<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 18, 1999
REGISTRATION NO. 333-74711
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
CALIFORNIA (PRIOR TO 3577 77-0409517
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY L. REYES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BROCADE COMMUNICATIONS SYSTEMS, INC.
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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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
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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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. [ ]
------------------------
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 5, 1999
3,250,000 Shares
[BROCADE LOGO]
COMMON STOCK
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC. IS OFFERING 3,250,000 SHARES OF ITS COMMON
STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS
FOR OUR COMMON STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL
BE BETWEEN $8 AND $10 PER SHARE.
------------------------
WE HAVE APPLIED TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "BRCD."
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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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<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS TO BROCADE
-------- ------------- ----------
<S> <C> <C> <C>
Per Share................................ $ $ $
Total.................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Brocade has granted the underwriters the right to purchase up to 487,500
additional shares to cover over-allotments. Morgan Stanley & Co. Incorporated
expects to deliver the shares of common stock to purchasers on , 1999.
------------------------
MORGAN STANLEY DEAN WITTER
BT ALEXS BROWN
DAIN RAUSCHER WESSELS
a division of Dain Rauscher Incorporated
, 1999
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 5
Special Note Regarding
Forward-Looking Statements........ 15
Use of Proceeds..................... 16
Dividend Policy..................... 16
Capitalization...................... 17
Dilution............................ 18
Selected Financial Data............. 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 20
Business............................ 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>
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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.
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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.
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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 California corporation and will reincorporate in Delaware prior to
the consummation of this offering. Our principal executive offices are located
at 1901 Guadalupe Parkway, San Jose, California 95131, and our telephone number
is (408) 487-8000.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
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SIX MONTHS
ENDED
YEAR ENDED OCTOBER 31, APRIL 30,
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1995 1996 1997 1998 1998 1999
----- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ -- $ -- $ 8,482 $ 24,246 $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 $9.00 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."
<TABLE>
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AS OF APRIL 30, 1999
-----------------------
ACTUAL AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 8,668 $31,689
Working capital............................................. 5,061 30,596
Total assets................................................ 27,450 50,471
Long-term portion of debt and capital lease obligations..... 1,525 232
Redeemable convertible preferred stock...................... 37,016 --
Total stockholders' equity (deficit)........................ (28,301) 35,543
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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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-- 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 $7.62 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 $9.00 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 $26,327,500, or $30,407,875
if the underwriters exercise their over-allotment option in full, at an assumed
initial public offering price of $9.00 per share and after deducting estimated
underwriting discounts and commissions and our estimated offering expenses. We
expect to use the net proceeds of this offering as follows:
-- to repay outstanding indebtedness under our bank credit facility and
our equipment loan agreement; and
-- for general corporate purposes, including capital expenditures and
working capital.
In addition, we may use a portion of the net proceeds for the acquisition
of businesses, products and technologies that are complementary to ours.
However, we have no current plans, agreements or commitments and are not
currently engaged in any negotiations with respect to any acquisition. Pending
such uses, we will invest the net proceeds of this offering in investment grade,
interest-bearing securities.
Borrowings under our credit facility bear interest at the bank's prime
rate, which was 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
$9.00 per share and the application of the net proceeds, after
deducting estimated underwriting discounts and commissions and our
estimated offering expenses.
The outstanding share information excludes 2,427,397 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 77,583
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 35,543
-------- -------- --------
Total capitalization............................ $ 10,645 $ 11,145 $ 36,180
======== ======== ========
</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 $9.00
per share and after deducting the estimated underwriting discounts and
commissions and our estimated offering expenses, our net tangible book value as
of April 30, 1999, would have been $35.5 million or $1.38 per share. This
represents an immediate increase in net tangible book value of $.97 per share to
existing stockholders and an immediate dilution in net tangible book value of
$7.62 per share to purchasers of common stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $9.00
Pro forma net tangible book value per share as of April
30, 1999............................................... $.41
Increase per share attributable to new investors.......... .97
----
Pro forma net tangible book value per share after this
offering.................................................. 1.38
-----
Dilution per share to new investors......................... $7.62
=====
</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 $9.00 per share, with respect to the
number of shares purchased from us, the total consideration paid and the average
price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............. 22,435,291 87% $46,243,000 61% $2.06
New stockholders.................. 3,250,000 13 29,250,000 39 9.00
---------- ----- ----------- -----
Total................... 25,685,291 100% $75,493,000 100%
========== ===== =========== =====
</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.
18
<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 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 have
filed 11 patent applications in the United States with respect to our technology
and
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are also seeking protection for the technology in selected international
locations. However, it is possible that patents may not be issued for these
applications. Our issued patents may not adequately protect our technology from
infringement or prevent others from claiming that our technology infringes that
of third parties. Failure to protect our intellectual property could materially
harm our business. In addition, our competitors may independently develop
similar or superior technology. It is possible that litigation may be necessary
in the future to enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the proprietary rights of
others. Litigation could result in substantial costs and diversion of our
resources and could materially harm our business.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Infringement or
other claims could be asserted or prosecuted against us in the future, and it is
possible that past or future assertions or prosecutions could harm our business.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
delays in the development and release of our products, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
materially harm our business.
PENDING LEGAL PROCEEDING
In October 1998, we were sued by one of our former contract manufacturers,
Manufacturers' Services Central U.S. Operations, Inc. and Manufacturers'
Services Western U.S. Operations, Inc., 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 $9.00 per
share and net of the option exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OCTOBER 31, 1998 OPTIONS AT OCTOBER 31, 1998
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) VESTED UNVESTED VESTED UNVESTED
---- ------------ ------------ --------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Reyes............. -- $ -- -- 1,535,662 $ -- $10,365,719
Bruce L. Bergman............. -- -- -- -- -- --
Kumar Malavalli.............. -- -- -- -- -- --
Paul R. Bonderson, Jr. ...... -- -- -- -- -- --
Victor M. Rinkle............. -- -- -- 200,000 -- 1,350,000
Charles W. Smith............. 25,000 30,000(1) 47,917 112,083 415,003 901,247
</TABLE>
- -------------------------
(1) Based on a price of $1.80 per share, the fair market value of our common
stock at January 13, 1998, as determined by our board of directors, 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
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<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.
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<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.
59
<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 April 1997, we issued a warrant to a sublessor of real property to
purchase 20,000 shares of our Series C Preferred Stock with an exercise price of
$3.00 per share. This warrant will remain outstanding after the completion of
this offering and will become exercisable for 20,000 shares of our common stock.
In May 1997, we issued a warrant to a bank to purchase 25,000 shares of our
Series C Preferred Stock with an exercise price of $3.00 per share. This warrant
will remain outstanding after the completion of this offering and will become
exercisable for 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
After the reincorporation discussed in Note 10 to Brocade Communications
Systems, Inc. financial statements, we expect to be in a position to render the
following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Brocade Communications Systems, Inc.:
We have audited the accompanying balance sheets of Brocade Communications
Systems, Inc. (a California corporation) as of October 31, 1998 and 1997 and the
related statements of operations, redeemable convertible preferred stock and
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brocade Communications
Systems, Inc. as of October 31, 1998 and 1997 and the results of its operations
and its cash flows for each of the three years in the period ended October 31,
1998 in conformity with generally accepted accounting principles.
San Jose, California
November 24, 1998
(except with respect to the matters
discussed in Note 10, as to which the
date is May , 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, 1999 and continuing
through August 4, 1999. 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 is to be effective
prior to Brocade's initial public offering. Upon reincorporation, Brocade will
be authorized to issue 50,000,000 shares of common stock, $.001 par value and
5,000,000 shares of undesignated preferred stock, $.001 par value.
1999 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........................................ $ 11,510
NASD filing fee............................................. 5,000
Nasdaq National Market listing fee.......................... 90,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 250,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous expenses...................................... 28,490
--------
$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, we issued two warrants to an equipment lease
financing company to purchase 15,753 and 35,444 shares of our Series A
Preferred Stock at exercise prices of $4.50 and $1.00 per share,
respectively.
6. On June 5, 1996, we sold 386,764 shares of our common stock, for
$.05 per share to Bruce L. Bergman, the former President and Chief
Executive Officer of Brocade, for an aggregate purchase price of
$19,338.20.
7. On June 17, 1996, we sold 816,250 shares of our Series B Preferred
Stock for $4.00 per share to a group of private investors for an aggregate
purchase price of $3,265,000.
8. On July 16, 1996, we issued 32,813 shares of Common Stock at $.05
per share to a then-current officer of Brocade as partial commission in
connection with the Series B Preferred Stock financing.
9. On September 11, 1996, we issued a warrant to an equipment lease
financing company to purchase 17,500 shares of our Series B Preferred Stock
at an exercise price of $4.00 per share.
10. On August 26, 1996, in connection with the lease of office space,
we issued a warrant to a real property lessor to purchase 3,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
11. On December 6, 1996, we sold 3,333,333 shares of our Series C
Preferred Stock at $3.00 per share to a group of private investors for an
aggregate purchase price of $9,999,999.
12. On May 6, 1997, in connection with a sublease agreement, we issued
a warrant to a sublessor of real property to purchase 20,000 shares of our
Series C Preferred Stock at an exercise price of $3.00 per share.
13. On June 13, 1997, in connection with a combined line of credit and
equipment lease, we issued a warrant to a bank to purchase 25,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
II-2
<PAGE> 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 17th 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 17, 1999
------------------------------------------
Seth D. Neiman
/s/ GREGORY L. REYES President and Chief Executive Officer May 17, 1999
------------------------------------------ (Principal Executive Officer)
Gregory L. Reyes
/s/ MICHAEL J. BYRD Vice President, Finance and Chief May 17, 1999
------------------------------------------ Financial Officer (Principal
Michael J. Byrd Financial and Accounting Officer)
Director
------------------------------------------
Neal Dempsey
* Director May 17, 1999
------------------------------------------
Mark Leslie
* Director May 17, 1999
------------------------------------------
Larry W. Sonsini
</TABLE>
* Power of Attorney
By: /s/ GREGORY L. REYES
--------------------------------------------------
Gregory L. Reyes
II-6
<PAGE> 100
After the reincorporation discussed in Note 10 to Brocade Communications
Systems, Inc.'s financial statements, we expect to be in a position to render
the following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Shareholders
of Brocade Communications Systems, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Brocade Communications Systems, Inc. included in
this Registration Statement and have issued our report thereon dated November
24, 1998. Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The accompanying schedule is the
responsibility of the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
S-1
<PAGE> 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 10.21
AGREEMENT NO. ________
BROCADE COMMUNICATION SYSTEMS, INC.
OEM AND LICENSE AGREEMENT
This BROCADE Communications Systems, Inc. Original Equipment Manufacturer
("OEM") and License Agreement (including the attached terms and conditions and
exhibits, each of which is expressly incorporated herein, collectively the
"Agreement") is entered into as of this 27th day of April, 1999 (the "Effective
Date") by and between Brocade Communications Systems, Inc., a corporation
organized under the laws of the State of California, U.S.A., and having its
principal place of business at 1901 Guadalupe Parkway, San Jose, California
95131, ("BROCADE") and McDATA Corporation ("McDATA"), a Delaware corporation,
and having its principal place of business at 310 Interlocken Parkway,
Broomfield, Colorado 80021.
This Agreement consists of the following:
THE TERMS AND CONDITIONS CONTAINED IN THIS COVER/SIGNATURE PAGE OEM
TERMS AND CONDITIONS (THE "TERMS")
EXHIBIT A - PRICE LIST
EXHIBIT B - SERVICE AND SUPPORT REQUIREMENTS
EXHIBIT C - TECHNICAL TRAINING PROGRAM
EXHIBIT D - SOFTWARE LICENSE AGREEMENT
EXHIBIT E - McDATA PRODUCTS
EXHIBIT F - SETTLEMENT AGREEMENT AND MUTUAL RELEASE (DATED APRIL 14,
1998)
EXHIBIT G - ASICS SPECIFICATIONS
EXHIBIT H - BROCADE - HP - McDATA SUPPORT LETTER
EXHIBIT I - BROCADE - McDATA NDA
EXHIBIT J - MANUFACTURING [*] TEST PROCESSES
EXHIBIT K- HARDWARE SUBASSEMBLIES MTBF
IN WITNESS WHEREOF, in consideration of the covenants and other compensation set
forth herein, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto have executed this Agreement as of the Effective Date.
BROCADE: BROCADE COMMUNICATIONS McDATA: MCDATA CORPORATION
SYSTEMS, INC.
Signature: Signature:
---------------------------- -------------------------
Name: Name:
--------------------------------- ------------------------------
Title: Title:
-------------------------------- -----------------------------
Agreement No.: _______
BROCADE COMMUNICATIONS SYSTEMS, INC.
OEM AND LICENSE AGREEMENT TERMS
These Terms are effective as of the Effective Date of the Agreement and are made
between BROCADE and McDATA, as identified on the cover/signature page to which
these Terms are attached. BROCADE and McDATA hereby agree as follows:
1
* 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> 2
1.0 DEFINITIONS
1.1 "ASICs Firmware" means the object code [*] versions of BROCADE's proprietary
software used in conjunction with BROCADE's current generation of Fibre Channel
products incorporating the BROCADE ASICs and designated with version numbers
1.X, and related software design specifications provided to McDATA pursuant to
the Technology License and Development Agreement between the parties dated
November 1, 1996.
1.2 "ASICs Specifications" means the specifications attached hereto as Exhibit
G.
1.3 "BROCADE ASICs" means that generation of BROCADE Felt and McFlannel
application specific integrated circuits ("ASICs") as of April 1, 1998 for the
Felt ASICs, and July 1998 for the McFlannel ASICs, with the LSI Logic part
numbers [*] and [*], respectively.
1.4 "Customers" means the collective reference to End Users and Resellers.
1.5 "Derivative Work(s)" means any work of authorship that is based upon one or
more preexisting works such as a revision, modification, translation,
abridgement, condensation, expansion, or any other form in which such
preexisting works may be recast, transformed, or adapted and which, if prepared
without authorization of the owner of the copyright in such preexisting work,
would constitute a copyright infringement.
1.6 "End User(s)" means McDATA's customers of the Products (as incorporated into
the McDATA Products), which shall only be the ultimate users of a McDATA
Product, and not a reseller, agent, broker or other intermediary in the chain of
distribution.
1.7 "Hardware" means the SilkWorm Motherboard, CPU Board, G_Port Board, and
FL_Port Board offered to McDATA by BROCADE as set forth in Exhibit A.
1.8 "Licensed Software" means the software products set forth in Exhibit A, in
object code only, supporting version numbers 1.x of the ASICs Firmware and which
are pre-installed on all of the applicable Hardware shipped to McDATA under this
Agreement, and which further require a license key specific to an individual
Hardware unit ("Key") to activate the Licensed Software.
1.9 "McDATA Functionality" means McDATA's Intellectual Property Rights (as
defined in Section 13) embodied in the ASICs Specifications, as amended from
time to time by mutual consent, and McDATA's hardware designs, simulation
models, and system architecture specifications embodied in the McDATA Products.
1.10 "McDATA Product" means the Fibre Channel switches set forth in Exhibit E
which are designed and assembled by McDATA in which the [*] of such switches are
comprised of the Hardware set forth in Exhibit A, in accordance with the terms
set forth in Section 2.2.
1.11 "Prices" means the net amounts charged by BROCADE in relation to the list
of Products offered by BROCADE hereunder. The Prices are attached hereto in
Exhibit A.
1.12 "Products" means the Hardware and Licensed Software offered to McDATA by
BROCADE as set forth in Exhibit A, and any related documentation and manuals
provided by BROCADE, as set forth in Section 2.4.2.
1.13 "Reseller(s)" means any business entity which McDATA utilizes to market and
service the McDATA Products to End Users in accordance with the terms of this
Agreement, including systems integrators, original equipment manufacturers and
distributors.
1.14 "Software License Agreement" means the Software License Agreement, set
forth as Exhibit D, as may be amended by mutual agreement from time to time.
2.0 LICENSES
2.1 Grant of License. Subject to the terms of this Agreement, BROCADE grants
McDATA a non-exclusive, non-transferable, worldwide license to: (a) market,
sell, distribute, sublicense and demonstrate the Products to Customers solely as
incorporated into the McDATA Products set forth in Exhibit E; and (b) use the
Products solely as incorporated into the McDATA Products as reasonably required
in connection with such marketing, sales, distribution and demonstration.
2.2 No Standalone. McDATA agrees not to market, sell, distribute, sublicense or
demonstrate the Products in standalone form, except that McDATA shall have the
right to distribute spare and field replacement units of the Hardware solely for
use in connection with previously sold units of McDATA Product.
2.3 Private Label. McDATA shall privately label the Products as incorporated
into the McDATA Products, and may remove the BROCADE branding on the Products
and attach McDATA trademarks or other marks to the Products as the branding of
the Products, except that McDATA shall not remove any of BROCADE's proprietary
copyright, trademark and patent notices without BROCADE's prior written notice.
2.4 Documentation.
2.4.1 Documentation to McDATA. Promptly following the Effective Date and
concurrent with BROCADE's general release, if any, of the Products, BROCADE will
provide to McDATA BROCADE's standard technical documentation including but not
limited to data sheets, BROCADE Manuals (as defined below) and other manuals
distributed to resellers of the Products (such as technical manuals), all of
which BROCADE will supply in BROCADE's standard electronic format for
incorporating into the McDATA Manuals (as defined below) ("Documentation").
During the term of this Agreement, BROCADE will provide to McDATA updates to the
Documentation, if any, when BROCADE generally makes such updates available to
licensees of the Products.
2.4.2 Documentation Licenses.
2
* 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
(a) Technical Documentation. Subject to the terms of this Agreement, BROCADE
hereby grants to McDATA a nonexclusive, nontransferable, worldwide license to
reproduce and use BROCADE's technical documentation provided to McDATA by
BROCADE hereunder, solely for McDATA's internal purposes in connection with the
manufacture, marketing and support of the McDATA Products into which the
Products are incorporated as set forth herein. Modifications to such technical
documentation by McDATA shall require BROCADE's prior written authorization,
which authorization will not be unreasonably withheld.
(b) Manuals. Subject to the terms of this Agreement, BROCADE hereby grants to
McDATA a nonexclusive, nontransferable, worldwide license to modify the BROCADE
End User manual(s) (including manual text and layouts) for the Products
("BROCADE Manuals"), subject to BROCADE's written approval as described below,
and to distribute such approved, revised versions of the BROCADE Manuals with
the McDATA Product (the "McDATA Manuals"). BROCADE will review and approve the
McDATA Manuals in writing as to form and content with respect to the Products
prior to their use or distribution. Such approval shall not be unreasonably
withheld and shall be made within [*] following BROCADE's receipt of the
proposed McDATA Manuals. Notwithstanding the foregoing, such approval shall not
be required for (a) changes to content made by McDATA which are consistent with
changes made by McDATA to the McDATA Products (other than changes to the
Products), or (b) changes consistent with McDATA's usage, style or format
guidelines, provided that no such change alters the form, features or
functionality of the Products.
(c) Ownership. McDATA agrees that the foregoing licenses do not grant to McDATA
any title or other right of ownership to the Documentation. Notwithstanding the
foregoing, the parties agree that McDATA shall own any modifications made to the
McDATA Manuals
2.4.3 Expenses. McDATA is solely responsible for all expenses incurred by McDATA
in modifying, reproducing and using the Documentation.
2.4.4 Documentation Warranty.
(a) [*]. BROCADE [*] that the Documentation will be [*]. Except as expressly
provided in this Section 2.4.4(a), BROCADE grants the licenses in Section 2.4.2
to McDATA hereunder solely on an "AS IS" basis.
(b) Disclaimer. EXCEPT AS OTHERWISE PROHIBITED BY LAW, AND THEN ONLY TO THE
EXTENT SO PROHIBITED, BROCADE DISCLAIMS ALL REPRESENTATIONS, WARRANTIES AND
CONDITIONS, WHETHER EXPRESS, IMPLIED OR STATUTORY, REGARDING THE DOCUMENTATION,
INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY,
NON-INFRINGEMENT OF THIRD PARTY RIGHTS, OR FITNESS FOR A PARTICULAR PURPOSE.
2.5 Restrictions. Without BROCADE's prior written consent, McDATA will not do
any of the following acts: (a) disassemble, decompile, reverse engineer any
Products, or otherwise reduce the Licensed Software to human-readable form; (b)
copy or otherwise reproduce any Products, in whole or in part; (c) except as
authorized herein, remove, modify or otherwise tamper with notices or legends on
the Products or any labeling on any physical media containing the Licensed
Software; (d) use the Products in any manner to provide service bureau, time
sharing, or other computer services to third parties, (e) except as set forth
below, create Derivative Works from, adapt, modify, change or enhance the
Products. McDATA's rights in the Products will be limited to those expressly
granted in this Agreement, (f) remove the Licensed Software from the Hardware in
which is it embedded, or (g) authorize third parties to do any of the foregoing.
McDATA agrees to include the foregoing restrictions in its agreements with its
Resellers.
2.6 ASICs License.
(a) Right to Purchase. BROCADE grants McDATA the right to purchase, use and
resell the BROCADE ASICs as incorporated into the McDATA Products and not for
resale on a standalone basis, and shall authorize LSI Logic and LSI Logic's
authorized distributors to sell the BROCADE ASICs to McDATA for incorporation
into the McDATA Products, (such right and authorization is herein defined as
"ASIC License")which ASIC License is fully paid-up and irrevocable. The pricing
for such ASICs shall be as established between McDATA and LSI Logic and/or its
distributors.
(b) [*]. Brocade agrees that within thirty (30) days of the Effective Date of
this Agreement, it will [*] with [*] reasonably acceptable to McDATA, all [*]
and [*] (as defined below) [*], all of which shall be in a [*] form which
generally conforms to industry standards. For the purposes of this Agreement,
the term [*] means [*], and [*] means the [*] required to [*] and [*] the [*],
including [*] and [*]. Upon completion of the final design of the McFlannel
application ASIC, BROCADE will update the [*] to include the [*] and [*] for the
McFlannel ASIC.
(c) Access to [*]. Concurrent with BROCADE's [*] of the [*], BROCADE and McDATA
will execute an [*] authorizing said [*] to [*] to McDATA in the event that: (i)
upon receipt of [*] from LSI Logic of the [*], BROCADE will promptly notify
McDATA and work with McDATA to [*] for the [*], (ii) LSI Logic and/or LSI
Logic's authorized distributors fail or refuse to sell such [*] to McDATA,
including as a result of LSI Logic's [*] or [*] (other than as a result of
McDATA's failure to make payments when due or McDATA otherwise breaches its
obligations owed to LSI Logic or LSI Logic's authorized distributors) and,
BROCADE has not, within [*] of receipt of McDATA's written notice of such
refusal to sell by LSI Logic, [*] for McDATA the right to purchase said [*] from
a [*], (iii) the filing by or against BROCADE of bankruptcy proceedings 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.
3
<PAGE> 4
have not been dismissed for a period of [*] after the date of filing, or (iv)
solely prior to the release to production of the McFlannel ASICs and solely with
respect to the ASIC Designs and Manufacturing Documentation for the McFlannel
ASICs, the McFlannel ASICs do not [*] to the McFlannel ASICs specifications
after McDATA has provided BROCADE with written notice of such [*] and BROCADE
has failed to remedy such [*] within: (A) [*] of receipt of such written notice,
or (B) if such [*] cannot reasonably be remedied within [*], if BROCADE fails to
provide McDATA, within the stated [*] period, a written plan for specifying a
[*] to such failure which will be completed within the ensuing [*] period (or
longer time period if mutually agreed by the parties), along with demonstrable
evidence that progress has begun with respect to such plan ("[*]"). BROCADE
shall pay all [*] charged by the [*] pursuant to the [*]. Upon the release of
the [*] following a [*], then McDATA shall have the following rights in and to
the [*]:
(i) McDATA shall have a non-transferable, non-exclusive, right and license
to complete the development of, or have developed, and to [*], or [*], the
[*] for incorporation into the McDATA Products. McDATA agrees that such [*]
shall be used by McDATA solely to complete the development of (if
applicable) and to [*], sell, maintain and support the [*] as incorporated
into the McDATA Products. McDATA agrees that BROCADE shall have the right to
approve any [*] McDATA may use pursuant to this section, which approval
shall not be unreasonably withheld by BROCADE;
(ii) McDATA shall not use the [*] and [*] except as provided herein.
(iii) McDATA will maintain the confidentiality of the proprietary [*] and
[*] as it would maintain the confidentiality of its own comparable
information, but in no event with less than reasonable care.
(iv) McDATA will not, without BROCADE's express written permission make or
have made, or permit to be made, more [*] of the [*] and/or [*] than are
necessary for the permissible uses hereunder, and that each such necessary
[*] shall contain the same notices or legends which appear on the [*] of
each portion of the [*] and [*].
(v) BROCADE shall use its reasonable best efforts to assist McDATA in
securing a [*] between McDATA and any third parties with whom BROCADE may
have contracts, licenses or other arrangements necessary to the [*] of the
[*].
(vi) If McDATA exercises the [*] under this Section 2.6, McDATA agrees to
[*] BROCADE reasonable [*] for the [*] by McDATA and the amount of such [*]
shall be subject to the good faith negotiation of the parties.
2.7. ASICs Firmware License BROCADE grants McDATA an irrevocable, perpetual,
nonexclusive, nontransferable, worldwide fully paid up license to (i) internally
reproduce and modify the [*] version of the ASICs Firmware to compile a
derivative object code version of the ASICs Firmware, (ii) prepare and have
prepared Derivative Works of the ASICs Firmware, and (iii) reproduce,
distribute, sublicense, publicly perform and publicly display such object code
version of the ASICs Firmware only as incorporated into the McDATA Products and
not for resale on a standalone basis. BROCADE will provide each new release of
the ASICs Firmware to McDATA in a mutually agreed format within [*] days after
the date of general commercial availability of such release. Within [*] days of
any such release, BROCADE shall notify McDATA in writing in the form of BROCADE
standard release notes of changes to the [*] of such ASICs Firmware or related
software design specifications resulting from program errors or corrections in
relation to the immediately prior version of the ASICs Firmware; the parties
agree that such BROCADE notification shall not include information regarding
modifications to the ASICs Firmware as a result of custom work performed by
BROCADE for third parties. BROCADE agrees not to incorporate any such custom
modifications to the ASICs Firmware into the versions provided to McDATA to the
extent that any such modifications would affect the base functionality of the
ASICs Firmware.
3.0 TERM
The initial term of this Agreement shall commence on the Effective Date, and
shall extend for a period of twenty-four (24) months from the Effective Date
("Initial Term"), unless earlier terminated as set forth herein. This Agreement
may be renewed for subsequent one (1) year terms upon the prior written
agreement of the parties (each a "Renewal Term"). Whether or not the parties
renew this Agreement upon the expiration of the Initial Term or any subsequent
Renewal Term as set forth in the foregoing sentence, the parties agree that this
Agreement shall be deemed to automatically renew for successive three (3) month
periods in the event that McDATA continues to [*] Products in the [*] set forth
in Section 10.3 hereof ("Product End-of-Life"), unless otherwise terminated as
set forth herein. This Agreement shall always be interpreted to have a definite
term. Neither party has made or shall make any commitments regarding the
duration or renewal of this Agreement beyond those expressly stated herein.
4.0 TAXES
The parties acknowledge that the Prices do not include duty, sales, use, excise,
import, export, goods and services, value added or similar taxes or duties,
including any penalties and interest thereon, and all government permit and
license fees and customs and similar fees, which BROCADE may incur in respect of
this Agreement, including any costs expended to collect such amounts from McDATA
("Taxes"). McDATA agrees to pay, indemnify and hold BROCADE harmless from all
applicable Taxes (other than taxes based upon BROCADE's net income), unless
McDATA procures and provides to BROCADE an exemption certificate in a form
reasonably acceptable to BROCADE and to the appropriate taxing authority. If
McDATA fails to pay any Taxes as of the original due date therefor and BROCADE
receives any assessment or other notice (collectively, the "Assessment") from
any governmental taxing authority stating that such Taxes are due from BROCADE,
then BROCADE shall give
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McDATA written notice of the Assessment and McDATA shall pay the taxing
authority.
5.0 ORDERS, CHANGES AND CANCELLATIONS
5.1 Sales Forecast. During the term of the Agreement, within [*] days after the
beginning of each month, McDATA will submit to BROCADE by facsimile, e-mail or
nationally-recognized overnight delivery service a forecast of its projected
sales and purchases for a one hundred and eighty (180) day rolling period. The
forecasts will include: (a) quantity and type of Product to be sold and
projected delivery dates for the first ninety (90) days of such period, and (b)
the aggregate number of quantity and type of Product to be sold in each of
months four, five and six of such period. Such forecasts shall not be binding on
either party, but shall be made in good-faith.
5.2 Orders.
(a) Hardware Orders. McDATA will order Hardware by submitting written purchase
orders to BROCADE by facsimile, e-mail or nationally-recognized overnight
delivery service. All orders shall reference this Agreement, state the
quantities, part numbers and descriptions of Hardware ordered, applicable prices
and license fees, requested delivery dates and shipping instructions. All orders
placed by McDATA will be subject to acceptance by BROCADE, as well as to
BROCADE's standard lead times and forecasted requirements. BROCADE shall accept
or reject in writing any purchase orders which were forecasted by McDATA in
accordance with Section 5.1 above within [*] days of receipt of such purchase
orders by BROCADE; BROCADE shall use commercially reasonable efforts to accept
or reject purchase orders which were not forecasted in accordance with Section
5.1 above. All such purchase orders shall be governed by the terms and
conditions of this Agreement. For purposes of this Agreement, the order date
will be the date on which BROCADE receives McDATA's order. BROCADE will use
commercially reasonable efforts to ship the Hardware to McDATA in accordance
with delivery dates specified in the order as accepted by BROCADE.
(b) Licensed Software Orders. McDATA will order Keys to the Licensed Software by
submitting written purchase orders to BROCADE by facsimile, e-mail or
nationally-recognized overnight delivery service. All orders shall reference
this Agreement, state the quantities ordered, and provide the [*] of the CPU
board(s) for which McDATA seeks to activate the Licensed Software. All such
orders are subject to acceptance by BROCADE. BROCADE shall accept or reject any
such purchase orders in writing within [*] days of receipt of such purchase
orders by BROCADE. All such purchase orders shall be governed by the terms and
conditions of this Agreement.
5.3 Hardware Order Change or Cancellation by McDATA. McDATA may not cancel or
modify its Hardware orders thirty (30) days or less prior to the originally
scheduled shipment date. If McDATA submits to BROCADE a written request to
cancel or modify a Hardware order more than thirty (30) days prior to the
originally scheduled shipment date, BROCADE will make commercially reasonable
efforts to accommodate such requests, subject to written confirmation of receipt
of such request by BROCADE; such confirmation of receipt shall be provided
within [*] days after receipt by BROCADE. In the event of a BROCADE authorized
Hardware order change, it may be necessary for BROCADE to revise the scheduled
shipment date by mutual agreement of the parties.
5.4 Cancellation by BROCADE. With [*] days prior notice, BROCADE reserves the
right to cancel any Hardware orders placed by McDATA and accepted by BROCADE as
set forth above, or to refuse or delay shipment thereof, if McDATA: (a) fails to
make any payment as provided in this Agreement or otherwise agreed to by BROCADE
and McDATA, (b) fails to meet reasonable credit or financial requirements
established by BROCADE, including any limitations on allowable credit, or (c)
otherwise fails to comply with the terms and conditions of this Agreement.
5.5 Conflict. Any terms and conditions of: (a) any McDATA order for Products, or
(b) BROCADE acknowledgment or acceptance which are in addition to or
inconsistent with the terms and conditions of this Agreement will be deemed
stricken and unenforceable under such order, acknowledgment or acceptance.
6.0 PAYMENT TERMS
6.1 Payment. In consideration of the rights granted by BROCADE to McDATA in
Sections 2.6 ("ASICs License") and 2.7 ("ASICs Firmware License"), McDATA shall
pay to BROCADE the following amounts: (a) [*] United States Dollars ([*]) on
April 15, 1998; (b) [*] United States Dollars on each of July 15, 1998, October
15, 1998, January 15, 1999 and April 15, 1999. The parties agree that as of the
Effective Date of this Agreement, [*] United States Dollars ([*]) has been paid
by McDATA in respect of such payment obligations.
6.2 Payment for Products. McDATA shall pay all invoices net thirty (30) days
after the date of BROCADE's invoice, which BROCADE will issue upon shipment of
the Products for the Hardware or delivery of the Keys for the Licensed Software.
6.3 Late Payment. Payments made under this Agreement after their due date will
incur interest at a rate equal to one and one-half percent (1.5%) per month or
the highest rate permitted by applicable law, whichever is lower. In addition,
if McDATA fails to pay any invoice when due, BROCADE may: (i) declare all
amounts owed by McDATA to be immediately due and payable and refuse to deliver
any further Products or Keys until such amounts have been paid (ii) require
C.O.D. payment for Products or Keys ordered, and/or (iii) pursue any other
remedies under this Agreement, at law or in equity available to it.
6.4 No Setoff. McDATA will not setoff or offset against BROCADE's invoices
amounts that McDATA claims are due to it other than for authorized returns and
rejected shipments.
7.0 SHIPMENT AND DELIVERY
7.1 Shipment and Delivery.
(a) Hardware. Delivery will be made F.O.B. BROCADE facility. In the absence of
specific written instructions from
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McDATA, BROCADE will select the carrier, but such carrier will not be the agent
of BROCADE. Title, risk of loss and/or damage to Hardware, and responsibility
for filing claims with the carrier, will pass to McDATA on delivery to such
carrier. BROCADE will pack all Hardware shipped in accordance with standard
commercial practices. McDATA agrees that it will be responsible for and pay all
shipping, freight and insurance charges incurred in such shipment.
(b) Licensed Software. Upon acceptance of an order as set forth in Section
5.2(b) above, BROCADE will promptly deliver the necessary Keys to the Licensed
Software for the specified Worldwide Switch Numbers via E-mail to McDATA. Upon
receipt of each delivery of Keys, McDATA will log the receipt of each Key for
tracking purposes, and will use commercially reasonable best efforts to prevent
unauthorized access to such Keys. Notwithstanding the provisions of Section
5.2(b) and 7.1(b), BROCADE authorizes McDATA to enable the BROCADE software
licensed to third parties through third party purchase orders issued to and
accepted by BROCADE for mutually agreed upon third parties for BROCADE software
installed on McDATA Products sold to such third parties, and McDATA shall [*]
for such software.
7.2 Partial Shipments. McDATA agrees to accept partial shipments and pay for
Products comprising a partial shipment on the terms set forth above; provided,
however, that BROCADE shall only submit an invoice for Products that it has
actually shipped, unless otherwise agreed to in writing by the parties.
7.3 Delayed Delivery. If delivery of any Products is delayed (i) more than [*]
days on or before December 31, 1999, or (ii) more than [*] days (after December
31, 1999) following the accepted scheduled delivery date, McDATA may, at any
time prior to delivery by BROCADE of such Products to the transporting carrier,
cancel without penalty that undelivered portion of its purchase order covering
such Products.
7.4 Acceptance of Products.
(a) All Products sold under this Agreement shall materially conform to the
standards set forth in Section 15.2, below. McDATA's acceptance of each Product
shall occur upon delivery unless McDATA notifies BROCADE in writing within
thirty (30) days after delivery that such Product does not materially conform to
such standards. Payment for any Product by McDATA shall not reduce the thirty
(30) day period available for inspection and reporting of any material
non-conformance.
(b) McDATA may inspect and test Products received from BROCADE as set forth
above. BROCADE shall have the right to observe McDATA's inspection and test
procedures.
(c) In the event that any Product delivered to McDATA does not conform to the
standards in Section 15.2 below, and such non-conformance is not due to freight
damage, damage incurred after receipt by McDATA, or other exclusions in Section
15, McDATA shall immediately notify BROCADE, and request a RMA from BROCADE.
McDATA shall deliver, at its expense, all such non-conforming Products to
BROCADE pursuant to a valid RMA. Upon verification of such non-conformance,
BROCADE will either promptly repair or replace the non-conforming Product within
thirty (30) days of its receipt by BROCADE. Upon receipt of written request from
McDATA, BROCADE may be able to process small amounts of Product on an expedited
basis for an additional fee.
8.0 OTHER AGREEMENTS, PRICING AND MARKETING
8.1 Software License Agreement. McDATA agrees that all Licensed Software will be
distributed to Customers subject to a Software License Agreement (including
warranty statement), along with a McDATA Manual, in a manner which is (a) no
less protective of BROCADE's Intellectual Property Rights in the Licensed
Software than the form attached hereto as Exhibit D, and (b) legally enforceable
in the jurisdictions in which the Licensed Software, as incorporated into the
McDATA Products, is distributed.
8.2 Pricing Freedom. McDATA is, and will remain, entirely free to determine its
Customer prices and fees in its own discretion.
8.3 Negative Statements. Neither party to this Agreement shall make any
intentionally false, negatively misleading or intentionally misleading remarks
of any kind or nature regarding the products or services of the other party to
its current or potential customers, the press, resellers, suppliers or any other
third party ("Negative Remarks"), and each party to this Agreement shall
expressly inform its employees, contractors, and resellers of such prohibition.
A violation of this section shall be immediately reported to the President of
each of the parties, and such individuals shall take mutually agreed remedial
measures to prevent future occurrences of Negative Remarks. Notwithstanding the
remedial efforts undertaken by either party to prevent such Negative Remarks,
the parties agree that the repeated violation of this Section by either party
shall be deemed to be a material breach of this Agreement.
8.4 Versions. In the event that BROCADE develops any new features or
functionality for (i) of the ASICs Firmware as described in Section 1.1, (ii)
the Licensed Software which supports such ASICs Firmware, or (iii) the Hardware
versions specified in Exhibit A, and BROCADE makes such new features or
functionality generally available to its customers, BROCADE shall offer such new
features or functionality to McDATA under the terms and conditions of this
Agreement at reasonable prices which are mutually agreed to by the parties.
8.5 Support Letter. BROCADE and McDATA agree to provide support to
Hewlett-Packard with respect to the McDATA Product and software licensed from
BROCADE related thereto as set forth on Exhibit H.
8.6 Repair Facilities. BROCADE will maintain facilities to repair or replace, at
BROCADE's sole discretion, the Hardware for a [*] year period, commencing
on the date BROCADE issues a general market End of Life ("EOL") notice to its
customers for the SilkWorm switch with respect to the generation of such switch
applicable to the Hardware subassemblies set forth in Exhibit A. Upon
expiration of the such [*] year period, BROCADE agrees to provide to
McDATA [*] required, as determined by BROCADE,
to repair the Hardware subassemblies
9.0 McDATA OBLIGATIONS
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the Commission. Confidential treatment has been requested with respect to the
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9.1 Training. McDATA agrees to train an appropriate number of its systems
engineering, manufacturing and support personnel on products purchased from
BROCADE according to the Technical Training Program listed in Exhibit C in order
to ensure McDATA can provide adequate support to Customers as set forth in
Exhibit B. From time to time BROCADE may introduce new training courses, and
McDATA agrees to provide ongoing training to its personnel on a periodic basis
to ensure that its personnel are adequately trained. Additional training
materials and updates are available for the fees set forth in Exhibit C.
9.2 Product Customer Support and Service. McDATA shall provide the appropriate
personnel, facilities and equipment necessary to provide support in the use of
the Products (as incorporated into the McDATA Products) to Customers as required
to: (i) provide BROCADE regular feedback (at least quarterly) on Customer
satisfaction metrics in a manner mutually agreed by the parties, and (ii)
conduct service and support of McDATA's Products. McDATA will have personnel
attend product, sales and service training courses as may be offered by BROCADE
or McDATA from time to time.
9.3 Support for McFlannel ASICs. The parties acknowledge that as of the
Effective Date, the McFlannel ASICs require testing to ensure that such ASICs
conform to the relevant ASICs Specifications. BROCADE agrees to provide
assistance with such McFlannel ASICs testing to ensure substantial conformity
with the ASICs Specifications through [*]. In the event that during such testing
of the McFlannel ASICs, a substantial non-conformity with the ASICs
Specifications is discovered by McDATA and/or BROCADE, the parties agree to meet
and jointly determine a plan of resolution for such non-conformity.
10.0 ENGINEERING CHANGES
10.1 Product ECO's BROCADE shall use commercially reasonable efforts to provide
McDATA with [*] days' notice of changes to the Products (including Licensed
Software or drivers) that affect the form, fit or function of the Products
("Engineering Change Order" or "ECO").
10.2 Mandatory Product ECO's. BROCADE may issue notice of "Mandatory Changes",
which are changes to the Product(s) required to satisfy governmental
environmental, safety or other standards, reliability concerns, or to guarantee
a continuity of supply. BROCADE will make commercially reasonable efforts to
provide McDATA with [*] days prior written notice of Mandatory Changes prior to
implementing such changes, however this period may be reduced if the change
involves safety or reliability, or if otherwise required by law.
10.3 Product End-of-Life. Upon EOL notification from BROCADE to McDATA for the
Hardware subassemblies and not withstanding any of the provisions in this
section, BROCADE and McDATA will work together to facilitate a mutually agreed
upon EOL plan. Provided that McDATA issues [*] no fewer than the following [*]
of the following Hardware subassemblies per [*]: [*] as set forth in Exhibit A,
and schedules a [*] of all such Hardware subassemblies in such [*] with a
minimum of [*] leadtime for [*], then BROCADE agrees [*] the manufacture, sale
or distribution of any such Product ("End of Life" or "EOL"). The pricing for
Hardware subassemblies purchased at [*] shall be the prices set forth in Exhibit
A in the [*]. In the contrary case, BROCADE shall have the right to provide
McDATA with one hundred eighty (180) days' written notice of intent to EOL any
Product provided to McDATA hereunder. McDATA may place orders for any demand
during the first ninety (90) days of such EOL notice for delivery of affected
Product(s) prior to the end of the notice period. To the extent that such orders
exceed McDATA's previous forecast for such Product(s), the orders shall be
non-cancelable. BROCADE shall accept only forecasted orders in the last [*] days
of the stated notice period, and all such orders shall be non-cancelable. In
addition, during such notice period, BROCADE shall have the right, in its sole
discretion, to require payment for Product(s) from McDATA at the time such
purchase orders are submitted. If any component of any of the four Hardware
subassembly products set forth on Exhibit A is declared EOL and independent of
McDATA's ability to maintain the minimum purchase requirement of the affected
Hardware subassembly unit, BROCADE may declare the affected Hardware subassembly
product EOL. Within [*] days of EOL notification from BROCADE ("EOL Notification
Period"), McDATA may (i) [*] for the affected Hardware subassembly component, or
(ii) notify BROCADE in writing that McDATA will [*] for sufficient units of the
relevant component from [*] and arrange for the [*] to the facility designated
by BROCADE ("Last Buy Notification"). Provided that BROCADE receives such Last
Buy Notification within [*] days from the date of BROCADE's EOL notification,
the parties will negotiate in good faith the terms whereby BROCADE would [*] the
affected Hardware subassembly. In no event, however, shall BROCADE be required
to resume the manufacture of an affected Hardware subassembly unit after [*]
days from the end of the EOL Notification Period. BROCADE shall not be obligated
to qualify new components, develop alternative sources or redesign the affected
Hardware subassembly unit.
11.0 CROSS LICENSE AND COVENANT NOT TO SUE
11.1 Definitions. For the purposes of this Agreement, the following terms shall
have the following definitions:
(a) "Fibre Channel-based Products" means technology and materials for switching
and interconnect hardware and related software involved with the development of,
operation, management services and software for Fibre Channel products.
(b) "BROCADE Know-how" means the designs, techniques, inventions, practices,
methods, knowledge, skill, experience, test data and cost, sales and
manufacturing data relating to the manufacture of Fibre Channel-based Products
developed or acquired by BROCADE or acquired by license or otherwise with a
royalty-free right of sublicense or license as of April 1, 1998, and in the
possession of McDATA as of April 1, 1998.
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separately with the Commission. Confidential treatment has
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(c) "BROCADE Patents" means the existing BROCADE patents and patent applications
as of April 1, 1998 whose claims would be infringed by the manufacture, use,
sale, offer for sale, import or other disposition of Fibre Channel-based
Products; including without limitation all foreign counterparts issued or
issuing on such patents or patent applications. It is understood that the
license set forth in Section 11.2 is not contingent upon actual practice of the
BROCADE Patents during the Patent Term.
(d) "McDATA Know-how" means the designs, techniques, inventions, practices,
methods, knowledge, skill, experience, test data and cost, sales and
manufacturing data relating to the manufacture of Fibre Channel-based Products
developed or acquired by McDATA or acquired by license or otherwise with a
royalty-free right of sublicense or license as of April 1, 1998, and in the
possession of BROCADE as of April 1, 1998. Notwithstanding the foregoing,
BROCADE acknowledges that McDATA Know-how shall not include McDATA know-how
developed by McDATA or [*] or McDATA know-how received from [*] in relation to
US Patent Application Serial Numbers [*] and [*] for products jointly developed
by McDATA and [*] or for products developed by McDATA for [*].
(e) "McDATA Patents" means, except as to the joint patents between McDATA and
[*] (US Patent Application Serial Numbers [*] and [*]) which patent applications
are directly related to the products jointly developed by McDATA for [*]
referenced in the Agreement between McDATA and BROCADE dated March 26, 1998, the
existing McDATA patents and patent applications as of April 1, 1998 whose claims
would be infringed by the manufacture, use, sale, offer for sale, import or
other disposition of Fibre Channel-based Products; including without limitation
all foreign counterparts issued or issuing on such patents or patent
applications. It is understood that the license set forth in Section 11.2 is not
contingent upon actual practice of the McDATA Patents during the Patent Term.
(f) "Patent Term" means the term of the patent cross-license contained in
Section 11.2.
11.2 Cross-License and Covenant Not to Sue. Subject to the terms and conditions
of this Agreement, (i) BROCADE hereby grants to McDATA a perpetual,
non-exclusive, non-transferable, worldwide, royalty-free license, without the
right to sublicense, under the BROCADE Patents and the BROCADE Know-how to make,
use, sell, offer to sell, lease, import and otherwise transfer the Fibre
Channel-based Products and BROCADE covenants that, to the extent that McDATA and
McDATA's customers and distributors exercise the rights expressly granted to
McDATA hereunder, BROCADE will not assert any patent or trade secret rights
against McDATA or its direct or indirect customers, and (ii) McDATA hereby
grants to BROCADE a perpetual, non-exclusive, non-transferable, worldwide,
royalty-free license, without the right to sublicense, under the McDATA Patents
and the McDATA Know-how to make, use, sell, offer to sell, lease, import and
otherwise transfer the Fibre Channel-based Products and McDATA covenants that,
to the extent that BROCADE and BROCADE's customers and distributors exercise the
rights expressly granted herein, McDATA will not assert any patent or trade
secret rights against BROCADE or its direct or indirect customers. For the
purposes of the patent licenses set forth above, "perpetual" shall mean the life
of the applicable patents. Each party shall be responsible for overseeing
compliance with the terms and conditions of this Agreement, and shall be liable
for any breach of its obligations hereunder. Nothing in this Section 11 shall be
construed to obligate either party to disclose any information or materials to
the other party with respect to the patents and know-how of such party, whether
or not in existence on or before April 1, 1998.
11.3 Ownership
(a) BROCADE. McDATA acknowledges and agrees that BROCADE is and shall remain the
sole owner of the BROCADE Patents and the BROCADE Know-how and that McDATA has
no rights in or to the BROCADE Patents or the BROCADE Know-how other than the
license set forth herein.
(b) McDATA. BROCADE acknowledges and agrees that McDATA is and shall remain the
sole owner of the McDATA Patents and the McDATA Know-how and that BROCADE has no
rights in or to the McDATA Patents or the McDATA Know-how other than the license
set forth herein.
11.4 Prosecution Expenses. Each party shall be responsible for the payment of
the prosecution expenses related to the patents that such party owns.
11.5 Disclaimer of Warranties. EXCEPT AS EXPRESSLY PROVIDED HEREIN, BROCADE AND
McDATA HEREBY EXPRESSLY DISCLAIM ANY AND ALL WARRANTIES, REPRESENTATIONS OR
CONDITIONS OF ANY KIND OR NATURE, WHETHER EXPRESS, IMPLIED OR STATUTORY,
RELATING TO EACH PARTY'S RESPECTIVE PATENTS AND KNOW-HOW SET FORTH IN THIS
SECTION 11, INCLUDING WITHOUT LIMITATION THE IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT OF THIRD
PARTY RIGHTS. Without limiting the generality of the foregoing, neither BROCADE
nor McDATA warrant the patentability of any information or materials, or the
safety, usefulness or accuracy of any information provided hereunder.
12.0 CONFIDENTIAL INFORMATION AND ADVERTISING
12.1 Definition. "Confidential Information" means: (i) all source code and all
technical or business information furnished in any form or medium, whether oral,
written, graphic or electronic by one party to the other pursuant to this
Agreement, including without limitation all analyses, architecture, code,
concepts, data, designs, discoveries, forecasts, ideas, information, inventions,
know-how, knowledge, layouts, mask works, methodologies, plans, processes,
products, projections, protocols, prototypes, schematics, skills, structure,
techniques, and/or work product, tangible or intangible, whether or not
patentable, and all originals and all copies of any compilations, database,
drawing, file (including on any computer storage media), memoranda, model,
notes, prototype, record, report, software, summary, writing or other materials
whether tangible or not, and whether or not eligible for copyright protection,
or any other information relating to any research project, work in progress,
future development, scientific engineering, manufacturing, marketing 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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other business or financial plan relating to either party, its present or future
products, sales, suppliers, customers, employees, investors or business; and
(ii) all other non-public information that the party disclosing the information
(the "Disclosing Party") designates at the time of disclosure as being
confidential, or if disclosed orally or visually is identified as such prior to
disclosure and summarized, in writing, by the Disclosing Party to the receiving
party (the "Recipient") within [*] days of initial disclosure, including
without limitation, the terms and conditions of this Agreement, and information
regarding either party's financial condition, business opportunities, plans for
development of future products or new versions of existing products, know-how,
technology or customers.
12.2 Access to and Use of Confidential Information. A party receiving
Confidential Information agrees (a) that it shall use the same degree of care
and means that it utilizes to protect its own information of a similar nature,
but in any event not less than reasonable care and means, to prevent the
unauthorized use or the disclosure of such confidential information to third
parties, (b) not to disclose or use any of such Confidential Information for any
purpose except as necessary and consistent with the terms of this Agreement, (c)
to limit the use of and access to such Confidential Information to such
employees and subcontractors who have a need to know such Confidential
Information and have signed legally binding non-disclosure agreements, and (d)
that it will promptly notify the other party in writing of any unauthorized
disclosures and/or use thereof. The aforementioned notice shall include a
detailed description of the circumstances of the unauthorized disclosure or use
and the parties involved therewith.
12.3 Exclusions. Notwithstanding the foregoing, Confidential Information does
not include information that: (a) is or becomes generally available to the
public other than (i) as a result of a disclosure by Recipient or its employees
or any other person who receives such information in violation of this
Agreement, (b) is or becomes available to Recipient on a non confidential basis
from a source which is entitled to disclose it to Recipient, (c) can be
documented, by adequate written records, was developed by employees or agents of
the Recipient independently of and without reference to any information
communicated to Recipient by the Disclosing Party, or (d) is required by law to
be disclosed by the Recipient. A disclosure of Confidential Information (x) in
response to a valid order by a court or other governmental body, (y) otherwise
required by law, or (z) necessary to establish the rights of either party under
this Agreement shall not be considered to be a breach of this Agreement or a
waiver of confidentiality for other purposes; provided however, that the party
disclosing such information shall provide prompt written notice thereof to the
other party to enable it to seek a protective order or otherwise prevent such
disclosure.
12.4 Injunctive Relief. In the event of an unauthorized use, distribution or
disclosure of any Confidential Information, the parties agree that the
disclosing party will not have an adequate remedy at law. Therefore, injunctive
or other equitable relief may be appropriate to restrain such use, distribution
or disclosure, threatened or actual.
12.5 Advertising and Releases. Except as may be required by law or regulation,
no news release, material that references this Agreement or the other party
shall be issued by either party without the prior written consent of the other
party.
13.0 PROPRIETARY RIGHTS
Subject to the provisions of Section 11 of this Agreement, the Intellectual
Property Rights in and to the ASICs Firmware, BROCADE ASICs, Licensed Software
and the Products are and will remain the sole and exclusive property of BROCADE
and its suppliers, if any, whether the ASICs Firmware, BROCADE ASICs, and the
Products are separate or combined with any other products. BROCADE's rights
under this Section 13.0 will include, but not be limited to: (i) all copies of
the ASICs Firmware, and the Licensed Software portion of the Products; (ii) all
Intellectual Property Rights in the ASICs Firmware, BROCADE ASICs, and the
Products; and (iii) all modifications to, and Derivative Works based upon, the
BROCADE ASICs and the Products. McDATA shall own all Intellectual Property
Rights in and to the authorized modifications to and Derivative Works based upon
the ASICs as set forth in Section 2.7 and McDATA Functionality. McDATA shall
retain all right, title and interest, including manufacturing control and
worldwide Intellectual Property Rights in and to the McDATA Functionality. For
the purposes of this Agreement, "Intellectual Property Rights" means copyright
rights (including, without limitation, the exclusive right to use, reproduce,
modify, distribute, publicly display and publicly perform the copyrighted work),
trademark rights (including, without limitation, trade names, trademarks,
service marks, and trade dress), patent rights (including, without limitation,
the exclusive right to make, use and sell), trade secrets, moral rights, right
of publicity, authors' rights, contract and licensing rights, goodwill and all
other intellectual property rights as may exist now and/or hereafter come into
existence and all applications, renewals and extensions thereof, regardless of
whether such rights arise under the law of the United States or any other state,
country or jurisdiction. "Moral Rights" means the inalienable right to claim
authorship to or to object to any distortion, mutilation, or other modification
in relation to a work, whether or not such would be prejudicial to the author's
reputation, and any similar right, existing under common or statutory law or any
country in the world or under any treaty, regardless or whether or not such
right is denominated or generally referred to as a "moral right."
14.0 INDEMNITY
14.1 Infringement Claims. BROCADE will indemnify, defend and hold McDATA
harmless from any and all damages, liabilities, costs and expenses finally
awarded against McDATA as a result of any claim, judgment or adjudication
against McDATA which claims that (i) any of the Products, as furnished by
BROCADE under this Agreement, infringes or misappropriates any US patent, any
copyright or trademark, or (ii) the ASICs Firmware infringes any US patent or
any copyright, or (iii) the design of the ASICs, as furnished by BROCADE to LSI
Logic, infringes any US patent or any copyright. If a Product, ASICs Firmware or
the BROCADE ASICs are held in any such suit to infringe and the use of such
Product, ASICs Firmware or BROCADE ASICs is enjoined, BROCADE will have the
option, at its own discretion and expense, to (w) procure for McDATA the right
to continue using such Product, ASICs Firmware or BROCADE ASICs, (x) replace
such Product, ASICs Firmware or BROCADE ASICs with non-infringing Product, ASICs
Firmware or BROCADE ASICs of substantially equivalent quality and purpose, (y)
modify such Product, ASICs Firmware or BROCADE ASICs to make it non-infringing,
provided the modified Product, ASICs Firmware or BROCADE ASICs remains
substantially equivalent in quality and purpose to such Product, ASICs Firmware
or BROCADE ASICs, or (z) terminate the Agreement and return to McDATA 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> 10
depreciated value of such Product, ASICs Firmware or BROCADE ASICs based on
straight line depreciation over [*].
14.2 Exceptions. BROCADE will not be obligated to defend or be liable for costs
and damages to the extent that infringement, or a claim thereof, arises out of
or is related to (a) a modification made to Product, ASICs Firmware or BROCADE
ASICs by McDATA or a third party made in violation of this Agreement, (b) the
combination of a Product, ASICs Firmware or BROCADE ASICs with products or data
not provided by BROCADE, (c) use of other than the latest unmodified release of
Product, ASICs Firmware or BROCADE ASICs made available to McDATA by BROCADE if
such infringement would have been avoided by the use thereof, (d) McDATA's
failure to use or deploy modifications to the ASICs Firmware or Licensed
Software provided to McDATA by BROCADE to avoid infringement, (e) the direct
result of the manufacture of the BROCADE ASICs by LSI Logic. Notwithstanding the
foregoing, the parties acknowledge and agree that BROCADE shall have no
obligation to defend or indemnify McDATA against claims that the Products
infringe the Intellectual Property Rights of third parties pursuant to the
foregoing Section unless McDATA: (x) promptly informs BROCADE of such suit or
proceeding, and furnishes to BROCADE a copy of each communication, notice or
other action relating thereto, (y) gives BROCADE the authority, information and
reasonable assistance necessary to settle or litigate such suit or proceeding,
and (z) does not settle, or agree to settle, any such suit or proceeding without
the prior written permission of BROCADE, which will not be unreasonably withheld
or delayed.
14.3 Limitations. THE FOREGOING STATES THE ENTIRE LIABILITY OF BROCADE FOR
INTELLECTUAL PROPERTY RIGHTS INFRINGEMENT BY ANY PRODUCT, ASICs FIRMWARE OR
BROCADE ASICs FURNISHED UNDER THIS AGREEMENT.
14.4 McDATA Indemnity. McDATA agrees to defend, indemnify and hold BROCADE
harmless from any and all losses, damages, liabilities, costs and expenses
(including but not limited to reasonable attorneys' fees and costs of
litigation) incurred by BROCADE as a result of any third party claim, regardless
of the form of action, arising from (i) McDATA's misuse or misrepresentation of
the Products or Documentation or Intellectual Property Rights contained therein,
(ii) McDATA's breach of its representations or warranties under this Agreement,
(iii) McDATA's false advertising, intentional wrongdoing, gross negligence, or
product liability arising from the marketing, sale or distribution of a McDATA
Product, or (iv) McDATA's modifications to the ASICs Firmware, the BROCADE ASICs
or the Products furnished by BROCADE to McDATA hereunder (if the unmodified
version of the information or materials provided by BROCADE to McDATA would not
have so infringed), provided that BROCADE promptly notifies McDATA of any such
claim in writing, gives McDATA sole control of the defense and all related
settlement negotiations, and cooperates with McDATA in defending or settling any
such claim.
15.0 LIMITED WARRANTY AND WARRANTY DISCLAIMER
15.1 Mutual Warranty. Each party certifies and represents to the other party
that as of the Effective Date, it has full power, right and authority to execute
this Agreement, to fulfill all its rights and obligations herein.
15.2 Product Warranty to McDATA. BROCADE warrants to McDATA that the Products
(except for Products which may be refurbished pursuant to Section 15.4) are new
, and that, for a period of [*] months after the date of the shipment
of the Products to McDATA (the "Hardware Warranty Period") (i) the Hardware will
substantially conform to BROCADE's standard manufacturing [*] test processes
as set forth in Exhibit J, and (ii) the Products will be Year 2000 compliant. In
addition, BROCADE warrants to McDATA that for a period of ninety (90) days after
the date of shipment of the Products to McDATA (the "Software Warranty Period")
the Licensed Software will substantially conform to the applicable standard
BROCADE product specifications for the Licensed Software. For the purposes of
this Agreement, "Year 2000 compliant" means that all Products and Documentation
provided to McDATA will correctly interpret and manipulate all date-related
data, when dates are in the 20th and 21st centuries, and that no delivery or
performance of such Products and Documentation shall be materially interrupted
or delayed as a result of the occurrence of or processes driven by dates after
December 31, 1999, provided that the non-BROCADE hardware, software and other
system components with which the Products and Documentation interact, directly
or indirectly (including without limitation the McDATA Products and all other
third party information, materials, components, hardware and software or any
kind), also correctly interpret and manipulate all such date-related data.
15.3 ASICs Warranty. BROCADE warrants to McDATA that the design information
furnished to LSI Logic for the manufacture of the BROCADE ASICs shall be
sufficient to enable LSI Logic to manufacture such BROCADE ASICs in substantial
conformance to the ASICs Specifications; provided, however, that nothing in this
Section 15.3 shall be construed to impose responsibility upon BROCADE for
defects in any such BROCADE ASICs introduced by LSI Logic in the course of the
LSI Logic manufacturing process. In the event that McDATA provides BROCADE with
written notice detailing a substantial non-conformity of the BROCADE ASICs with
the ASICs Specifications due to the design thereof and not the manufacture of
such BROCADE ASICs by LSI Logic, BROCADE will use diligent efforts to coordinate
with LSI Logic to remedy any such substantial non-conformity.
15.4 Limitations to Warranty. McDATA shall notify BROCADE of a failure by the
Product to substantially perform in accordance with the relevant standards set
forth in Section 15.2, as applicable, during the applicable Hardware Warranty
Period or Software Warranty Period. If BROCADE confirms such Product is
defective after McDATA, at McDATA's expense, has returned the Product to a
BROCADE-authorized repair center for inspection, then, BROCADE will at its
election promptly repair or replace any such Product within [*] days of
receipt thereof, at no charge to McDATA. Replacement Product may be either new
or re-manufactured and certified as new (in accordance with BROCADE's
* 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.
10
<PAGE> 11
standard manufacturing test processes or, with regard to the Licensed Software,
the applicable specifications). In the event that the Product returned is not
defective, McDATA will be responsible for freight costs for return shipment to
McDATA. The foregoing warranties shall not apply to Products that have been (i)
damaged by accident through no fault of BROCADE, Acts of God, shipment, improper
installation, abnormal physical or electrical stress, misuse or misapplication,
as determined by BROCADE in its sole reasonable discretion, or (ii) modified
without BROCADE's express written acceptance of such modification for warranty
purposes. BROCADE reserves the right to charge additional fees for repairs or
replacements performed on Products after the Hardware Warranty Period or
Software Warranty Period, as applicable, has terminated.
15.5 McDATA's Exclusive Remedy. McDATA acknowledges and agrees that its sole and
exclusive remedy for breach of the limited Product warranties is as set forth in
Section 15.4.
15.6 Title Warranty. BROCADE warrants that title to all Products and ASICs
Firmware delivered to McDATA by BROCADE shall be free and clear of all liens,
encumbrances or other restrictions.
15.7 Disclaimer. THE FOREGOING PRODUCT WARRANTIES IN SECTION 15 ARE IN LIEU OF,
AND BROCADE EXPRESSLY DISCLAIMS, ALL OTHER REPRESENTATIONS, WARRANTIES OR
CONDITIONS, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF NON-INFRINGEMENT OF THIRD PARTY RIGHTS,
MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE.
15.8 [*] Warranty In addition to the warranties specified above, BROCADE
warrants all Hardware subassemblies against [*] for a period of [*] years
after date of shipment of the Hardware subassemblies from BROCADE. An epidemic
failure means:
(i) the occurrence of the [*] the Hardware subassembly [*] more
frequently that the calculated Mean Time Between Failure
("MTBF"), as specified in Exhibit K attached hereto and
incorporated herein by reference, for that Hardware subassembly
within a [*], provided [*] is caused by the Hardware subassembly
and is not McDATA system or McDATA environment induced. In the
case of the [*], BROCADE shall [*] of the affected Hardware
subassembly population (after [*] is identified), as long as the
[*], as specified in Exhibit K, remains at [*]. BROCADE
calculates the MTBF for each Hardware subassembly using Belcore
Specification TR332, Issue 5 parts count method.
(ii) the occurrence of more than [*] that is considered a hazard class
2 or above (approved and initialed by both parties) safety
incident where the customers life or property is damaged due to
the [*].
8. RELATED PARTY TRANSACTIONS
.
16.0 LIMITATION OF LIABILITY AND INSURANCE
16.1 Nuclear, Aviation or Life Support Application. McDATA acknowledges that
Product is not specifically designed, manufactured or intended for use in
connection with the design, construction, maintenance, and/or operation of any
(i) nuclear facility, (ii) aircraft, aircraft communication or aircraft ground
support system, or (iii) life support system. Except as otherwise provided
herein, BROCADE shall not be liable to McDATA, in whole or in part, for any
claims or damages arising from such use, or resale by McDATA to a third party
for such purposes, and McDATA agrees not to sell into nuclear, aviation or life
support application and shall include a provision in its Customer agreement a
statement relating to the Products' inapplicability to such applications.
16.2. Limitation of Liability.
(a) EXCEPT FOR BREACHES OF SECTION 12 AND 14, IN NO EVENT SHALL EITHER PARTY BE
LIABLE TO THE OTHER PARTY, FOR INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, LOSS OF PROFIT, WHETHER
BASED ON BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR
OTHERWISE, AND WHETHER OR NOT THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF
SUCH LOSS.
(b) WITHOUT LIMITING THE GENERALITY OF THE FOREGOING SUBSECTION, EITHER PARTY'S
TOTAL LIABILITY (EXCEPT FOR BREACHES OF SECTIONS 12 AND 14) TO THE OTHER PARTY
UNDER THIS AGREEMENT WILL BE LIMITED TO (a) WITH REGARD TO THE PRODUCTS, [*], OR
(b) WITH REGARD TO THE ASICs FIRMWARE OR BROCADE ASICs, [*].
16.3 Insurance. Each party agrees during the term of this Agreement to carry the
amount that party deems to be sufficient liability insurance to meet its
indemnification obligations under this Agreement.
17.0 EXPORTATION; GOVERNMENT APPROVAL AND FOREIGN CORRUPT PRACTICES ACT
17.1 Export. McDATA acknowledges that all Products including documentation and
other technical data are subject to export controls imposed by the U.S. Export
Administration Act of 1979, as amended (the "Act"), and the regulations
promulgated thereunder. McDATA warrants and represents to BROCADE that it will
not export or re-export (directly or indirectly) any Products or documentation
or other technical data therefor, in whole or in part, in violation of the Act
and the regulations thereunder. McDATA shall indemnify, defend and hold BROCADE
harmless against any claims for cost, damage, expense or liability arising out
of or in connection with any breach of this Section.
17.2 Government Rights. The Licensed Software is "commercial computer software"
as defined in the applicable provisions of the Federal Acquisition Regulation
(the "FAR") and supplements thereto, including the Department of Defense ("DoD")
FAR Supplements (the "DFARS"). The parties acknowledge that the Licensed
Software was developed entirely at private expense and that
* 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.
11
<PAGE> 12
no part of the Licensed Software was first produced in the performance of a
Government contract. If McDATA supplies the Licensed Software to a U.S.
Government agency, in accordance with FAR 12.212 and its successors or DFARS
227.7202 and its successors, as applicable, McDATA shall license the Licensed
Software to the Government subject to the terms of this Agreement.
17.3 Governmental Approval. If any approval with respect to this Agreement, or
the notification or registration thereof, will be required at any time during
the term of this Agreement, with respect to giving legal effect to this
Agreement in the jurisdiction where McDATA Products are distributed, or with
respect to compliance with exchange regulations or other requirements so as to
assure the right of remittance abroad of U.S. dollars pursuant to this
Agreement, McDATA will immediately take whatever steps may be necessary in this
respect, and any charges incurred in connection therewith will be for the
account of McDATA. McDATA will keep BROCADE currently informed of its efforts in
this connection. BROCADE will be under no obligation to ship Products to McDATA
hereunder until McDATA has provided BROCADE with satisfactory evidence that such
approval, notification or registration is not required or that it has been
obtained.
18.0 DEFAULT AND TERMINATION
18.1 Default. In addition to any other rights or remedies which may be available
at law or in equity, either party may terminate this Agreement upon the
occurrence of any one of the following:
(a) In the event of a material breach by either party in the performance of
their obligations hereunder, the party alleging the breach shall give written
notice specifying the nature and extent of the breach to the other party and
such party shall have [*] days thereafter to cure the breach. If the breach is
not cured within the [*] day period, termination shall be come effective on the
[*] day following the written notice;
(b) In the event of proceedings in bankruptcy or insolvency invoked by or
against either party, or in the event of the appointment of a receiver, or the
making an assignment for the benefit of creditors; or proceedings are commenced
against such party under any bankruptcy, insolvency or debtor's relief law, if
such proceeding is not vacated or set aside within [*] days after the date of
commencement thereof; or
18.2 Termination for Convenience. In the event market conditions change to the
extent that the Product is no longer competitive, McDATA may terminate this
agreement for convenience. In that event, McDATA agrees to provide BROCADE with
[*] days written notice of its intent to terminate for convenience. Further,
McDATA agrees to reasonably compensate BROCADE for work in progress as of the
date of notification.
18.3 Effect of Termination. Upon the expiration or termination of this
Agreement, however arising:
18.3.1 Except for the retention of [*] of the Confidential Information
of the other party solely for support purposes, each party will cease its use of
the Confidential Information of the other party, and will return or destroy, at
the other party's direction, all such Confidential Information and any copies or
portions thereof which are incorporated into documents or archives;
18.3.2 If this Agreement is terminated pursuant to Section 18.1, the payment of
all amounts owed by McDATA to BROCADE as of the effective date of such
expiration or termination shall accelerate, and such payments shall become
payable as of such effective date, whether or not longer payment periods had
originally been established; and
18.3.3 Provided that BROCADE has not terminated this Agreement due to McDATA's
material breach of the terms of this Agreement, McDATA may submit orders for
Products, including without limitation those Products which BROCADE has agreed
not to discontinue pursuant to the terms and conditions set forth in Section
10.3 ("Product End of Life"), which orders are subject to approval by BROCADE in
its sole discretion, provided that McDATA pays BROCADE for such Product(s) at
the time such purchase orders are accepted by BROCADE. The parties agree that
orders submitted as set forth in this Section shall not be considered approved
by BROCADE until and unless BROCADE has notified McDATA of its acceptance of
such order in writing pursuant to Section 5.2 hereof.
18.4 Nonexclusive Remedy. The exercise by either party of any remedy under this
Agreement will be without prejudice to its other remedies under this Agreement
or otherwise.
18.5 Survival. The parties' obligations under Sections 2.4.2(c) ("Ownership"),
2.4.4 ("Documentation Warranty"), 2.5 ("Restrictions"), 2.6 ("ASICs License"),
2.7 ("ASICs Firmware License"), 4.0 ("Taxes"), 8.1 ("Software License
Agreement"), 10.2 ("Mandatory Product ECO's"), 11.0 ("Cross License and Covenant
Not to Sue"), 11.3 ("Ownership"), 11.5 ("Disclaimer of Warranties"), 12
("Confidential Information and Advertising"), 13 ("Proprietary Rights"), 14
("Indemnity"), 15 ("Limited Warranty and Warranty Disclaimer"), 16.2
("Limitation of Liability"), 18 ("Default and Termination"), 19 ("General") and
Exhibit D shall survive any termination and/or expiration of this Agreement.
19.0 GENERAL
19.1 Assignment. This Agreement will bind and inure to the benefit of each
party's permitted successors and assigns. Neither party may assign this
Agreement, in whole or in part, without the other party's written consent which
consent will not be unreasonably withheld, except that BROCADE may assign its
rights and delegate its duties hereunder in connection with any merger,
reorganization, consolidation, or other business combination, or the sale of all
or substantially all of its assets. Any attempt to assign this Agreement without
such consent will be null and void.
19.2 Independent Contractors. The relationship between BROCADE and McDATA
established by this Agreement is that of independent contractors. No franchise,
joint venture or partnership is established by this Agreement. Neither party
hereunder is the agent, broker, partner, employee, or legal representative of
the other for any purpose, and neither party shall have the right to bind or
otherwise obligate such other party.
19.3 Governing Law; Attorneys Fees. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California, excluding
its conflicts and choice of law rules, and shall not be construed in accordance
with the United Nations Convention
* 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
for the International Sale of Goods (CISG). In the event that any dispute
between the parties arises out of or is related to any of the provisions of this
Agreement, and/or the performance or termination thereof, the prevailing party
in any such action shall recover all of its costs, including reasonable
attorneys' fees.
19.4 Arbitration. Except with respect to claims for emergency or preliminary
injunctive relief with respect to breach of provisions in Section 11 above or
breach of any Intellectual Property Rights hereunder, any dispute, claim or
controversy arising out of or relating to this Agreement, or the interpretation,
making, performance, breach or termination thereof, shall be finally settled by
binding arbitration in Santa Clara County, California under the Rules of
Arbitration of the American Arbitration Association, by a panel of three
arbitrators reasonably familiar with the technology and business pertaining to
the products covered by this Agreement, appointed in accordance with said Rules.
The arbitration and all pleadings and written evidence shall be in the English
language. Judgment on the award entered by the arbitrator may be entered in any
court having jurisdiction thereof.
19.5 Notices. Notices under this Agreement shall be sufficient only if sent by
certified mail or air express, return receipt requested, or other
nationally-recognized delivery service, or personally delivered to a party.
Notice by mail shall be deemed received on actual receipt. Notices to McDATA
shall be sent to the attention of the Contracts Department, and notices to
BROCADE shall be sent to the attention of "Legal Services."
19.6 No Waiver. The failure of either party to enforce any of the provisions
hereof shall not be construed to be a waiver of the right of such party to
thereafter enforce any such provision or any other provision.
19.7 Unenforceable Provisions. If any term of this Agreement is found to be
illegal or unenforceable, the remaining portions of this Agreement shall remain
in effect, and the parties agree to negotiate in good faith substitute
enforceable terms with similar economic impact on the parties.
19.8 Force Majeure. Neither party will be responsible for any failure to perform
due to causes beyond its reasonable control (each a "Force Majeure"), including,
but not limited to, acts of God, war, riot, embargoes, acts of civil or military
authorities, denial of or delays in processing of export license applications,
fire, floods, earthquakes, accidents, strikes, or fuel crises, provided that
such party gives prompt written notice thereof to the other party. The time for
performance will be extended for a period equal to the duration of the Force
Majeure, but in no event longer than sixty (60) days.
19.9 Modifications. Any amendments and modifications to this Agreement shall be
in writing signed by both parties.
19.10 Entire Agreement. Except as provided in (i) the Non-Disclosure Agreement
executed by and between the parties as of February 23, 1999 set forth hereto as
Exhibit I, (ii) the Memorandum of Understanding executed by and between the
parties as of February 23, 1999, or (iii) the Settlement Agreement and Mutual
Release between the parties dated April 14, 1998 set forth hereto as Exhibit F,
this Agreement is the entire understanding between McDATA and BROCADE with
respect to the subject matter of this Agreement, and supersedes:
(a) All prior or contemporaneous proposals, whether oral or written, all
negotiations, conversations or discussions between the parties, and industry
custom or past course of dealing, relating to such subject matter,
(b) The Purchase and License Agreement entered into between the parties on May
31, 1996,
(c) The Technology License and Development Agreement entered into between the
parties on November 1, 1996,
(d) The Software License Agreement entered into between the parties on October
2, 1998,
(e) The Mutual Confidentiality and Non-Disclosure Agreement entered into between
the parties on February 12, 1996; and
(f) The two-page Agreement entered into between the parties on March 26, 1998.
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EXHIBIT A
PRICE LIST
SILKWORM SUBASSEMBLIES
<TABLE>
<CAPTION>
[*] [*] [*] [*]
PRODUCT NUMBER SUBASSEMBLY UNITS UNITS UNITS UNITS
- -------------- ----------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
MD1001 [*] [*] [*] [*] [*]
MD1002 [*] [*] [*] [*] [*]
MD1003 [*] [*] [*] [*] [*]
MD1015 [*] [*] [*] [*] [*]
FW-0000000007-0002 Licensed Software [*] /bundle/motherboard
(regardless of number of units)
BROCADE WebTools
BROCADE SES
BROCADE Zoning
</TABLE>
- - McDATA acknowledges and agrees that the lead time for forecasted new orders
as of the Effective Date is sixty (60) days.
- - McDATA agrees that subassemblies are to be ordered in [*] in
minimum increments of [*].
- - McDATA acknowledges that subassemblies have not been [*].
Repair Pricing
MD 1001: [*]
<TABLE>
<S> <C> <C>
MD1002 [*] [*]
MD1003 [*] [*]
MD1015 [*] [*]
</TABLE>
TIME AND MATERIALS
BROCADE will evaluate"Out of Warranty" returns of each of the above
Hardware subassemblies for a fixed evaluation fee of [*] per Hardware
subassembly ("Evaluation Fee"). In the event that McDATA authorizes the
repair of the Hardware subassemblies, the applicable Evaluation Fee will be
applied toward the repair cost. In the event the rate of the subassemblies
tested to the BROCADE standard manufacturing [*] process exceed a "No
Trouble Found" ("NTF") rate greater than [*] during any given [*] day
period, the Evaluation Fee will be charged for all subassemblies exceeding
the [*] NTF rate for the following [*] day period. BROCADE will use
commercially reasonable efforts to repair subassemblies within [*] days of
the receipt of the written or email approval by McDATA of the repair or the
quote by BROCADE. All such repairs will be subject to a ninety (90) day
warranty (according to the terms and limitations set forth in Section 15 of
this Agreement) from the date of shipment by 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.
<PAGE> 15
EXHIBIT B
SERVICE AND SUPPORT REQUIREMENTS
1.0 SERVICE AND SUPPORT REQUIREMENT
McDATA will be responsible for working directly with Customers, and BROCADE
Support will work directly with McDATA to support McDATA personnel, as
necessary. McDATA represents and warrants that it is experienced in, capable
of, and staffed to provide, Level 1 and Level 2 support (as defined below).
BROCADE offers training programs for BROCADE's standard fees as set forth in
this Exhibit B (which may be amended from time to time upon written notice)
to assist in attaining this level of expertise on BROCADE Products. BROCADE
Support will accept calls for technical assistance only from Level II
engineers.
BROCADE will provide Level 3 support to McDATA (as defined below).
2.0 SUPPORT LEVEL DEFINITIONS
2.1 LEVEL 1 SUPPORT
Level 1 support is the first line, direct Customer contact, most
likely via a telephone call handling group provided by McDATA.
Level One support includes:
- [*] (rephrased, please approve)
- 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
The parties agree that Customers shall not have the right to contact
BROCADE directly for questions related to the Products.
2.2 LEVEL 2 SUPPORT
Level 2 support is "technical support" provided by McDATA personnel.
Level 2 support is typically provided by experts in the applicable
Product and who serve as the escalation point for Level 1. Level 2
support personnel are expected to resolve all known problems,
installation and configuration issues, assist in firmware or driver
updates at the Customer site, search BROCADE posted Technical Notes
and other technical information supplied that will assist in providing
problem resolutions. All pertinent data shall be entered in McDATA's
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, the Level 2
analyst may escalate the problem to Level 3 for resolution. Level 2
personnel of McDATA will continue to diligently work with Level 3
personnel of BROCADE to accomplish resolution. Level 2 personnel of
McDATA will communicate all resolutions back to the Customers.
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 in detail.
In an effort to maintain an efficient support organization and crisp
exchange of information, McDATA will limit the number of support
personnel ( Level 2) authorized to contact BROCADE (Level 3) to 5 and
ensure that these personnel have attended Courses 1,2, and 3 taught at
the BROCADE training facility.
2.3 LEVEL 3 SUPPORT
Level 3 support is provided by BROCADE System Engineers (SE) and/or
Technical Support Engineers (TSE). Level 3 is the first point of
contact for technical issues between BROCADE and McDATA. Once a
problem is accepted by BROCADE in its sole discretion for escalation
to Level 3, BROCADE is responsible for resolution and will utilize
commercially reasonable resources to resolve such problem.
Prior to escalating to Level 3, it is expected that McDATA 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.
- Detailed definition of all steps taken to reproduce and
resolve this situation prior to escalation to Level 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> 16
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 will be possible
during normal BROCADE business hours (8 AM to 5 PM PST, M-F).
Emergency situations for Severity 1 problems are handled via 7 X 24
pager coverage at 1-888-ATFIBRE (1-888-283-4273)
3.0 BROCADE SEVERITY DEFINITIONS AND SUPPORT GOALS
The goal for initial response time to all telephone support requests
is [*] or less during normal BROCADE working hours. For after hours
telephone requests, the goal is [*] or less. The targeted response
time for requests submitted by other means, such as email, or fax, is
[*].
<TABLE>
<CAPTION>
SEVERITY DEFINITION SERVICE OBJECTIVE RESOLUTION TIME
-------- ---------- ----------------- ---------------
<S> <C> <C> <C>
1 BROCADE Product is completely Respond to initial request Less than 5
non-functional, or deemed a within 30 minutes during days, using
safety hazard, situation has normal BROCADE business commercially
high impact on development or hours, and 1 hour for reasonable
delivery efforts. non-business hours. efforts
Installation problems. Resources applied until a
solution or acceptable work-
around is found.
2 BROCADE Product is Respond to initial request Less than 15 days
functionally impaired, has within 1 (one) hour during
substantially degraded normal BROCADE business
performance but is not hours. Resources applied
completely dysfunctional. continuously, during
There are no available business hours, until a
work-arounds. Situation has solution or work-around is
medium impact on customer found.
activity
3 BROCADE Product or advertised Resources applied on a Next maintenance
functionality may be slightly priority basis, until a release.
impaired but is operational, solution or a work-around is
has low to no impact on found.
customer activity, and there
are work-arounds available.
4 Generic questions, and Answer generic questions or Commercially
enhancement requests. provide path to answers reasonable
within reasonable time efforts for
frames. The BROCADE web generic
site will be the prime questions.
repository for this type of Enhancement
information. Enhancement requests are
requests will be reviewed processed on a
and implemented in the next case by case
major release, where basis.
feasible, or to meet
specific commitments made.
</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> 17
EXHIBIT C
TECHNICAL TRAINING PROGRAM
BROCADE TRAINING OUTLINE
<TABLE>
<CAPTION>
COST PER
COURSE DAYS PERSON
-------------------------------------------------- ------------- ------------
<S> <C> <C>
1.1 FC & SAN intro: 1 [*]
Audience: Sales/Marketing/SE's
1.2 Switch intro & features : 2 [*]
Audience Sales/Marketing/SE's:
1.3 Install/Config/Troubleshoot/Mgmt tools: 2 [*]
Audience SE's, Tech support:
FULL COURSE 5 [*]
Note: Includes non-reproducible copy of all course materials
for each person. Additional binders of training materials
may be purchased from BROCADE.
</TABLE>
Courses will be offered at BROCADE's offices in San Jose, CA or at such
other facility notified to McDATA from time to time. A minimum of [*]
students will be required to register and attend each course, or the course
in question may, at BROCADE's sole option, be canceled. McDATA agrees that
it shall pay any and all travel and lodging expenses related to such
training. BROCADE will make these courses available to Customers, on terms
to be negotiated at BROCADE's then-current rates for Customer training
courses.
* 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
EXHIBIT D
BROCADE SOFTWARE LICENSE AGREEMENT
PLEASE READ THIS END-USER SOFTWARE LICENSE AGREEMENT CAREFULLY BEFORE USING THE
SOFTWARE CONTAINED IN THIS EQUIPMENT.
BY USING THE EQUIPMENT THAT CONTAINS THIS SOFTWARE, YOU ARE CONSENTING TO BE
BOUND BY THIS AGREEMENT. IF YOU DO NOT AGREE TO ALL OF THE TERMS OF THIS
AGREEMENT, PROMPTLY RETURN THE EQUIPMENT AND DO NOT USE THE SOFTWARE OR ALLOW
OTHERS TO USE OR COPY THE SOFTWARE.
SINGLE USER LICENSE. Subject to the terms and conditions of this Agreement,
Brocade Communications Systems, Inc. ("Brocade") and its suppliers grant to
Customer ("Customer") a personal, non-transferable, nonexclusive license to use
the specific Brocade Software program modules or features which have been
enabled by license keys supplied by Brocade or its authorized distributors and
for which Customer has paid any applicable license fees (collectively, the
"Software"), in object code form only: (i) solely as embedded in Brocade
equipment owned or leased by Customer; and (ii) for key-enabled Software, solely
on the single central processing unit corresponding to the license key(s)
supplied by Brocade or its authorized distributors and to the license fees paid
by Customer.
LIMITATIONS. Except as otherwise expressly provided under this Agreement,
Customer shall have no right, and Customer specifically agrees not to:
(i) make error corrections to or otherwise modify, edit or adapt the Software
or create Derivative Works based upon the Software;
(ii) except as set forth herein, copy the Software, in whole or in part;
(iii) decompile, reverse engineer, translate, disassemble or otherwise reduce
the Software to human-readable form;
(iv) remove the Software from the equipment in which it is embedded; or
(v) permit third parties to do any of the foregoing.
Only to the extent required by law, if any, Brocade shall provide Customer with
the interface information needed to achieve interoperability between the
Software and another independently created program, upon Customer's request and
upon payment of Brocade's applicable fee. Customer shall observe strict
obligations of confidentiality with respect to such information, using
commercially reasonable efforts and means consistent with high industry
standards.
UPGRADES AND ADDITIONAL COPIES. For purposes of this Agreement, "Software" shall
include (and the terms and conditions of this Agreement shall apply to) any
upgrades, updates, bug fixes or modified versions (collectively, "Upgrades") or
backup copies of the Software licensed or provided to Customer by Brocade or its
authorized distributor; provided that Customer has paid the applicable license
fees and holds the corresponding license keys for such copies or Upgrades.
NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, CUSTOMER HAS NO LICENSE
OR RIGHT TO USE ANY SUCH ADDITIONAL COPIES OR UPGRADES UNLESS (1) CUSTOMER, AT
THE TIME OF ACQUIRING SUCH COPY OR UPGRADE, ALREADY HOLDS A VALID LICENSE AND
THE CORRESPONDING LICENSE KEYS TO THE ORIGINAL SOFTWARE; (2) SUCH ADDITIONAL
COPIES OR UPGRADES ARE USED ONLY ON THE BROCADE EQUIPMENT FOR WHICH THE ORIGINAL
SOFTWARE IS LICENSED; AND (3) CUSTOMER IS THE ORIGINAL END USER PURCHASER OR
LESSEE OF SUCH BROCADE EQUIPMENT. Except as explicitly provided for in the
Limited Warranty section below, Brocade reserves the right to charge additional
fees for such additional copies and Upgrades.
NOTICES OF PROPRIETARY RIGHTS. Customer may make such backup copies of the
Software as may be necessary for Customer's lawful use, provided Customer
affixes to such copies all trademark, copyright, patent, and notices of other
proprietary rights on any such copies, in whatever form, of the Software in the
same form and manner that such notices appear in the Software. Except as
expressly authorized in this Agreement, Customer shall not make any copies or
duplicates of any Software without the prior written permission of Brocade.
PROTECTION OF INFORMATION. Customer agrees that aspects of the Software and
associated documentation, including the specific design and structure of
individual programs, constitute the trade secrets and/or copyrighted material of
Brocade and its Customer shall not disclose, provide, or otherwise make
available such trade secrets or copyrighted material in any form to any third
party without the prior written consent of Brocade. Customer shall implement
reasonable security measures to protect such trade secrets and copyrighted
material. Title to Software and all related documentation shall remain solely
with Brocade.
LIMITED WARRANTY. Brocade warrants that the Software will substantially conform
to its published specifications for a period of ninety (90) days from the later
of receipt of the equipment containing the Software or receipt of access to the
Software. This limited warranty extends only to Customer as the original
licensee. Customer's sole and exclusive remedy and the entire liability of
Brocade and its suppliers under this limited warranty will be, at Brocade or its
service center's option, repair, replacement, or refund of the Software if
reported (or, upon request, returned) to Brocade or its designee within the
stated ninety (90) day period. Except as expressly granted in this Agreement,
the Software is provided AS IS. Brocade does not warrant that the Software is
error free or that Customer will be able to operate the Software without
problems or interruptions. Brocade reserves the right to charge additional fees
for repairs or replacements performed outside of the ninety (90) day limited
warranty period.
<PAGE> 19
This warranty does not apply if the Software or the Brocade equipment in which
the Software is embedded (a) is licensed for beta, evaluation, testing or
demonstration purposes for which Brocade does not receive a license fee, (b) has
been altered, except by Brocade, (c) has not been installed, operated, repaired,
or maintained in accordance with instructions supplied by Brocade, (d) has been
subjected to abnormal physical or electrical stress, misuse, negligence, or
accident, or (e) is used in ultra-hazardous activities.
DISCLAIMER. EXCEPT AS SPECIFIED IN THIS WARRANTY, ALL EXPRESS OR IMPLIED
CONDITIONS, REPRESENTATIONS, AND WARRANTIES INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS, SATISFACTORY QUALITY OR ARISING
FROM A COURSE OF DEALING, USAGE, OR TRADE PRACTICE, ARE HEREBY EXCLUDED TO THE
MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW.
LIMITATION OF LIABILITY. TO THE MAXIMUM EXTENT ALLOWED BY APPLICABLE LAW, IN NO
EVENT WILL BROCADE OR ITS SUPPLIERS BE LIABLE FOR ANY LOST REVENUE, PROFIT, OR
DATA, OR FOR SPECIAL, INDIRECT, EXEMPLARY, EXTRAORDINARY, CONSEQUENTIAL,
INCIDENTAL, OR PUNITIVE DAMAGES HOWEVER CAUSED, AND REGARDLESS OF THE THEORY OF
LIABILITY, ARISING OUT OF THE USE OF OR INABILITY TO USE THE SOFTWARE EVEN IF
BROCADE OR ITS SUPPLIERS HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
IN NO EVENT SHALL BROCADE'S OR ITS SUPPLIERS' LIABILITY TO CUSTOMER, WHETHER IN
CONTRACT, TORT (INCLUDING NEGLIGENCE), OR OTHERWISE, EXCEED THE PRICE PAID BY
CUSTOMER. THE FOREGOING LIMITATIONS SHALL APPLY EVEN IF THE ABOVE-STATED
WARRANTY FAILS OF ITS ESSENTIAL PURPOSE. BECAUSE SOME STATES OR JURISDICTIONS DO
NOT ALLOW LIMITATION OR EXCLUSION OF CONSEQUENTIAL OR INCIDENTAL DAMAGES, THE
ABOVE LIMITATION MAY NOT APPLY.
ASSIGNMENT. This Agreement will bind and inure to the benefit of each party's
successors and permitted assigns. Customer may not transfer or assign this
Agreement, in whole or in part, without Brocade's written consent, even if
Customer sells, rents, distributes or leases the equipment for which the
Software is licensed or on which the Software is loaded.
TERM AND TERMINATION. This Agreement is effective until terminated. Customer's
license rights under this Agreement will terminate immediately without notice
from Brocade if Customer fails to comply with any provision of this Agreement.
Upon termination, Customer must destroy all copies of Software and the
corresponding license keys in its possession or control.
CUSTOMER RECORDS. Customer grants to Brocade and its independent accountants the
right to examine Customer's books, records and accounts during Customer's normal
business hours to verify Customer's compliance with this Agreement. In the event
such audit discloses non-compliance with this Agreement, Customer shall promptly
pay to Brocade the appropriate license fees.
EXPORT. Software, including technical data, is subject to U.S. export control
laws, including the U.S. Export Administration Act and its associated
regulations, and may be subject to export or import regulations in other
countries. Customer agrees to comply strictly with all such regulations and
acknowledges that it has the responsibility to obtain licenses to export,
re-export, or import Software.
RESTRICTED RIGHTS. The Software is "commercial computer software" as defined in
the applicable provisions of the Federal Acquisition Regulation (the "FAR") and
supplements thereto, including the Department of Defense ("DoD") FAR Supplements
(the "DFARS"). The parties acknowledge that the Licensed Software was developed
entirely at private expense and that no part of the Licensed Software was first
produced in the performance of a Government contract. If Customer is a U.S.
Government agency, in accordance with FAR 12.212 and its successors or DFARS
227.7202 and its successors, as applicable, the Software is licensed to the
applicable U.S. Government agency subject to the terms of this Agreement.
GENERAL. This Agreement shall be governed by and construed in accordance with
the laws of the State of California, United States of America, as if performed
wholly within the state and without giving effect to the principles of choice or
conflicts of law. If any portion hereof is found to be void or unenforceable,
the remaining provisions of this Agreement shall remain in full force and
effect. This Agreement constitutes the entire agreement between the parties with
respect to the use of the Software.
<PAGE> 20
EXHIBIT E
McDATA PRODUCTS
All releases and subsets of:
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 21
EXHIBIT F
SETTLEMENT AGREEMENT AND MUTUAL RELEASE
McDATA CORPORATION (McDATA) and BROCADE COMMUNICATIONS SYSTEMS, INC.,
("Brocade") enter into this Mutual Release as of April 14, 1998.
1. The intent of this settlement agreement and mutual release is to release
McDATA and Brocade from any and all claims which have been brought or could
have been brought by either party in two lawsuits referenced below.
2. McData has filed an action in the United States District Court for the
District of Colorado on March 4, 1998, entitled McDATA Corporation v.
Brocade Communications Systems, Inc., et al., Civil Action No. 98-S-535
(the "Colorado Action"). Brocade has filed an action in the United States
District Court for the Northern District of California on March 20, 1998,
entitled Brocade Communications Systems, Inc. v. McDATA Corporation, Civil
Action No. C98-20259 RWM (the "California Action"). Both parties have
agreed to dismiss with prejudice the Colorado Action and the California
Action. Each party will bear its own costs for the Colorado Action and the
California Action, including all attorneys' fees.
3. McDATA, for itself and its legal successors and assigns, agents, employees,
representatives, officers, directors, parent, subsidiary or affiliated
corporations, and each of them, hereby releases Brocade and its legal
successors and assigns, agents, employees, representatives, officers,
directors, parent, subsidiary, or affiliated corporations, and each of
them, from and against any and all claims, actions, causes of action,
liabilities and demands, whether known or unknown, that McDATA brought or
could have brought in the Colorado Action or the California Action
(collectively, the "McDATA Claims"). McDATA acknowledges that both known
and unknown McDATA Claims are covered by this Settlement Agreement and
Mutual Release, and waives any rights or benefits that may arise under
California Civil Code section 1542, which provides as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
4. Brocade, for itself and its legal successors and assigns, agents,
employees, representatives, officers, directors, parent, subsidiary or
affiliated corporations, and each of them, hereby releases McDATA and its
legal successors and assigns, agents, employees, representatives, officers,
directors, parent, subsidiary, or affiliated corporations, and each of
them, from and against any and all claims, actions, causes of action,
liabilities and demands, whether known or unknown, that Brocade brought or
could have brought in the Colorado Action or the California Action
(collectively, the "Brocade Claims"). Brocade acknowledges that both known
and unknown Brocade Claims are covered by this Settlement Agreement and
Mutual Release, and waives any rights or benefits that may arise under
California Civil Code section 1542, which provides as follows:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
5. Excluded from the operation of this Mutual Release are any continuing
obligations of the parties in connection with the March 26, 1998 Agreement,
the Technology License and Development Agreement dated as of November 1,
1996, and the Purchase and License Agreement dated as of May 31, 1996, and
any claims arising out of such continuing obligations.
6. This agreement is executed in counterparts.
McData Corporation Brocade Communications
Systems, Inc.
By: /s/ By:
----------------------------- ------------------------------
<PAGE> 22
EXHIBIT G
ASICS SPECIFICATIONS
[*]
McDATA has this copy
[*]
McDATA has this copy
[*] and BROCADE will Fed Ex the [*] within [*] of the approval 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.
<PAGE> 23
EXHIBIT H
SUPPORT LETTER
BROCADE COMMUNICATIONS SYSTEMS, INC.
1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
FAX 408-487-8091
APRIL __, 1999
SUPPORT LETTER
McDATA Corporation Hewlett-Packard Company
310 Interlocken Parkway 8000 Foothills Blvd.
Broomfield, CO 80021 Roseville, CA 95747
Dear _____________and _____________ :
This letter is a follow-up to our recent communications and sets forth the
general terms under which BROCADE will supply products and support to HP in
connection with HP's use of a certain McDATA switch that incorporates unmodified
BROCADE hardware and software system elements and components, or modifications
approved in writing by BROCADE as defined in Exhibit A (the "ES 2500
Switch").BROCADE and McDATA will each enter into separate written agreements
with HP with respect to the products and services it will supply based on the
parties' understandings reflected below. This arrangement, of course, is being
entered into by BROCADE voluntarily and without any obligation to do so, solely
as an accommodation to HP and McDATA, and there is no obligation on the part of
any of us to enter into similar arrangements concerning other products or other
customers.
1. Software License: BROCADE will license specified software applications to
HP for use in the ES 2500 Switch, in accordance with a mutually agreed upon
application software license agreement.
2. BROCADE Support: BROCADE will provide technical support to HP consistent
with the attached escalation procedures, Schedule 1, to assist HP and
McDATA in performing fault isolation and analysis of the ES 2500 Switch,
and will use reasonable efforts to work with HP and McDATA to correct or
provide work-arounds for any errors attributable to BROCADE. Such support
will include BROCADE's using reasonable efforts to assist HP and McDATA in
supporting the approved modifications listed in Schedule 2. BROCADE support
will require both HP and McDATA to provide BROCADE with the necessary
system elements to replicate identical configurations in the field.
However, BROCADE will in no event be held legally or financially liable for
any failure to identify, isolate, correct or provide work-arounds to any
problems or deficiencies with the ES 2500 Switch or any modified BROCADE
hardware or software, regardless of the reasons or circumstances.
3. McDATA Support: McDATA will make available to BROCADE such information and
equipment (including one or more ES 2500 Switches) at no charge to BROCADE
as are reasonably necessary for BROCADE to provide the support to HP
contemplated under the parties' arrangement in an efficient manner. In
doing so, McDATA will not disclose to BROCADE any confidential information,
and BROCADE will have no obligation of confidentiality with respect to the
information provided. If BROCADE requires access to McDATA confidential
information, the request must be made in writing and be submitted by a Vice
President of BROCADE. The McDATA confidential information will then be
supplied only to a Vice President at BROCADE. McDATA confidential
information will be protected under the terms of the Non-Disclosure
Agreement dated February 23, 1999.
This letter serves as Exhibit D of the BROCADE-HP Software License Agreement and
also as Exhibit H of the BROCADE-McDATA OEM and License Agreement.
Please indicate your acceptance of the above terms by signing below and
returning the signed letter to me at your earliest convenience. Please do not
hesitate to call me if you have any questions or concerns.
Sincerely,
Greg Reyes
Agreed to and Accepted: Agreed to and Accepted:
McDATA Corporation Hewlett-Packard Company
<PAGE> 24
By By
----------------------------- -----------------------------------
Name Name
----------------------------- -----------------------------------
Date Date
----------------------------- -----------------------------------
<PAGE> 25
SCHEDULE 1
TO
SUPPORT LETTER
ESCALATION, SERVICE AND SUPPORT REQUIREMENTS
1.0 SERVICE AND SUPPORT REQUIREMENT
HP will be responsible for working directly with the End Users. McDATA and
BROCADE support will work directly with HP to support HP personnel, as
necessary. HP represents and warrants that it is experienced in, capable
of, and staffed to provide, Level 1 and Level 2 support (as defined below).
BROCADE offers regular training programs to assist in attaining this level
of expertise on BROCADE Products.
Subject to the terms of the "Support Letter" and the Non-Disclosure
Agreement dated February 23, 1999, BROCADE and/or McDATA, as applicable,
will provide Level 3 support (as defined below). Specifically, McDATA will
be the initial contact for problem isolation and escalation, service and
support issues from HP, and will be specifically responsible for hardware
support. BROCADE will be the contact for escalation, service and support
for BROCADE software issues following problem isolation by McDATA or HP.
2.0 SUPPORT LEVEL DEFINITIONS
2.1 LEVEL 1 SUPPORT
Level 1 support is the first line, direct End User contact, most likely
via a telephone call handling group provided by HP.
Level One support includes:
- On site service and FRU replacement
- First contact, direct McDATA/End User interaction
(rephrased, please approve)
- 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
The parties agree that End Users shall not have the right to contact
BROCADE directly for questions related to the Products.
2.2 LEVEL 2 SUPPORT
Level 2 support is "technical support" provided by HP personnel. Level 2
support is typically provided by experts in the applicable Product and
who serve as the escalation point for Level 1. Level 2 support personnel
are expected to resolve all known problems, installation and
configuration issues, assist in firmware or driver updates at the End
User site, search BROCADE and/or McDATA posted Technical Notes and other
technical information supplied that will assist in providing problem
resolutions. All pertinent data shall be entered in HP's 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, the Level 2 analyst
may escalate the problem to Level 3 for resolution. Level 2 personnel of
HP will continue to diligently work with Level 3 personnel of BROCADE
and/or McDATA to accomplish resolution. Level 2 personnel of HP will
communicate all resolutions back to the End Users.
Escalations should be presented to BROCADE and/or McDATA engineers in
the form of a problem tracking data base record with all pertinent
configuration detail and failure information or symptoms documented in
detail.
In an effort to maintain an efficient support organization and crisp
exchange of information, HP and McDATA will limit the number of support
personnel (Level 2) authorized to contact BROCADE (Level 3) to 5.
2.3 LEVEL 3 SUPPORT
Level 3 support for covered software is provided by BROCADE System
Engineers (SE) and/or Technical Support Engineers (TSE). Level 3 is the
first point of contact for technical issues between BROCADE and HP or
McDATA. Once a problem is accepted by BROCADE in its sole discretion for
escalation to Level 3, BROCADE will utilize commercially reasonable
resources to resolve such problem within the time frames set forth
below.
Prior to escalating to Level 3, it is expected that HP and/or McDATA
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.
<PAGE> 26
- Any trace file from the devices connected to the switch.
- The configuration information of the equipment being used.
- Any troubleshooting steps already performed.
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 will be possible during normal
BROCADE business hours (8 AM to 5 PM PST, M-F). Emergency situations for
Severity 1 problems are handled via 7 X 24 pager coverage at
1-888-ATFIBRE (1-888-283-4273)
3.0 BROCADE SEVERITY DEFINITIONS AND SUPPORT GOALS
The goal for initial response time to all telephone support requests is
[*] or less during normal BROCADE working hours. For after hours
telephone requests, the goal is [*] or less. The targeted response time
for requests submitted by other means, such as email, or fax, is [*].
<TABLE>
<CAPTION>
SEVERITY DEFINITION SERVICE OBJECTIVE RESOLUTION TIME
-------- ---------- ----------------- ---------------
<S> <C> <C> <C>
1 BROCADE Product is completely Respond to initial Less than 5 days,
non-functional, or deemed a safety request within 30 using
hazard, situation has high impact minutes during normal commercially
on development or delivery BROCADE business hours, reasonable efforts
efforts. Installation problems. and 1 hour for
non-business hours.
Resources applied until
a solution or acceptable
work- around is found.
2 BROCADE Product is functionally Respond to initial Less than 15 days
impaired, has substantially request within 1 (one)
degraded performance but is not hour during normal
completely dysfunctional. There BROCADE business hours.
are no available work-arounds. Resources applied
Situation has medium impact on continuously, during
customer activity business hours, until a
solution or work-around
is found.
3 BROCADE Product or advertised Resources applied on a Next maintenance
functionality may be slightly priority basis, until a release.
impaired but is operational, has solution or a
low to no impact on customer work-around is found.
activity, and there are
work-arounds available.
4 Generic questions, and enhancement Answer generic questions Commercially
requests. or provide path to reasonable
answers within efforts for
reasonable time frames. generic
The BROCADE web site questions.
will be the prime Enhancement
repository for this type requests are
of information. processed on a
Enhancement requests case by case
will be reviewed and basis.
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 Commission. Confidential treatment has
been requested with respect to the omitted portions.
<PAGE> 27
SCHEDULE 2
TO
SUPPORT LETTER
APPROVED MODIFICATIONS FOR THE HP OEM FIBRE CHANNEL SWITCH
1. External Loop Back Test
2. [*]
3. Remove BROCADE name and BROCADE unique references from SilkWorm
4. [*]
5. [*]
6. Generic SNMP modifications
7. OEM Logo Set command
[*]
* 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> 28
EXHIBIT I
McDATA CORPORATION
MUTUAL CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT
(Organizational Level)
THIS AGREEMENT, by and between McDATA Corporation, hereinafter referred to as
"McDATA", having its principal place of business at 310 Interlocken Parkway,
Broomfield, Colorado 80021-3484 and,
Brocade Communication
457 E. Evelyn
Suite E
Sunnyvale, CA 94086
Hereinafter referred to as the "Organization", establishes certain terms and
conditions applicable to the parties relative to the protection and
non-disclosure of the confidential information and materials of the parties.
RECITALS
WHEREAS, each party hereto desires to protect its trade secrets, confidential
information and patentable ideas from unnecessary risk of unauthorized
disclosure while at the same time conducting business with the other party, and
the other party is willing to abide by the following covenants,
NOW, THEREFORE, the parties covenant and agree as follows:
1. DEFINITION AND AGREEMENT
1.1 Either party hereto may disclose to the other party (the receiving party)
certain of its confidential information as defined at Section 1.2 below. All
such confidential information shall remain the property of the disclosing party.
1.2 In order to come under the terms of this Agreement, such confidential
information must either be: (a) disclosed in tangible form clearly marked as
"confidential", "restricted", "proprietary", or with similar wording, or (b) if
orally disclosed, as may happen during meetings of the parties, within
seventy-two hours of such disclosure, disclosing party shall deliver to
receiving party a letter specifically identifying any such confidential
information so disclosed and indicating that such information is to be treated
as confidential under this Agreement. Neither party will, without the prior
written consent of the other, receive or take possession of any books, drawings,
blueprints, specifications, software (in any media), customer lists, data
formulations, compositions, reports, letters, memoranda, notes or other writings
or documents or copies thereof which contain or relate to any of the
confidential information.
1.3 The receiving party hereby agrees to maintain such confidential information
in confidence, to protect same with the same degree of care as that with which
it uses to preserve and safeguard its own information of a similar nature and to
disclose same only to officers, employees and agents of the receiving party who
reasonably require same for the purposes hereof and who execute a
confidentiality and non-disclosure agreement prior to receipt of same.
1.4 Each of the parties represents that it has in force a similar policy
respecting the protection of its information as described in 1.2 through 1.3, or
will develop and implement a policy substantially equivalent to that as
contained herein, including the execution of a confidentiality and
non-disclosure agreement by each officer, employee and agent of the receiving
party prior to divulging confidential information as described in 1.2 above.
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EXHIBIT I
1.5 The restrictions and obligations of the parties shall expire five (5) years
from the date of termination of the party's contacts with the other party, and
shall not apply to information which:
1.5.1 becomes a matter of general public knowledge; or
1.5.2 is required to be disclosed by the law of any government which has
jurisdiction over such information; or
1.5.3 was previously known at the time of its receipt from the disclosing party
without similar restrictions; or
1.5.4 is released by written mutual agreement of the parties; or
1.5.5 is provided by the owner of such information to third parties without
similar restrictions on disclosure; or
1.5.6 can be documented, by adequate written records, to have been independently
developed by the receiving party without reference to or use of any confidential
information.
1.6 Use of such confidential information by the receiving party is limited to
the use as is appropriate in exploring a potential business relationship and the
furnishing of such confidential information under this Agreement shall not
constitute any grant, option or license to the receiving party under any patent,
copyright or other rights now or hereafter held by the party disclosing said
confidential information.
1.7 In the event of a breach of this Agreement the parties expressly agree that
the aggrieved party shall be entitled to (in addition to all other remedies
available to it under this Agreement, by statute, or otherwise) injunctive
and/or other equitable relief to secure the enforcement of this Agreement, or
any part thereof.
2. CHANGES TO AGREEMENT
No provision of this Agreement shall be deemed waived, amended or modified by
either party unless such waiver, amendment or modification is in writing, signed
by the parties. No waiver in any one instance or with respect to any particular
entity shall be deemed to be a waiver in any other instance or with respect to
any other entity.
3. CONTINUING OBLIGATIONS
This Agreement shall be binding upon and inure to the benefit of the parties
hereto, their permitted successors and assigns.
4. MAINTENANCE OF AGREEMENT
If one or more provisions of this Agreement should be invalid, illegal or
unenforceable in any respect, the remaining provisions contained herein shall
not, in any way, be affected or impaired thereby.
5. LEGAL AUTHORITY
This Agreement shall be construed under and governed by the laws of the State of
Colorado as though this Agreement were executed in, by parties who were all
residents of, and were intended to be performed fully in, the State of Colorado.
6. ATTORNEYS' FEES
If any dispute arises between the parties with respect to the matters covered by
this Agreement which leads to a proceeding to resolve such dispute, the
prevailing party in such proceeding shall be entitled to receive
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<PAGE> 30
EXHIBIT I
its reasonable attorneys' fees and out-of-pocket costs incurred in connection
with such proceeding, in addition to any other relief it may be awarded.
7. RETURN OF CONFIDENTIAL INFORMATION
Upon request, a receiving party shall destroy or return all confidential
information to the disclosing party.
8. EXPORT
The Parties agree that they will not in any form export, reexport, resell, ship
or divert or cause to be exported, reexported, resold, shipped or diverted,
directly or indirectly, any product or technical data (as defined by the United
States Export Administration Regulations) or Software furnished hereunder or the
direct product of such technical data or Software which, in so doing, would
violate any United States Export Laws or Regulations.
If such technical data of Software or the direct product thereof is covered by
General License GTDR (Technical Data Under Restriction) then such technical data
or Software or the direct product thereof will not be sold or otherwise made
available, directly or indirectly, to or for use by country groups, Q, S, W, Y,
Z, Afghanistan, or the People's Republic of China or such other countries as
specified by the current Export Administration Regulations.
By execution hereof, the parties hereby certify that they have read, understand
and are DULY AUTHORIZED TO EXECUTE THIS AGREEMENT.
Executed and submitted to McDATA Accepted and effective as
for acceptance: of: ____________________
Brocade Communication McDATA Corporation
(Organization)
By: /s/ By: /s/
-------------------------------- -----------------------------------
(signature) (signature)
Name: Seth D. Neiman Name: Wo Overstreet
Title: CEO Title: Vice President of Marketing
and Sales
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<PAGE> 31
EXHIBIT J
MANUFACTURING [*] TEST PROCESSES
1. [*] TEST. BROCADE will perform an [*] test on each subassembly ([*]) prior
to shipping that subassembly to McDATA.
2. [*] TESTS. BROCADE perform [*] tests on each subassembly ([*]). All such
[*] tests shall have optical ports cross-connected during diagnostics (port
0 to 3; port 2 to 4, etc.). Additional loops of [*] and [*] shall be done
at [*] test:
[*]
3. [*] TESTS. BROCADE agrees to work diligently to eliminate failures on the
subassemblies. If the failures persist for [*] days after the date of
execution of this Agreement, and if McDATA yields can be substantially
improved by performing a [*] test, then BROCADE shall perform the following
[*] test on the affected subassemblies:
Additional [*] testing shall be set up to run the [*] in a test
environment similar to the [*]. [*] test suites shall be agreed
upon by both parties within [*] days of execution of this
Agreement. All ports will be [*] during such tests. The duration
of such tests shall be [*].
4. TEST CORRELATION FOR FAILED SUBASSEMBLIES.
a. For the [*], BROCADE will provide to McDATA
a test fixture for performing validation tests on failed [*]
and [*]. McDATA shall run a validation test on each failed
[*] and [*] on the BROCADE test fixture, using a test
suite agreed upon by both parties. If McDATA is unable to validate the
failure, McDATA shall put the [*] or [*] back into its
stock. If McDATA is able to validate the failure, McDATA will return
the validated failed [*] or [*] to BROCADE for repair or
replacement.
b. McDATA shall return to BROCADE all failed [*] and [*]. BROCADE shall
run such failed [*] through BROCADE's standard validation test. If
such [*] is determined to be No Trouble Found (NTF), then BROCADE
shall retest such [*] in McDATA equipment, using McDATA's [*]. If the
failure is validated in McDATA equipment, BROCADE shall repair or
replace such [*].
c. Both parties shall review the test correlation data and process every
[*] days to determine if the then-current test correlation process
shall be continued or changed.
d. Such test correlation process shall apply to [*] and [*] failures.
* 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 17, 1999
