiration
of the allotted Level 2 resolution time,
they may escalate the problem to Level 3
for resolution. Level 2 shall continue
to work with Level 3 to accomplish
resolution. Level 2 shall communicate
all resolutions back to the End User.
Escalations should be presented to
BROCADE engineers in the form of a
problem tracking data base record with
all pertinent configuration detail and
failure information or symptoms
documented.
<PAGE> 37
In an effort to maintain an efficient
support organization and crisp exchange
of information, DELL shall limit the
number of support personnel (Level 2)
authorized to contact BROCADE (Level 3)
to a total of 8.
Level Three Both DELL and BROCADE provide level 3
Technical Support support. BROCADE System Engineers (SE)
Engineer and/or Technical Support Engineers
(TSE). Level 3 is the first point of
contact for technical issues between
BROCADE and DELL. Once a problem is
escalated to Level 3, BROCADE shall
utilize commercially reasonable
resources to resolve such problem within
DELL tested and DELL released
configurations.
Prior to escalating to Level 3, it is
expected that DELL shall provide the
following information and documentation:
- Any error information from the
device connected to the switch
and from the switch.
- All names and revisions of
hardware equipment.
- All firmware revisions of the
drivers.
- Any log files from the devices
connected to the switch.
- Any trace file from the
devices connected to the
switch.
- The configuration information
of the equipment being used.
Assigned Level 3 support personnel (SE
and/or TSE) can be contacted via direct
dial, email to an established "support"
alias, web site initiated input, and by
calling BROCADE's 1-888-ATFIBRE support
number. Direct access to BROCADE support
personnel shall be possible during
normal BROCADE business hours (8 AM to 5
PM PST, M-F). Emergency situations are
handled via 7 X 24 pager coverage at 1-
888-ATFIBRE (1-888-283-4273).
2 DELL FIELD SERVICE COMMITMENT.
2.1 DELL shall agree to BROCADE's definition of Technical Support
Engineers in Section 1.17.
2.2 DELL shall agree to provide first, second, and third level
support to DELL's worldwide customer base as described in
Section 4.
<PAGE> 38
2.3 DELL shall identify DELL Level III engineering to BROCADE for
direct interface with BROCADE level III staff.
2.4 DELL shall maintain appropriate stocking levels to support
service demand in order to reduce FRU expedite occurrences
3 TRAINING REQUIREMENTS
3.1 BROCADE shall provide to DELL a complete set of training
classes for proper installation and resolution of field
failures (one class not to exceed one week, and each class not
to exceed twelve (12) persons for [*] for the fee schedule as
defined in the table below. BROCADE shall provide additional
Product training for DELL personnel and DELL designated DSPs
worldwide at BROCADE's standard charge and terms. Fees and [*]
in the table below are one time quotes only for these specific
instances as listed.
<TABLE>
<CAPTION>
Brief course Switch provided
Audience description by: Duration [*] Price
- -------- ----------- --------------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
DELL Courses 1, 2 BROCADE 3-5 days, [*] [*]
instructors and 3 as [*]
Free* described in
and DELL BROCADE's
Level III published
engineers material
DELL Courses 1, 2 BROCADE shall 3-5 days [*] [*]
international and 3 as provide the
instructors described in required number
BROCADE's of switches (up to
published 6) for training to
material DELL. [*]
DELL Level I Courses 1, 2 DELL 3-5 days [*] [*]
& II and 3 as
engineers described in
BROCADE's
published
material
</TABLE>
*Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 39
<TABLE>
<S> <C> <C> <C> <C> <C>
DELL Level I Courses 1, 2 BROCADE shall 3-5 days [*] [*]
& II and 3 as provide the
engineers described in required number
(Japan) BROCADE's of switches (up to
published 6) for training to
material DELL. [*]
</TABLE>
3.2 Training materials shall be made available in "master-copy"
format and licensed to DELL. BROCADE shall provide updates to
such training materials as available for the life of the
Products.
4. TECHNICAL SUPPORT AND ESCALATIONS
4.1 DELL supports their worldwide end user base through a number
of regional support centers.
4.1.1 These centers are staffed with Level I and Level II
engineers and operated on a 7 day, 24 hour basis.
4.1.2 DELL's Level III Server Product Support is located in
Austin, Texas and is currently available on a 5 day,
9 hour per day basis.
4.1.2.1 At the time of this writing the Server
Product Support group is managed by Patricia
Westerfield. Patricia can be reached via:
Phone - 512-728-4260
Pager - 888-857-9801
email - [email protected]
4.2 BROCADE's DELL Engineers shall take calls primarily from the
DELL Level III Server Product Support group located in Austin.
There shall be no charges for support delivered according to
these parameters during the Product warranty period as defined
in Section 1.1. Charges may apply in situations as defined in
Section 4.3.2.
4.2.1 BROCADE shall provide support on DELL tested and DELL
released configurations
4.2.2 DELL shall provide BROCADE with representative
equipment sufficient to test and duplicate escalated
problems/issues.
4.3 DELL and BROCADE agree to following technical support call
handling flow:
*Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 40
[CHART]
4.3.1 DELL shall follow the standard escalation processes,
during normal working hours. That is: a DELL Level
II, to DELL Level III, to BROCADE Level III
escalation path shall be followed.
4.3.2 For after hours Severity One problems, selected DELL
Level II engineers as specified by DELL from time to
time (up to two per region) in Americas, Europe, Asia
and Japan shall escalate to BROCADE Level III
directly. After hours in this context is based on the
Austin, Texas location of DELL's Level III group,
which is in the Central Time Zone. Such escalations
are limited to [*] per month per region. Escalations
exceeding [*] per month shall be billable at the rate
of [*] per incident. Escalations for non-Severity One
problems shall be billed at the rate of [*] for the
[*] incident and [*]. Dell shall provide an open
purchase order to BROCADE for the invoicing of these
billable services.
4.3.3 DELL Level II engineers shall be responsible for
updating DELL Level III engineers on any after hours
activity that took place directly with BROCADE.
4.3.4 Designated Level II engineers shall be identified by
DELL management to escalate directly to BROCADE after
hours. These names shall be communicated to BROCADE
so that any calls from those individuals shall be
properly handled.
4.4 BROCADE shall provide DELL with the following response times:
<TABLE>
<S> <C> <C>
Priority 1 System down [*]
Priority 2 Degraded system operation [*]
</TABLE>
4.5 BROCADE shall provide DELL with the following escalation time
lines and process:
*Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 41
4.5.1 Escalations from DELL shall generally come from DELL
Level III engineers but under certain conditions as
covered in Section 4.3.2 may be initiated by DELL
Level II engineers.
4.5.2 During normal BROCADE hours of 8 A.M. to 5 P.M.,
Monday through Friday, PDT, and excluding BROCADE
observed holidays, the first escalation request to
BROCADE should be to the BROCADE assigned Level III
engineer. This person can be reached by pager at
1-888-397-1728. At the present time this contact is
Tom Kirchner.
4.5.3 The BROCADE Level III engineer shall normally respond
to the initial request within 30 minutes during
normal BROCADE business hours. A call shall be opened
and a call number assigned through the BROCADE call
tracking database.
4.5.4 Calls shall be worked between the BROCADE Level III
engineer and the DELL escalation engineer until the
problem is resolved. For Severity 1 problems the
BROCADE Level III engineer shall gather information,
perform problem analysis and trouble shooting, and
work this problem for no more than four hours. After
this time the call shall be escalated from the
BROCADE Level III engineer to the internal BROCADE
Technical Support Engineering ("TSE") group to apply
more resources.
4.5.5 The TSE group shall analyze the available data and
provide a resolution or escalate this problem to
BROCADE's development engineering group within four
hours. The call record shall be updated by the TSE
along with this request for additional resources. If
this time frame is missed the Director of BROCADE
Engineering is automatically notified by the BROCADE
call handling tool. The Director shall then ensure
that this issue is escalated to the next level and
track until resolved.
4.5.6 An Engineering resource shall be assigned to work
with the TSE resource within two hours of the
escalation being issued.
4.5.7 DELL shall be contacted by the TSE and the
engineering escalation engineer within two hours of
the BROCADE internal escalation as described in
Section 4.5.5 to further assess the problem, collect
data, and either resolve the issue or further develop
a plan for resolution.
4.5.8 Resources shall be assigned on a continuing basis
until the escalation is closed. Note: the escalation
can be closed when DELL is satisfied with BROCADE's
response and plan of action - which may not coincide
with the final problem resolution (bug fix, patch,
etc.) The maximum time to resolve a Severity 1 issue
is five working days.
4.5.9 The TSE resource requesting escalation shall
facilitate needed communication with DELL and
required exchange of data or equipment as appropriate
in the course of problem resolution on an as needed
basis.
4.5.10 ALL escalated calls require daily updates through the
BROCADE call handling tool. Any report not updated by
the end of the business day shall result in a
<PAGE> 42
warning flag message being sent to the assigned
escalation engineer, to the Director of BROCADE
Engineering, the VP of Engineering, and the VP of
Sales.
4.5.11 If this escalation issue is not resolved within five
working days the Director of BROCADE Engineering and
the VP of Engineering shall apply all resources and
actions as necessary to further expedite resolution
of this issue.
4.5.12 In general the following chart specifies BROCADE
severity levels and service objective goals.
<TABLE>
<CAPTION>
Severity Definition Service Objective Resolution Time
- -------- ---------- ----------------- ---------------
<S> <C> <C> <C>
1 BROCADE Product is completely non- Respond to initial request within Less than [*]
functional, or deemed a safety hazard, situation [*] during normal (A work around to be
has high impact on development or delivery BROCADE business hours, and implemented within
efforts. Installation problems. [*] for non-business hours. [*]
Resources applied until a
solution or acceptable work-
around is found.
2 BROCADE Product is functionally impaired, Resources applied continuously, Less than [*]
has substantially degraded performance but is during business hours, until a (A work around to be
not completely dysfunctional. There are no solution or work-around is found. implemented within [*]
available work-arounds. Situation has medium
impact on DELL activity
3 BROCADE Product or advertised functionality Resources applied on a priority Next maintenance
may be slightly impaired but is operational, has basis, until a solution or a work- release or [*]
low to no impact on DELL activity, and there around is found. whichever is less.
are work-arounds available.
4 Generic questions, and enhancement requests. Answer generic questions or [*] for generic
provide path to answers within questions.
reasonable time frames. The Enhancement requests
BROCADE web site shall be the are processed on a case
prime repository for this type of by case basis.
information. Enhancement
requests shall be reviewed and
implemented in the next major
release, where feasible, or to
meet specific commitments
made.
</TABLE>
*Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
<PAGE> 43
DELL SOFTWARE LICENSE AGREEMENT
This is a legal agreement between you, the user, and Dell Products, L.P. By
opening the software packet(s), you agree to be bound by the terms of this
agreement. If you do not agree to these terms, promptly return all software
items (disks, written materials, and packaging) for a full refund.
You may use one copy of the software on only one computer at a time. If you have
multiple licenses for the software, you may use as many copies at any time as
you have licenses. "Use" means loaded in temporary memory or permanent storage
on the computer. Installation on a network server solely for distribution to
other computers is not "use", if you have a separate license for each computer
to which the software is distributed. If users will exceed the number of
licenses, you must have a reasonable process to assure that the number of
persons using the software concurrently does not exceed the number of licenses.
The software is protected by United States copyright laws and international
treaties. You may make one copy of the software solely for backup or archival
purposes or transfer it to a single hard disk provided you keep the original
solely for backup or archival purposes. You may not rent or lease the software
or copy the written materials accompanying the software, but you may transfer
the software and all accompanying materials on a permanent basis, if you retain
no copies and the recipient agrees to the terms, hereof. Any transfer must
include the most recent update and all prior versions. You may not reverse
engineer, decompile or disassemble the software. If the package contains 3.5"
and 5.25" disks, you may use only the disks appropriate for your computer. You
may not use the disks on another computer or network, or loan, rent, lease, or
transfer them to another user except as permitted by this agreement.
LIMITED WARRANTY
Dell warrants that the software disks are free from defects in materials and
workmanship under normal use for ninety (90) days from the date you receive
them. This warranty is limited to you and is not transferable. Any implied
warranties are limited to 90 days. Some jurisdictions do not allow limits on the
duration of an implied warranty, so this limitation may not apply to you. The
entire liability of Dell and its suppliers, and your exclusive remedy, shall be
(a) return of the price paid for the software or (b) replacement of any disk
that does not meet this warranty which is sent with a return authorization
number to Dell, at your cost and risk. This limited warranty is void if any disk
damage has resulted from accident, abuse, misapplication, or service or
modification by someone other than Dell. Any replacement disk is warranted for
the remaining original warranty period or 30 days, whichever is longer. Dell
does not warrant that the functions of the software will meet your requirements
or that operation of the software will be uninterrupted or error free. You
assume responsibility for selecting the software to achieve your intended
results, and for the use and results obtained from the software. Dell disclaims
all other warranties, express or implied, including but not limited to implied
warranties of merchantability and fitness for a particular purpose, for the
software and all accompanying written materials. This limited warranty gives you
specific legal rights. You may have others, which vary from jurisdiction to
jurisdiction.
In no event shall Dell or its suppliers be liable for any damages whatsoever
(including, without limitation, damages for loss of business profits, business
interruption, loss of business information, or other pecuniary loss) arising out
of use or inability to use the software, even if advised of the possibility of
such damages. Because some jurisdictions do not allow an exclusion or limitation
of liability for consequential or incidental damages, the above limitation may
not apply to you.
U.S. GOVERNMENT RESTRICTED RIGHTS
The software and documentation are provided with Restricted Rights. Use,
duplication or disclosure by the Government is subject to restrictions as set
forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer
Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the
Commercial Computer Software-Restricted Rights at 48 CFR 52.227-19, as
applicable. Contractor/manufacturer is Dell Products, L.P., One Dell Way, Round
Rock, TX 78682. This license is effective until terminated. It will terminate
upon the conditions set forth above or if you fail to comply with any term
hereof. Upon termination, you agree that the software and accompanying
materials, and all copies thereof, will be destroyed. This agreement is governed
by the laws of the State of Texas. You acknowledge that you have read this
agreement, you understand it, you agree to be bound by its terms, and that this
is the complete and exclusive statement of the agreement between you and Dell
regarding the software.
<PAGE> 44
SCHEDULE D TO AGREEMENT NUMBER BRO-001
DELL INBOUND PACKAGING STANDARDS
PART NUMBER 11500
<PAGE> 45
DELL COMPUTER CORPORATION
INBOUND PACKAGING STANDARDS PN- 11500
REV A06
Page 1
<PAGE> 46
<TABLE>
<CAPTION>
REV ECO DESCRIPTION DATE APPROVED
- --- --- ----------- ---- --------
<S> <C> <C> <C> <C>
A00-00 1285 Release for procurement use. 08/10/87 ---- ----
A01-00 2182 Revise and update. 02/28/89 Pete Genix
A02-00 3650 Correct spelling and revise wording. 07/05/90 Pete Genix
A02-01 11401 Update description to conform to Naming Standard. 10/19/93 Rita Maloy
A03-00 15031 Update rack height requirements. 12/13/94 Greg Peden
A04-00 15031 Incorporate reference of PN 00121 for test method. 12/13/94 Pete Genix
A05-00 Update and revise spec to include line ready packaging
requirements. - JB 12/15/95
A06-00 Tighten palletization methods and add pictorials. - JB
02/27/96
</TABLE>
Page 2
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. PURPOSE
2. GENERAL SUPPLIER RESPONSIBILITIES
3. COMPLIANCE
4. DEFINITIONS.
5. PACKAGING CRITERIA
6. LINE READY PACKAGING
7. PALLETIZATION REQUIREMENTS
8. MARKING AND IDENTIFICATION
9. LABELING REQUIREMENTS
10. PACKING LIST
</TABLE>
Page 3
<PAGE> 48
1.0 PURPOSE
This Dell Computer Corporation (DCC) Specification defines for our
suppliers packaging requirements that might be specific for Dell
Computer Corporation. The goal of this document is to specify DCC's
requirements for receiving; packaging protection; warehouse; safety and
line ready usage.
2.0 GENERAL SUPPLIER RESPONSIBILITIES
2.1 COMMUNICATIONS
2.1.2 Vendors shall communicate packaging assumptions to Dell Computer
Corporation in quote, including factors such as cost, box dimensions,
weight, quantity per box and internal packaging descriptions.
2.1.2 This communication shall be coordinated through DCC purchasing.
2.1.3 Vendors shall communicate any modifications to packaging that
might be mutually beneficial.
2.1.4 Vendors shall provide packaging drawings and specifications when
available.
2.2 PRODUCT PROTECTION
2.2.1 All shipments to DCC must be packaged and/or palletized so that
both containers and contents arrive at DCC free from damage.
2.2.2 Pallet loads received by DCC may be broken down into their
individual containers to be reshipped. These individual containers may
require a packaging test to verify the performance of the suppliers
packaging during testing per Dell's Packaged Product Test Procedure.
Part Number 00121.
2.3 LEGAL
It is the suppliers obligation to ensure that packaging and palletizing
comply with all applicable laws and regulations including:
Rail Regulations: Uniform Freight Classification, Rule 41.
Truck Regulations: National Motor Freight Classification,
Item 222.
Air Regulations: International Air Transportation Association
Page 4
<PAGE> 49
3.0 COMPLIANCE
3.1 IN THE EVENT OF NON-COMPLIANCE DCC RESERVES THE RIGHT TO:
3.1.1 Reject and return any shipments received that are improperly
packaged or identified.
3.1.2 Charge the supplier for the cost of labor and materials for any
repackaging resulting from the non-compliance with DCC specifications.
3.1.3 Remove from it's list of approved suppliers, any who repeatedly
fail to comply with the DCC Packaging requirements.
4.0 DEFINITIONS
ASTM - American Society of Testing and Materials Line Ready - Part
prepared for use on production line.
Michelman - A coating process used in the corrugated industry to reduce
abrasion.
O.D. - Outside Dimensions
Unitized Load - Two or more containers secured to a pallet or shipping
base.
5.0 PACKAGING CRITERIA
5.1 CONTAINER INTEGRITY
All containers must comply with the National Motor Freight
Classification rules, items 222 and 222-1 for all packaged product
received by DCC.
5.2 CUBE EFFICIENCY
Container selection shall consider the amount of space the product
occupies, the number of cartons per pallet load, and the number of
pallets per trailer/sea container.
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<PAGE> 50
PACKAGING CRITERIA (CONTINUED)
5.3 ELECTROSTATIC SENSITIVE PARTS
5.3.1 Shall be packaged as defined in Military Specification 1696 for
Class One parts with a 1000 Volt sensitivity or below.
5.3.2 These parts shall be received in containers which provide
electrostatic field shielding properties per standard EIA-541.
5.3.3 Static shielding bags shall have the following electrical surface
resistivity properties (ohms/square)
SURFACE RESISTIVITY (Outside Layer) between 10 7 & 10 12 (+/-10%)
SURFACE RESISTIVITY (Inside Layer) 10 7 or less (+/-10%) SURFACE
RESISTIVITY (Metalized Layer) 10 3 or less (+/-10%)
5.4 MECHANICALLY HANDLED LOADS
Refer to Palletization Requirements in Section 6.0.
5.5 MANUALLY HANDLED PACKAGES
Gross weight of the package shall not exceed 50 pounds. Packages with
gross weight under 35 pounds is preferred.
5.6 PARTS CLEANLINESS
All parts will be clean prior to packaging. Cleanliness of the part is
not to be degraded by the packaging materials or any of it's components.
5.7 PARTS INTEGRITY
5.7.1 Parts shipped on different purchase orders must be packaged
separately and marked accordingly.
5.7.2 Each different part number item must be packed in it's own
discrete package and identified. Refer to Markings and Identification in
Section 7.0.
5.8 PACKAGING CLOSURES
The packaging closure must maintain interior cleanliness and ensure that
contents remain intact and damage free during shipping and handling.
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<PAGE> 51
6.0 LINE READY PACKAGING
DCC in writing a contract may specify that "line ready packaging" is
requested. The ideal is to have packaging and sub-packaging that flow
through DCC's manufacturing process without any unboxing or modification
to assembly areas.
6.1 GENERAL GUIDELINES
6.1.1 Internal packaging should be designed to allow for minimal
material handling and secondary detrashing upon product removal.
6.1.2 Components should not be individually wrapped or bagged unless
sensitive to cosmetic or electrostatic discharge.
6.1.3 Donnage should be minimized.
6.1.4 Reusable packaging should be considered when applicable.
6.1.5 Designs should have minimal adhesion of two dissimilar materials
(foam and corrugated) to allow for ease of recycling.
6.1.6 Boxes to be manually handled should be smaller than roughly 24" x
20" x 20". If the box is larger then it should be broken into smaller
sub-boxes or sub-packs.
6.2 LARGE PALLETIZED BULK CONTAINERS
6.2.1 These containers shall consists of a design that allows for one
lid to be removed for access to all parts inside.
6.2.2 The height of the palletized load shall not exceed 48 inches
(including pallet).
6.2.3 Pallet shall be a standard 40 x 48 pallet with a 48 x 48 pallet
acceptable. Other pallet designs will need approval to insure they are
compatible with DCC's internal transport devices.
6.3 BULK BOXES
6.3.1 Bulk boxes should weight no more than 35 pounds (50 pounds
absolute maximum).
6.3.2 Boxes shall have Dell part number and part quantity on each of the
width panels.
6.3.3 Bags shall be used for abrasion protection as a last resort. Other
anti-abrasion measures should be considered first such as coatings on
corrugated.
6.3.4 Box shall be designed so that parts will not be damaged if box is
opened by a knife.
6.3.5 Ideal box size is 24 x 20 x 18 or smaller.
6.3.6 Ideally lids should be designed so that they can be removed in a
one step process.
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<PAGE> 52
LINE PACKAGING (CONTINUED)
6.4 PIECE PART BOXES
6.4.1 Small piece part boxes shall easily countable quantities inside
(10, 50., 100, etc...).
6.4.2 Boxes shall have Dell part number and part quantity on each width
panel.
7.0 PALLETIZATION
7.1 REQUIREMENTS
7.1.1 Palletization is required for all orders that occupy more than 50%
of a pallet load or exceeds 50 pounds per package.
7.1.2 Load Height Maximum: 60 inches including pallet(s)
7.1.3 Load Weight Maximum: 1000 pounds gross palletized load
7.1.4 Leaning, bulging, and pallet loads with overhang are not
acceptable.
---
7.1.5 Standard 40 X 48 inch pallets are preferred, 42 X 48 inch and 48 X
48 inch pallets are acceptable.
7.1.6 All pallets must be constructed with runner and stringer boards
and have four way entry, pallets with corner blocks or cones are
unacceptable. Pallets without bottom runners are also unacceptable.
7.1.7 All palletized loads shall have a corrugated slip sheet between
the boxes and the top runners to aid in load distribution.
[CHART]
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<PAGE> 53
PALLETIZATION (CONTINUED)
7.2 STACKING
7.2.1 Packaging shall be designed to withstand double stacking of two
similar pallets and must pass National Motor Freight Rule 180. . A "Do
Not Stack" label does not absolve the suppliers of their responsibility
for proper packaging.
7.2.2 The top surface of the pallet load shall be flat to permit
stacking for both carrier and warehouse requirements.
7.3 MIXTURE OF PRODUCT.
7.3.1 Shipments of a given part number must be consolidated on the same
pallet.
7.3.2 Different part numbers, as well as different purchase orders, can
be consolidated in a bulk shipper with a single bill of lading if each
part number group is individually packaged and labeled properly.
7.4 BANDING
7.4.1 Two-way banding using metallic or polyester material is required
for all purchase orders that call out banding of loads.
7.4.2 Angle boards or edge protectors are required under bands to
maintain individual container's integrity, as well as the pallet's.
[CHART]
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<PAGE> 54
PALLETIZATION (CONTINUED)
7.5 STRETCHWRAPPED LOADS
7.5.1 Shrink films or stretch wraps must adequately secure the load to
the pallet. The film must have adequate tack to prevent loose ends from
hanging off the load.
7.5.2 Angle boards shall be used on the four vertical corners to prevent
the corrugated from collapsing due to stretchwrap pressure.
[CHART]
7.5.3 There shall be a minimum of three spiral wraps per unitized load.
7.6 COMBINATION PALLETIZATION METHODS
Some commodity managers may require both banding and stretchwrap as a
requirement. If both are required then all requirements in both sections
apply. (I.E. angle boards shall be required on all four vertical edges
and well as the horizontal banded edges.
7.6 TESTING
Palletization loads to be tested per the Dell Packaging Specification
00121.
8.0 MARKING AND IDENTIFICATION
Supplier shipments routed by common carriers must be accurately
described on the bill of lading with the appropriate package
description, as required by the National Motor Freight Classification.
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<PAGE> 55
9.0 LABELING REQUIREMENTS
9.1 REQUIREMENTS
Receipt and storage of materials, requires that incoming loads be easily
and quickly identified. All shipping containers must be identified with
an "Outer Package Label" as specified in the "Electronic Industries
Association Shipping and Receiving Bar Code Label Standard," available
from Dell Computer Corporation's Procurement and Receiving Departments.
9.2 EXCEPTIONS
Exceptions for OEM products will have superseding requirements as
outlined by each commodity's contract/specification requirements.
10.0 PACKING LISTS
10.1 REQUIREMENTS
10.1.1 One packing list is required with each shipment, as it specifies
the contents of the shipment received.
10.1.2 The preferred location of the packing list is on the outside of
the shipping container, positioning it on the side or end, not on top.
Securely affix a transparent envelope or tape such that the packing list
is visible and protected from damage.
10.1.3 When the packing list is enclosed on the inside of a carton, that
carton must be identified with a "Packing List Enclosed" label.
10.1.4 All packing lists must contain the following information:
Name and Address of Supplier
Dell Computer Corporation Part Number
Purchase Order Number
Name and Address of Receiving Location
Number of pieces shipped
Description of Material
Shipping Date
Case Number
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<PAGE> 56
SCHEDULE E TO AGREEMENT NUMBER BRO-001
DELL SUPPLIER LABELING SPECIFICATION
PART NUMBER 13190
<PAGE> 57
DELL
SUPPLIER
LABELING
SPECIFICATION
DELL Part No. 13190
Rev. A09-00
PROPRIETARY NOTE
THIS ITEM IS THE PROPERTY OF DELL COMPUTER CORP. AUSTIN, TEXAS AND CONTAINS
CONFIDENTIAL AND TRADE SECRET INFORMATION. THIS ITEM MAY NOT BE TRANSFERRED FROM
THE CUSTODY OF DELL COMPUTER CORP., EXCEPT AS AUTHORIZED BY DELL COMPUTER CORP.
AND THEN ONLY BY WAY OF LOAN FOR LIMITED PURPOSES. IT MUST NOT BE REPRODUCED IN
WHOLE OR IN PART AND MUST BE RETURNED TO DELL COMPUTER CORP. UPON REQUEST AND IN
ALL EVENTS UPON COMPLETION OF THE PURPOSE OF THE LOAN. NEITHER THIS ITEM NOR THE
INFORMATION IT CONTAINS MAY BE USED BY OR DISCLOSED TO PERSONS NOT HAVING A NEED
FOR SUCH USE OR DISCLOSURE CONSISTENT WITH THE PURPOSE OF THE LOAN WITHOUT PRIOR
WRITTEN CONSENT OF DELL COMPUTER CORPORATION.
<PAGE> 58
LABELING SPECIFICATION
CONTENTS
<TABLE>
<S> <C>
SCOPE 4
Purpose 4
Application 4
Subassembly (Parts) Classes 4
BARCODE DEFINITIONS 5
GENERAL LABEL REQUIREMENTS 6
Subassembly (Parts) Labels 6
Subassembly (Parts) Label Content 6
Type A Label 6
Type B Label 6
Type C Label 7
Type D Label 7
Twenty Digit Barcode 8
DELL Part Number 9
Manufacturer's Identification 9
Seven Character Date Code/Sequence Number Combination 9
Date Code 9
Sequence Number 10
DELL Part Number 10
Revision (Rev) Level Barcode 10
Label Placement 11
Code Density and Dimension 11
Code Height 11
Intercharacter Gap 11
Quiet Zones 11
Spacing Between Barcode and HRI 11
Spacing Between Edge Of Label and HRI 11
Readability and Printing Requirements 11
Subassembly (Parts) Label Material Requirements 12
Non-PCB/PWA (Label Types A and B Only) 12
Face Stock Characteristics 12
Adhesive Characteristics 12
PCB/PWA Labels (Label Type C Only) 12
Face Stock Characteristics 12
Adhesive Characteristics 12
Durability 13
Electronic Industries Association (EIA) Shipping/Receiving Label 13
EIA Label 13
EIA Label Content 13
EIA Label Location 15
Code Density and Dimension 15
Code Height 15
Intercharacter Gap 15
Quiet Zones 15
Spacing Between Barcode and HRI 15
Spacing Between Edge of Label and HRI 15
Height of Human Readable Interpretation 15
Readability and Printing Requirements 16
EIA Label Material Requirements 16
</TABLE>
2
<PAGE> 59
<TABLE>
<S> <C>
Face Stock Characteristics 16
Adhesive Characteristics 16
Durability 16
Sample Electronics Industry Association (EIA) Labels 17
ISO Country Codes 19
</TABLE>
3
<PAGE> 60
LABELING SPECIFICATION
SCOPE
1.1 PURPOSE:
The purpose of this document is to specify the characteristics,
standards and requirements for electronic subassembly (parts) labels (referred
to as PPID {piece part identification}) and EIA labels by suppliers to DELL
Computer Corporation.
1.2 APPLICATION:
This document shall apply whenever label marking and reading are
employed on shipping containers and electronic subassemblies used in DELL
products and when shipping components to DELL.
1.3 SUBASSEMBLY (PARTS) CLASSES:
This document shall apply to each of the following subassembly classes
as indicated by DELL Computer Corporation.
- AC Adapters
- Add on Cards (all types)
- CD ROM's
- Controller Cards
- Tape Drives
- Floppy Drives
- Hard Drives
- PCMCIA Card Interfaces
- Keyboards
- Monitors
- PCB/PWA's (motherboards, risers, backplanes, and {as
indicated by procurement}, cache cards, daughter cards,
and other PCB's)
- Portable Batteries
- Power Supplies
- Docking Modules/Port Replicators
- Thermal Monitoring Cards
- Selected notebook components
4
<PAGE> 61
- 2.1 BARCODE DEFINITIONS:
BAR - The darker element of a barcode.
BARCODE - An array of rectangular bars and spaces in a predetermined
pattern.
BARWIDTH - The perpendicular distance across a bar measured from a point
on one edge to a point on the opposite edge. Each point will be defined
as having a reflectance that is 50% of the difference between the
background and bar reflectances.
BINARY - Pertaining to a characteristic or property involving a
selection, choice or condition in which there are two possibilities.
BINARY CODE - A code which makes use of exactly two distinct characters,
usually 0 (zero) or 1 (one).
CHARACTER - Letter, digit or other special form that is used as part of
the organization, control or representation of data. A character is
often in the form of a spatial arrangement of adjacent or connected
strokes.
CODE 128 - A variable length, alpha-numeric encoding the full ASCII 128
character set. Every character is made up of 11 modules containing three
bars and three spaces. Bar and space width is one, two three, or four
modules. Three different start characters are used to select one of
three character sets, including a high-density numeric arrangement that
can encode two numeric digits in each character.
CODE DENSITY - The number of characters that can appear per unit of
length, normally expressed in characters per inch (CPI).
ELEMENT - A generic term used to refer to either a bar or a space.
HUMAN READABLE INTERPRETATION (HRI) - The exact interpretation of the
encoded barcode data presented in a human readable font.
INTERCHARACTER GAP - The space between the last element of one character
and the first element of the adjacent character of a discrete barcode.
MARGIN (QUIET ZONE) - The area immediately preceding the start character
and following the stop character, which contains no markings. SPACE -
The lighter element of a barcode. START AND STOP CHARACTER - A distinct
character represented by an asterisk (*), used at the beginning and end
of each 3 of 9 barcode which provides initial timing references and
direction of read information to the coding logic. The asterisk start
and stop code is an integral part of, and peculiar to, the 3 of 9
barcode. SYMBOL - A complete barcode containing margins, start
character, data characters, check digit (if any) and a stop character.
UNIT SIZE - The bar width of a narrow element. The narrow bar and the
narrow space are equal in the 3 of 9 barcode. 3 OF 9 BARCODE - a
variable length, discrete, self-checking, bi-directional alphanumeric
barcode. Its character set contains 43 meaningful characters: 0 - 9, A -
Z, -, ., $, /, +, % and space. Each character is composed of nine
elements: five bars and four spaces. Three of the nine elements are wide
(binary value 1), and six elements of narrow (binary value 0). An
additional common character, asterisk (*) is used for both start and
stop delimiters.
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<PAGE> 62
LABELING SPECIFICATION
GENERAL LABEL REQUIREMENTS
3.1 SUBASSEMBLY (PPID) LABELS
3.1.1 SUBASSEMBLY (PPID) LABEL CONTENT
Subassemblies (see Scope for commodities specified as subassemblies)
shall be labeled with one of the following three types of barcode labels as
indicated in the DELL Specification Control Drawings. The Label Type must be
assigned by DELL Procurement Group for all parts. Every label must fit on the
part without affecting functionality or cosmetically mar the look of the
finished DELL product (see below for detail technical specifications).
TYPE A LABEL
This barcode label will be applied to most parts on label stock 2.0
inches (50.8 mm) wide by .5 inch (12.7 mm) high using a wide to narrow
element ratio of 3 to 1. The narrow element must be a minimum of 5 mils
(.127 mm). This is a 12.5 CPI bar code. This is the preferred label for
all parts (except motherboards), and is recommended unless the
manufacturer is incapable of printing or scanning a label printed with
this density bar code. Approval to use an alternative label is to be
obtained in writing from DELL via contract or Purchase Order. (Special
note: Upon specific approval from Dell, this label may be produced in a
smaller size using Code 128 rather than Code 39. This approval is
intended only for parts that are too small for a 2" label, such as
certain notebook components)
[GRAPHIC]
TYPE B LABEL
For manufacturers not having equipment capable of printing or scanning
the standard size label (Type A above), a label up to 3.25 inches (79.4
mm) wide by .5 inch (12.7 mm) high will be permitted, provided the
component size permits and it does not interfere with the operation or
finished look of the component. When the narrow element exceeds width of
6.6 mils (.167 mm), a 2 to 1 or 2.5 to 1 ratio may be used. DELL
discourages the use of this label unless it is absolutely necessary. The
bar code densities can, for a label wider than 2 inches, range down to
as low as 7.7 CPI which requires a label to be at least 3.125 inches
long to have acceptable quiet zones. A bar code density of 10.4 CPI
requires a 2.375 inch (60.3 mm) long minimum label. This density is
achieved with a 300 DPI printer using a 6.6 mil (2 dot) narrow element
at a 2.5 to 1 ratio.
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<PAGE> 63
[GRAPHIC]
TYPE C (2 PART) LABEL
For subassemblies, such as boards, that do not have sufficient surface
area to affix a Type A or Type B label without interfering with the
performance or finished look of the part. Use a 3 to 1 ratio where the
narrow element must be a minimum of 5 mils (.127 mm). The Type C label
may only be used with the written permission of DELL via contract or
Purchase Order. The Rev label may have the human readable type above,
below, or to the left of the bar code, provided it all fits on the
label, with minimum quiet zones on either side of the bar code.
[GRAPHIC]
TYPE D LABEL
For items which require a country of origin label for customs, a Type D
label may be used. Use a 4 to 2 ratio where the narrow element must be a
minimum of 5 mils (.127 mm). The Rev must have the human readable type
below or to the left of the bar code with minimum quiet zones on either
side of the bar code. The country of origin, of the form "MADE IN
XXXXX," on one or two lines, must be located immediately to the left of
the Rev bar code while maintaining minimum quiet zones. The area to the
left of the country of origin may be used by the vendor for additional
information, such as special handling icons, provided that such
information does not interfere with the readability of the human
readable code denoting the Dell Part Number or the country of origin
text. For portable hard disk drives the label must be located within the
position window shown below.
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<PAGE> 64
[GRAPHIC]
Parts labels will be made up of three general physical areas: the Twenty
Digit Barcode, the DELL Part Number and the Rev Level.
TWENTY DIGIT BAR CODE A bar code message, containing the sequence of
Dell Part Number, Supplier's Identification Number and location code, and a
serial number consisting of a Date code and a sequence number (see definitions
below), consisting of CODE 3 of 9 symbols enclosed between start and stop
character codes with Human Readable Interpretation (HRI) directly below. The bar
code shall not include any dashes (-) or other information besides that
specifically mentioned above. The HRI will separate the Manufacturer ID number,
the Date Code and the sequence number with a minus sign (-). The Dell part
number will be printed in human readable form separately from the other
information contained within the bar code (except on Type C labels, where the
text string may be
8
<PAGE> 65
continuous, and will have DP/N as the leading text.) Note: In special
circumstances, Code 128 will be approved, but cannot be used without specific
approval.
DELL PART NUMBER -
Eight alphanumeric characters assigned by DELL to identify the
part. In the event that the Dell part number is 5 characters,
three leading zeros shall be used to fill out the 8 spaces
designated for the DELL part number. The DP/N will be provided on
the purchase order placed for the parts.
MANUFACTURER'S IDENTIFICATION -
Five numeric (currently, may be alphanumeric in the future)
characters naming the supplier of the part and the location of
the manufacturing plant, to be supplied by DELL Procurement. The
first four characters shall represent the base supplier number.
The fifth character shall be a numeric character representing the
manufacturing plant, and shall be issued by DELL procurement as
requested by supplier, one per manufacturing location.
SEVEN CHARACTER DATE CODE/SEQUENCE NUMBER COMBINATION
The first 3 characters of this component of the bar code shall
represent the year, month and day of manufacture. The last four
shall be a sequence number. The first character shall be a number
representing the last digit of the year of manufacture (1995
would be a 5). The second character shall represent the month per
the table below. The third character shall represent the day of
manufacture beginning with a 1 through 9, and then with the
letters A through V representing the 10th through 31st of a month
per the table below.
DATE CODE - A three character field used to identify the date a
part was manufactured, or the date Dell received the part (If a
part label had to be generated by Dell). This date code is made
up of a one character code for year (0-9), a one character code
for month, and a one character code for day.
The following tables apply to the Date Code:
Month codes
<TABLE>
<S> <C> <C> <C>
January 1 July 7
February 2 August 8
March 3 September 9
April 4 October A
May 5 November B
June 6 December C
</TABLE>
Day Codes
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1st 1 11th B 21st L 31st V
2nd 2 12th C 22nd M
3rd 3 13th D 23rd N
4th 4 14th E 24th O
5th 5 15th F 25th P
6th 6 16th G 26th Q
</TABLE>
9
<PAGE> 66
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
7th 7 17th H 27th R
8th 8 18th I 28th S
9th 9 19th J 29th T
10th A 20th K 30th U
</TABLE>
SEQUENCE NUMBER
A four character field used in conjunction with the Dell Part Number,
the MFG ID and the MFG Date Code to provide the detail necessary to
uniquely identify an individual part.
Suppliers will be allowed the use of characters 0-9, A-O in the first
position of the sequence number, with no restrictions on the 2nd through
4th positions. The use of the characters P through Z in the first
position of the sequence number is reserved for use internally by Dell,
for labels that Dell prints itself. When Dell prints its own labels (not
applicable to suppliers), the first position will be used to identify
where the part was received, as outlined below:
"P" & "Q" Received in AMF facilities
(Applies to facilities in Austin, including
Manufacturing, Field Service & Board Repair)
"R" & "S" Received in EMF facilities
(Applies to facilities in Ireland)
"T" & "U" Received in APCC facilities
(Applies to facilities in Malaysia)
"V" through "Z" Reserved for future use
with no restrictions on the 2nd through 4th positions.
In the event a barcode is not on the part when received, Dell will create a
barcode label by entering the DELL Part Number and Manufacturer's
Identification, and the computer will assign the next available sequence number
for that part number and print a properly formatted barcode label, including a
date code reflecting the date of label generation. If the manufacturing location
code is unknown for Dell generated labels, a 0 (zero) will be used for the
location code portion of the supplier's ID. The Dell receiving location will be
indicated by the first character of the sequence number, as noted in the table
above, when Dell is printing its own labels.
ANY COMPONENT WITHOUT SUBASSEMBLY LABELS (REQUIRING PARTS TO BE BARCODE LABELED
BY DELL) WILL NOT BE CAPABLE OF REFERENCING MANUFACTURING INFORMATION SUCH AS
DATE OF MANUFACTURE, WHERE BUILT, ETC. THEREFORE, IT IS MOST ADVANTAGEOUS FOR A
MANUFACTURER TO PROVIDE THE SUBASSEMBLY (PART) LABEL AND BE A BENEFACTOR OF THE
QUALITY MANAGEMENT INFORMATION DERIVED BY THE DELL SYSTEM.
DELL PART NUMBER (DP/N) IN HUMAN READABLE FORM, LARGER LETTERS.
The eight numeric character part number assigned by DELL that appears as the
first eight characters of the subassembly bar code label. The DP/N will be
provided on the purchase order placed for the parts. Note: If the Assigned Dell
part number is 5 characters, precede it with 3 zeros.
REVISION (REV) LEVEL BARCODE
A barcode message consisting of three CODE 3 of 9 characters enclosed between
start and stop character codes. These three characters represent the first three
characters of the DELL revision level
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<PAGE> 67
of the subassembly. The revision level will be supplied to the manufacturer via
the purchase order. The supplier's rev level information for a particular PO
will be supplied to Purchasing at the time of ordering, and confirmation must be
received from DELL prior to shipping a new rev of an existing part where DELL is
continuing to use the same DELL part number.
3.1.2 LABEL PLACEMENT
The placement of the label on the subassembly (part) must be on a flat
surface and in a location that will not cosmetically mar the look of the
finished DELL product and not on a surface normally used for the attachment of
the component. If DELL controls the specification for the subassembly, the
placement will be in the location indicated on the DELL assembly drawings.
DELL's purchasing agents should be able to answer questions regarding placement,
or refer you to the appropriate contacts, such as peripheral development. Note:
The location of labels on hard drives intended for notebooks can be critical due
to the close tolerances of hard drive bays (See Type D Label).
3.1.3 CODE DENSITY AND DIMENSION FOR PPID LABELS
The maximum bar code density in characters per inch is 12.5 (CPI). The
minimum and maximum widths for narrow elements, and allowable ratios are as
follows:
<TABLE>
<S> <C>
Narrow element width 0.005 inches (.127 mm) to 0.010 inch (.254 mm)
Wide element width 0.015 inches (.381 mm) to 0.020 inch (.762 mm)
Wide to narrow element ratios 3:1 for narrow elements less than .065 inch (.165mm)
2.5:1 to 3:1 for narrow elements greater than or equal
to 0.066 inch (.167 mm)
2:1 to 3:1 for narrow elements of 0.010 inch or greater
Element tolerance 0.0017 inches (0.044 mm)
</TABLE>
Special note: If Code 128 has been specifically approved for use on a
particular part, the minimum narrow element width must be .005 inches. Only
Subset A of Code 128 is allowed for use.
3.1.3.1 CODE HEIGHT -
The allowable range for the bar code height is 0.20 inch +/-0.01 inch.
3.1.3. INTERCHARACTER GAP -
The distance between characters is the same as the minimum dimension of
a narrow element.
3.1.3.3 QUIET ZONES -
The minimum left and right margins shall be 15 times the width of
one narrow element or 0.12 inch (2.0 mm).
3.1.3.4 SPACING BETWEEN BARCODE AND HRI -
A minimum of 0.005 inch (0.127 mm) and a maximum of 0.015 inch(0.38 mm).
3.1.3.5 SPACING BETWEEN EDGE OF LABEL AND HRI -
The minimum spacing between the horizontal edge of the label and the HRI
shall be 0.015 inch(0.38 mm).
3.1.3.6 READABILITY AND PRINTING REQUIREMENTS.
Using commercially available bar code verifiers, labels must have a
minimum decode percentage of 95% or more. The label stock and ribbon
combination, stock, or other printing method must produce labels
acceptable for scanning in the visible light (600 to 660 nm wavelength)
as well as
11
<PAGE> 68
laser and infrared scanners operating at wavelengths up to 900 nm. Specific
details, if required, can be obtained by referring to the EIA-556-A Shipping and
Receiving Bar Code Label Specification or ANSI bar code specifications. ANSI bar
code quality standard "C" or better is indicative of acceptable labels, although
care should be used in using this as the only standard of quality, particularly
on higher density labels. These specifications will lay out minimum
reflectivity, print contrast ratios, bar growth and size tolerances, defect
tolerances, etc. Labels using the direct thermal process are not acceptable for
5 mil narrow element PPID labels.
Dell is interested in decodability using commercial laser scanners and
will be happy to verify any contemplated labels. Dot matrix printed labels are
not acceptable as piece part labels.
3.1.4 SUBASSEMBLY (PARTS) LABEL MATERIAL REQUIREMENTS
3.1.4.1 NON-PCB/PWA (LABEL TYPES A AND B ONLY)
a) Face Stock Requirements
The actual material used is at the discretion of the affixing party,
provided the labels are legible, permanent and meet the following minimum
standards:
<TABLE>
<S> <C>
1) Face Stock Characteristics
Type Polyester or topcoated paper
Caliper 0.0020 inch
Basis Weight 42 lb. / 3000 square feet
Color White
Background Reflectance 633nm / 80% min. (90nm / 70% min.)
Print Contrast Signal 95% min. 85% min.
Service Temperature Range 0 to 225 degrees Fahrenheit
2) Adhesive Characteristics
Type Permanent Acrylic
Minimum Application Temp. 50 degrees Fahrenheit
Service Temperature Range 0 to 225 degrees Fahrenheit
Dwell: Initial Tack 1 hour (at room temperature)
Ultimate Tack 30 hours - Full Strength
Caliper 0.0009 inch
Conductivity Non-conductive if applied across
any contacts on a PWA
</TABLE>
3.1.4.2 PCB/PWA LABELS (LABEL TYPE C ONLY)
a) Face Stock Requirements - The actual material used is at the
discretion of the affixing party, provided the labels are legible, permanent and
meet the following minimum standards:
<TABLE>
<S> <C>
1) Face Stock Characteristics
Type Polymide (kapton) or high
temperature polyester
Caliper 0.0027 inch
Basis Weight 70 lb. / 3300 square feet
Color Buff / Amber (or white for
polyester)
Background Reflectance 633nm / 75% (900nm / 80% min.)
Print Contrast Signal 63% min. 65% min.
2) Adhesive characteristics
</TABLE>
12
<PAGE> 69
<TABLE>
<S> <C>
Type High Temp Permanent Acrylic
Minimum Application Temp 50 degrees Fahrenheit
Service Temperature Range 0 to 525 degrees Fahrenheit
Dwell - Initial Tack 6 Hours at Room Temperature
Ultimate Tack 36 Hours - Full Strength
Caliper 0.0020 inches
</TABLE>
3.1.4.3 DURABILITY
Labels must remain scanable at the above listed minimum acceptable
levels for a period of 5 years in a non-condensing environment with temperatures
up to 150 degrees Fahrenheit (65 degrees C). Direct thermal labels are not
allowed for PPID labels without documentation with regards to durability.
3.2 ELECTRONIC INDUSTRIES ASSOCIATION (EIA) SHIPPING/RECEIVING LABEL
Sections of the DELL Standard for this label have been taken from the
Electronics Industry Association Standard EIA-556-A for OUTER PACKAGE LABELS,
but have been retyped to focus on the specific needs of DELL. In the event the
EIA standard for this label should change, the DELL Standard will remain in
effect until DELL approves in writing any modifications to reflect the EIA
Standards change.
3.3.1 EIA LABEL CONTENT
Each shipping container received at DELL shall be labeled with the
information indicated below. A shipping container is an individual sealed box
containing one or more parts. It is not a pallet, or overwrap, but is the
container from which individual parts would be removed for assembly into a
finished computer. Thus, each individual shipping container on a pallet, or
unitized overwrap, will contain multiple individual cartons with individual EIA
labels.
a) FROM AND TO - This shipping information data field is a non-barcoded
mandatory data field located as shown in Figure 1. It shall contain, at
a minimum, the supplier's name and address (under the title "FROM") and
DELL's name and address (under the title "TO"). Additional information
may be printed in this area such as the DELL logo or telephone numbers,
all only in human readable form. The height of the human readable
interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
b) VENDOR ORDER / SHIPPING NUMBER (15 characters) - A mandatory barcoded
field defined by the supplier which contains the supplier's Invoice or
Packing Slip number, in both barcoded and HRI formats. The height of the
human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
c) PO NUMBER (8 characters) - A mandatory barcoded field containing
DELL's Purchase Order Number in both barcoded and HRI formats. The
height of the human readable interpretation (HRI) shall be a minimum 0.2
inch (5.1mm).
d) LINE NUMBER (2 characters) - A mandatory barcoded field containing
the Line Number on the DELL Purchase Order that corresponds to the item
contained in the shipping container. The height of the human readable
interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
e) DELL PART NUMBER (5 characters) - A mandatory barcoded field
indicating the DELL Part Number of the items in the shipping container.
This number will appear on the DELL
13
<PAGE> 70
P.O. Only one part number may be packed in each shipping container. The
human readable interpretation (HRI) shall be located to the right of the
barcode (not closer than 0.25 inch or 6.41mm) and have a minimum height
of 0.5 inch (12.7mm). At a future date, if Dell increases the size of
its part number, the number of characters for this field will be
increased. Until then, even if leading zeroes are being used to fill out
the 8 character part number field on the PPID, this field needs to
contain only the 5 character Dell Part number, as issued to suppliers by
Dell.
f) BOX QUANTITY (6 numeric digits) - A mandatory barcoded field
containing the total quantity of items within the shipping container.
When multiple containers are indicated in the Package Count data field
(e.g. 1 of 2), the quantity shown in Box Quantity shall be the quantity
in each package, not the total quantity --- of all packages in the
shipment. The human readable interpretation (HRI) shall be located to
the right of the barcode (not closer than 0.25 inch or 6.41mm) and have
a minimum height of 0.5 inch (12.7mm).
G) DELL PPID APPLIED? (1 characters) - A mandatory barcoded field
indicating whether or not (Y for yes, N for No) the parts within the box
are complaint with Dell's PPID labeling requirements, and that the
labels are applied. If the parts within the box do not require PPID
labels, then this field will always be N. The height of the human
readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
h) COUNTRY OF ORIGIN (2 characters) - A mandatory barcoded field
designating the country from which the item(s) originated. Country codes
have been assigned by DELL and are listed below. The height of the human
readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
i) PART DESCRIPTION - A non-barcoded field which conveys summary
information of the pertinent features of the part. The 5 character DELL
Part Number is required to be in the first 5 characters of this field.
Optional information such as supplier's description, date of
manufacture, lot number, etc. may also be included in this field. This
information must be in human readable form only and the height shall be
a minimum 0.2 inch (5.1mm).
j) PACKAGE COUNT - A non-barcoded mandatory field that describes the
numerical sequence of the package when more than one package is shipped
for a specific order or when multiple packages are required for a
specific part number. When only one package is required, this should be
indicated as 1 of 1. When multiple packages are required, the form X of
Y should be used, where X is the number of the package and Y is the
total number of packages. The height of the human readable
interpretation (HRI) shall be a minimum 0.2 inch (5.1mm).
k) TOTAL ORDER QUANTITY - A non-barcoded field indicating the total
quantity shipped of the specific part (corresponding to the PO Number
and Line Number). The Total Order Quantity may be contained in more than
one shipping container. This should not be confused with Box Quantity as
defined above. The height of the human readable interpretation (HRI)
shall be a minimum 0.2 inch (5.1mm).
14
<PAGE> 71
3.3.2 LABEL LOCATION
Whenever possible, the label should be affixed to the smaller end of the
package or box, which might be facing the aisle if the package is stored on the
shelving or racks, to permit easy identification during storage. In addition,
the EIA Label should not be covered by tape, stickers or other materials that
might inhibit scanning.
[GRAPHIC]
3.3.3 CODE DENSITY AND DIMENSION -
The optimum barcode density in characters per inch (CPI) is 3.70 to
6.90. The allowable range for the nominal width of the narrow elements (unit
size) and nominal ratio of the wide-to-narrow elements is as follows:
Minimum width of narrow elements 0.010 inch (0.254 mm) Minimum width of
wide elements 0.02 inch (0.432 mm) Minimum wide to narrow ratio 2:1 to
3:1 Element tolerance +/-0.0017 inch (0.41 mm)
3.3.3.1 CODE HEIGHT -
The allowable range for the bar code height is 0.50 inch +/- 0.1 inch.
3.3.3.2 INTERCHARACTER GAP -
Shall be the range of 1X to 2X.
3.3.3.3 QUIET ZONES -
The minimum clear area immediately preceding and following the barcode
shall be 0.17 inch (4.32 mm).
3.3.3.4 VERTICAL SPACING BETWEEN BARCODE AND HRI -
A minimum of 0.005 inch (0.127 mm) and a maximum of 0.015 inch (0.38
mm).
3.3.3.5 SPACING BETWEEN EDGE OF LABEL AND HRI -
The minimum spacing between the horizontal edge of the label and the HRI
shall be 0.015 inch (0.38 mm).
3.3.3.5 HEIGHT OF HUMAN READABLE INTERPRETATION -
The minimum height shall be 0.2 inch (5.1mm).
15
<PAGE> 72
3.3.3.6 READABILITY AND PRINTING REQUIREMENTS
Using commercially available bar code verifiers, labels must have a
minimum decode percentage of 95% or more. The label stock and ribbon
combination, direct thermal stock, or other printing method must produce labels
acceptable for scanning in the visible light (600 to 660 nm wavelength) as well
as laser and infrared scanners operating at wavelengths up to 900 nm. Specific
details, if required, can be obtained by referring to the EIA-556-A Shipping and
Receiving Bar Code Label Specification or ANSI bar code specifications. These
specifications will lay out minimum reflectivity, print contrast ratios, bar
growth and size tolerances, defect tolerances, etc. DELL is interested in
decodability using commercial laser scanners and will be happy to verify any
contemplated labels.
3.3.4 EIA LABEL MATERIAL REQUIREMENTS
3.3.4.1 EIA LABELS
a) Face Stock Requirements - The actual material used is at the
discretion of the affixing party, provided the labels are legible, permanent and
meet the following minimum standards:
<TABLE>
<S> <C>
1) Face Stock Characteristics
Type Polyester or top coated paper
Caliper 0.0020 inch
Optimum Dimensions - width 4 inches (102mm)
- height 6.5 inches (165mm)
Basis Weight 42 lb. / 3000 square feet
Color White
Background Reflectance 670nm (visible light) & 900nm (infra-red
light)
2) Adhesive Characteristics
Type Permanent Acrylic
Min. Application Temp. 50 degrees Fahrenheit
Svc Temperature Range 0 to 225 degrees Fahrenheit
Dwell: Initial Tack 1 hour (at room temperature)
Ultimate Tack 30 hours - Full Strength
Caliper 0.0009 inch
</TABLE>
3.3.4.2 DURABILITY -
Labels must remain scanable at minimum standards for a period of 12
months with storage in an indoor, controlled environment at temperatures up to
100 degrees Fahrenheit (38 degrees Centigrade).
16
<PAGE> 73
ELECTRONICS INDUSTRIES ASSOCIATION (EIA) LABEL
[GRAPHIC]
17
<PAGE> 74
DELL COMPUTER CORPORATION
ISO COUNTRY CODE TABLE
Feb. 23, 1995
<TABLE>
<CAPTION>
COUNTRY COUNTRY
CODE COUNTRY CODE COUNTRY
- ------- ------- ------- -------
<S> <C> <C> <C>
AF Afghanistan CO Columbia
AL Albania CN Comoros
AG Algeria CF Congo
AQ American Samoa CW Cook Islands
AN Andorra CS Costa Rica
AO Angola HR Croatia
AV Anguilla CU Cuba
AY Antarctica CY Cyprus
AC Antigua EZ Czech Republic
AR Argentina DA Denmark
AM Armenia DJ Djibouti
AS Australia DO Dominica
AU Austria DR Dominican Republic
AJ Azerbaijan EC Ecuador
BF Bahamas, The EG Egypt
BA Bahrain ES El Salvador
BG Bangladesh EK Equatorial Guinea
BB Barbados ER Eritrea
BO Belarus EN Estonia
BE Belgium ET Ethiopia
BH Belize FA Falkland Islands
DM Benin FO Faroe Islands
BD Bermuda FJ Fiji
BT Bhutan FI Finland
BL Bolivia FR France
BK Bosnia and Herzegovina FG French Guiana
BC Botswana FP French Polynesia
BV Bouvet Island FS French Southern
BR Brazil GB Gabon
IO British Indian Ocean GA Gambia, The
VI British Virgin Islands GZ Gaza Strip
BX Brunei GG Georgia
BU Bulgaria GE Germany, Federal Republic
BM Burma GH Ghana
BY Burundi GI Gibraltar
CB Cambodia GR Greece
CM Cameroon GL Greenland
CA Canada GJ Grenada
PQ Canal Zone GP Guadaloupe
CV Cape Verde, Republic GQ Guam
CJ Cayman Islands GT Guatemala
CT Central African Empire GV Guinea
CD Chad PU Guinea-Bissau
CI Chile GY Guyana
CH China (PRC) HA Haiti
KT Christmas Island HM Heard & McDonald Islands
CK Cocos (Keeling Island) HO Honduras
</TABLE>
18
<PAGE> 75
DELL COMPUTER CORPORATION
ISO COUNTRY CODE TABLE
Feb. 23, 1995
<TABLE>
<CAPTION>
COUNTRY COUNTRY
CODE COUNTRY CODE COUNTRY
- ------ ------- ------ -------
<S> <C> <C> <C>
HK Hong Kong MW Montenegro
HU Hungary MH Monserrat
IC Iceland MO Morroco
IN India MZ Mozambique
ID Indonesia WA Namibia
IR Iran NR Nauru
IZ Iraq BQ Navassa Island
EI Ireland NP Nepal
IS Israel NL Netherlands
IT Italy NA Netherlands Antilles
IV Ivory Coast NC New Caledonia
JM Jamaica NZ New Zealand
JA Japan NU Nicaragua
JQ Johnson Atoll NG Niger
JO Jordan NI Nigeria
KZ Kazakhstan NE Niue
KE Kenya NF Norfolk Island
KR Kiribati CQ Northern Mariana Island
KN Korea, PDR NO Norway
KS Korea, Republic of MU Oman
KU Kuwait PK Pakistan
KG Kyrgyzstan PM Panama
LA Laos PP Papua New Guinea
LG Latvia PF Paracel Islands
LE Lebanon PA Paraguay
LT Lesotho PE Peru
LI Liberia RP Philippines
LY Lybia PC Pitcaim Islands
LS Liechtenstein PL Poland
LH Lithuania PO Portugal
LU Luxemborg RQ Puerto Rico
MC Macao QA Qatar
MK Macedonia RE Reunion
MA Madagascar RO Romania
MI Malawi RS Russia
MY Malaysia RW Rwanda
MV Maldives SM San Marino
ML Mali TP Sao Tome & Principe
MT Malta SA Saudi Arabia
MB Martinique SG Senegal
MR Mauritania SR Serbia
MP Mauritius SE Seychelles
MX Mexico SL Sierra Leone
MQ Midway Islands SN Singapore
MD Moldova LO Slovakia
MN Monaco SI Slovenia
MG Mongolia BP Solomon Islands
</TABLE>
<PAGE> 76
DELL COMPUTER CORPORATION
ISO COUNTRY CODE TABLE
Feb. 23, 1995
<TABLE>
<CAPTION>
COUNTRY COUNTRY
CODE COUNTRY CODE COUNTRY
- ------ ------- ------ -------
<S> <C> <C> <C>
SO Somalia VQ Virgin Islands (U.S.)
SF South Africa WQ Wake Island
SP Spain WF Wallis and Futuna
PG Spratly Islands WI Western Sahara
CE Sri Lanka WS Western Samoa
SC St. Christopher-Nevis YE Yemen, Rep. of (SANA)
SH St. Helena CG Zaire
SB St.Pierre and Miquelon ZA Zambia
ST St. Lucia ZI Zimbabwe
VC St. Vincent
SU Sudan
NS Surinam
JS Svalbard and Jan Mayen
WZ Swaziland
SW Sweden
SZ Switzerland
SY Syria
TW Taiwan
TI Tajikistan
TZ Tanzania, United Republic
TH Thailand
TO Togo
TL Tokelau
TN Tonga
TD Trinidad and Tobago
NQ Trust Terr. of the Pacific Is.
TS Tunisia
TU Turkey
TX Turkmenistan
TK Turks and Caicos Islands
TV Tuvalu
UG Uganda
UP Ukraine
TC United Arab Emirates
UK United Kingdom
US United States
ZZ Unknown
UV Upper Volta
UY Uruguay
IQ US. Misc. Pacific Islands
UZ Uzbekistan
NH Vanuatu
VV Various
YY Various Bloc Countries
VT Vatican City
VE Venzuela
VM Vietnam
</TABLE>
19
<PAGE> 77
SCHEDULE F TO AGREEMENT NUMBER BRO-001
DELL UNIQUE SERVICE TAG/BARCODE LABELING REQUIREMENTS
<PAGE> 78
DELL UNIQUE SERVICE TAG/BARCODE LABELING REQUIREMENTS
Due to the fact that the Product will not be introduced into the Dell
manufacturing process, specific Product tracking code labels will be required to
be applied by BROCADE or their authorized subcontractor. The following labeling
requirements will be required in addition to those specified in Schedule E -
Dell Supplier Labeling Specification, Part Number 13190.
1. Service Tag Track Code
Dell will provide BROCADE a supply of unique 5-digit alpha numeric Service Tag
Track Codes (Codes) for use on barcode labels to be applied to the Product and
to the shipping container. The quantity of codes to be supplied will be mutually
agreed to by both parties. BROCADE will notify Dell when the remaining supply of
Codes has reached approximately two (2) weeks. Dell will issue a new supply of
Codes upon request.
2. Barcode Label Requirements
BROCADE shall barcode label the Product with the Service Tag Track Code and
shall apply the same information on each shipping container to be received at
Dell. The location and size of labels shall be mutually agreed to by the
parties. Barcode definitions are contained in Schedule E of this Agreement.
1
<PAGE> 79
SCHEDULE G TO AGREEMENT NUMBER BRO-001
PRODUCT REGULATORY AND SAFETY REQUIREMENTS
<PAGE> 80
FIBRE CHANNEL SWITCH EMC REGULARLY AND PRODUCT SAFETY REQUIREMENTS
<TABLE>
<CAPTION>
Responsibility
<S> <C> <C> <C> <C>
Country / Mark Markings which apply Brocade Dell Comments
FCC Class A EMC
CE EMC
VCCI - A EMC
UL Safety Agency
CSA Safety Agency
TUV Safety Agency
NEMKO Safety Agency Post RTS - requires
translations
EZU Safety Agency
NORTH AMERICA
United States UL, FCC
Canada CSA, ICES
SOUTH & CENTRAL AMERICA
Mexico NOM, Safety Agency
WESTERN EUROPE
United Kingdom/Ireland CE
Benelux CE
France CE Post RTS - requires
translations
Germany TUV-GS,CE
Austria CE
Spain/ Portugal/ Italy CE
SCANDINAVIAN COUNTRIES
Switzerland/Austria CE
Sweden NEMKO/SEMKO, Safety Agency
Norway CE
Finland NEMKO/FIMKO, Safety Agency
Denmark NEMKO, Safety Agency
EASTERN EUROPE
Russia GOST, Safety Agency requires EMC
Czech Republic EZU, Safety Agency requires EMC
Slovenia SIQ
Slovakia EVPU
Hungary PCBC, Safety Agency requires EMC
Poland PCBC, Safety Agency requires EMC
ASIA PACIFIC
Japan VCCI Post RTS - requires
translations
Australia C-Tick, EMC
New Zealand C-Tick, EMC
SOUTH EAST ASIA
China CCIB, Safety Agency Not required for SilkWorm
Express
</TABLE>
Page 1 of 2
<PAGE> 81
FIBRE CHANNEL SWITCH EMC REGULARLY AND PRODUCT SAFETY REQUIREMENTS
<TABLE>
<S> <C> <C> <C> <C>
Hong Kong CCIB, Safety Agency Post RTS - requires
translations
Taiwan BCIQ, EMC
Korea RRL, EMC Post RTS - requires
translations
Singapore PSB, Safety Agency
Philippines No Known Requirements
Indonesia No Known Requirements
INDIAN CONTINENT
India No Known Requirements
Malaysia No Known Requirements
Thailand No Known Requirements
AFRICA
South Africa SABS
MIDDLE EAST
Saudi Arabia SASO
</TABLE>
Page 2 of 2
<PAGE> 82
SCHEDULE H TO AGREEMENT NUMBER BRO-001
PRODUCT SPECIFICATIONS
1. NO. 0027-SEDS-2 -- SILKWORM EXPRESS SWITCH
<PAGE> 83
[BROCADE LOGO]
SILKWORM EXPRESS(TM) SWITCH
THE ESSENTIAL ELEMENT TO CREATE AN
ENTRY-LEVEL SAN
[GRAPHIC]
SILKWORM EXPRESS is an 8-port, full-duplex, gigabit Fibre Channel switch in the
SilkWorm(TM) Switch Family offered by Brocade Communications Systems, Inc.
(BROCADE (R)). This low-cost, high-performance switch ideally suits applications
requiring fewer ports while delivering full SilkWorm Family benefits including:
- - Scalability for expanding a network's initial size and capability
- - Resiliency to resolve faults immediately, isolating down time to the
faulty connection/device
- - Connectivity that increases aggregate bandwidth instead of degrading port
performance Configuration flexibility for attaching devices, arbitrated
loops, and switches
- - Management that is completely automatic and transparent, minimizing
administration
The SilkWorm Express switch houses four interface modules (a selection of G-PORT
OPTIONS OR FL-PORT OPTIONS). Each of the two ports on a module supports mixed
industry media. The GBICs (Gigabit Interface Converters) plug in from the front
of the switch. Each port operates independently at I-gigabit-per-second
(Gb/sec), full-duplex data rate.
A SilkWorm Express switch connects servers and storage devices to create an
entry-level Server-Storage Area Network (SAN). The SAN coexists with and
complements an existing LAN/WAN communications infrastructure.
[GRAPHIC]
STATE-OF-THE-ART SWITCHING FOR THE SAN
BROCADE switches fully comply with the Fibre Channel ANSI Standards, as well as
provide exclusive leadership hardware design including:
- - In-order delivery of data frames--guarantees that frames are delivered
to a destination in the same order as received by the switch from the
originator
- - Cut-through frame hardware routing--sends a frame without waiting for
the end of the frame or for a response back from its destination, improving
bandwidth utilization and minimizing transmission delays
- - Cascading--enables a switch to connect to as many other BROCADE switches
as there are available ports, enabling a maximum of 32 switches for
thousands of connections and long distances by placing switches at intervals
- - Flexible switch buffering--stores a data frame for only as long as is
absolutely necessary, moving data faster through the switch
- - Path selection--automatically identifies a failure and immediately
reroutes data onto alternate pathing, creating a highly resilient network
- - Registered state change notification--dynamic detection of changes in
configuration and port status
CONFIGURATION VERSATILITY
The customer predetermines the configuration of interface options and media to
be installed at the factory:
- - G-PORT OPTION--automatically detects the connection's operating mode to
either a device (F-port mode) or another BROCADE switch (E-port mode)
- - FL-PORT OPTION--connects both Fibre Channel Arbitrated Public and
Private Loops (i.e., legacy environments), providing their devices
full-citizenship status in the SAN
SCALABILITY AS NEEDED
The SAN grows by adding an additional SilkWorm Family switch and will:
- - Seamlessly incorporate more BROCADE switches into the network
- - Increase in aggregate bandwidth as connectivity increases
- - Network services automatically expand without additional system resources
[GRAPHIC]
<PAGE> 84
FL-PORT OPTION
AN INTERFACE FOR FIBRE CHANNEL CONNECTIONS
TO SILKWORM(TM) FAMILY SWITCHES
[GRAPHIC]
The FL-PORT OPTION, offered by Brocade Communications Systems, Inc.
(Brocade(R)), is an interface module used for connecting either Public or
Private Fibre Channel Arbitrated Loops (loops) to a SilkWorm Family switch. The
module provides two FL Ports, each port operating independently at
I-gigabit-per-second (Gb/sec) data rate, with full-duplex communication. Two
GBICs (Gigabit Interface Converters) are plugged into the module and are
accessible from the front panel of the switch. The form factor of the FL-PORT
OPTION is the same as the Brocade G-Port Option. The latter is used to connect
servers and storage devices to the network.
BOTH PUBLIC AND PRIVATE LOOP SUPPORT
A unique feature of Brocade's FL-PORT OPTION is that any device connected to the
Server-Storage Area Network (SAN) may communicate with a Fibre Channel disk or
other type of device on either Public or Private Loops:
- - In Public Loop operation--all loop devices are available to all other
network-connected devices and loop devices in the SAN. The loop devices
behave the same as devices attached directly to the SAN.
- - In Private Loop (legacy) operation--Brocade's translative mode allows up
to 32 devices connected to the SAN to appear as phantom devices on a Private
Loop.
[GRAPHIC]
FULL NETWORK SUPPORT TO LOOP DEVICES
The interface module acts as a bridge-to-the-world for loop devices, allowing
full citizen status in the Brocade Fibre Channel Fabric--the intelligent
interconnection scheme created by the switch. Loop devices realize the same
network benefits as a device connected directly to a switch, because the module
manages loop communication with the Brocade Fabric.
IMPROVED LOOP BANDWIDTH UTILIZATION
The module makes best use of a loop tenancy, which begins when a port gains
control of the loop and opens another port to send and/or receive frames, and
ends when a port gives up control of the loop. The FL_Port's
intelligent-transmit buffer collects data frames for optional transmission.
Collected frames delivered in a single loop tenancy reduce overhead from loop
arbitration, thus using loop bandwidth more efficiently. Collected frames are
delivered based on certain criteria, such as when:
- - a specific number of frames have been accumulated,
- - the end of a sequence has been detected,
- - or after a specific time period has elapsed.
SIMPLE NETWORK MANAGEMENT
Brocade, in partnership with such companies as Sun Microsystems, Hewlett
Packard, and Seagate Technology, led in the creation of the industry-standard
Fibre Channel Fabric Loop-Attachment technical report (profile). In addition to
full Fibre Channel switching capability and normal Fibre Channel Fabric
operation, Brocade extends to loops its commitment of providing value-added
software and services available for the SAN.
[GRAPHIC]
<PAGE> 85
G-PORT OPTION
AN INTERFACE FOR FIBRE CHANNEL CONNECTIONS
TO SILKWORM(TM) FAMILY SWITCHES
The G-PORT OPTION, offered by Brocade Communications Systems, Inc. (Brocade(R)),
is an interface module used for connecting nodes to a SilkWorm Family switch.
The module provides two G_Ports, each port operating independently at
I-gigabit-per-second (Gb/sec) data rate, with full-duplex communication. The
module provides point-to-point connections between the switch and devices, such
as a server or storage, or to other Brocade switches.
The two GBICs (Gigabit Interface Converters) support a choice of
industry-standard media. The GBICs are accessible from the front panel of the
switch. A Public or Private Fibre Channel Arbitrated Loop can also connect to
the network (see the Brocade FL-Port Option data sheet).
VERSATILE CONNECTIVITY
The module operates in two Fibre Channel modes:
- - E-port mode for connecting the switch with another Brocade switch
- - F-port mode for connecting a storage device or server to the network
A port has an auto-sensing capability that determines its mode transparently.
The module's ports can be operating in different modes.
[GRAPHIC]
MEDIA FLEXIBILITY
The configuration of G-PORT OPTIONS and FL-PORT OPTIONS is predetermined by the
customer and installed in the switch at the factory. Each port can support a
different type of media module. The GBICs plug into an interface module without
powering down the unit, making it easy to swap or replace media modules. The
SilkWorm Switch Family supports short- and long-wave-length laser optical fiber
and copper media. Connection distances vary depending on the type of industry
GBIC selected.
TRANSPARENT CONFIGURATION AND RECONFIGURATION
Upon initialization of the network, a port automatically identifies information
about its connections. The information determines the mode of operation. The
module then reports the port mode to the local Brocade switch. Reconfiguration
is automatic--addition of or change in connections is automatically and
transparently recorded in every switch, a key element in making the network
resilient.
TRAFFIC MANAGEMENT
In the E-port mode, traffic congestion within the network is managed on the
Inter-Switch Link (ISL) via virtual channels. Establishing parallel links
between switches creates alternate pathing to increase network resiliency.
An ISL has up to eight virtual channels with four priority levels. The virtual
channels can be configured to logically separate:
- - Interswitch and node-related traffic
- - Multicast and unicast traffic
- - Class-2 and -3 service-related traffic
[GRAPHIC]
<PAGE> 86
BROCADE(R) WEB TOOLS
MANAGEMENT OF A SAN VIA THE
INTERNET OR INTRANET
MAJOR BENEFITS
- - Dynamic remote management
- - Control at all levels--at the Fabric, switch, and port viewpoints
- - Graphical user interface (GUI)--for quick and intuitive management
- - One-stop administration--for routine management functions
- - Access to all switches--by simple point-and-click
- - "Expert Administrator"--displays appear automatically with suggested actions
- - Simple setup--accessible via familiar in-band and out-of-band interfaces
[GRAPHIC]
BROCADE WEB TOOLS, optional software offered by Brocade Communications Systems,
Inc. (BROCADE(R)), helps to remotely manage a Server-Storage Area Network (SAN)
of SilkWorm(TM) Family switches via the Internet or Intranet. The IT
(Information Technology) administrator logs onto a switch from a host with a
Java-based Web browser. From that switch, the administrator dynamically
interacts with any switch in the SAN to monitor its status and performance.
Information is available to assist the administrator in making decisions about
the overall topology (for example, increasing bandwidth on a path saturated with
data). The Administrative Interface and the Telnet session provide the means to
make administrative changes to the switches/network, with security enforced by
user name and encrypted password.
ESSENTIAL CAPABILITIES YET A SIMPLE GUI
BROCADE WEB TOOLS comprise seven screens. Five provide tools for managing:
- - Fabric (SAN) View--depicts the number of switches in the network and
confirms worldwide names, domain IDs, and switch names, if applicable
- - Fabric Topology View--depicts the physical configuration, including
active domains and paths, and routing information (for example, hop
counts--the number of switches that handle a data frame from its
origination through its destination)
- - General Switch View--displays information about the endosure, gives
general switch information, and includes GUI buttons for quick access to
the Administrative Interface, a Telnet session, and the Performance View
- - Performance View--graphically portrays real-time data throughput for
each port and displays switch bandwidth utilization
- - Port Detail View--displays statistics, general information, and status
for all ports
Two of the seven screens provide secured interfaces for taking administrative
action:
- - Administrative Interface--for performing routine functions, such as
upgrading firmware versions or reconfiguring a switch
- - Telnet Interface--to use BROCADE's superset of Telnet commands
(configuration, diagnostics, displaying, and routing) for switch
diagnostics, troubleshooting, and management
<PAGE> 87
BROCADE(R) ZONING
A SERVICE FOR EXTRA CONTROL OF THE SAN
MAJOR BENEFITS
- - Increased environmental security applied where and when needed
- - Optimization of Information Technology (IT) resources in response to
user demand and changing user profiles
- - Versatility to customize environments
- - Flexibility to manage a Server-Storage Area Network (SAN) to meet the
objectives of different closed-user groups
[GRAPHIC]
Brocade Communications Systems, Inc. (BROCADE(R)) provides advanced management
for the SAN with its introduction of BROCADE ZONING. This optional licensed
software allows finer segmentation of SANs.
One or more BROCADE switches create the BROCADE Fibre Channel Fabric. This
intelligent infrastructure is the backbone for deploying and managing enterprise
resources in a network. Using BROCADE ZONING, Fabric-connected devices are
arranged into logical groups over the physical configuration of the Fabric.
ZONING is one of the BROCADE Fabric services that provide management for the SAN
both automatically and transparently.
INCREASED CONTROL OF A SAN
The BROCADE Fabric provides fast, reliable, seamless information access within
the SAN for anyone, anywhere, at anytime. ZONING allows an administrator to
create segmentation--or zones--within a Fabric, comprised of selected storage,
servers, or even workstations. It also enforces access of information to only
the devices in the defined zone.
Zones may be configured dynamically. The number of zones and zone membership are
effectively unlimited. Zones vary in size and shape, depending on the number of
Fabric-connected devices included and device locations. Devices may be members
of more than one zone. In addition, temporary zones can be created, as an
example, for enterprise backup.
Zone members "see" only members in their zones and, therefore, access only one
another. A device not included in any zone is not available to the devices in
the zones.
THE SIMPLICITY OF BROCADE ZONING
BROCADE ZONING involves:
- - Zone Specification--a set of Telnet commands are used to create, delete,
and display zones, to add or remove zone members, and to configure a set
of zones.
- - Zone Enforcement--the BROCADE Fabric automatically and transparently
restricts access to only the devices that are members of the defined
zone(s).
- - Zone Management--the administrator creates and controls the zones.
CUSTOMIZATION OF THE SAN
Uses for BROCADE ZONING include:
Integrated support for heterogeneous environments--by isolating systems that
have different operating environments or uses Creating functional areas in the
Fabric--for example, by separating test or maintenance areas from production
areas Designating closed user groups--by including certain devices in a zone for
exclusive use by zone members Simplifying resource utilization--for instance, by
consolidating equipment logically for IT convenience Facilitating time-sensitive
functions--for example, by creating a temporary zone used to back up a set of
devices that are members of other zones Securing Fabric areas--by providing
another level of software-managed security to control access
<PAGE> 88
SCHEDULE I TO AGREEMENT NUMBER BRO-001
END USER LICENSE AGREEMENT
<PAGE> 1
EXHIBIT 10.15
PURCHASE AGREEMENT
BETWEEN
BROCADE COMMUNICATIONS SYSTEMS, INC.
AND
SEQUENT COMPUTER SYSTEMS, INC.
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
1. DEFINITIONS 2
2. SCOPE OF AGREEMENT 2
3. TERM AND TERMINATION 3
4. PRODUCT DOCUMENTATION AND TRAINING 3
5. PRICE AND PAYMENT 4
6. FORECASTING 5
7. PURCHASE ORDERS 5
8. SHIPPING, DELIVERY AND PACKAGING 9
9. INSPECTION AND ACCEPTANCE 10
10. WARRANTY 10
11. [*]
12. RETURN MATERIAL AUTHORIZATION 12
13. MANDATORY CHANGES 12
14. SEQUENT REQUESTED CHANGES 13
15. BROCADE REQUESTED CHANGES 14
16. PRODUCT WITHDRAWAL 15
17. MEETINGS AND SUPPLIER PERFORMANCE 15
18. REPORTS 16
19. MATERIAL MANAGEMENT 16
20. LIMITATION OF LIABILITY 16
21. CONFIDENTIAL AND PROPRIETARY INFORMATION 16
22. INFRINGEMENT 17
23. INDEMNITY AND INSURANCE 18
24. NOTICES 19
25. MISCELLANEOUS PROVISIONS 19
26. ENTIRE AGREEMENT 21
ATTACHMENTS
A PRODUCT SPECIFICATION 23
B PRODUCT AND PRODUCT SUPPORT PRICING 24
C SUPPLIER QUALITY 26
D PRODUCT SUPPORT 32
E REPORTS 38
</TABLE>
*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
<PAGE> 2
PURCHASE AGREEMENT
BETWEEN
BROCADE COMMUNICATIONS SYSTEMS, INC.
AND
SEQUENT COMPUTER SYSTEMS, INC.
This Agreement, effective_______________("Effective Date"), is entered into by
and between Sequent Computer Systems, Inc. ("Sequent"), an Oregon corporation,
and Brocade Communications Systems, Inc. ("Brocade"), a California corporation.
Now, therefore, the parties agree as follows:
1. DEFINITIONS
1.1 "Product(s)" means the products described in Attachment A,
Product Specification and any other product(s) added to this
Agreement by mutual consent of the parties.
1.2 "Product Documentation" means Brocade's assembly drawings, user
manuals, diagnostic software documentation, operations manuals,
and any other such materials required for the maintenance,
operation, and use of the Products generally made available to
customers. Upon mutual agreement between the parties, Brocade
will provide additional documentation not generally made
available to customers.
1.3 "Product Support" means the type and level of support described
in Attachment D, Product Support, subject to the provisions
contained in this Agreement.
1.4 "Field Replaceable Unit" ("FRU") means a component of the Product
that will be used to replace or repair failed Product in the
field.
2. SCOPE OF AGREEMENT
2.1 Brocade agrees to sell Products and Product Support to Sequent in
accordance with the terms and conditions of this Agreement. This
Agreement is non-exclusive and the parties may enter into similar
agreements with other parties. The parties acknowledge that
Sequent may sell the Products worldwide for use with Sequent's
NUMA-Q and Symmetry product lines and other product lines as
mutually agreed between the parties. Sequent shall not be
obligated to purchase any Products or Product Support from
Brocade hereunder.
2.2 The parties acknowledge that this Agreement may be executed prior
to complete qualification of the Product by Sequent.
Qualification of the Product by Sequent and the Product meeting
all Product specifications as required in Attachment A are
conditions precedent to Sequent's willingness to purchase
Products or Product Support under this Agreement.
Page 2
<PAGE> 3
3. TERM AND TERMINATION
3.1 Subject to the provisions of sub-Sections 3.2, 3.3, and 3.4,
below, the term of this Agreement shall be for a period of three
(3) year(s) from the Effective Date.
3.2 Sequent may terminate this Agreement at any time, without cause,
by giving Brocade at least sixty (60) calendar days prior written
notice. Termination of the Agreement will not relieve the parties
of any obligations incurred prior to the date of termination,
including any Sequent liability for cancellations as described in
sub-Section 7.7.
3.3 Either party may immediately terminate this Agreement if the
other party:
(i) becomes insolvent or bankrupt, files or has filed against
it a petition in bankruptcy and any proceeding under the
bankruptcy or insolvency laws is not dismissed within
thirty (30) calendar days, or undergoes a reorganization
pursuant to a petition in bankruptcy filed with respect to
it; or
(ii) has all or a substantial portion of its capital stock or
assets expropriated by any government; or
(iii) is dissolved or liquidated, or has a petition for
dissolution or liquidation filed with respect to it; or
(iv) is subject to property attachment, court injunction, or
court order which substantially and negatively affects its
operations; or
(v) makes an assignment for the benefit of creditors.
3.4 Either party may terminate this Agreement if the other party
fails to perform any of its material obligations under the terms
and conditions of this Agreement so as to be in default hereunder
and fails to cure such default within thirty (30) calendar days
after receiving written notice thereof.
4. PRODUCT DOCUMENTATION AND TRAINING
4.1 Brocade shall provide Sequent with one (1) reproducible copy of
the Product Documentation in the form of printed material,
magnetic media, CD ROM, or electronic means as mutually agreed,
at no charge to Sequent. Brocade reserves the right to change the
content of the Product Documentation at any time. In the event
that such Documentation is changed during the term of this
Agreement, Brocade agrees, also at no charge, to promptly notify
Sequent of revised Product Documentation and its availability on
Brocade's web site. Additional copies of Product Documentation
and changes thereto may be ordered by Sequent at Brocade's
then-current price.
4.2 Brocade hereby grants to Sequent without additional charge the
right to reproduce any Product Documentation furnished under this
Section together with an unconditional license to Sequent or each
Sequent customer who purchases the Product to use the Product
Documentation to maintain, use, or provide training on the
Product purchased by such customer. Any reproduced
*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
<PAGE> 4
copies of such Documentation shall contain legends and copyrights
appearing on the copies of the Product Documentation which were
furnished to Sequent.
4.3 Brocade will provide one initial training course to a maximum of
[*] Sequent employees at a time and location to be agreed upon
between the parties. The training course and materials will be at
no charge to Sequent. [*] for use in subsequent training. [*]
4.4 Brocade will provide additional training to Sequent when Product
changes are made that affect Product Support. [*]
4.5 Sequent may request training courses in addition to those
described in sub-Section 4.3 and 4.4, above, at Brocade's
then-current charges.
5. PRICE AND PAYMENT
5.1 [*]
5.2 [*]
5.3 [*]
*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
<PAGE> 5
5.4 [*]
5.5 Pricing does not include federal, state, or local excise, sales,
or use taxes, except those taxes that are based on Brocade's
income. If such taxes are applicable, they shall be set out as a
separate line item on Brocade's invoice.
5.6 Payment terms for all Products and Product Support shall be net
[*] from the date of a correct invoice. Payment of an invoice
shall not constitute or imply acceptance of the Product or
Product Support or relieve Brocade of any obligations assumed
under this Agreement, nor prevent Sequent from asserting any
other rights it may have under this Agreement or at law or in
equity.
5.7 [*]
5.8 [*]
6. FORECASTING
Sequent agrees to provide Brocade with twelve-month rolling forecasts of
Sequent's estimated annual Product purchase requirements. These
forecasts are good faith estimates only, and Sequent shall not be liable
to Brocade for failure to purchase any of the forecasted Product.
7. PURCHASE ORDERS
7.1 Sequent's purchase orders shall be the sole basis for purchase of
Product and Product Support under this Agreement. Designated
Sequent procurement agents shall be the only persons authorized
to issue purchase orders or changes to purchase orders. Purchase
orders and change orders may be transmitted by mail, facsimile,
or other methods approved by both parties. Purchase order numbers
shall be referenced on all correspondence, invoicing, and packing
slips relating to each order.
*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.
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<PAGE> 6
7.2 Purchase orders will specify: (i) Sequent's part numbers, (ii)
Product description, (iii) Product revision level, (iv) quantity
ordered, (v) shipping destination, and (vi) due-on-dock dates.
Brocade shall acknowledge in writing its acceptance of such
purchase orders within [*] from receipt of Sequent's purchase
order.
7.3 Sequent's part numbers and part number revision levels appearing
on the purchase orders shall be considered the most recent. In
the event that Brocade finds any discrepancy between the part or
revision level numbers appearing on a purchase order and any
other part or revision level numbers which Brocade believes are
correct, Brocade shall obtain clarification from Sequent before
shipment of the Product.
7.4 Product lead-time shall be no greater than the lead times in the
schedule below, from receipt of Sequent's purchase order until
shipment by Brocade to Sequent's requested point of delivery.
Brocade shall use best efforts to meet deliveries requested
inside the Product lead-time. Brocade agrees to meet the Product
lead-times according to the following schedule.
<TABLE>
<CAPTION>
Time Period Lead Time (Calendar Days)
----------- -------------------------
<S> <C>
through 9/30/97 [*]
10/1/97-3/31/98 [*]
4/1/98-onward [*]
</TABLE>
7.5 Upside Flexibility Model: Sequent shall have the right for any
given purchase order on "unallocated Product" as that term is
described below, to an increase in quantities in issued purchase
orders as follows:
<TABLE>
<CAPTION>
Number of Calendar Days
Prior to Scheduled Due on Dock Date Allowable Increase
<S> <C>
[*] [*]%
[*]%
[*]%
[*]%
[*]%
[*]%
[*]%
[*]%
</TABLE>
For the purposes of this sub-Section, "unallocated Product" shall
mean a Product not on allocation; with allocation defined as
Brocade's inability to meet the allowable increase in quantities
provided above due to Product component or capacity constraint
which is beyond the reasonable control of Brocade.
7.6 Sequent shall have the right to reschedule delivery for [*] up to
maximum of [*] out from the original scheduled due-on-dock date
for all quantities not scheduled for delivery in Sequent's then-
current fiscal quarter. For all reschedules of quantities
scheduled
*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
<PAGE> 7
for delivery in Sequent's then-current fiscal quarter, [*] of the
monthly volume can be rescheduled up to [*] out into Sequent's
next fiscal quarter. Sequent shall provide Brocade written notice
of requested reschedules at least [*] prior to the scheduled
due-on-dock date.
7.7 This sub-Section governs cancellation of Product by Sequent.
Sequent shall have the right to cancel delivery for any
particular Product subject to the provisions of this sub-Section.
7.7.1 Sequent cancellations of Product occurring in calendar
year 1997 are subject to the following cancellation
schedule and fees:
<TABLE>
<CAPTION>
<S> <C>
[*]
</TABLE>
* On cancellations occurring within 1 - 30 calendar days
from the due on dock date of the cancelled Product
cancellation fees will be;
[*] of the Product purchase price of the cancelled
Product, [*]
** On cancellations occurring within 31 - 60 calendar days
from the due on dock date of the cancelled Product;
Cancellation fees shall be based on [*] of the cancelled
Product purchase price.
*** On cancellations occurring greater than [*] calendar days
from the due on dock date of the cancelled Product;
[*]
7.7.2 Cancellations occurring during calendar year 1998 through
the remainder of the term of the Agreement are subject to
the following cancellation schedule and fees:
<TABLE>
<CAPTION>
<S> <C>
[*]
</TABLE>
*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
<PAGE> 8
[*]
* On cancellations occurring within 1 - 15 calendar days
from the due on dock date of the cancelled Product
cancellation fees will be;
[*] of the Product purchase price of the cancelled
Product, [*]
** On cancellations occurring within 16 - 30 calendar days
from the due on dock date of the cancelled Product;
Cancellation fees will be based on Brocade's [*] of the
cancelled Product purchase price.
*** On cancellations occurring within 31 - 60 calendar days
from the due on dock date of the cancelled Product;
Cancellation fees shall be based on [*] of the cancelled
Product purchase price.
**** On cancellations occurring greater than [*] calendar days
from the due on dock date of the cancelled Product;
[*]
7.7.3 [*]
7.7.4 Prior to any subsequent re-sale of a cancelled Product
Brocade may invoice Sequent for such Product, as of the
Product's due-on-dock date. Payment terms will be net
[*] from the date of a correct invoice. [*]
*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
<PAGE> 9
8. SHIPPING, DELIVERY, AND PACKAGING
8.1 Brocade shall follow all instructions contained in Sequent's
routing instructions, which Sequent will provide to Brocade.
Sequent may modify its routing instructions from time to time and
will provide Brocade with an updated version of any such modified
instructions. Brocade shall be responsible for any freight
charges incurred for Product shipped outside the routing
instructions to include, but not be limited to, use of other than
Sequent preferred carriers.
8.2 Brocade will ship the Product so that delivery is made at
Sequent's dock or a dock location designated by Sequent on the
due-on-dock date specified in the purchase order, subject to
Sequent's right to reschedule or cancel delivery as provided in
sub-Sections 7.6 and 7.7, above. Brocade shall maintain a minimum
on-time delivery performance of [*] to Sequent's requested
due-on-dock dates. Deliveries will be considered on time if they
are made no more than [*] earlier or [*] later than the
due-on-dock date specified in the Sequent purchase order. Sequent
may refuse to accept deliveries that are not on time. [*] If
Sequent agrees to take partial shipments of any order, each such
partial shipment shall be deemed a separate transaction. [*]
8.3 If Brocade anticipates or becomes aware that it will not supply
the Product on the due-on-dock delivery date acknowledged by
Brocade for any reason, Brocade shall notify Sequent immediately
after Brocade has knowledge of the situation. The notification
may be communicated by facsimile, telephone, electronic mail, or
any other method agreed to by the parties, provided that Brocade
shall obtain Sequent's actual acknowledgment of the notice of
anticipated delay. Brocade and Sequent will jointly develop
alternatives to resolve any late delivery of the Product,
including use of premium routing. Brocade will develop recovery
plans with new committed due-on-dock dates and communicate such
plans to Sequent within [*] of missed shipments. If Brocade is
unable to deliver the Product on the acknowledged due-on-dock
date, through no fault of Sequent, Sequent may require Brocade
to use premium routing and ship the Product freight pre-paid
at Brocade's expense.
8.4 In the event of Product allocation due to circumstances beyond
Brocade's reasonable control, Brocade shall [*] to supply the
number of Products in Sequent's then current forecast covering
the affected period of allocation, in no event less than the
proportion of Sequent's percentage of Product on order to the
total Product on order by all of Brocade's customers for the
Product or similar Products.
8.5 Except as provided otherwise in sub-sections 8.1 and 8.3, above,
sub-section 13.2.1, below, and applicable provisions of
Attachment D, [*] unless otherwise specified by Sequent's
designated procurement agents.
8.6 Each shipment of the Product by Brocade shall include a packing
slip which contains at a minimum: (i) Brocade's name; (ii) box
number (e.g., 1 of 3, 2 of 3); (iii) receiving address; (iv)
Sequent's purchase order number; (v) Sequent's part
*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.
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<PAGE> 10
number; (vi) revision level of Sequent's part number; (vii)
Product serial number; (viii) shipping quantity; (ix) date of
shipment; and (x) return material authorization ("RMA") number,
when applicable.
8.7 Unless requested otherwise by Sequent, all shipments to a single
Sequent-designated location shipped on the same day shall be
consolidated by Brocade into a single shipment.
8.8 Brocade shall provide the following information about its Product
in writing within two weeks of execution of the Agreement: (i)
country of origin; (ii) NAFTA preference criteria; (iii)
harmonized scheduled tariff classification number; and (iv)
export commerce control number ("ECCN"). Brocade, at its expense,
will prepare all international shipping documentation, including
commercial invoice, NAFTA certificate, Shipper's Letter of
Instruction, Shipper's Export Declaration, and any other
necessary documentation, for international shipments upon request
from Sequent, provided that the Product can be shipped to the
requested destination under a General License under the U.S.
Export Administration Regulations. If a validated or other
specific prior license is required under the U.S. Export
Administration Regulations, Brocade may request that the Product
be exported by Sequent and that Sequent assume all responsibility
for export licenses and other export documentation.
9. INSPECTION AND ACCEPTANCE
Inspection and acceptance of the Product by Sequent will be made within
[*] after delivery. Failure to inspect and accept or reject the Product
shall neither relieve Brocade from warranty responsibility or any
applicable quality requirements, infringement, or Product liability as
provided in this Agreement nor impose any liability on Sequent. Product
not conforming to Product specifications may, at Sequent's option, be
returned to Brocade at Brocade's expense for repair or replacement of
the Product, [*] for any amounts previously paid by Sequent for the
Product, or, if the foregoing remedies are insufficient, [*].
10. WARRANTY
Brocade warrants that all new Product delivered under this Agreement
will for a period of [*] from the date of shipment of the Product by
Brocade: (i) conform to and perform in accordance with the Product
specifications identified in Attachment A, and to any drawings agreed
upon by the parties or samples provided to and approved by Sequent; and
(ii) be free from defects in materials and workmanship. This warranty
shall survive inspection, test, acceptance, and payment. The warranties
provided in this Section, referred to hereinafter as the Product
Warranty, are in addition to any other remedies available at law or in
equity, including the remedies set forth in Section 11, below.
11. [*]
11.1 In addition to the provisions of this Section, Brocade shall be
subject to the requirements and expectations provided for in
Attachment C.
11.2 For the purposes of this Section, the following definitions
apply.
*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.
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<PAGE> 11
11.2.1 "Reimbursement" shall mean monetary compensation, no
charge replacement Product, unscheduled price reductions,
or some mutually agreed to combination thereof. Other
forms of Reimbursement may be identified by mutual
agreement on a case by case basis.
11.2.2 The terms "Quality Failure," "Reliability Failure," "Red
Light," and "Purge" are defined in Attachment C.
11.3 [*] Quality Failures, Reliability Failures, Red Lights, and
Purges when the quality and/or reliability of the Product drops
below the thresholds defined in this sub-Section.
11.3.1 [*] will be [*] when any of the following events occur:
(i) Brocade-confirmed Quality Failures in parts per
million ("PPM") exceed [*] the PPM
defined in Section 5 of Attachment C; or
(ii) A Red Light or Purge is directly attributable to
Brocade's inability to meet the Product
specification or PPM thresholds described in this
sub-Section, or results from a safety violation.
11.3.2 [*] when any of the following events occur:
(i) Product mean time between failures ("MTBF") drops
below [*] of Brocade's predicted MTBF of [*] for a
16 port switch and [*] for an 8 port switch; or
(ii) A Red Light or Purge is directly attributable to
Brocade's inability to meet the Product
specification or the MTBF thresholds described in
this sub-Section, or results from a safety
violation.
11.3.3 [*] to Sequent will be based on accumulated performance
over a [*] rolling period. For instance:
[*]
11.3.4 The parties will summarize and communicate quality and
reliability data to provide metrics needed to track
performance as provided in Section 7 of Attachment C.
11.4 [*]
*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
<PAGE> 12
(ii) [*]
(iii) An "incident" as described in 11.4 (i) and 11.4 (ii) above
begins when a Quality Failure, Reliability Failure, Red
Light or Purge is directly attributable to Brocade's
inability to meet the Product specification or the
appropriate PPM or MTBF thresholds, as provided in this
Section 11, or results from a safety violation. An
"incident" ends when Brocade meets or exceeds the
deficient Product specification or PPM or MTBF threshold
or the safety violation has been fully resolved.
11.5 [*] to Sequent under this Section shall be made by the parties at
the end of each calendar year quarter and [*] Brocade to Sequent
within [*] from the date of the accounting.
11.6 Remedies in this Section are in addition to those outlined in
Section 10, Warranty. Payment under this Section shall not
relieve Brocade of any obligations assumed, nor prevent Sequent
from asserting any other rights it may have, under this
Agreement. Amounts paid pursuant to sub-Section 11.4 constitute
all damages per incident for Quality Failures and/or
Reliability Failures under this Agreement.
12. RETURN MATERIAL AUTHORIZATION
If Brocade requires an RMA to expedite the return of defective Product,
Brocade shall provide a verbal RMA allowing immediate return of the
Product and follow up with a written RMA within [*] from the date of
giving the verbal RMA. Except for the need to obtain an RMA, Brocade
shall not require prior approval for the return of Product from Sequent.
13. MANDATORY CHANGES
13.1 In the event that changes are required to make the Product
conform to safety and/or regulatory agency requirements
("Mandatory Engineering Changes"), Brocade shall immediately
implement the Mandatory Engineering Changes
*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.
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<PAGE> 13
without charge to Sequent in further production of the Product.
Brocade shall provide Sequent with written notice of any
Mandatory Engineering Changes at the time that Brocade knows of
such requirements.
13.2 Brocade and Sequent shall discuss and mutually agree upon one or
more of the following remedies, or any other agreed upon
remedies, for implementing Mandatory Engineering Changes on
previously delivered Product. Brocade shall use best efforts to
immediately implement the selected remedies, [*].
13.2.1 Sequent may return the affected Product to Brocade or an
authorized Brocade facility for implementation of the
Mandatory Engineering Change or Product replacement.
[*]
13.2.2 Sequent may request and Brocade will ship Mandatory
Engineering Change kits for Product delivered to Sequent
before the Mandatory Engineering Change was implemented.
Brocade shall provide Sequent with installation
instructions and/or training necessary to implement the
Mandatory Engineering Change.
13.2.3 Brocade may be requested to provide on-site technical
assistance at the appropriate location to implement the
Mandatory Engineering Change.
13.2.4 Sequent may request that a Brocade-approved third party
organization implement Mandatory Engineering Change kits
for the affected Product.
13.3 In the event that Brocade cannot implement all Mandatory
Engineering Changes to Product delivered to Sequent within a
reasonable time, not to exceed [*] from the date of Brocade's
written notice to Sequent of the requirement for such changes,
Brocade shall provide no charge replacement Product to Sequent in
exchange for the Product requiring the Mandatory Engineering
Change.
13.4 Sequent shall have the option to cancel open purchase orders
without penalty if the Mandatory Engineering Changes are
incompatible with or adversely affect performance of Products
purchased by Sequent and such changes are not made compatible
with the Products or Sequent is not provided with an acceptable
remedy within [*] after Brocade receives notification from
Sequent of its intent to cancel its open purchase orders.
14. SEQUENT REQUESTED CHANGES
14.1 Sequent may request that Brocade provide [*] evaluation of
changes to the Product or changes to the method of packing,
packaging, or shipment of the Product. Sequent's request will
include a written description of the proposed change sufficient
to permit Brocade to evaluate its feasibility.
14.2 If Sequent's proposed change is accepted by Brocade, Brocade
shall notify Sequent in writing within [*] from the date of
request, of the terms and conditions under which it would make
the change requested by Sequent. Brocade's written evaluation
shall state the cost, if any, to make the
*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.
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<PAGE> 14
change and the date that Brocade would be able to implement such
change. If the proposed change would be at cost to Sequent,
Sequent must provide prior written approval to Brocade before the
change is made. In the evaluation of the effect such changes may
have on regulatory agency certifications, the above referenced
[*] may be extended to take into account the time necessary for
Brocade to obtain new regulatory agency certifications.
15. BROCADE REQUESTED CHANGES
15.1 Subject to the provisions of this Section 15, Brocade may propose
optional changes, including changes that affect form, fit,
function, [*] as those terms are defined below, which are not
Mandatory Engineering Changes ("Optional Engineering Changes").
For the purposes of this Section, the following definitions
apply:
15.1.1 "Form" means the dimensions, weight, appearance,
packaging, labeling, finish, texture, color, or material
properties of the Product.
15.1.2 "Fit" means the assembly interchangeability or attachment
scheme of the Product or FRU within the Product. Fit
includes the ability of an item to become an integral part
of another item.
15.1.3 "Function" means performance, operational interface to
other components or functions, fitness for use, or
testability of the Product or FRU within the Product.
15.1.4 [*]
15.1.5 [*]
15.2 Brocade shall maintain a formal product change control system to
ensure that notification is submitted to Sequent on all proposed
changes to Products covered by Attachment A. Brocade shall
provide ongoing Product technology directions and schedules for
all Product and Product-related options. Included in the change
notification process shall be the following:
(i) anticipated last shipment date of unchanged Product;
(ii) means of identification between changed and unchanged
Product;
(iii) a complete and detailed description of the change
proposed and any data that will support the benefits of
the change;
(iv) impact to installed base of Product, including FRU
inventories.
15.3 [*]
15.4 If the Optional Engineering Changes proposed by Brocade in
Sequent's sole opinion necessitate evaluation by Sequent for
compatibility with Sequent's systems and/or specifications,
Brocade upon Sequent's request shall provide Sequent with one (1)
set of evaluation products, FRUs, or designs which
*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.
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<PAGE> 15
incorporate the proposed changes. Sequent will request such
evaluation products, FRUs, or designs within [*] of receipt of
Brocade's change proposal. Evaluation products, FRUs, or designs
that are provided to Sequent under this provision are for
evaluation purposes and will be returned to Brocade after the
evaluation period. Sequent has the right, without liability, to
accept or reject Brocade's proposed Optional Engineering Changes
and will inform Brocade of its approval or rejection of those
changes in writing within [*] from Sequent's receipt of notice of
Brocade's proposed changes or within [*] of receipt of the
evaluation products, FRUs, or designs, whichever is later. If no
written response is received by Brocade from Sequent within the
applicable period, Sequent will be deemed not to have accepted
the changes.
15.5 If Sequent rejects the Optional Engineering Changes, Brocade
shall continue supplying the unaltered Product or provide Sequent
with opportunities for last time buy of the unaltered Product
under the terms of Section 16, below.
15.6 Brocade will incorporate changes accepted by Sequent into Product
on Sequent's open purchase orders and, at Sequent's request, into
Product going through Brocade's repair process.
15.7 Any changed Product resulting from application of this Section
shall be considered added to this Agreement and subject to its
terms and conditions.
16. PRODUCT WITHDRAWAL
Brocade will notify Sequent in writing at least [*] prior to withdrawal
of a Product. Brocade will ship Product for open purchase orders that
Brocade has accepted before the withdrawal date for an additional [*]
after the withdrawal date. All EOL ("End of Life") purchase orders will
be considered non-cancellable.
17. MEETINGS AND SUPPLIER PERFORMANCE
17.1 Brocade appoints its Account Manager and Sequent appoints its
designated Supplier Business Manager as liaisons to monitor
Brocade's performance under this Agreement. These liaisons will
also be responsible for coordinating meetings, discussions and
reports provided for in this Agreement. The names and telephone
and facsimile numbers of the liaisons will be provided and may be
changed by notice from one party to the other.
17.2 Sequent's designated liaison will conduct quarterly supplier
performance review and planning meetings with Brocade's Sequent
account management team. Sequent and Brocade shall mutually
develop supplier performance requirements and goals based on
Brocade's obligations and responsibilities under this Agreement,
to be evaluated by the parties at these periodic meetings.
Brocade's performance requirements and goals will be based on:
[*] The locations and times for these meetings will be determined
by Sequent and Brocade. The purpose of these meetings will
include the following:
*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.
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<PAGE> 16
(i) Review Brocade's performance over the previous quarter;
(ii) Review action items and resolution;
(iii) Identify opportunities and areas of improvement;
(iv) Agreement on commitments, set target dates, and identify
persons responsible;
(v) Review appropriate Brocade reports;
(vi) [*]
(vii) Review Brocade quality and reliability improvement plans;
(viii) Publish minutes.
18. REPORTS
Recurring reports to be provided by Brocade and Sequent under this
Agreement are listed in Attachment E, Reports. All reports will be made
available in electronic form or as otherwise mutually agreed. There
shall be no charge to either for any recurring reports required under
this Agreement.
19. MATERIAL MANAGEMENT AND PERFORMANCE STANDARDS
19.1 Brocade shall manage the scheduling of material to meet Sequent's
Product availability and delivery requirements as set forth in
this Agreement and on accepted purchase orders. Brocade will
provide status reports to Sequent that include open order status
and ship date information, on the following schedule:
<TABLE>
<S> <C>
1997: [*]
1998: [*]
</TABLE>
19.2 Brocade shall manage sub-tier supplier performance in areas to
include quality, availability, including allocated Product, and
delivery to meet the requirements of this Agreement. Brocade
shall set performance goals and objectives with sub-tier
suppliers and monitor progress against goals. Sequent may request
status reports periodically to audit these suppliers'
performance.
20. LIMITATION OF LIABILITY
EXCEPT AS PROVIDED FOR IN [*] NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES,
INCLUDING LOST PROFITS, ARISING OUT OF THIS AGREEMENT OR ANY PERFORMANCE
HEREUNDER, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
21. CONFIDENTIAL AND PROPRIETARY INFORMATION
21.1 Both parties may, in connection with this Agreement, disclose to
the other party information considered confidential and
proprietary information of the disclosing party ("Confidential
Information"). Information shall be considered Confidential
Information if identified as confidential in nature by the
disclosing party at the time of disclosure, or which by its
nature is normally and reasonably considered confidential, such
as information related to past, present or future research,
development, or business affairs, any proprietary products,
materials 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.
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<PAGE> 17
methodologies, or any other information which provides the
disclosing party with a competitive advantage. Confidential
Information, if disclosed or provided in tangible form, shall be
clearly and conspicuously identified as company confidential or
proprietary. Confidential Information, if orally or visually
disclosed, shall be identified as company confidential or
proprietary in nature at the time of disclosure. The receiving
party shall protect the disclosing party's Confidential
Information with the same degree of care that it regularly uses
to protect its own Confidential Information from unauthorized use
or disclosure, but in no event less than a reasonable degree of
care. Confidential Information shall not be provided or disclosed
to anyone except those employees of the receiving party with a
need to know under this Agreement. No rights or licenses under
patents, trademarks or copyrights are granted or implied by any
disclosure of Confidential Information. Confidential Information
and any and all authorized copies thereof shall remain the
property of the disclosing party and shall be destroyed or
returned if requested by the disclosing party. The receiving
party shall not export or re-export Confidential Information
without the appropriate United States or foreign government
export licenses. This Section 21 shall survive the expiration or
termination of this Agreement for a period of [*]
21.2 The obligations of confidentiality imposed by this Agreement
shall not apply to any Confidential or Proprietary Information
that: (a) is rightfully received from a third party without
accompanying markings or disclosure restrictions; (b) is
independently developed by employees of the receiving party who
have not had access to such Confidential Information; (c) is or
becomes publicly available through no wrongful act of the
receiving party; (d) is already known by the receiving party as
evidenced by documentation bearing a date prior to the date of
disclosure; or, (e) is approved for release in writing by an
authorized representative of the disclosing party.
21.3 The terms and conditions of this Agreement, but not its
existence, are considered Confidential Information.
22. INFRINGEMENT
22.1 Brocade will defend or settle at its own expense any action or
claim brought against Sequent to the extent that such action is
based upon a claim that any Product purchased hereunder infringes
a patent, copyright, trade secret, or any intellectual property
right of any third party. Brocade shall indemnify and hold
Sequent harmless against all costs and expenses and damages,
including reasonable attorneys' fees, and shall pay those costs,
expenses, and damages incurred by Sequent, so long as Sequent
provides the following: (i) prompt notification of any claim,
provided that Sequent has actual knowledge of such claim; (ii)
reasonable cooperation and assistance with a claim at Brocade's
expense; (iii) sole control of defense and settlement to Brocade.
22.2 In the defense or settlement of a claim for infringement of a
patent, copyright, trade secret, or any intellectual property
right of any third party, Brocade may procure for Sequent the
right to continue using the Product, or if such remedy is not
reasonably available, replace or modify the Product so that its
use or resale becomes non-infringing, provided that any
replacement or modified product meets substantially the same
specifications as the original and is acceptable to
*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.
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<PAGE> 18
Sequent. If any of the above remedies are not available, Sequent
may return the Product to Brocade and receive [*] for the
Product.
22.3 Brocade shall have no liability to Sequent to the extent that a
claim of infringement is based upon (i) compliance with Sequent's
designs, plans, or specifications if without such designs, plans,
or specifications the Product would not have been infringing;
(ii) the combination of the Product with other products or
devices not supported hereunder where the Product itself would
not be infringing; or (iii) modifications of the Product made by
Sequent or on Sequent's behalf by a party other than Brocade,
where the unmodified Product would not be infringing.
23. INDEMNITY AND INSURANCE
23.1 Brocade shall defend, indemnify, and hold Sequent harmless at
Brocade's sole cost and expense, from tangible property damage,
personal injury including death, and expense, including
attorney's fees, incurred by an employee, agent, invitee, or
customer of Sequent, regardless of how caused if arising out of a
Product defect or defect that results from the providing of
services, except to the extent such loss, property damage,
personal injury, or expense, including attorneys' fees, was
caused by the negligence of Sequent or its employees, customers,
or authorized agents while acting within the scope of their
authority.
23.2 Brocade shall provide Sequent with a certificate of insurance
with not less than the following coverages upon execution of this
Agreement. Sequent shall be named as an additional insured on
Brocade's insurance coverage. The fulfillment of the insurance
obligations shall not otherwise relieve Brocade of any liability
assumed under the Agreement or in any way modify or limit any
obligations of indemnification hereunder.
<TABLE>
<CAPTION>
Coverage Required Limits
-------- ---------------
<S> <C>
Worker's Compensation: Statutory
Employer's Liability: [*] each accident, bodily injury by accident
[*] each employee, bodily injury by disease
[*] policy limit, bodily injury by disease
Comprehensive General
Liability: [*] general aggregate
[*] products/completed operations aggregate
[*] personal and advertising injury limit
[*] each occurrence limit
Automobile Liability: [*] combined single limit, bodily injury and
property damage coverage
</TABLE>
23.3 Certificates of insurance shall state that a policy or policies
have been issued and are in force at such time, that the policy
or policies shall not expire or lapse, and that the policy or
policies will not be cancelled or changed so as to affect the
insurance described in the certificate until after thirty (30)
days prior written
*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.
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<PAGE> 19
notice to Sequent of such change. Such certificates or true
copies thereof and any notices regarding insurance shall be sent
to:
Sequent Computer Systems, Inc.
15450 S.W. Koll Parkway
Beaverton, OR 97006-6064
Attn: Manager, Contracts, MS EDO2-805
23.4 Upon Sequent's request, Brocade shall furnish Sequent, for its
inspection and approval, policies of insurance with all
endorsements, or conformed specimens thereof, certified by the
insurance company to be true and correct copies. The fulfillment
of this insurance obligation shall not otherwise relieve Brocade
of any liability assumed under this Agreement or in any way
modify or limit Brocade's obligations to indemnify Sequent
hereunder.
24. NOTICES
Any legal notice required or permitted to be made or given to either
party pursuant to this Agreement shall be sufficiently made or given on
the date of delivery if delivered personally or on the date of mailing
if sent by certified or registered mail (postage prepaid and return
receipt requested) to the other party at the address set forth below.
Either party may change the information below by giving the other party
prior written notice of such change.
Brocade: Brocade Communications Systems, Inc.
1901 Guadalupe Parkway
San Jose, CA 95131
Attn: Chief Financial Officer
Sequent: Sequent Computer Systems, Inc.
15450 S.W. Koll Parkway
Beaverton, OR 97006
Attn: Manager, Contracts, MS EDO2-805
25. MISCELLANEOUS PROVISIONS
25.1 Compliance with Laws
Brocade shall comply with all applicable federal, state, country,
and local laws, ordinances, regulations, and codes in the
performance of this Agreement.
25.2 Governing Law
This Agreement shall be governed by and construed in accordance
with the laws of the State of Oregon.
25.3 Waiver
The failure of either party to insist upon or enforce strict
conformance by the other party of any provision of this Agreement
or to exercise any right under this Agreement shall not be
construed as a waiver or relinquishment of such party's
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<PAGE> 20
right unless made in writing and shall not constitute any
subsequent waiver or relinquishment.
25.4 Amendments, Changes, and Modifications
Amendments, changes, or modifications to the Agreement, to be
valid, must be in writing and signed by authorized
representatives of both parties. Any verbal agreements,
discussions, and understandings, express or implied, shall not
constitute an amendment to this Agreement.
25.5 Invalid Provisions
If any provision of this Agreement is finally held by a court of
competent jurisdiction to be illegal or unenforceable, the
legality, validity, and enforceability of the remaining
provisions of this Agreement shall not be affected or impaired.
25.6 Survival
The provisions of Section 10 (Warranty), Section 11 [*], Section
16 (Product Withdrawal), Section 20 (Limitation of Liability),
Section 21 (Confidential and Proprietary Information), Section 22
(Infringement), Section 23 (Indemnity and Insurance), sub-Section
25.1 (Compliance with Laws), sub-Section 25.2 (Governing Law),
and applicable provisions of Attachment D (Product Support) of
this Agreement shall survive the termination or expiration of
this Agreement. Outstanding purchase orders shall survive the
termination of this Agreement.
25.7 Force Majeure
Neither party shall be responsible for delays or failures in
performance resulting from acts beyond the reasonable control of
such party, including, but not limited to, acts of God, strikes
or other labor disputes, riots, acts of war, communication line
failures, power failures, fire, or disasters. The time for
performance of any delayed obligation shall be extended for the
time period lost by reason of the delay, except that if the delay
exceeds thirty (30) calendar days from the beginning of the
delay, Sequent may terminate this Agreement for cause without
further notice or liability to Brocade.
25.8 Successors and Assigns
Except as specifically provided for in sub-Section 3.3.2 of
Attachment D, below, neither party may assign any rights
hereunder without the prior written consent of the other party,
which consent shall not be unreasonably withheld. Any assignment
of rights shall not work as a novation of obligations hereunder
without written agreement. Any attempt to assign any rights,
duties, or obligations hereunder without the other party's
written consent will be void, either party may assign this
Agreement to a surviving entity in connection with any merger,
acquisition, or consolidation of not less than a majority
ownership in the merged, acquired, or consolidated company by the
surviving entity.
*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.
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25.9 Attorney's Fees
If either party commences litigation to enforce any provision of
this Agreement, the prevailing party shall be entitled to recover
reasonable attorneys' fees and expenses of litigation, including
fees and expenses of any appeal.
25.10 Headings
The section and paragraph headings of this Agreement are intended
as a convenience only, and shall not affect the interpretation of
its provisions.
25.11 Conflicting Terms
The terms and conditions of this Agreement shall take precedence
over any conflicting terms and conditions contained on Sequent's
purchase orders and Brocade's quotation or acknowledgment.
25.12 Cumulative Remedies
The rights and remedies afforded to either party pursuant to any
provision of this Agreement are in addition to and do not in any
way limit any other rights or remedies afforded to either party
by any other provision of this Agreement or by law. All such
rights and remedies are cumulative and may be exercised
singularly or concurrently.
26. ENTIRE AGREEMENT
This Agreement, including all Attachments, constitutes the entire
Agreement between the parties and supersedes all prior or
contemporaneous agreements, discussions, and understandings between the
parties, either express or implied. The following Attachments are part
of this Agreement and are incorporated herein by this reference.
Attachments:
A Product Specification
B Product and Product Support Pricing
C Supplier Quality
D Product Support
E Reports
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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
Sequent Computer Systems, Inc. Brocade Communications Systems, Inc.
By: /s/ Wayne A. Pittarger By: /s/ Bruce J. Bergman
------------------------------- ----------------------------
(Signature) (Signature)
Name: Wayne A. Pittarger Name: Bruce J. Bergman
-------------------------- --------------------------
(Printed or Typed) (Printed or Typed)
Title: VP Operations Title: CEO
------------------------- -------------------------
Date: 6/17/97 Date: 6/17/97
-------------------------- -------------------------
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ATTACHMENT A
PRODUCT SPECIFICATION
This Attachment describes the Product and Product specifications required under
the Agreement.
1. PRODUCT DESCRIPTION AND PRODUCT SPECIFICATIONS
The Products and Product specifications are described below. The Product
specifications are further described in Sequent documents identified by
the Sequent part numbers listed below. Such documents identified below
are incorporated by reference as though fully set forth herein. Product
descriptions and specifications are subject to change by mutual
agreement of the parties.
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION Production Specifications
------------------- (By Sequent Part Numbers)
-------------------------
<S> <C>
16 Port Fibre Channel Switch 1003-69661
8 Port Fibre Channel Switch 1003-69660
0 Port Fibre Channel Switch for Service Spares 1003-73151
G-Port Card for Service Spares 1003-73153
GBIC, multi-mode, non-OFC for FC Switch (2M to 500M) 1003-73152
</TABLE>
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ATTACHMENT B
PRODUCT AND PRODUCT SUPPORT PRICING
This Attachment sets forth Product and Product Support pricing to Sequent from
Brocade under the Agreement.
1. PRODUCT PRICING
<TABLE>
<CAPTION>
1997 1998*
(not to exceed)
<S> <C> <C>
1.1 8 Port Sequent part number 1003-69660;
Brocade part number B1600-110 [*] [*]
1.2 16 Port: Sequent part number 1003-69661;
Brocade part number B1600-100 [*] [*]
1.3 0 Port: Sequent part number 1003-73151;
Brocade part number X1017 [*] [*]
1.4 GBIC: Sequent part number 1003-73152
Brocade part number X1006 [*] [*]
1.5 G-Port Card: Sequent part number 1003-73153;
Brocade part number X1003 [*] [*]
</TABLE>
* Note: Pricing for 1999 through the remainder of the term of the
Agreement will be as agreed upon between the parties [*].
** Note: For initial stocking orders and subsequent orders in excess of
a net aggregate of [*], Brocade will apply a [*] for Brocade
part number X1003 and a [*] for Brocade part number X1006.
2. PRODUCT SUPPORT PRICING
2.1 Exchange Product Charges
The charge for Exchange Product, as that term is defined in
sub-Section 3.1 of Attachment D, shall be [*] of the then-current
Product price or the repair price for the Product, whichever is
less.
2.2 Out of Warranty Repair Charges
<TABLE>
<S> <C>
(i) Switch: [*]
(ii) G Port without GBIC: [*]
</TABLE>
2.3 NTF Charges
Charges for NTF testing of Product will be per the following
schedule:
<TABLE>
<S> <C>
(i) Switch: [*]
</TABLE>
*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.
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<PAGE> 25
<TABLE>
<S> <C>
(ii) G-Port Card: [*]
</TABLE>
2.4 Recertification Charges
Charges for re-certification, as provided in sub-Section 6 of
Attachment D, shall be [*].
2.5 Charges for out of warranty upgrade will be as agreed upon
between the parties on a case-by-case basis.
3. TRAINING
Charges for additional training (training conducted other than the
original/initial one day training course provided to Sequent and Sequent
service partners) shall be as follows:
(i) One (1) day at Brocade: [*] per person
Includes: Copy of all course materials
(ii) One (1) day at Sequent-specified site:
[*][*] persons/5 person minimum, plus travel expenses
[*] per person for more than five persons
Includes: Copy of all course materials for each
person
*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.
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ATTACHMENT C
SUPPLIER QUALITY
1. INTRODUCTION, SCOPE AND [*]
1.1 This Attachment is subject to applicable terms and conditions of
the Agreement and defines the quality requirements and
expectations for Brocade under the Agreement. Changes to this
Attachment must be approved by the parties' designated quality
representatives. Except as specifically provided otherwise, there
will be no charge to Sequent for activities and discharge of
obligations required of Brocade described in this Attachment.
1.2 Brocade shall implement the procedures, plans, goals and
processes to include but not be limited to: (i) document control;
(ii) continuous improvement; (iii) customer feedback; (iv)
performance tracking against objectives; and (v) corrective
action processes required of Brocade to remain in compliance with
its obligations under the Agreement.
1.3 Brocade shall create, implement and maintain a continuous
process improvement program with the goals of reducing costs and
lead-time and improving quality and service to Sequent. Such
program shall be documented and provided to Sequent.
1.4 [*]
2. INSPECTION, AUDIT RIGHTS AND STOP SHIPS
2.1 Sequent shall have the right to inspect and audit any
manufacturing or administrative site, including Brocade sites
that supply goods or services, including the Product, subject to
agreements with Brocade suppliers. In addition, on an annual
basis at a time which is mutually agreed upon between the
parties, Sequent shall be entitled to audit Brocade records and
processes which directly insure that Brocade [*]. Sequent shall
also be entitled to review relevant documents pertaining to
quality information including but not limited to procedures and
certificates of conformance affecting materials, including the
Products, if requested. Brocade shall assist Sequent in arranging
such inspections, audits and reviews.
2.2 Sequent shall have the right, without liability, to stop
Brocade's shipments to Sequent and/or Sequent's customers of
Product that does not conform to the specifications and criteria
contained herein. Sequent will advise Brocade of such
non-conformance. Such Products shall not be shipped by Brocade
unless (i) Brocade has corrected the areas of non-conformance in
the Product and Sequent approves Product shipment or (ii) Sequent
permits shipment of such Products pending Brocade's correction of
the non-conformance.
*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.
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3. DEFINITIONS
3.1 Quality Failure: Any failure that occurs in Sequent's factory
during integration/systems test or during the first [*]
after installation at a Sequent customer site, both
circumstances sometimes referred to as "dead on arrival" ("DOA").
These failures are considered in the calculation of the
parts-per-million ("PPM") failure rate. This includes any and all
functional and non-functional failures, to include but not be
limited to incorrect labels and missing jumpers.
3.2 Reliability Failure: Any failure that occurs after the first
[*] of operation after installation at Sequent's customer's
site. Reliability is measured as mean-time-between-failure(s)
("MTBF").
3.3 Red Light: A Red Light is anything that causes data corruption,
loss of use, safety, and/or other problems that negatively impact
the customer's ability to effectively use the Product per its
functional specification or intended use. This includes not only
the Product or a service but also related processes such as
shipping and documentation. When a Red Light occurs, Product is
not shipped and resources are redirected to solve the situation.
3.4 Purge: Removal and segregation of Product in Sequent's factory
and service centers due to a discrepancy with a particular lot or
date code of the Product.
3.5 Quality Issues: Quality Issues are those issues that arise when
the Products do not meet the Product specifications and include
but are not limited to incorrect packaging, labeling, incorrect
revision levels and Purges.
3.6 Routine Questions and Issues: Routine Questions and Issues are
those that do not address Quality Failures, Red Lights, Purges
or Quality Issues.
4. PERFORMANCE ACTIVITIES
4.1 Brocade shall establish, implement and maintain a comprehensive
quality assurance program to ensure the consistent supply of
Products that meet the requirements specified in the Agreement
and this Attachment. Details of the program shall be made
available to Sequent upon request and Sequent has the right to
survey and audit the program. Sequent will provide a minimum of
two (2) weeks notice prior to any planned survey or audit.
4.2 Brocade shall have a documented system to ensure a consistent
supply of materials used for the assembly of Products. This
system shall maintain procedures for incoming inspection per
category of material and procedures outlining the qualification
of new materials suppliers.
4.3 Brocade shall have a formally documented manufacturing process
and quality control system. Brocade shall also maintain
established intervals for preventive maintenance of manufacturing
equipment.
4.4 Brocade shall have a documented system to ensure continued
accuracy of measurement equipment in manufacturing. Measuring
equipment shall be
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calibrated at established intervals against certified standards
that have valid relationships to national standards.
4.5 Brocade shall have an established program for statistical process
control ("SPC") in manufacturing. This program shall use SPC
tools to control and improve the manufacturing process and its
capabilities. Documentation for process control shall consist of
control procedures, SPC limits and SPC violation rules.
4.6 Brocade shall maintain and use a system for identifying and
segregating non-conforming material. Adequate documentation
concerning the nature of the non-conformance shall be generated
and maintained.
4.7 All material received at Sequent shall conform with the
requirements specified in the purchase order and the Product
specifications. To support Sequent's quality assurance program
and to enable compliance with regulatory requirements, the
current revision of each of the following items must be furnished
to Sequent upon request:
(i) [*]
(ii) [*]
(iii) [*]
5. SEQUENT QUALITY FAILURE AND RELIABILITY FAILURE REQUIREMENTS
5.1 The Quality Failure requirement for the Product is that the
failure rate shall be no higher than [*]. This
failure rate will be measured by calculating the number of
defects found in Sequent factory in addition to any failures that
occur within the first [*] after installation
at a customer site, divided by the total number of Products
shipped. [*]
[*]
5.2 The Reliability Failure Goal for the 16 Port Switch is [*]
MTBF (Annual Failure Rate (AFR) x [*]). The Reliability
Failure Goal for the 8 Port Switch is [*] MTBF (Annual
Failure Rate (AFR) equal to or approximately %)
5.3 A Red Light will occur if the reliability of the Product drops
below the required [*] for the 16 port switch or [*]
for the 8 port switch.
[*]
*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.
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6. TECHNICAL SUPPORT AND RESPONSIVENESS
6.1 Brocade shall promptly notify Sequent, in writing, of any
discrepancies found which could have a detrimental effect on
previously shipped Product. In such cases, Brocade shall provide
a timely response with effective corrective action for any
nonconformity discovered.
6.2 Routine Questions and Issues. Brocade will provide [*]
acknowledgment, by electronic mail ("Email"),
facsimile ("Fax") or other method of communication agreed to by
the parties, of all Sequent requests for assistance with Routine
Questions and Issues, including but not limited to questions
regarding Product service and support. Sequent shall have access
to Brocade personnel, to include but not be limited to
developers, order fulfillment, quality and technical personnel,
to assist Sequent. Brocade personnel shall use best efforts to
provide a response to Sequent's requests for assistance within
[*] of receipt of the request.
6.3 Failure Analysis. Brocade shall perform failure analysis on
all failed Products returned to Brocade. Failure analysis will be
a cooperative effort between Brocade and Sequent to determine the
root cause of the failure. Initial failure analysis on failed
Products shall be completed within [*] from Brocade's receipt of
the Products; except in isolated incidents based on extreme
critical Sequent customer need, from the time of receipt by
Brocade of defective Product from Sequent, Brocade agrees to
provide expedited failure analysis on a commercially reasonable
basis, including isolation of the defect to the basic component
level. Complete failure analysis to root cause shall be completed
within [*] from receipt of failed Product. Once failure analysis
has been completed, Brocade will Email or Fax a failure analysis
report to the Sequent Supplier Engineer designated by Sequent to
work with Brocade. The failure analysis report shall include at a
minimum, the Product part number, Product serial number, failure
cause and corrective action that Brocade will take to prevent
further occurrences of the failure. There will be no charges for
failure analysis.
6.4 Quality Issues. Quality Issues must be responded to by Brocade
within two (2) business days after being notified that such an
issue exists. Brocade shall completely close the Quality Issue
with effective corrective action that will prevent a repeat
failure within [*] depending on the nature of the issue.
6.5 Red Lights. Red Lights shall be highest priority and shall cause
immediate allocation of all necessary Brocade resources to
expeditiously develop and implement effective containment and
resolution plans in conjunction with Sequent, until problem
resolution. Brocade's commitment of resources shall be at its
expense and shall include but not be limited to committing
Brocade personnel to work evenings and weekends or, if necessary,
to send such personnel to Sequent's site or Sequent's customer's
site.
6.6 Brocade shall comply with the Sequent Corporate Standard
Operating Policy for Electrostatic Discharge Control, Sequent
part number 1003-55472-E01, a copy of which has been provided to
Brocade.
*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.
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6.7 Depending on the amount and/or complexity of quality issues
outstanding at any given time, either party may initiate ongoing
weekly conference calls between the parties for the purpose of
quality issue resolution.
7. QUALITY DATA AND REPORTING
7.1 The parties will be responsible for providing each other with
quality data. The specific data, the party responsible for the
data, and the time for reporting is as follows:
<TABLE>
<CAPTION>
<S> <C>
Data (Field Metrics) & Responsible Party Time of Reporting
Summary of field Quality Failures [*] after On or before the
install) (Sequent) 15th of the month
Reliability Data in the form of average time between On or before
the replacement ("ATBR"). ATBR includes all 15th of the month
replacements, some of which may not have been actual failures
(Sequent)
Data (Factory Metrics) & Responsible Party Time of Reporting
Summary of all inspection/test station yields for the On or before the
month for all Products shipped to Sequent (Brocade) 15th of the month
Pareto of failures for the above stations for the month On or before the
for all Products shipped to Sequent (Brocade) 15th of the month
Failure analysis summary of Sequent returned On or before the
Products (Brocade) 15th of the month
[*]
</TABLE>
7.2 This above data will be sent by Email, Fax or other method agreed
to by the parties, between Brocade and Sequent quality personnel
no later than the required time of reporting.
7.3 All Brocade test records must be archived for a minimum of
[*]. Brocade shall maintain and analyze in-process failure
data and use best efforts to improve test suites to drive the
number of in-process failures to zero.
7.4 Test flow diagram and content for all Products including systems,
features and spares shall be available to Sequent upon request.
8. CORRECTIVE ACTION PROCESS
All Quality Failures and Reliability Failures shall be resolved to root
cause. Brocade shall perform failure analysis on defective Products in
accordances with sub-Section 6.3 of the Agreement. Upon determining the
root cause of the failure, Brocade shall establish a corrective action
plan, with Sequent's assistance if requested, to insure that the Product
defect is removed and that root cause corrective action is implemented.
Sequent will assist Brocade with tracking all open failures and will
work with Brocade to insure that the proper repair priority is set. In
the event Brocade encounters a no trouble found ("NTF") in a Product
sent from Sequent, Brocade shall re-submit through the complete
manufacturing test process for a final assembly.
*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.
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9. MULTIPLE FAILURE PRODUCT DISPOSITION
9.1 Product of a specific part and serial number with a history of
[*] or more failures ("Multi-failure Product") shall be clearly
labeled as non-conforming due to multiple failures and segregated
from good Product, as the term "good" is described in sub-section
9.2, below.
9.2 Multi-failure Product may be re-labeled as "good" and used as a
replacement Product when the following criteria have been met:
(i) Brocade provides to the designated Sequent Supplier
Engineer ("SE"), written documentation of a positive
correlation between all failures and Brocade's fixes; and
(ii) Product meets all Product specifications and test
criteria; and
(iii) Sequent's SE has provided Brocade with written
authorization to label the documented Multi-failure
Product as good.
9.3 In the event that no positive correlation between failure and fix
can be established for a Multi-failure Product, then Brocade
shall not repair or use such Product as a replacement Product.
Brocade shall submit a scrap request to Sequent's designated
Supplier Engineer for review and authorization. Brocade's
requests for scrap authorization shall include the following
information:
(i) Product part, revision, and serial numbers;
(ii) Documented history of remedial processes performed on
the Product; and
(iii) Product's failure mode or quality conformance issue.
9.4 Brocade may be required to return scrapped Product to Sequent for
verification and analysis. Sequent will notify Brocade of this
requirement at the time of Product scrap authorization.
*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.
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ATTACHMENT D
PRODUCT SUPPORT
This Attachment sets forth the terms and conditions that govern the support for
the Product(s). Notwithstanding anything that may be construed to the contrary,
Sequent shall not have an obligation to purchase any Product Support from
Brocade under the Agreement.
1. PRODUCT SUPPORT AND PRODUCT SUPPORT DURATION
1.1 At Sequent's request, Brocade shall provide the Product Support
described in this Attachment. Charges for Product Support are
provided in Attachment B to the Agreement.
1.2 Product Support may include but not be limited to Product: (1)
testing; (ii) repair; (iii) upgrades; (iv) failure analysis; and
(v) advance exchange.
1.3 Brocade shall provide Product repair and testing at reasonable
prices and throughput time as provided in this Attachment D for a
period of not less than [*] years after Product withdrawal.
1.4 In the event that Brocade is unable or unwilling to comply with
Sequent's Product Support requirements, Brocade will, at
Sequent's request, assist Sequent in identifying another repair
source to provide all or part of the Product Support. Brocade's
assistance may include, but is not limited to: (i) training
required by Sequent and/or the third party to provide Product
Support and (ii) providing Sequent and/or the third party with
all necessary documentation and component sourcing information
required to perform Product Support. Such assistance will be
provided to Sequent [*].
1.5 The parties acknowledge that Product returns to Brocade may come
from three (3) different sources: (i) Sequent's service
organization; (ii) Sequent's evaluation and demonstration product
organization; and (iii) [*]. Processing returns may differ
depending on the source of the return. [*]
2. PRODUCT REPAIR
2.1 Upon Sequent's request for Product repair, Brocade shall ship
repaired or replacement Product within [*] of receipt of
Sequent's defective Product.
2.2 All field returned Product shall be upgraded and/or repaired as
agreed between the parties, and then reassembled, tested and
packaged per Sequent's requirements for new Product. All final
test and inspection as required by Brocade for new Product shall
be performed on field returned Product prior to its return to
Sequent.
*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.
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2.3 There shall be no charge for Product repair during Product
warranty. Prices for out-of-warranty Product repair are as
provided in sub-Section 2.2. of Attachment B.
3. EXCHANGE PRODUCT
3.1 For purposes of this Section 3, the following definitions apply:
3.1.1 "Exchange Product" means a new Product or a Product that
has been previously repaired or refurbished and which
Brocade uses to replace defective Product.
3.1.2 "Product Warranty" means the warranty period as provided
for in Section 10 of the Agreement.
3.1.3 "Product Support Warranty" means the warranty, as
described in sub-Section 3.5.3, below, applicable to
Exchange Product delivered pursuant to this Section 3
after expiration of the Product Warranty.
3.2 Brocade will provide replacement Product to Sequent under the
provisions of this Section 3. The charge for Exchange Product
shall be as provided in sub-Section 2.1 of Attachment B.
3.3 Repair of Exchange Product
3.3.1 All field returned Product shall be upgraded and/or
repaired as agreed between the parties, and then
reassembled, tested and packaged per Sequent's
requirements for new Product. All final test and
inspection required by Brocade for new Product shall be
performed on field returned Product prior to its return to
Sequent.
3.3.2 Brocade shall be responsible for repair and/or
refurbishment of Products that may be provided to Sequent
as Exchange Product. Brocade may assign repair or
refurbishment activities to a third party provided that
Brocade's assignee repairs and/or refurbishes Product in
accordance with Attachment C, Supplier Quality, and the
provisions of this Agreement. Brocade shall remain liable
to Sequent for its obligations under the Agreement, to
include but not be limited to providing Exchange Product.
3.4 In-Warranty Product Exchange
3.4.1 During Product Warranty, Brocade shall replace defective
Product under Product Warranty in accordance with and
subject to the following provisions. Except as provided in
sub-Section 3.4.1.2, below, there shall be no charge to
Sequent for Exchange Product provided under this
sub-Section 3.4.
3.4.1.1 Upon Sequent's request for an Exchange Product,
Sequent shall provide the serial number of the
failed Product and Brocade
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shall ship Exchange Product to Sequent or to a
location designated by Sequent:
(i) within [*] of Sequent's request; or
(ii) in case of a Quality Failure, as defined
in Attachment C, Brocade will ship an
Exchange Product (equivalent to new,
defined as any repaired line integration
failure, and line integration and DOA
NTFs) within [*] of Sequent's request.
If a new (not previously repaired or
refurbished) Exchange Product is
required, Brocade will ship such
Exchange Product within [*] starting the
next business day. Brocade may request
that line integration failures be
retained at Sequent as Brocade will have
the option to send a trained technician
to diagnose a failure to a FRU level and
effect repair on site, provided that
Sequent can accommodate Brocade's
request without impact to the Sequent
customer requested ship date.
3.4.1.2 Sequent will use best efforts to return the
defective Product to Brocade within [*] from
domestic locations and [*] from international
locations from the date of delivery of the
Exchange Product unless otherwise directed to
hold or dispose of the defective Product by
Brocade. Brocade shall provide to Sequent a
listing by location of Brocade's exchange
facilities. In the event that the failed Product
is not returned to Brocade within the applicable
time period, Brocade may invoice Sequent for the
difference between the then-standard commercial
list price of a new Product and the price of an
Exchange Product, for the replacement Product;
provided, however, that upon receipt of the
defective Product from Sequent, Brocade shall
credit Sequent for the amount invoiced less any
reasonable and necessary administrative costs
incurred by Brocade for the invoice and credit
transactions.
3.4.1.3 Upon shipment of an Exchange Product, Brocade
shall notify Sequent of the Exchange Product
serial number that is being shipped as the
replacement.
3.4.1.4 Sequent shall be responsible for all freight
charges for return of failed Product and Brocade
shall be responsible for freight charges for
shipment of Exchange Product.
3.4.1.5 Brocade shall honor the original Product
Warranty of a Product and provide Exchange
Product under this Agreement, regardless of
whether Sequent was the original purchaser of
the Product.
3.4.2 From the date of delivery, the Exchange Product shall be
warranted in accordance with and for the remainder of the
Product Warranty of the defective Product which was
replaced or in accordance with and for the period of the
Product Support Warranty provided at sub-Section 3.5.3 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.
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this Attachment, whichever is longer, provided that
Sequent has provided Brocade with the serial number of the
failed Product, as defined in sub-Section 3.4.1.1. In the
case where no serial number is provided by Sequent, the
Exchange Product warranty shall default to [*]. Warranty
tracking and documentation for Products and FRUs as
configured upon initial shipment from Brocade, including
Exchange Products, shall be the responsibility of Brocade.
3.5 Post-Warranty Product Exchange and Repair
3.5.1 The provisions of this sub-Section 3.5 shall apply solely
to replacement of Product after expiration of the Product
Warranty.
3.5.2 Brocade shall repair or replace or exchange defective
Product under Product Support Warranty in accordance with
and subject to the following provisions.
3.5.2.1 Upon Sequent's request for Exchange Product,
Brocade shall ship Exchange Product to Sequent
within three (3) business days of Sequent's
request at no charge.
3.5.2.2 Sequent will use best efforts to return the
defective Product to Brocade within [*] from
domestic locations and [*] from international
locations, from the date of delivery of the
Exchange Product unless otherwise directed to hold
or dispose of the defective Product by Brocade.
Brocade shall provide to Sequent a listing by
location of Brocade's exchange facilities. In the
event that the failed Product is not returned to
Brocade during the applicable time period, Brocade
may invoice Sequent for the Exchange Product
Charge per Attachment B less the Out of Warranty
Repair charge per Attachment B. Invoices generated
under these circumstances shall be payable net [*]
from the date of receipt of a correct invoice.
3.5.2.3 Upon shipment of an Exchange Product, Brocade
shall notify Sequent of the Exchange Product
serial number that is being shipped as the
replacement.
3.5.2.4 Sequent shall be responsible for freight charges
for shipment of defective Product to Brocade.
Brocade shall be responsible for freight charges
for shipment of Exchange Product.
3.5.3 Products, including Exchange Product used to replace
defective Products under this Section 3.5 of Attachment D,
are warranted for a period of [*] from the date of
delivery of the Exchange Product, to conform to and
perform in accordance with the Sequent's specifications in
effect at the time of the replacement of the defective
Product, and to be free from defects in materials and
workmanship ("Product Support Warranty"). The
above-referenced Product Support Warranty is subject to
the applicable provisions of Section 10, Warranty, of the
Agreement. Warranty tracking and documentation for
Products,
*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.
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including Exchange Products, shall be the responsibility
of Brocade. Sequent shall have the right to audit
Brocade's records that directly verify and monitor Product
warranty, at times and places mutually agreed upon.
4. FAILURE ANALYSIS
Brocade shall provide failure analysis in accordance with the provisions
of sub-Section 6.3 of Attachment C.
5. NO TROUBLE FOUND ("NTF") TESTING
5.1 Brocade shall provide NTF testing under the provisions of this
Section 5. For purposes of this Section 5, NTF shall mean that a
Product has undergone testing and has been determined by Brocade
to conform to and perform in accordance with all applicable
specifications, without repair, upgrade, or other modification
being required. Charges for NTF testing of Products are provided
for in Attachment B.
5.2 Upon Sequent's request, Brocade shall provide NTF testing on
Products, Such testing shall commence no later than [*] from
Brocade's receipt of the Product to be tested. Brocade shall
provide Sequent with the reports documenting and describing its
NTF results no later than [*] after Brocade receives the Product.
There shall be no charge to Sequent for NTF reports.
6. RECERTIFICATION
6.1 For purposes of this sub-Section, the following definition
applies:
"Recertification" shall include the following: (i) diagnostic
testing; (ii) upgrade with Mandatory Engineering Changes, if
required; (iii) system test; (iv) HASS test; (v) burn-in; and
(vi) final test.
6.2 Brocade shall provide Recertification under the provisions of
this Section 6. Charges for Recertification testing of Products
are provided for in Attachment B.
6.3 Upon Sequent's request, Brocade shall provide Recertification on
Products. Such testing shall commence no later than [*] from
Brocade's receipt of the Product to be tested. Brocade shall
provide Sequent with the reports documenting and describing the
Recertification results no later than [*] after Brocade receives
the Product. There shall be no charge to Sequent for
Recertification reports.
6.4 Recertification will be performed on any Product that has been at
Sequent or one of Sequent's customers for period not exceeding
[*]. This Product would have originally been shipped to Sequent
or one of Sequent's customers for the purpose of qualification,
demonstration or on a similar trial basis. The expectation is
that after undergoing Brocade's Recertification process, this
Product could be returned to Sequent as "equivalent-to-new"
product.
6.5 In the event that Product is returned from one of Sequent's
customers after a period exceeding [*] and Brocade's estimated
cost 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.
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<PAGE> 37
recertification exceeds the standard cost provided in sub-Section
2.4 of Attachment B, Brocade shall provide a quotation with a
complete breakdown of time and materials for the Recertification
and upon Sequent's acceptance of the pricing Brocade shall
perform the Recertification.
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<PAGE> 38
ATTACHMENT E
REPORTS
This Attachment summarizes the reports required of Brocade and Sequent under the
Agreement. There shall be no charge to either party for any reports required
under the Agreement.
1. RECURRING REPORTS
1.1 Brocade Provided Reports
1.1.1 Brocade Factory Metrics
Brocade will provide these reports to the designated
Sequent Supplier Engineer as provided in sub-Section 7.1
of Attachment C. The content of these reports shall
include:
(i) Summary of all inspection/test station yields
for the month for all Products shipped to
Sequent;
(ii) Pareto of failures for all inspection/test
stations for the month for all Products shipped
to Sequent; and
(iii) Failure analysis summary of Sequent returned
Products.
1.1.2 Repair Throughput and Aging Profile
Brocade will provide these reports [*] as agreed upon
between the parties.
1.2 Sequent Provided Reports
1.2.1 Sequent Field Metrics
Sequent will provide the following reports as provided for
in sub-Section 7.1 of Attachment C. The content of these
reports shall include:
(i) Summary of field Quality Failures
(ii) Reliability Data in the form of average time
between failures ("ATBR"). ATBR includes all
replacements, some of which may not have been
actual failures.
2. REQUESTED REPORTS
2.1 Brocade Provided Reports
2.1.1 Sub-Tier Supplier Performance
The content shall include status reports indicating
sub-tier supplier performance as provided in Section 19 of
the Agreement.
*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.
Pg. 38
<PAGE> 39
2.1.2 NTF Test Reports
The NTF reports required in Section 5 of Attachment D are
to be supplied no later than ten 10) business days after
completion of the NTF testing. Content of the reports will
be as provided in sub-Section 5.2 of Attachment D.
2.1.3 Failure Analysis Reports
Failure Analysis reports, including report content and
time requirements, are to be supplied under sub-Section
6.3 of Attachment C.
2.1.4 Recertification Reports
The Recertification reports required in Section 6 of
Attachment D are to be supplied no later than ten (10)
business days after completion of the Recertification.
Content of the reports will be as provided in sub-Section
6.3 of Attachment D.
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<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 three (3) years, 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
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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
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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
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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
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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
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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
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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
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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
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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
May 20, 1999
