<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA (PRIOR TO 7372 77-0409517
REINCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
DELAWARE (AFTER REINCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
</TABLE>
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GREGORY L. REYES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
BROCADE COMMUNICATIONS SYSTEMS, INC.
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(408) 487-8000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LARRY W. SONSINI GREGORY M. GALLO
JOHN T. SHERIDAN DENNIS C. SULLIVAN
ALISANDE M. ROZYNKO JEFFREY D. BALL
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>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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- ----------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Common Stock ($.001 par value).............................. $41,400,000 $11,510
- ----------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o).
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued , 1999
Shares
[BROCADE LOGO]
COMMON STOCK
------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC. IS OFFERING 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 $ AND $ PER SHARE.
------------------------
WE HAVE APPLIED TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET
UNDER THE SYMBOL "BRCD."
------------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 5.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<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
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
<TABLE>
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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>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 41
Certain Transactions................ 52
Principal Stockholders.............. 56
Description of Capital Stock........ 59
Shares Eligible for Future Sale..... 62
Underwriters........................ 64
Legal Matters....................... 66
Experts............................. 66
Change in Independent Accountants
and Fiscal Year End............... 66
Where You May Find Additional
Information....................... 67
Index to Financial Statements....... F-1
</TABLE>
-------------------------
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. Our fiscal year ends on October 31. 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.
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. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of the common stock.
Unless otherwise specifically stated, the information in this prospectus
has been adjusted to reflect the assumed exercise of warrants to purchase
296,881 shares of preferred stock prior to this offering and the subsequent
conversion of all outstanding shares of preferred stock into common stock on the
completion of this offering, but does not take into account the possible
issuance of additional shares of common stock to the underwriters pursuant to
their right to purchase additional shares to cover over-allotments. In this
prospectus, "Brocade," "we," "us," and "our" refer to Brocade Communications
Systems, Inc.
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.
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.
2
<PAGE> 4
PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and our financial statements and notes to the financial statements appearing
elsewhere in this prospectus.
BROCADE COMMUNICATIONS SYSTEMS, INC.
We are the leading provider of Fibre Channel switching solutions for
storage area networks, or SANs, which apply the benefits of a networked approach
to the connection of storage systems and servers. Our family of SilkWorm
switches enables enterprises 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 reliable backup and restore, and
disaster recovery on the SAN. We sell our SAN switching solutions through
leading storage systems and server OEMs, including Compaq Computer, Dell
Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. These
OEMs and our system integrator customers combine our switching solutions with
other system elements and services for enterprise data centers.
Over the past decade, the volume of business-critical data that is being
captured, processed, stored and manipulated in business environments has
exploded, creating a data transmission bottleneck between storage systems and
servers. In response to the demand for high-speed and high-performance
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect, an industry standard network protocol, was developed in the early
1990s. Fibre Channel is well suited for data transfers between storage systems
and servers and has earned broad support from storage and server industry
leaders. Fibre Channel's support for networked connections, large data block
transfers and multiple protocols enables SANs to meet the increasing
performance, scalability, flexibility and management requirements of enterprise
data centers.
Our SilkWorm family of Fibre Channel switches provides a switch
interconnect, enabling any-to-any connectivity between storage systems and
servers. Multiple interconnected switches enable the deployment of our Brocade
Fabric, which includes our Brocade Fabric Operating System, SAN management
tools, fabric services and ready-to-deploy configurations. Our SAN solutions
offer the following benefits:
- Address the Input/Output Bottleneck. Our solutions are designed to
deliver gigabit transfer rates and any-to-any connectivity, addressing
the storage-to-server and server-to-server bottleneck.
- Provide Scalability to SANs. Our switches can be used to incrementally
increase the size and scope of the SAN, enabling enterprises to grow
clusters of high performance storage systems and servers. Connecting in a
meshed topology, or cascading, multiple SilkWorm switches enables
enterprises to interconnect separate SAN clusters into one large SAN to
share distributed data.
- Build a Mission-Critical Data Center. We have designed our solutions to
provide high levels of resiliency and availability with maximum up-time
for business-critical applications.
- Enable SAN Applications. Our products provide a network infrastructure
that allows our customers and partners to address compelling data
requirements by running multiple new data-intensive applications
concurrently on the SAN, including data backup and restore, and disaster
recovery.
- Enhance SAN Management. Our Brocade Fabric is designed for ease of use
and implementation to reduce the overall costs and improve the efficiency
of managing SANs.
We intend to capitalize on our SAN switching market leadership and our
Fibre Channel technology leadership to leverage our core technologies and
products to address the evolving SAN market. In addition to focusing on our
distribution relationships with leading storage systems and server OEMs, we have
recently launched our system integrator program. Furthermore, we intend to
continue building relationships with leading technology partners.
3
<PAGE> 5
THE OFFERING
Common stock offered................ shares
Common stock to be outstanding after
this offering....................... shares
Over-allotment option............... shares
Use of proceeds..................... We intend to use the net proceeds for
general corporate purposes, including
repayment of outstanding indebtedness,
capital expenditures and working
capital.
Proposed Nasdaq National Market
symbol.............................. BRCD
The foregoing information is as of January 31, 1999 and excludes 2,082,471
shares of common stock issuable upon exercise of options outstanding as of
January 31, 1999 with a weighted average exercise price of $1.95 per share,
287,788 shares of common stock issuable upon exercise of warrants outstanding as
of January 31, 1999 with a weighted average exercise price of $1.37 per share,
and 466,516 shares of common stock reserved for additional option grants under
our stock plans as of January 31, 1999.
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
------------------------------------- -----------------
1995 1996 1997 1998 1998 1999
----- ------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues............................. $ -- $ -- $ 8,482 $ 24,246 $ 7,850 $ 8,007
Gross profit............................... -- -- 1,800 8,487 3,153 4,686
Loss from operations....................... (176) (3,818) (9,442) (15,231) (1,398) (1,846)
Net loss................................... (166) (3,934) (9,619) (15,111) (1,355) (1,839)
Pro forma basic net loss per share......... $ (.84) $ (.10)
Shares used in per share calculations...... 17,915 18,973
</TABLE>
The following table presents summary balance sheet data as of January 31,
1999, which has been adjusted to reflect the assumed exercise of warrants to
purchase 296,881 shares of preferred stock at an exercise price of $6.78 per
share prior to this offering and the subsequent conversion of our preferred
stock into 14,623,614 shares of common stock upon completion of this offering,
our sale of shares of our common stock in this offering at an assumed
initial public offering price of $ per share and the application of the
estimated net proceeds. See "Use of Proceeds" and "Capitalization."
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 10,137 $
Working capital............................................. 4,500
Total assets................................................ 24,576
Long-term portion of debt and capital lease obligations..... 1,808
Redeemable convertible preferred stock...................... 35,261
Total stockholders' equity (deficit)........................ (27,825)
</TABLE>
4
<PAGE> 6
RISK FACTORS
This offering and an investment in our common stock involve a high degree
of risk. You should carefully consider the following risk factors and the other
information in this prospectus before investing in our common stock. Our
business, financial condition and results of operations could be seriously
harmed by any of the following risks. The trading price of our common stock
could decline due to any of these risks and you may lose all or part of your
investment.
WE HAVE AN ACCUMULATED DEFICIT OF $30.7 MILLION AND MAY NOT ACHIEVE
PROFITABILITY
We have incurred significant losses since inception and expect to incur
losses in the future. As of January 31, 1999, we had an accumulated deficit of
$30.7 million. Although our revenues have grown in recent quarters, we cannot be
certain that we will be able to sustain these growth rates or that we will
realize sufficient revenues to achieve profitability. We also expect to incur
significant product development, sales and marketing and administrative expenses
and, as a result, we will need to generate significant revenues to achieve and
maintain profitability. Moreover, even if we do achieve profitability, we may
not be able to sustain or increase profitability. See "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
We also may incur additional losses as a result of our limited operating
history. Specifically, Brocade has been operating less than four years.
Therefore, we cannot forecast future operating results based on our historical
results. We plan our operating expenses based in part on future revenue
projections. Our ability to accurately forecast our quarterly revenue is limited
for the reasons discussed below in "-- We Expect Our Quarterly Revenues and
Operating Results to Fluctuate for a Number of Reasons Which Could Cause Our
Stock Price to Fluctuate." Moreover, most of our expenses are fixed in the
short-term or incurred in advance of receipt of corresponding revenue. As a
result, we may not be able to decrease our spending to offset any unexpected
shortfall in our revenues. If this were to occur, we would expect to incur
significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
- fluctuations in demand for our SilkWorm family of products and services;
- the timing of customer orders and product implementations, particularly
large orders from and product implementations of our OEM customers;
- our ability to develop, introduce, ship and support new products and
product enhancements;
- announcements and new product introductions by our competitors;
- the expected decline in the prices at which we can sell our SilkWorm
family of products to our customers;
- our ability to obtain sufficient supplies of sole or limited sourced
components, including application specific integrated circuits, or ASICs,
gigabit interface converters, or GBICs, and power supplies, for our
SilkWorm family of products;
- increases in the prices of the components we purchase;
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<PAGE> 7
- our ability to attain and maintain production volumes and quality levels
for our SilkWorm family of products;
- the mix of our SilkWorm and SilkWorm Express switches sold and the mix of
distribution channels through which they are sold;
- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key OEMs 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 OEM 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 OEMs and
system integrators. In addition, our products are designed to conform to the
Fibre Channel interconnect networking 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 OEMs or end-users.
WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE
We currently derive substantially all of our revenues from sales of our
SilkWorm family of products. We expect that revenue from this product family
will continue to account for a substantial portion of our revenues for the
foreseeable future. Therefore, widespread market acceptance of these products is
critical to our future success. Some of our products have been only recently
introduced and therefore, the demand and market acceptance of our products is
uncertain. Factors that may affect the market acceptance of our products include
market acceptance of SAN switching products, the performance, price and total
cost of ownership of our products, the availability and price of competing
products and
6
<PAGE> 8
technologies, and the success and development of our OEMs 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 OEM CUSTOMERS AND THE LOSS OF ANY OF THESE OEMS COULD
SIGNIFICANTLY REDUCE OUR REVENUES
We depend on a few key OEM customers. For example, in the three months
ended January 31, 1999, sales to Sequent and McDATA accounted for 37% and 33% of
our total revenues, respectively. We anticipate that our operating results will
continue to depend on sales to a relatively small number of OEMs. Therefore, the
loss of any of our key OEMs, or a significant reduction in sales to these OEMs
could significantly reduce our revenues.
EXPANDING OUR DISTRIBUTION CHANNELS AND SELLING OUR PRODUCTS TO END-USERS EACH
INVOLVE LENGTHY SALES CYCLES
Our strategy is to expand our OEM and system integrator distribution
channels. Our success will depend on our continuing ability to develop and
manage relationships with significant OEMs, as well as on the sales efforts and
success of those OEMs. Our OEM customers typically conduct significant
evaluation, testing, implementation and acceptance procedures before they begin
to market and sell new technologies, including our products. This evaluation
process is lengthy and may range from six months to a year. This process is also
complex and may require significant sales and marketing and management efforts
on our part. The complexity of this process increases if we have to qualify our
products with multiple customers at the same time. We cannot assure you that we
will be able to manage this process successfully. Our failure to do so could
reduce our revenues.
In addition, once our products have been qualified, the length of the sales
cycle of our OEMs may vary depending upon whether the OEM is bundling our
products with another product or selling our products as an option or add-on.
Moreover, our agreements with our OEMs and system integrators have no minimum
purchase commitments. We cannot assure you that our customers will market our
products effectively.
THE FAILURE OF OUR SOLE MANUFACTURER TO MEET OUR MANUFACTURING NEEDS 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.
7
<PAGE> 9
Accordingly, if we inaccurately forecast demand for our products, we may be
unable to obtain adequate manufacturing capacity from Solectron to meet our
customers' delivery requirements or we may accumulate excess inventories.
We plan to regularly introduce new products and product enhancements, which
will require that we coordinate our efforts with those of our suppliers and
Solectron to rapidly achieve volume production. While we have not, to date,
experienced supply problems with Solectron, we have experienced delays in
product deliveries from one of our former contract manufacturers. If we should
fail to effectively manage our relationships with our suppliers and Solectron,
or if Solectron experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, our ability to ship products
to our customers could be delayed and our competitive position and reputation
could be harmed. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.
WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS INCLUDING ASICS AND POWER SUPPLIES
We currently purchase several key components from single or limited
sources. We purchase ASICs and power supplies from single sources, and printed
circuit boards and GBICs from limited sources. If we are unable to buy these
components on a timely basis we will not be able to manufacture our products. We
use a rolling six-month forecast based on anticipated product orders to
determine our component requirements. If we overestimate our component
requirements, we may have excess inventory, which would increase our costs. If
we underestimate our component requirements, we may have inadequate inventory,
which could interrupt our manufacturing. In addition, lead times for materials
and components we order vary significantly and depend on factors such as the
specific supplier, contract terms and demand for a component at a given time. We
also may experience shortages of certain components from time to time, which
also could delay our manufacturing.
THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE
The markets for our SAN switching products are competitive, and are likely
to become even more competitive. Increased competition could result in pricing
pressures, reduced sales, reduced margins, reduced profits, reduced market share
or the failure of our products to achieve or maintain market acceptance. Our
products face competition from multiple sources. Some of our competitors and
potential competitors have longer operating histories, greater name recognition,
access to larger customer bases, or substantially greater resources than we
have. As a result, they may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or customer requirements. For
all of the foregoing reasons, we may not be able to compete successfully against
our current and future competitors. See "Business -- Competition."
THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND
GROSS MARGINS
The average unit price of our products decreased 26% in fiscal 1998. We
anticipate that the average unit price of our products may continue to decrease
in the future in response to changes in product mix, competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. If we are unable to offset these factors by
increasing our sales volumes, our revenues will decline. In addition, to
maintain our gross margins, we must develop and introduce new
8
<PAGE> 10
products and product enhancements, and we must continue to reduce the
manufacturing cost of our products.
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. Certain members of our management team, including Mr. Reyes, and many of
our employees 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.
9
<PAGE> 11
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. Our
international sales growth 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 are subject to a number of risks,
including:
- 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, 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 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-
10
<PAGE> 12
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 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.
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.
11
<PAGE> 13
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.
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.
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.
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 %
of our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder
12
<PAGE> 14
approval, including the election of directors and approval of significant
corporate transactions, which could delay or prevent someone from acquiring or
merging with us. See "Principal Stockholders."
PROVISIONS IN OUR CHARTER DOCUMENTS, CUSTOMER AGREEMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF BROCADE AND MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders;
- prohibiting stockholder actions by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us. Further, our agreements with certain
of our customers require us to give prior notice of a change of control of
Brocade and grant certain manufacturing rights following the change of control.
See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and
Certain Provisions of Our Certificate of Incorporation and Bylaws."
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- losses of major OEM customers;
- additions or departures of key personnel; and
- sales of common stock in the future.
13
<PAGE> 15
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 be required, or could elect,
to seek additional funding prior to that time. In the event we are required 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. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. See "Shares
Eligible for Future Sale."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the book value per share of our outstanding common stock immediately after
the offering. Accordingly, if you purchase common stock in the offering, you
will incur immediate dilution of approximately $ in the book value per share
of our common stock from the price you pay for our common stock. This
calculation assumes that you purchase our common stock for $ per share. See
"Dilution."
14
<PAGE> 16
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. 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.
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. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of such statements. We
are under no duty to update any of the forward-looking statements after the date
of this prospectus or to conform such statements to actual results.
15
<PAGE> 17
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the shares of
common stock we are offering will be approximately $ , or
$ if the underwriters exercise their over-allotment option in full,
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and our estimated
offering expenses. We expect to use a portion of the net proceeds to repay
outstanding indebtedness under our bank credit facility and our equipment loan
agreement. Borrowings under our credit facility bear interest at the bank's
prime rate, which was 7.8% per annum as of January 31, 1999, and indebtedness
under our equipment loan agreement bears interest at the bank's prime rate plus
1%. At January 31, 1999, the principal amount of outstanding indebtedness under
our credit facility and our equipment loan agreement was $1.7 million and $2.7
million, respectively. We expect to use the balance of the net proceeds for
general corporate purposes, including capital expenditures and working capital.
A portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to ours. 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.
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.
16
<PAGE> 18
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
January 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect the assumed exercise of warrants to
purchase 296,881 shares of preferred stock at an exercise price of $6.78
per share prior to this offering and the subsequent conversion of all
outstanding shares of preferred stock into 14,623,614 shares of common
stock; and
- on a pro forma as adjusted basis to reflect our reincorporation in
Delaware and the sale of the common stock in this offering at an assumed
initial public offering price of $ per share and the application of
the net proceeds, after deducting estimated underwriting discounts and
commissions and our estimated offering expenses.
The outstanding share information excludes 2,082,471 shares of common stock
issuable on exercise of options outstanding as of January 31, 1999 with a
weighted average exercise price of $1.95 per share, 287,788 shares of common
stock issuable upon exercise of warrants outstanding as of January 31, 1999 with
a weighted average exercise price of $1.37 per share, and 466,516 shares of
common stock reserved for additional option grants under our stock plans as of
January 31, 1999. In addition, subsequent to January 31, 1999, 1,000,000 shares
have been reserved under our stock plans. This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and the notes to the
financial statements. See "Use of Proceeds" and "Management -- Employee Benefit
Plans."
<TABLE>
<CAPTION>
AS OF JANUARY 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Short-term debt........................................... $ 3,644 $ 3,644 $
======== ======== ========
Long-term portion of debt and capital lease obligations... $ 1,808 $ 1,808 $
Redeemable convertible preferred stock, no par value,
9,791,280 shares authorized, 9,235,448 issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted........ 35,261 --
Warrants to purchase redeemable convertible preferred
stock................................................... 648 324
Stockholders' equity (deficit):
Preferred stock, $.001 par value, no shares authorized,
issued or outstanding, actual; 5,000,000 shares
authorized, no shares issued or outstanding, pro
forma and pro forma as adjusted......................
Common stock, $.001 par value, 30,000,000 shares
authorized, 7,408,167 shares issued and outstanding,
actual; 50,000,000 shares authorized, 22,031,781
shares issued and outstanding, pro forma; 50,000,000
shares authorized, issued and outstanding,
pro forma as adjusted................................ 10,309 47,907
Additional paid-in capital.............................. -- --
Notes receivable from stockholders...................... (4,899) (4,899)
Deferred compensation................................... (2,566) (2,566)
Accumulated deficit..................................... (30,669) (30,669)
-------- -------- --------
Total stockholders' equity (deficit)................. (27,825) 9,773
-------- -------- --------
Total capitalization............................ $ 13,536 $ 15,549 $
======== ======== ========
</TABLE>
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<PAGE> 19
DILUTION
The pro forma net tangible book value of our common stock as of January 31,
1999, was approximately $9.8 million, or $.44 per share of common stock. Pro
forma net tangible book value per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by
22,031,781 shares of common stock outstanding after giving effect to the assumed
exercise of warrants to purchase 296,881 shares of preferred stock at an
exercise price of $6.78 per share prior to this offering and the subsequent
conversion of all outstanding shares of preferred stock into shares of common
stock upon completion of this offering. After giving effect to our sale of
shares of common stock in this offering at an assumed initial
offering price of $ per share and after deducting the estimated underwriting
discounts and commissions and our estimated offering expenses, our net tangible
book value as of January 31, 1999, would have been $ million or $
per share. This represents an immediate increase in net tangible book value of
$ per share to existing stockholders and an immediate dilution in net
tangible book value of $ per share to purchasers of common stock in this
offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share as of January
31, 1999............................................... $.44
Increase per share attributable to new investors..........
----
Pro forma net tangible book value per share after this
offering..................................................
----
Dilution per share to new investors.........................
====
</TABLE>
The following table sets forth on a pro forma basis as of January 31, 1999,
after giving effect to the assumed exercise of warrants to purchase 296,881
shares of preferred stock at an exercise price of $6.78 per share prior to this
offering, the subsequent conversion of all outstanding shares of preferred stock
into common stock upon completion of this offering, the differences between the
existing stockholders and the purchasers of shares in this offering, at the
assumed initial public offering price of $ per share, with respect to the
number of shares purchased from us, the total consideration paid and the average
price paid per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 22,031,781 % $43,917,000 % $1.99
New stockholders..........
---------- ----- ----------- -----
Total........... 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
As of January 31, 1999, there were options outstanding to purchase a total
of 2,082,471 shares of common stock at a weighted average exercise price of
$1.95 per share. In addition, as of January 31, 1999, there were warrants
outstanding to purchase 287,788 shares of common stock on an as converted basis
at a weighted average exercise price of approximately $1.37 per share, which we
have assumed will not be exercised prior to this offering. To the extent
outstanding options or warrants are exercised, there will be further dilution to
new investors. See "Management -- Employee Benefit Plans" and notes 6 and 7 to
our financial statements.
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<PAGE> 20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with our
financial statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and other financial information
appearing elsewhere in this prospectus. The statement of operations data set
forth below for each of the years in the three-year period ended October 31,
1998 and the balance sheet data as of October 31, 1997 and 1998 are derived
from, and qualified by reference to, our audited financial statements appearing
elsewhere in this prospectus. The statement of operations data for the period
from inception on August 24, 1995 to October 31,1995 and the balance sheet data
as of October 31, 1995 and 1996 are derived from audited financial statements
not included herein. The statement of operations data for the three-month
periods ended January 31, 1998 and 1999 and the balance sheet data as of January
31, 1999 are derived from unaudited financial statements appearing elsewhere in
this prospectus which, in the opinion of our management, reflect all normal
recurring adjustments that we consider necessary for a fair presentation of such
information in accordance with generally accepted accounting principles.
Operating results for the three months ended January 31, 1999 are not
necessarily indicative of the results that may be expected for the full fiscal
year.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED OCTOBER 31, JANUARY 31,
-------------------------------------- -----------------------
1995 1996 1997 1998 1998 1999
------ ------- -------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product revenue....................... $ -- $ -- $ 8,482 $ 22,414 $ 7,824 $ 6,429
License revenue....................... -- -- -- 1,832 26 1,578
------ ------- -------- -------- -------- -------
Total revenues................. -- -- 8,482 24,246 7,850 8,007
Cost of revenues........................ -- -- 6,682 15,759 4,697 3,321
------ ------- -------- -------- -------- -------
Gross profit............................ -- -- 1,800 8,487 3,153 4,686
------ ------- -------- -------- -------- -------
Operating expenses:
General and administrative............ 52 575 1,464 3,813 639 741
Sales and marketing................... -- 152 2,112 5,154 1,074 1,729
Research and development.............. 124 3,091 7,666 14,744 2,838 2,905
Amortization of deferred
compensation........................ -- -- -- 7 -- 1,157
------ ------- -------- -------- -------- -------
Total operating expenses....... 176 3,818 11,242 23,718 4,551 6,532
------ ------- -------- -------- -------- -------
Loss from operations.................... (176) (3,818) (9,442) (15,231) (1,398) (1,846)
Other income (expense).................. 10 (116) (177) 120 43 7
------ ------- -------- -------- -------- -------
Net loss................................ $ (166) $(3,934) $ (9,619) $(15,111) $ (1,355) $(1,839)
====== ======= ======== ======== ======== =======
Basic net loss per share................ $ -- $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
====== ======= ======== ======== ======== =======
Shares used in computing basic net loss
per share............................. -- 414 1,997 3,400 2,570 4,349
====== ======= ======== ======== ======== =======
Pro forma basic net loss per share
(unaudited)........................... $ (.84) $ (.10)
======== =======
Shares used in computing pro forma basic
net loss per share (unaudited)........ 17,915 18,973
======== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF OCTOBER 31, AS OF
-------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999
------ ------- -------- -------- -----------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments........................... $1,168 $ 700 $ 2,552 $ 10,420 $ 10,137
Working capital......................... 922 104 15,334 5,276 4,500
Total assets............................ 1,549 2,605 26,100 21,301 24,576
Long-term portion of debt and capital
lease obligations..................... -- 874 1,954 2,209 1,808
Redeemable convertible preferred
stock................................. 1,411 4,613 30,359 35,261 35,261
Total stockholders' deficit............. (166) (3,957) (13,458) (27,355) (27,825)
</TABLE>
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 Fibre Channel switching solutions for storage area
networks, or SANs. We sell our SAN switching solutions through leading storage
systems and server OEMs, including Compaq Computer, Dell Computer, McDATA
Corporation, Sequent Computer Systems and StorageTek. These OEMs 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 OEMs. In the three
months ended July 31, 1997, we commenced volume shipments of our SilkWorm
switch. Since our inception we have incurred significant losses and as of
January 31, 1999, we had an accumulated deficit of $30.7 million.
Our revenue is derived primarily from sales of our SilkWorm family of
products. Additionally, we have recognized licensing revenue in connection with
the licensing of certain technology rights to a customer. In fiscal 1998, sales
to Sequent and McDATA accounted for 72% and 11% of our total revenues,
respectively, and in the three months ended January 31, 1999, Sequent and McDATA
accounted for 37% and 33% of our total revenues, respectively. These percentages
exclude deferred revenue, which is discussed further below. The level of sales
to any customer may vary from quarter to quarter. However, we expect that
significant customer concentration will continue for the foreseeable future.
We currently sell substantially all of our products through several major
OEMs. The initial evaluation and product qualification cycle with OEMs typically
takes six to 12 months and includes technical evaluation, integration, testing,
product launch planning and execution. Our sales strategy also includes
recruiting system integrators with a Fortune 500 data center presence and the
technical resources to design, implement and support SANs. To date,
substantially all of our sales have been in the United States. However, we have
launched sales and marketing efforts in Europe and have a distributor in Japan.
Product revenue is recognized when products are shipped to customers,
unless at the time of shipment product returns cannot be estimated or
significant support services are required to successfully launch the customer's
products. In the three months ended January 31, 1999, several of our customers
were implementing SAN solutions, including our product, for their end-users for
the first time. Given the recent adoption of the SAN model and Brocade's
solution by these OEMs and because substantial Brocade services were required to
support these OEMs' product launches, the revenue related to shipments to these
OEM customers has been deferred. The deferred revenue will be recognized on a
customer-by-customer basis as each customer successfully completes its product
launch. Similarly, revenue is deferred for new products that have not completed
the beta test phase. For the three months ended January 31, 1999, $3.4 million
of revenue was deferred. It is expected that this deferred revenue will be
recognized in fiscal 1999. We believe that, as the SAN market matures, this
revenue deferral method for new customers may not be necessary. We do not
provide our customers with product return programs. We provide a reserve for
warranty returns based on our warranty history. License revenue is
20
<PAGE> 22
recognized when collection is reasonably assured. We do not anticipate
significant licensing revenues in the future.
From fiscal 1997 to fiscal 1998 our average unit selling price decreased
26.0% primarily due to the introduction of the SilkWorm Express, a lower port
count product. We expect continued declines in our average unit selling price
due to anticipated increases in per customer sales volume, the impact of
competitive pricing pressures and new product introductions.
Our gross margins will be affected by declines in average unit selling
prices, fluctuations in manufacturing volumes and component costs, the mix of
products sold and the introduction of new products. Additionally, our gross
margins may be impacted by the mix of distribution channels through which our
products are sold.
In July 1998, we outsourced our manufacturing and the majority of our
supply chain management operations. Accordingly, a significant portion of our
cost of revenues consists of payments to our contract manufacturer, Solectron.
We conduct quality assurance, manufacturing engineering, documentation control
and repairs at our facility in San Jose, California.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and human resources personnel,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
travel expenses. We believe that continued investment in sales and marketing is
critical to the success of our strategy to expand our relationships with leading
OEMs and to maintaining our leadership position in the SAN market. As a result,
we expect these expenses to increase in absolute dollars in the future.
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
prototyping expenses related to the design, development, testing and
enhancements of our ASICs and software and the costs of computer support
services. We believe that continued investment in research and development is
critical to our strategic product and cost-reduction objectives. As a result, we
expect these expenses to increase in absolute dollars in the future.
In fiscal 1998, we initiated a plan to reduce our operating expenses by
restructuring our operations. In connection with this plan, we recorded a $3.2
million restructuring charge allocated among various expense categories.
In connection with the grant of certain stock options to employees during
fiscal 1998 and the three months ended January 31, 1999, we recorded deferred
compensation of $307,000 and $3.4 million, respectively, representing the
difference between the deemed value of our common stock for accounting purposes
and the option exercise price of these options at the date of grant. Deferred
compensation is presented as a reduction of stockholders' equity and amortized
ratably over the vesting period of the applicable options. We expensed $1.2
million of deferred compensation during the three months ended January 31, 1999.
We will expense the balance ratably over the remainder of the vesting period of
the options. See note 6 to our financial statements.
As of January 31, 1999, we had operating loss carryforwards of
approximately $20.5 million for federal purposes and $6.5 million for state
purposes. The federal net operating loss carryforwards expire on various dates
between 2010 and 2018, and the state net operating loss carryforwards will begin
to
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<PAGE> 23
expire in 2003. We have provided a full valuation allowance against our deferred
tax assets, consisting primarily of net operating loss carryforwards, because of
the uncertainty regarding their realization.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
OCTOBER 31, JANUARY 31,
--------------- --------------
1997 1998 1998 1999
------ ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Product revenue..................................... 100.0% 92.4% 99.7% 80.3%
License revenue..................................... -- 7.6 .3 19.7
------ ----- ----- -----
Total revenues................................. 100.0 100.0 100.0 100.0
Cost of revenues...................................... 78.7 65.0 59.8 41.5
------ ----- ----- -----
Gross margin.......................................... 21.3 35.0 40.2 58.5
------ ----- ----- -----
Operating expenses:
General and administrative.......................... 17.3 15.7 8.1 9.2
Sales and marketing................................. 24.9 21.3 13.7 21.6
Research and development............................ 90.4 60.8 36.2 36.3
Amortization of deferred compensation............... -- -- -- 14.4
------ ----- ----- -----
Total operating expenses....................... 132.6 97.8 58.0 81.5
------ ----- ----- -----
Loss from operations.................................. (111.3) (62.8) (17.8) (23.0)
Other income (expense)................................ (2.0) .5 .5 --
------ ----- ----- -----
Net loss.............................................. (113.3)% (62.3)% (17.3)% (23.0)%
====== ===== ===== =====
</TABLE>
THREE MONTH PERIODS ENDED JANUARY 31, 1998 AND 1999
Revenues. Total revenues increased by 1.3% from $7.9 million for the three
months ended January 31, 1998 to $8.0 million for the three months ended January
31, 1999. This increase was due to license revenue of $1.6 million in the three
months ended January 31, 1999. There was no significant license revenue in the
comparable three month period in fiscal 1998 and we do not anticipate
significant licensing revenues in the future. This increase was substantially
offset by a decrease in product revenue of $1.4 million primarily due to the
deferral of $3.4 million of product revenue in connection with shipments to new
customers, In addition, product revenue was adversely affected by a decline in
average unit selling prices resulting from the introduction of the SilkWorm
Express, a lower port count product.
Gross profit. Gross profit increased from $3.2 million for the three months
ended January 31, 1998 to $4.7 million for the three months ended January 31,
1999. Gross margin increased from 40.2% for the three months ended January 31,
1998 to 58.5% for the three months ended January 31, 1999. The increases were
due to lower manufacturing costs and the recognition of $1.6 million in
non-recurring license revenue for the three months ended January 31, 1999, which
had no related direct cost of revenues.
General and administrative expenses. General and administrative expenses
increased by 16.0% from $639,000 for the three months ended January 31, 1998 to
$741,000 for the three months ended
22
<PAGE> 24
January 31, 1999. This increase was due primarily to increased legal expenses
related to pending litigation. See "Business -- Legal Proceeding."
Sales and marketing expenses. Sales and marketing expenses increased by
60.9% from $1.1 million for the three months ended January 31, 1998 to $1.7
million for the three months ended January 31, 1999. This increase was due
primarily to an increase in personnel. Sales and marketing personnel totalled 17
and 30 for the three months ended January 31, 1998 and 1999, respectively.
Research and development expenses. Research and development expenses
increased by 2.4% from $2.8 million for the three months ended January 31, 1998
to $2.9 million for the three months ended January 31, 1999. The increase
primarily resulted from the increased cost of prototype materials.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock option grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $1.2 million for the three months ended January 31, 1999.
YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998
Revenues. We shipped our first commercial product in the second quarter of
fiscal 1997, generating revenues of $8.5 million for the year. Total revenues
increased by 185.0% to $24.2 million in fiscal 1998 reflecting the ramp-up of
sales to a significant OEM 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 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
headcount reduction and severance arrangements for our former Chief Executive
Officer.
Sales and marketing expenses. Sales and marketing expenses increased from
$152,000 in fiscal 1996 to $2.1 million in fiscal 1997 and to $5.2 million in
fiscal 1998. The increases reflect the hiring of additional sales and marketing
personnel. Sales and marketing personnel totaled 12 and 24 at the end of fiscal
1997 and fiscal 1998, respectively.
Research and development expenses. Research and development expenses
increased from $3.1 million in fiscal 1996 to $7.7 million in fiscal 1997 and to
$14.7 million in fiscal 1998. These increases reflect significant research and
development efforts required to bring the SilkWorm and SilkWorm Express products
to market and to begin development of second generation products. The
23
<PAGE> 25
increase in fiscal 1998 expenses also reflects restructuring costs associated
with the cancellation of a development project.
Amortization of deferred compensation. During fiscal 1998 and the three
months ended January 31, 1999, we recorded total deferred compensation of $3.7
million in connection with stock options grants. We are amortizing this amount
over the vesting periods of the applicable options, resulting in amortization
expense of $7,000 in fiscal 1998.
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<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited statement of operations
data for each of the seven quarters ended January 31, 1999, as well as such data
expressed as a percentage of our total revenues for the quarters presented. This
unaudited quarterly information has been prepared on the same basis as our
audited financial statements and, in the opinion of our management, reflects all
normal recurring adjustments that we consider necessary for a fair presentation
of the information for the periods presented. Operating results for any quarter
are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
-------- ----------- ----------- --------- -------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue....................... $ 1,534 $ 6,347 $ 7,824 $ 5,134 $ 4,056 $ 5,400 $ 6,429
License revenue....................... -- -- 26 1,286 513 7 1,578
------- ------- ------- ------- ------- ------- -------
Total revenues...................... 1,534 6,347 7,850 6,420 4,569 5,407 8,007
Cost of revenues........................ 1,212 4,435 4,697 3,672 4,351 3,039 3,321
------- ------- ------- ------- ------- ------- -------
Gross profit............................ 322 1,912 3,153 2,748 218 2,368 4,686
------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and administrative............ 378 462 639 624 1,979 571 741
Sales and marketing................... 616 839 1,074 1,302 1,444 1,334 1,729
Research and development.............. 2,046 2,847 2,838 3,457 5,016 3,433 2,905
Amortization of deferred
compensation........................ -- -- -- -- -- 7 1,157
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 3,040 4,148 4,551 5,383 8,439 5,345 6,532
------- ------- ------- ------- ------- ------- -------
Loss from operations.................... (2,718) (2,236) (1,398) (2,635) (8,221) (2,977) (1,846)
Other income (expense).................. (50) (119) 43 120 114 (157) 7
------- ------- ------- ------- ------- ------- -------
Net loss................................ $(2,768) $(2,355) $(1,355) $(2,515) $(8,107) $(3,134) $(1,839)
======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
---------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
-------- ----------- ----------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenue....................... 100.0% 100.0% 99.7% 80.0% 88.8% 99.9% 80.3%
License revenue....................... -- -- .3 20.0 11.2 .1 19.7
------- ------- ------- ------- ------- ------- -------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues........................ 79.0 69.9 59.8 57.2 95.2 56.2 41.5
------- ------- ------- ------- ------- ------- -------
Gross margin............................ 21.0 30.1 40.2 42.8 4.8 43.8 58.5
------- ------- ------- ------- ------- ------- -------
Operating expenses:
General and administrative............ 24.6 7.3 8.1 9.7 43.3 10.6 9.2
Sales and marketing................... 40.2 13.2 13.7 20.3 31.6 24.7 21.6
Research and development.............. 133.4 44.8 36.2 53.8 109.8 63.5 36.3
Amortization of deferred
compensation........................ -- -- -- -- -- .1 14.4
------- ------- ------- ------- ------- ------- -------
Total operating expenses............ 198.2 65.3 58.0 83.8 184.7 98.9 81.5
------- ------- ------- ------- ------- ------- -------
Loss from operations.................... (177.2) (35.2) (17.8) (41.0) (179.9) (55.1) (23.0)
Other income (expense).................. (3.2) (1.9) .5 1.8 2.5 (2.9) --
------- ------- ------- ------- ------- ------- -------
Net loss................................ (180.4)% (37.1)% (17.3)% (39.2)% (177.4)% (58.0)% (23.0)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
25
<PAGE> 27
Revenues. Our total revenues increased each quarter from our initial
product introduction during the three months ended April 30, 1997 through the
three months ended January 31, 1998 when total revenues reached $7.9 million.
The substantial increase in total revenues for the three-month periods ended
October 31, 1997 and January 31, 1998 primarily resulted from purchases by an
OEM 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 their inventory position. Since July
31, 1998, total revenues have increased each quarter, primarily as a result of
an expanded customer base.
Gross margin. Gross margin has generally increased each quarter since we
commenced volume shipments in the three months ended July 31, 1997. Gross margin
increased from 21.0% in the three months ended July 31, 1997 to 58.5% in the
three months ended January 31, 1999. These increases have been due to reduced
production costs on a per unit basis as manufacturing volumes increased, a
reduction in manufacturing costs due to increased use of outsourcing and
nonrecurring license revenue in the three months ended January 31, 1999. The
only exception to this trend was in the third quarter of fiscal 1998 when gross
margin decreased to 4.8%. This decrease was due primarily to a corporate
restructuring charge of $1.3 million associated with the outsourcing of
manufacturing which resulted in a reduction of internal manufacturing personnel
and the write-off of excess and obsolete inventory.
Operating expenses. Operating expenses increased each quarter until our
restructuring in the three months ended July 31, 1998. In connection with this
restructuring plan, we recorded a $1.9 million charge to operating expenses,
which included a $700,000 charge to research and development expenses and a $1.2
million charge to general and administrative expenses. The restructuring charge
included costs associated with a reduction of personnel in these areas, the
write-off of excess equipment and the write-off of other tangible and intangible
assets related to the cancellation of certain development and simulation
projects. As a result of these charges, total operating expenses declined in
absolute dollars for the three-month periods ended October 31, 1998 and January
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, for aggregate proceeds of approximately $35.8 million, capital
equipment lease lines and bank debt. During fiscal 1996, cash utilized by
operating activities was $3.4 million, compared to $7.3 million in fiscal 1997
and $11.6 million in fiscal 1998. The increases in cash utilized in fiscal 1997
and 1998 reflected the increased working capital required to fund expanding
operations and increases in inventory and accounts receivable. Capital
expenditures were $1.5 million in fiscal 1996, $3.4 million in 1997 and $3.8
million in 1998. These expenditures reflect our investments in computer
equipment, software development tools and facilities, which were required to
support our business expansion.
Our principal sources of liquidity as of January 31, 1999 consisted of
$10.1 million in cash and cash equivalents and our bank credit facility. The
credit facility includes a revolving line of credit providing borrowings up to
the lesser of $4.0 million or 80% of eligible accounts receivable and an
equipment loan agreement providing for financing up to $5.0 million. Borrowings
under the revolving line of credit bear interest at the bank's prime rate, which
was 7.8% at January 31, 1999, are secured by our accounts receivable and
inventory, and are payable in August 1999. Borrowings under the equipment loan
agreement bear interest at the bank's prime rate plus 1.0%, are secured by the
related capital equipment and are payable through June 30, 2002. The line of
credit and equipment loan contain provisions that prohibit the payment of cash
dividends and require the maintenance of specified levels of tangible net worth
and certain financial ratios measured on a monthly basis. As of January 31,
1999, there were borrowings under the revolving line of credit of $1.7 million
and under the equipment financing of
26
<PAGE> 28
$2.7 million. We intend to pay off our existing line of credit and equipment
loan with a portion of the net proceeds of this offering.
We believe the net proceeds of this offering, together with our existing
cash balances and credit facilities and cash flow expected to be generated from
future operations, will be sufficient to meet our capital requirements at least
through the next 12 months, although we could be required, or could elect, to
seek additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of our products. There can be no
assurances that additional equity or debt financing, if required, will be
available on acceptable terms or at all.
YEAR 2000 COMPLIANCE
Impact of the year 2000 computer problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
State of readiness of our products. We have been testing our existing
products for use in the year 2000 and beyond, and believe all of our products
are year 2000 compliant. However, our testing does not cover every possible
computing environment. Accordingly, some customers may have year 2000 problems
with products that we believe are year 2000 compliant.
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 obtaining assurances from our third-party vendors
for all material systems in use by us that such systems are year 2000 compliant.
We are not currently aware of any year 2000 problem relating to any of our
internal, material systems. We plan to test all such systems for year 2000
compliance before the end of our fiscal year. We do not believe that we have any
significant systems that contain embedded chips that are not year 2000
compliant.
Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers 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 at such third parties will not have a material impact on our
operations.
Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediating our internal systems will exceed $250,000.
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. 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.
27
<PAGE> 29
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9
amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of
certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years
beginning on or before March 15, 1999. All other provisions of SOP 98-9 are
effective for transactions entered into in fiscal years beginning after March
15, 1999. We have not had significant software sales to date and do not expect
the adoption of SOP 98-9 to have a significant effect on our financial condition
or results of operations.
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 of Fibre Channel switching solutions for
storage area networks, or SANs, which apply the benefits of a networked approach
to the connection of storage systems and servers. Our family of SilkWorm
switches enables enterprises 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 reliable backup and restore, and
disaster recovery, on the SAN. We sell our SAN switching solutions through
leading storage systems and server OEMs, including Compaq Computer, Dell
Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. These
OEMs and our system integrator customers combine our switching solutions with
other system elements and services for enterprise data 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 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 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.
29
<PAGE> 31
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 protocol,
an industry standard networking protocol, 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 storage systems and servers and
takes advantage of the inherent benefits of a networked approach. These benefits
include the decoupling of 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 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 storage systems, servers,
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workstations and other enterprise 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 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 enterprises 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 enterprises 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 centers. Our products allow all departments within an enterprise 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, enterprises utilizing the Brocade Fabric for their e-commerce and
other low latency transaction processing applications can leverage hundreds of
storage devices and servers.
Support a mission-critical data 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 center.
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
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data. Our products deliver a rich set of SAN management information that can be
accessed both locally and remotely. Data-intensive connections in the enterprise
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 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 OEMs and system integrators. We intend to
continue to expand our relationships with key storage system and server OEMs and
system integrators, both domestically and abroad. Currently, our major OEM
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 OEMs. 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 OEMs. The following is a representative list of
our OEM customers who have purchased more than $500,000 worth of products since
the beginning of fiscal 1998:
<TABLE>
<S> <C>
Compaq Computer Sequent Computer Systems
Dell Computer StorageTek
McDATA
</TABLE>
Sequent and McDATA accounted for approximately 72% and 11%, respectively,
of our total revenues in the fiscal year ended October 31, 1998 and 37% and 33%
of our total revenues, respectively, for the three-month period ended January
31, 1999. Our total revenues do not include deferred revenue.
In the third quarter of fiscal 1998, we launched our system integrators
program. To date, we have entered into relationships with Cranel, Polaris, RAID
Power, Tokyo Electron Ltd. and TranSoft Networks.
CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization provides technical support to
our OEMs and system integrators, enabling them to provide technical support to
their end-users. We prepare our OEMs 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 OEM and system integrator customers provide primary technical
support.
We have developed an extensive training course for our OEM 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 OEMs and system integrators. Our distribution channels are
supported by a sales and marketing organization comprised of 32 individuals,
including managers, sales representatives and technical and administrative
support personnel. We have entered into a relationship with a distributor in
Japan, and we expect to expand our international sales activities. Our marketing
effort is focused on developing strategic partnerships and relationships with
industry analysts, providing customer sales support, managing new product
planning and supporting industry standard initiatives.
OEMs. We have established key relationships with several storage systems
and server OEMs. Each OEM 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 OEM customers, we
intend to pursue relationships with additional OEMs 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 OEMs.
System integrators. We have recently launched our system integrator program
and have established several relationships within this channel. Although we have
not experienced significant volume from this channel to date, we believe
revenues from this channel may increase significantly in the future. Each 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.
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PRODUCTS
Brocade provides the SilkWorm family of Fibre Channel switches, which
creates a switch interconnect, enabling any-to-any connectivity between storage
devices and servers. SilkWorm switches can be used individually for server
clustering or storage consolidation, or cascaded with other switches to form a
powerful networking infrastructure, the Brocade Fabric. Brocade's software
solutions provide network administrators with tools to manage the switches and
the SAN. Brocade also provides extensive Fabric services, in order to optimize
the Brocade Fabric for an enterprise's particular needs. Moreover, Brocade
SOLUTIONware provides instructions to enterprises on implementing SANs.
SILKWORM FAMILY OF SWITCHES
Our SilkWorm switches are a key element of a SAN. SilkWorm, introduced in
March 1997, is a configurable 16-port switch used to connect servers to storage
devices to create a SAN. File servers and storage devices can then access
information anywhere on the SAN. In April 1998, Brocade introduced SilkWorm
Express, an eight-port Fibre Channel switch.
The SilkWorm family of switches share a common platform designed to provide
the following features and benefits:
- High throughput. Each port delivers a 1 gigabit per second, full-duplex
data rate regardless of network connectivity.
- Hardware-based data path. SilkWorm reduces latency by eliminating
software processing from the path of data frames.
- Management. SilkWorm supports customers' existing management solutions,
such as local and wide area networks, SCSI tools and web tools.
- In-order delivery of data frames. SilkWorm guarantees that frames are
delivered to a destination in the same order as received by the switch
from the originator.
- Cut-through frame routing. Frames are sent without waiting for the entire
frame or for a response back from its destination, thereby improving
bandwidth utilization and minimizing transmission delays.
- Cascading. SilkWorm may be connected to as many other SilkWorm switches
as there are available ports creating in a meshed topology, enabling
hundreds of connections and large SANs.
- Flexible switch buffering. If the destination is busy, data frames are
stored by a SilkWorm switch for only as long as is necessary, thereby
moving data faster through the switch.
- Path selection. SilkWorm identifies failures automatically and
immediately, and reroutes data to alternate paths, creating a highly
resilient network.
- Registered state change notification. SilkWorm automatically detects
changes in configuration and port status to enable quick corrective
action.
- Media independent. SilkWorm enables the SAN to support diverse media,
including fiberoptic connections up to 10 kilometers and copper
connections.
- 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
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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 OEMs 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.
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
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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 (up to 13
meters), short wavelength laser (up to 500 meters) and long wavelength
laser (up to 10 kilometers) interfaces. Removable media interfaces
provide flexible product configurations and simple product maintenance.
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- 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 Application Specific Integrated
Circuits. 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 the
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 single contract manufacturer, Solectron Corporation,
based in San Jose, California, to manufacture our products. 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, GBICs and software, as well as certain details in the
fabrication and enclosure of our products. In addition, we determine the
components that are incorporated in our products and select the appropriate
suppliers of the components.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single source
components include ASICs, power supplies and chassis, and our principal limited
source components include printed circuit boards and GBICs. See "Risk
Factors -- The Failure of Our Sole Manufacturer to Meet Our Manufacturing Needs
Would Negatively Impact Our Ability to Manufacture and Sell Our Products."
RESEARCH AND DEVELOPMENT
In fiscal 1998, and the three months ended January 31, 1999, our research
and development expenses were $14.7 million and $2.9 million, respectively. We
believe that our future success depends on our ability to continue to enhance
our existing products and to develop new products that maintain technological
competitiveness. We focus our product development activities on solving the
needs of SAN users. We work closely with our OEMs 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.
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.
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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 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
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be necessary in the future to enforce our intellectual property rights, to
protect our trade secrets or to determine the validity and scope of the
proprietary rights of others. Litigation could result in substantial costs and
diversion of our resources and could materially harm our business.
From time to time, we have received, and may receive in the future, notice
of claims of infringement of other parties' proprietary rights. Infringement or
other claims could be asserted or prosecuted against us in the future, and it is
possible that past or future assertions or prosecutions could harm our business.
Any such claims, with or without merit, could be time-consuming, result in
costly litigation and diversion of technical and management personnel, cause
delays in the development and release of our products, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
materially harm our business.
PENDING LEGAL PROCEEDING
In October 1998, we were sued by one of our former contract manufacturers,
Manufacturers' Services Central U.S. Operations, Inc. and Manufacturers'
Services Western U.S. Operations, Inc., in the Santa Clara County, California
Superior Court. The suit involves claims for amounts allegedly owed by us for
circuit boards manufactured by MSL and previously shipped to us (approximately
$900,000), for circuit boards manufactured for us and held by MSL (approximately
$500,000), and for raw material purchased by MSL for inclusion in circuit boards
to be manufactured for us (approximately $1.5 million). 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 amounts due to us under MSL's warranty
(approximately $600,000), the value of equipment and electronic components
consigned by us to MSL (approximately $200,000) and other damages sustained by
us related to MSL's performance during our manufacturing relationship
(approximately $150,000). We deny any liability for the circuit boards
manufactured by MSL but not shipped to us or for raw material purchased by MSL.
In December 1998, MSL obtained a writ of attachment against us for
approximately $1.4 million and related to the circuit boards manufactured by
MSL. We responded by posting a bond for this amount. The parties have exchanged
documents and conducted preliminary discovery. No trial date has been set.
We believe that we have strong defenses against 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
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 and
reimburse MSL for some or all of its attorneys' fees which could materially harm
our business.
EMPLOYEES
As of February 15, 1999, we had 110 full-time employees, 41 of whom were
engaged in research and development, 32 of whom were in sales and marketing and
37 of whom were in finance, administration and operations. None of our employees
are represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
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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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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of January 31, 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
B. Carl Lee...................... 50 Vice President, Finance and Chief Financial Officer
Kumar Malavalli.................. 56 Vice President, Technology
Victor M. Rinkle................. 46 Vice President, Operations
Charles W. Smith................. 37 Vice President, Worldwide Sales
Peter J. Tarrant................. 39 Vice President, Marketing and Business Development
Seth D. Neiman(1)................ 44 Chairman of the Board
Neal Dempsey(1)(2)............... 58 Director
Mark Leslie(2)................... 53 Director
Larry W. Sonsini................. 58 Director
</TABLE>
- -------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Gregory L. Reyes has served as our President and Chief Executive Officer
and a member of our board of directors since July 1998. From January 1995 to
June 1998, Mr. Reyes served as President, Chief Executive Officer and Chairman
of the board of directors of Wireless Access, Inc., a wireless data
communications products company. From January 1991 to January 1995, Mr. Reyes
served as Divisional Vice President and general manager of Norand Data Systems,
a data collection company. Mr. Reyes also serves as a director of Proxim, Inc.,
a wireless networking company. Mr. Reyes received a B.S. in Economics and
Business Administration from Saint Mary's College in Moraga, California.
Paul R. Bonderson, Jr. co-founded Brocade in August 1995 and has served as
Vice President, Engineering since August 1995. From March 1986 to August 1995,
Mr. Bonderson held several engineering positions at Sun Microsystems, Inc., most
recently as Director of Engineering. Mr. Bonderson received a B.S. in Electrical
Engineering from California Polytechnic State University, San Luis Obispo.
B. Carl Lee has served as our Vice President, Finance and Chief Financial
Officer since December 1996. From December 1995 to December 1996, Mr. Lee served
as Vice President, Corporate Controller at California Microwave, Inc., a
telecommunications company. From October 1986 to October 1995, Mr. Lee was a
partner with the accounting firm of Ernst & Young LLP. Mr. Lee received a B.S.
in Accounting from the University of Wyoming and is a certified public
accountant.
Kumar Malavalli co-founded Brocade in August 1995 and has served as our
Vice President, Technology since October 1995. From July 1993 to October 1995,
Mr. Malavalli served as Manager of Architecture and Standards in the Canadian
Network Operation at Hewlett-Packard Company. Mr. Malavalli was a member of the
industry team that originated the Fibre Channel architecture, has helped guide
the technology through the industry standards committees and currently chairs
the ANSI T11 Technical Committee, which oversees all standards related to the
development of Fibre Channel. From 1993 to 1999, Mr. Malavalli was the chairman
of the Fibre Channel Association Technical 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.
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<PAGE> 43
Victor M. Rinkle has served as our Vice President, Operations since January
1998. From April 1989 to December 1997, Mr. Rinkle held several managerial
positions at Apple Computer, Inc., most recently as Vice President, Global
Supply Base Management. Mr. Rinkle received a B.B.A. in Marketing and Production
Logistics from the University of Houston.
Charles W. Smith has served as our Vice President, Worldwide Sales since
February 1997. From June 1996 to February 1997, Mr. Smith served as Director,
Corporate Account Sales at IBM. From July 1990 to February 1996, Mr. Smith held
various senior sales management positions at Conner Peripherals, Inc., a storage
solutions company, most recently as Vice President, US Sales, Western Region.
Mr. Smith received an A.S. in Aeronautics and Business from the College of San
Mateo and a B.S. in Business Management from San Jose State University.
Peter J. Tarrant has served as our Vice President, Marketing and Business
Development since December 1997. From October 1994 to December 1997, Mr. Tarrant
served as Vice President, Product Management and Vice President, Business
Development at Bay Networks, Inc., a computer networking company. From April
1990 to October 1994, Mr. Tarrant held several product management positions at
SynOptics, a predecessor of Bay Networks, Inc. most recently as Director,
Product Management. Mr. Tarrant received a B.Sc. in Electronic Engineering from
the University of Southampton, United Kingdom.
Seth D. Neiman has served as Chairman of the board of directors of Brocade
since August 1995. Mr. Neiman formerly served as our Chief Executive Officer
from August 1995 to June 1996. Since August 1994, Mr. Neiman has held various
positions at Crosspoint Venture Partners, a venture capital firm, and has been a
partner of Crosspoint since January 1996. From September 1991 to July 1994, Mr.
Neiman was Vice President of Engineering at Coactive Networks, a local area
networks company. Mr. Neiman also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Neiman received a
B.A. in Philosophy from Ohio State University.
Neal Dempsey has served as a director of Brocade since December 1996. Since
May 1989, Mr. Dempsey has been a General Partner of Bay Partners, a venture
capital firm. Mr. Dempsey also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Dempsey received a
B.A. in Business from the University of Washington.
Mark Leslie has served as a director of Brocade since January 1999. Mr.
Leslie has served as the Chief Executive Officer and a member of the board of
directors of VERITAS Software Corporation, a storage management software
company, since February 1990. Mr. Leslie also serves on the boards of directors
of VERITAS Software Corporation and Versant Object Technology, as well as on the
board of directors of a private company. Mr. Leslie received a B.A. in Physics
and Mathematics from New York University.
Larry W. Sonsini has served as a director of Brocade since January 1999.
Mr. Sonsini has been a partner of the law firm of Wilson Sonsini Goodrich &
Rosati, P.C., since 1973 and is currently the Chairman of the Executive
Committee of the firm. Mr. Sonsini serves on numerous advisory boards and
committees, including the SEC's Advisory Committee on Capital Formation and
Regulatory Processes, the ABA Committee on Federal Regulation of Securities and
the Legal Advisory Committee to the Board of Governors, New York Stock Exchange.
Mr. Sonsini serves on the boards of directors of Novell, Inc., Lattice
Semiconductor Corporation and Pixar Animation Studios, as well as on the boards
of directors of several private companies. Mr. Sonsini received an A.B. from the
University of California, Berkeley and an L.L.B. from Boalt Hall School of Law,
University of California, Berkeley.
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<PAGE> 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. The Class I directors will be and , the
Class II directors will be and and the Class III
directors will be and . At each annual meeting of
stockholders after the initial classification, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. This
classification of the board of directors may have the effect of delaying or
preventing a change of control or management of Brocade. See "Risk
Factors -- Provisions in Our Charter Documents, Customer Agreements and Delaware
Law Could Prevent or Delay a Change of Control of Our Company and May Reduce the
Market Price of Our Common Stock." Each officer serves at the discretion of the
board of directors. There are no family relationships among any of our directors
or officers.
Board Committees. Our board of directors currently has two committees: an
Audit Committee and a Compensation Committee. The Audit Committee consists of
Mr. Neiman and Mr. Dempsey. The Audit Committee makes recommendations to our
board of directors regarding the selection of independent auditors, reviews the
results and scope of audit and other services provided by our independent
auditors and reviews the accounting principles and auditing practices and
procedures to be used for the financial statements of Brocade. The Compensation
Committee consists of Mr. Leslie and Mr. Dempsey. The Compensation Committee
makes recommendations to our board of directors regarding our stock plans and
the compensation of officers and other managerial employees.
Director Compensation. Directors currently do not receive any cash
compensation from Brocade for their services as members of our board of
directors, although we are authorized to pay members for attendance at meetings
or a salary in addition to reimbursement for expenses in connection with
attendance at meetings. Certain non-employee directors have received grants of
options to purchase shares of our common stock. See "Principal Stockholders."
Upon and following this offering, certain non-employee directors will receive
automatic option grants under our 1999 Director Option Plan. See "-- Employee
Benefit Plans -- 1999 Director Option Plan."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee is currently or has been,
at any time since the formation of Brocade, an officer or employee of Brocade.
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or Compensation
Committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the Delaware General Corporation Law, we have adopted
provisions in our certificate of incorporation and bylaws that limit or
eliminate the personal liability of our directors for a breach of their
fiduciary duty of care as a director. The duty of care generally requires that,
when acting on behalf of the corporation, directors exercise an informed
business judgment based on all material information
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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 have
entered into indemnification agreements with each of our directors and officers
that will give them additional contractual reassurances regarding the scope of
indemnification and that may provide additional procedural protection. The
indemnification agreements require actions such as:
- indemnifying officers and directors against certain liabilities that may
arise because of their status as officers or directors;
- advancing expenses, as incurred, to officers and directors in connection
with a legal proceeding, subject to certain limited exceptions; or
- obtaining directors' and officers' insurance.
The limited liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty and may reduce the
likelihood of derivative litigation against our directors and officers, even
though a derivative action, if successful, might otherwise benefit us and our
stockholders. Moreover, a stockholder's investment in Brocade may be adversely
affected to the extent we pay the costs of settlement or damage awards against
our directors and officers under these indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor are
we aware of any threatened litigation that may result in claims for
indemnification.
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<PAGE> 46
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal year ended
October 31, 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 $100,000, collectively referred to below as the Named Executive
Officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES OTHER
---------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) ($)(2)
--------------------------- ---------- --------- ------------ ------------
<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(3)
</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) Represents cost of term life insurance.
(3) 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 the fiscal year ended October 31, 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 the fiscal year ended October 31, 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.
Potential realizable values are net of exercise price before taxes, and are
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 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
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<PAGE> 47
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 are subject to repurchase by us at the original exercise price
upon the optionee's cessation of service prior to vesting of such shares. The
repurchase right lapses and the optionee vests as to 25% of the option shares
upon completion of one year of service from the date of grant and the balance in
a series of equal monthly installments over the next three years of service
thereafter. In the event of a termination without cause or constructive
termination other than for cause at any time during the first year following a
change of control, these options will fully vest. See "-- Change of Control and
Severance Arrangements."
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------ POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
NUMBER TOTAL ANNUAL RATES OF
OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE PER OPTION TERM
OPTIONS IN FISCAL SHARE EXPIRATION -----------------------
NAME GRANTED 1998 ($/SHARE) DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gregory L. Reyes........................ 1,535,662 48.7% $2.25 10/08/08 $2,172,982 $5,506,762
Bruce L. Bergman........................ -- -- -- -- -- --
Kumar Malavalli......................... -- -- -- -- -- --
Paul R. Bonderson, Jr................... -- -- -- -- -- --
Victor M. Rinkle........................ 200,000 6.3% 2.25 02/25/08 283,003 717,184
Charles W. Smith........................ 35,000 1.1% 2.25 10/08/08 49,525 125,507
</TABLE>
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. The value of in-the-money options is based on an assumed
offering price of $ per share and net of the option exercise price.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT OCTOBER 31, IN-THE-MONEY
SHARES 1998(1) 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
Bruce L. Bergman............... -- -- -- --
Kumar Malavalli................ -- -- -- --
Paul R. Bonderson, Jr. ........ -- -- -- --
Victor M. Rinkle............... -- -- -- 200,000
Charles W. Smith............... 25,000 $ 30,000(2) 47,917 112,083
</TABLE>
- -------------------------
(1) The options are immediately exercisable for all of the option shares, 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 such 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.
(2) Based on $1.80 per share, the fair market value of our common stock at
January 13, 1998, as determined by our board of directors, minus the
exercise price.
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<PAGE> 48
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS
Options granted to certain of our officers and directors under our 1995
Equity Incentive Plan and 1998 Equity Incentive Plan will vest fully in the
event that these individuals are terminated without cause or are constructively
terminated at any time during the first year following a change of control of
Brocade.
Mr. Reyes's option agreement under the 1998 Equity Incentive Plan provides
that if, during the first year of his employment, he is terminated other than
(1) constructively or without cause during the first year following a change of
control, or (2) 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 (1) constructively or without cause during the first year
following a change of control, or (2) 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 (1) constructively or without cause during the first year following a
change of control, or (2) 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.
1999 KEY EMPLOYEE INCENTIVE PROGRAM
We have adopted the 1999 Key Employee Incentive Program, an executive bonus
program, pursuant to which selected key employees of Brocade are eligible for
quarterly and annual cash bonuses based upon achieving specified individual and
company-wide objectives, including revenue targets.
For Mr. Smith, bonuses are not based on the 1999 Key Employee Incentive
Program, but rather on the achievement of sales revenue and other specified
sales objectives.
EMPLOYEE BENEFIT PLANS
Upon the completion of this offering, our 1995 Equity Incentive Plan, our
1998 Equity Incentive Plan and our 1998 Executive Equity Incentive Plan will be
combined and continue as our 1999 Stock Plan. No additional options will be
granted under the 1995 Equity Incentive Plan, the 1998 Equity Incentive Plan or
the 1998 Executive Equity Incentive Plan after the completion of this offering.
However, the terms and conditions of the options granted previously under these
plans will continue to
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<PAGE> 49
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 (the "1995 Plan") was adopted by our
board of directors in August 1995 and 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 (the "Code"), to employees and for the grant of
nonstatutory stock options to employees, non-employee directors and consultants.
A total of 3,807,000 shares of common stock has been reserved for issuance under
the 1995 Plan.
The 1995 Plan is administered by our board of directors or a committee
thereof. 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) (a "10% stockholder"), 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 (the "1998 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
thereof. 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;
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<PAGE> 50
- 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 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 (the "1998 Executive 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 thereof. 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 (the "1999 Plan") was adopted by our board of directors
in March 1999 and will be effective upon the completion of this offering,
subject to stockholder approval. The 1999 Plan provides for the grant of
incentive stock options, within the meaning of Section 422 of the Code, to
employees. The 1999 Plan has provisions for compliance with the $1,000,000 limit
set by the Internal Revenue Service.
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<PAGE> 51
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, (ii) 5% of the outstanding shares on that date, or (iii) a lesser amount
determined by the board of directors.
The 1999 Plan will be administered by our board of directors or a committee
thereof. 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 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 1999 Plan, or such options shall terminate.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan (the "Purchase Plan") was adopted in
March 1999 and will be effective upon the completion of this offering, subject
to stockholder approval. Initially, 200,000 shares of common stock will be
reserved for issuance under the Purchase Plan. An annual increase will be added
on the first day of our fiscal year beginning in 2000 equal to the lesser of (1)
2,500,000 shares, (2) 2.5% of the outstanding shares on that date, or (3) 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 thereof.
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
date (the "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
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<PAGE> 52
or merger of Brocade, the board may accelerate the Exercise Date of the current
purchase period to a date prior to the change of control, or the acquiring
corporation may assume or replace the outstanding purchase rights under the
Purchase Plan.
1999 Director Option Plan
Our 1999 Director Option Plan (the "Director Plan") was adopted in March
1999 and will be effective upon the completion of this offering, subject to
stockholder approval. Initially, a total of 200,000 shares of common stock will
be reserved for issuance under the Director Plan. Non-employee directors are
entitled to participate in the 1999 Director Option Plan. However, Mr. Leslie
and Mr. Sonsini will be excluded from receiving option grants under the Director
Plan for three years.
The Director Plan provides for the automatic grant of 2,500 shares of
common stock to each non-employee director on the date on which such person
first becomes a non-employee director. After the first 2,500 share option is
granted to the non-employee director, he or she shall automatically be granted
an option to purchase 2,500 shares each quarter of each year, provided that he
or she shall have served on the board for at least the preceding month. Each
option shall have a term of 10 years. Each option granted under the Director
Plan will be fully vested and 100% exercisable on the date of grant. The
exercise price of all options shall be 100% of the fair market value per share
of the common stock, generally determined with reference to the closing price of
the common stock as reported on the Nasdaq National Market on the date of grant.
In the event of a merger, or the sale of substantially all of the assets,
of Brocade and if the option is not assumed or substituted, the option will
terminate unless exercised. Options granted under the Director Plan must be
exercised within three months of the end of the optionee's tenure as a director
of Brocade, or within 12 months after such director's termination by death or
disability, but not later than the expiration of the option's ten-year term.
401(k) Plan
Brocade provides a tax-qualified employee savings and retirement plan which
covers our eligible employees. Pursuant to the 401(k) Plan, employees may elect
to reduce their current annual compensation up to the lesser of 20% or the
statutorily prescribed limit, which was $10,000 in calendar year 1999, and have
the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is
intended to qualify under Sections 401(a) and 401(k) of the Code, so that
contributions by us or our employees to the 401(k) Plan, and income earned on
Plan contributions, are not taxable to employees until withdrawn from the 401(k)
Plan, and so that contributions will be deductible by Brocade when made. The
trustee of the 401(k) Plan invests the assets of the 401(k) Plan in the various
investment options as directed by the participants.
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<PAGE> 53
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 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.
52
<PAGE> 54
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 for $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
53
<PAGE> 55
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 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.
STOCK OPTION GRANTS AND LOAN TO CERTAIN DIRECTORS
On January 6, 1999, we granted to Mark Leslie, a director of Brocade, an
option to purchase 121,856 shares of our common stock at $2.25 per share that
vests over four years. On January 28, 1999, we loaned $274,176 to Mr. Leslie,
secured by a stock pledge agreement, in connection with his purchase of 121,856
shares of our common stock for $2.25 per share. This note accrues interest at
the rate of 4.59% per annum, compounded semi-annually, and is due on January 28,
2000. The principal amount and accrued interest on this note remain outstanding.
54
<PAGE> 56
On January 29, 1999, we granted to Larry W. Sonsini, a director of Brocade,
a fully vested stock option to purchase 121,856 shares of our common stock for
$5.00 per share. Mr. Sonsini is also a partner of Wilson Sonsini Goodrich &
Rosati, P.C., a law firm, to whom we have paid legal fees in connection with
this offering.
INDEMNIFICATION
We have entered into indemnification agreements with each of our directors
and officers. Such indemnification agreements will require us to indemnify our
directors and officers to the fullest extent permitted by Delaware law. See
"-- Limitation of Liability and Indemnification."
55
<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of our common stock as of January 31, 1999, and as adjusted
to reflect the sale of the shares of common stock in this offering by:
- each person who is known by Brocade to beneficially own more then 5% of
our common stock;
- each of the Named Executive Officers;
- each of our directors; and
- all officers and directors as a group.
Unless otherwise indicated, the address of each listed stockholder is c/o
Brocade Communications Systems, Inc., 1901 Guadalupe Parkway, San Jose, CA
95131. The number and percentage of shares beneficially owned are based on
21,734,900 shares of common stock outstanding as of January 31, 1999, assuming
conversion of all outstanding shares of preferred stock into common stock, and
shares of common stock outstanding after the completion of this
offering, assuming the Underwriters' over-allotment option to purchase
shares of common stock is not exercised. Beneficial ownership is
determined under the rules and regulations of the Securities and Exchange
Commission. Shares of common stock subject to options or warrants that are
currently exercisable or exercisable within 60 days of January 31, 1999 are
deemed to be outstanding and beneficially owned by the person holding the
options or warrants for the purpose of computing the number of shares
beneficially owned and the percentage ownership of that person. The shares
subject to options or warrants held by a person are not deemed to be outstanding
for the purpose of computing the percentage ownership of any other person.
Except as indicated in the footnotes to this table, and subject to applicable
community property laws, the persons named in the table have sole voting and
investment power with respect to all shares of Brocade's common stock shown as
beneficially owned by them. Percentage ownership figures after the offering do
not include shares that may be purchased by each person in the offering.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
----------------------
NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING
------------------------------------ ----------------------------- ---------- ---------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Gregory L. Reyes(1)............................... 1,535,662 7.1%
Bruce L. Bergman(2)............................... 773,528 3.6
Kumar Malavalli(3)................................ 728,000 3.3
Paul R. Bonderson, Jr.(4)......................... 910,000 4.2
Victor M. Rinkle(5)............................... 200,000 *
Charles W. Smith(6)............................... 195,000 *
Neal Dempsey(7)................................... 807,843 3.7
c/o Bay Partners Inc.
10600 N. De Anza Blvd., Suite 100
Cupertino, CA 95054
Mark Leslie(8).................................... 121,856 *
Seth D. Neiman(9)................................. 7,131,107 32.8
Larry W. Sonsini(10).............................. 121,856 *
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED
----------------------
NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING
------------------------------------ ----------------------------- ---------- ---------
<S> <C> <C> <C>
5% STOCKHOLDERS
Crosspoint Venture Partners(11)................... 6,676,107 30.7
2925 Woodside Road
Woodside, CA 94062
Mohr, Davidow Ventures IV(12)..................... 1,579,123 7.3
2774 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94028
Weiss, Peck & Greer(13)........................... 1,355,017 6.2
555 California Street,
Suite 3130
San Francisco, CA 94104
Andreas V. Bechtolsheim(14)....................... 1,168,814 5.4
1140 Hamilton Avenue
Palo Alto, CA 94301
All Executive Officers and Directors
as a group (12 persons)(15)..................... 12,924,852 59.1
</TABLE>
- -------------------------
* Less than 1%
(1) Includes 1,535,662 shares subject to a right of repurchase in favor of
Brocade which lapses over time. Includes 1,500,110 shares held by Gregory
Reyes and Penny Reyes as Community Property. Also includes 17,776 shares
held by Gregorio Reyes, Trustee of the Rebecca Mary Reyes 1997 Trust UTA
Dated August 15, 1997 and 17,776 shares held by Gregorio Reyes, Trustee of
the Gregory Louis Reyes, Jr. 1996 Trust UTA Dated April 30, 1996.
(2) All shares listed are held by The Bergman Family Trust.
(3) Includes 106,167 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(4) All shares listed are held by The Bonderson Family Living Trust Dated June
28, 1994. Includes 132,708 shares subject to a right of repurchase in favor
of Brocade which lapses over time.
(5) Includes 150,000 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(6) Includes 139,271 shares subject to a right of repurchase in favor of
Brocade which lapses over time.
(7) Mr. Dempsey is a general partner of Bay Partners SBIC, L.P. and is a
director of Brocade. Includes 796,425 shares held by Bay Partners SBIC,
L.P. and 11,418 shares subject to warrants held by Bay Partners SBIC, L.P.,
which are exercisable within 60 days of January 31, 1999. Mr. Dempsey
disclaims beneficial ownership of shares held by this entity, except to the
extent of his proportional interest arising from his partnership interest
in Bay Partners SBIC, L.P.
(8) Represents 121,856 shares subject to a right to repurchase in favor of
Brocade which lapses over time. Includes 8,888 shares held directly by Seth
Leslie and 8,888 shares held directly by Joshua Leslie, of which Mr. Leslie
disclaims beneficial ownership.
(9) Mr. Neiman is a partner of Crosspoint Venture Partners and the Chairman of
the board of directors of Brocade. Includes 25,289 shares subject to a
right of repurchase in favor of Brocade which lapses over time. Includes
20,000 shares held by The Alexandra Grace Speeth Neiman 1996 Trust and
20,000 shares held by The Morgan Olivia Speeth Neiman 1996 Trust, of which
57
<PAGE> 59
Mr. Neiman disclaims beneficial ownership. Also includes 5,811,556 shares
held by Crosspoint Venture Partners 1993, 570,821 shares held by Crosspoint
Venture Partners LS Fund 1997 and 293,730 shares held by Crosspoint 1993
Entrepreneurs Fund. Mr. Neiman disclaims beneficial ownership of shares
held by these entities, except for his proportional interest arising from
his partnership interest in Crosspoint Venture Partners.
(10) Represents 121,856 shares issuable upon exercise of an option held by Mr.
Sonsini exercisable within 60 days of January 31, 1999.
(11) Represents 5,811,556 shares held by Crosspoint Venture Partners 1993,
570,821 shares held by Crosspoint Venture Partners LS Fund 1997 and 293,730
shares held by Crosspoint 1993 Entrepreneurs Fund.
(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.
(13) Includes 596,453 shares held by Weiss, Peck & Greer Venture Associates IV,
L.P., 537,111 shares held by WPG Enterprise Fund III, L.P., 85,259 shares
held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America
Trust & Banking Corporation (Cayman) Limited and 20,762 shares held by WPG
Information Sciences Entrepreneur Fund, L.P. Also includes 59,645 shares
subject to warrants held by Weiss, Peck & Greer Venture Associates IV,
L.P., 53,711 shares subject to warrants held by WPG Enterprise Fund III,
L.P., 7,750 shares subject to warrants held by Weiss, Peck & Greer Venture
Associates IV Cayman, L.P. Bank America Trust & Banking Corporation
(Cayman) Limited and 2,076 shares subject to warrants held by WPG
Information Sciences Entrepreneur Fund, L.P., each of which is exercisable
within 60 days of January 31, 1999.
(14) Includes 63,164 shares held by TPK Unitrust, of which Mr. Bechtolsheim is
the trustee.
(15) Includes 20,762 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 an option, each of which is exercisable
within 60 days of January 31, 1999.
58
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
Upon consummation of this offering, our authorized capital stock will
consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred
stock. The following is a summary of the material provisions of the common stock
and the preferred stock contained in Brocade's certificate of incorporation and
bylaws.
COMMON STOCK
As of January 31, 1999, there were 7,408,167 shares of common stock
outstanding held of record by 112 stockholders. Subject to preferences that may
be applicable to any preferred stock outstanding at the time, the holders of
outstanding shares of common stock are entitled the following rights:
- to receive dividends out of assets legally available therefor at such
times and in such amounts as the board of directors from time to time may
determine;
- one vote for each share held on all matters submitted to a vote of
stockholders; and
- upon liquidation, dissolution or winding-up of Brocade, to share ratably
in all assets remaining after payment of liabilities and the liquidation
of any preferred stock.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
common stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Each outstanding share of common stock is, and all
shares of common stock to be outstanding upon completion of this offering will
be, upon payment therefor, duly and validly issued, fully paid and
nonassessable.
PREFERRED STOCK
The board of directors is authorized, without action by the stockholders,
to designate and issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions thereon.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under certain circumstances, have
the effect of delaying, deferring or preventing a change in control of Brocade.
We have no current plans to issue any shares of preferred stock.
WARRANTS
In December 1995, we issued a warrant to an equipment lease financing
company to purchase 35,444 shares of our Series A Preferred Stock with an
exercise price of $1.00 per share, in consideration for equipment leases and a
loan. In October 1996, we issued a warrant to the same equipment lease financing
company to purchase 15,753 shares of our Series A Preferred Stock with an
exercise price of $4.50 per share, also in consideration for equipment leases
and a loan. In September 1996, we issued a warrant to the same equipment lease
financing company to purchase 17,500 shares of our Series B Preferred Stock at
an exercise price of $4.00 per share. These warrants will remain outstanding
after the completion of this offering and will become exercisable for our common
stock.
59
<PAGE> 61
In August 1996, we issued a warrant to a real property lessor to purchase
3,000 shares of our Series C Preferred Stock with an exercise price of $3.00 per
share. This warrant will remain outstanding after the completion of this
offering and will become exercisable for our common stock.
In April 1997, we issued a warrant to a sublessor of real property to
purchase 20,000 shares of our Series C Preferred Stock with an exercise price of
$3.00 per share. This warrant will remain outstanding after the completion of
this offering and will become exercisable for our common stock.
In May 1997, we issued a warrant to a bank to purchase 25,000 shares of our
Series C Preferred Stock with an exercise price of $3.00 per share. This warrant
will remain outstanding after the completion of this offering and will become
exercisable for our common stock.
In September 1997, we issued warrants to certain investors in our Series D
Preferred Stock financing to purchase that number of shares equal to 10% of the
number of shares purchased by each respective investor in the financing, for a
total of 296,881 shares, at an exercise price of $6.78 per share. These warrants
terminate upon our initial public offering, and will all be exercised prior to
the effective date.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of approximately 14,623,614 shares of
common stock and warrants to acquire 264,788 shares of common stock will be
entitled to rights with respect to the registration of such shares under the
Securities Act. Under the terms of the agreements between us and the holders of
such registrable securities, if we propose to register any of our securities
under the Securities Act, either for our own account or for the account of other
security holders exercising registration rights, such holders are entitled to
notice of such registration and are entitled to include shares of such common
stock therein. Additionally, certain of such holders are also entitled to
certain demand registration rights pursuant to which they may require us on up
to two occasions to file a registration statement under the Securities Act at
our expense with respect to our shares of common stock, and we are required to
use our best efforts to effect such registration. Moreover, holders may require
us to file an unlimited number of additional registration statements on Form S-3
at our expense. All of these registration rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration and our
right not to effect a requested registration within six months following an
offering of our securities, including the offering made here. In addition, the
holders of registration rights have agreed not to exercise such rights for at
least 180 days after the offering without the prior written consent of Morgan
Stanley & Co. Incorporated.
DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of Brocade by means of a tender
offer, a proxy contest, or otherwise, and the removal of incumbent officers and
directors. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of Brocade to first negotiate with us. We believe that the
benefits of increased protection of Brocade's potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to acquire or
restructure Brocade outweighs the disadvantages of discouraging such proposals,
including proposals that are priced above the then current market value of our
common stock, because, among other things, negotiation of such proposals could
result in an improvement of their terms.
We are subject to section 203 of the Delaware General Corporation Law. This
provision generally prohibits a Delaware corporation from engaging in any
business combination with any interested
60
<PAGE> 62
stockholder for a period of three years following the date such stockholder
became an interested stockholder, unless:
- prior to such date the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of
the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
Our certificate of incorporation and bylaws require that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of the stockholders and may not be effected by
a consent in writing. In addition, special meetings of our stockholders may be
called only by the board of directors or certain of our officers. Our
certificate of incorporation and bylaws also provide that, beginning upon the
closing of the offering, our board of directors will be divided into three
classes, with each class serving staggered three-year terms and that certain
amendments of the certificate of incorporation and of the bylaws require the
approval of holders of at least 66 2/3% of the voting power of all outstanding
stock. These provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of Brocade.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Norwest Bank
Minnesota, N.A. Its address is 161 North Concord Exchange, South St. Paul,
Minnesota 55075-0738, and its telephone number at this location is (651)
450-4189.
61
<PAGE> 63
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 shares
of common stock, assuming the issuance of shares of common stock
offered hereby and no exercise of options after . Of these
shares, the 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 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. Of these shares, shares will be
subject to "lock-up" agreements described below on the effective date of the
offering. On the effective date of the offering, shares not subject to
the lock-up agreements described below will be eligible for sale pursuant to
Rule 144(k). Upon expiration of the lock-up agreements 180 days after the
effective date of the offering, 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 Shares sold in the offering
90 Days Shares saleable under Rule 144
180 Days Lock-up released; shares salable under Rules 144 and
701
</TABLE>
As of January 31, 1999, there were a total of 984,190 shares of common
stock subject to outstanding options under our 1995 Equity Incentive Plan,
87,068 of which were vested. As of January 31, 1999, there were a total of
1,098,281 shares of common stock subject to outstanding options under our 1998
Equity Incentive Plan, 130,515 of which were vested. As of January 31, 1999, no
shares of common stock were subject to outstanding options under our 1998
Executive Equity Incentive Plan. However, all of these shares are subject to
lock-up agreements. Immediately after the completion of the offering, Brocade
intends to file registration statements on Form S-8 under the Securities Act to
register all of the shares of common stock issued or reserved for future
issuance under our 1999 Stock Plan, 1999 Director Option Plan and 1999 Employee
Stock Purchase Plan. On the date 180 days after the effective date of the
offering, a total of 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 stockholders have agreed 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 lock-up agreements.
62
<PAGE> 64
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 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.
63
<PAGE> 65
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.....................................................
======
</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 additional
shares of common stock at the public offering price set forth on the cover page
of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered by the prospectus. To the extent this option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of additional shares of common stock
as the number set forth next to each underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the names
of all underwriters in the preceding table.
At the request of Brocade, the underwriters have reserved up to five
percent of the shares of common stock to be issued by Brocade and offered hereby
for sale, at the initial public offering price, to directors, officers,
employees, business associates and related persons of Brocade. 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.
64
<PAGE> 66
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 (1) 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 (2) 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 (1) the sale of any
shares to the underwriters pursuant to the underwriting agreement, or (2)
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.
65
<PAGE> 67
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.
66
<PAGE> 68
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 not necessarily
complete, and we refer you to the full text of the contract or other document
filed as an exhibit to the registration statement. 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.
67
<PAGE> 69
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 70
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> 71
After the reincorporation discussed in Note 10 to Brocade Communications
Systems, Inc. financial statements, we expect to be in a position to render the
following audit report:
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Brocade Communications Systems, Inc.:
We have audited the accompanying balance sheets of Brocade Communications
Systems, Inc. (a California corporation) as of October 31, 1998 and 1997 and the
related statements of operations, redeemable convertible preferred stock and
shareholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brocade Communications
Systems, Inc. as of October 31, 1998 and 1997 and the results of its operations
and its cashflows for each of the three years in the period ended October 31,
1998 in conformity with generally accepted accounting principles.
San Jose, California
November 24, 1998
(except with respect to the matters
discussed in Note 10, as to which the
date is March , 1999)
F-2
<PAGE> 72
BROCADE COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 31,
1999
OCTOBER 31, PRO FORMA
------------------- JANUARY 31, SHAREHOLDERS'
1997 1998 1999 EQUITY (NOTE 6)
-------- -------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,552 $ 10,420 $ 10,137
Short-term investments.................................... 15,920 -- --
Accounts receivable, net of allowance for doubtful
accounts of $100, $285 and $260, respectively........... 2,646 3,430 6,028
Inventories............................................... 471 1,744 2,528
Prepaid expenses and other current assets................. 342 220 491
-------- -------- --------
Total current assets........................................ 21,931 15,814 19,184
Property and equipment, net................................. 3,922 5,323 5,248
Other assets................................................ 247 164 144
-------- -------- --------
$ 26,100 $ 21,301 $ 24,576
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Borrowings under line of credit........................... $ 500 $ 1,672 $ 1,700
Current portion of debt................................... 367 1,231 1,231
Current portion of capital lease obligations.............. 679 784 713
Accounts payable.......................................... 3,292 3,247 4,863
Accrued liabilities....................................... 1,759 3,604 6,177
-------- -------- --------
Total current liabilities.......................... 6,597 10,538 14,684
-------- -------- --------
Long-term liabilities:
Long-term portion of debt................................. 694 1,731 1,443
Long-term portion of capital lease obligations............ 1,260 478 365
Commitments and contingencies (Note 4)
Redeemable convertible preferred stock, no par value,
aggregate liquidation preference of $35,850:
Authorized -- 9,791,280 shares at January 31, 1999 and
pro forma
Issued and outstanding (Series A, B, C and
D) -- 8,370,431 shares at October 31, 1997; and
9,235,483 shares at October 31, 1998 and January 31,
1999; no shares issued and outstanding pro forma...... 30,359 35,261 35,261
Warrants to purchase redeemable convertible preferred
stock................................................... 648 648 648
-------- -------- --------
Total long term liabilities........................ 32,961 38,118 37,717
-------- -------- --------
Shareholders' equity (deficit):
Common stock, no par value:
Authorized -- 30,000,000 shares at January 31, 1999 and
pro forma
Issued and outstanding -- 4,913,383 shares at October
31, 1997; 5,194,765 shares at October 31, 1998;
7,408,167 shares at January 31, 1999; and 22,031,781
shares outstanding pro forma.......................... 424 2,225 10,309 $ 47,907
Deferred compensation....................................... (88) (300) (2,566) (2,566)
Notes receivable from shareholders.......................... (75) (450) (4,899) (4,899)
Accumulated deficit......................................... (13,719) (28,830) (30,669) (30,669)
-------- -------- -------- --------
Total shareholders' equity (deficit)............... (13,458) (27,355) (27,825) $ 9,773
-------- -------- -------- --------
$ 26,100 $ 21,301 $ 24,576
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 73
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product revenue............................. $ -- $ 8,482 $ 22,414 $ 7,824 $ 6,429
License revenue............................. -- -- 1,832 26 1,578
------- ------- -------- ------- -------
Total revenues......................... -- 8,482 24,246 7,850 8,007
Cost of revenues............................ -- 6,682 15,759 4,697 3,321
------- ------- -------- ------- -------
Gross profit........................... -- 1,800 8,487 3,153 4,686
------- ------- -------- ------- -------
Operating expenses:
General and administrative.................. 575 1,464 3,813 639 741
Sales and marketing......................... 152 2,112 5,154 1,074 1,729
Research and development.................... 3,091 7,666 14,744 2,838 2,905
Amortization of deferred compensation....... -- -- 7 -- 1,157
------- ------- -------- ------- -------
Total operating expenses............... 3,818 11,242 23,718 4,551 6,532
------- ------- -------- ------- -------
Loss from operations........................ (3,818) (9,442) (15,231) (1,398) (1,846)
Other income (expense)...................... (116) (177) 120 43 7
------- ------- -------- ------- -------
Net loss.................................... $(3,934) $(9,619) $(15,111) $(1,355) $(1,839)
======= ======= ======== ======= =======
Basic net loss per share.................... $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
======= ======= ======== ======= =======
Shares used in computing basic net loss per
share..................................... 414 1,997 3,400 2,570 4,349
======= ======= ======== ======= =======
Pro forma basic net loss per share
(unaudited)............................... $ (.84) $ (.10)
======== =======
Shares used in computing pro forma basic net
loss per share (unaudited)................ 17,915 18,973
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 74
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE NOTES
PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE
--------------------------- ---------------- STOCK FROM ACCUMULATED
SHARES AMOUNT WARRANTS SHARES AMOUNT COMPENSATION SHAREHOLDERS DEFICIT
------ ------- -------- ------ ------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1995........... 1,425 $ 1,411 -- 2,093 $ 52 $ -- $ (52) $ (166)
Issuance of warrants related to
leases............................... -- -- 188 -- -- -- -- --
Exercise of options.................... -- -- -- 1,562 48 -- -- --
Issuance of Series B Redeemable
Convertible Preferred Stock, net of
issuance costs of $63................ 816 3,202 -- -- -- -- -- --
Forgiveness of notes receivable from
founders............................. -- -- -- -- -- -- 52 --
Stock in exchange for services......... -- -- -- 66 13 -- -- --
Issuance of common stock to officer.... -- -- -- 773 151 (132) -- --
Deferred compensation.................. -- -- -- -- -- 11 -- --
Net loss............................... -- -- -- -- -- -- -- (3,934)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1996........... 2,241 4,613 188 4,494 264 (121) -- (4,100)
Exercise of options.................... -- -- -- 384 90 -- -- --
Issuance of stock for notes receivable
from shareholders.................... -- -- -- 250 75 -- (75) --
Repurchase of common stock............. -- -- -- (215) (5) -- -- --
Issuance of Series C Redeemable
Convertible Preferred Stock, net of
issuance costs of $49................ 3,333 9,952 -- -- -- -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $42................ 2,796 15,794 -- -- -- -- -- --
Issuance of warrants related to leases
and notes payable.................... -- -- 135 -- -- -- -- --
Issuance of warrants................... -- -- 325 -- -- -- -- --
Deferred compensation.................. -- -- -- -- -- 33 -- --
Net loss............................... -- -- -- -- -- -- -- (9,619)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1997........... 8,370 30,359 648 4,913 424 (88) (75) (13,719)
Exercise of options.................... -- -- -- 201 55 -- -- --
Compensation charges................... -- -- -- -- 1,067 88 -- --
Deferred compensation.................. -- -- -- -- 307 (307) -- --
Amortization of deferred
compensation......................... -- -- -- -- -- 7 -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $98................ 865 4,902 -- -- -- -- -- --
Issuance of stock for notes receivable
from shareholders.................... -- -- -- 225 375 -- (375) --
Stock in exchange for services......... -- -- -- 18 41 -- -- --
Repurchase of common stock............. -- -- -- (162) (44) -- -- --
Net loss............................... -- -- -- -- -- -- -- (15,111)
----- ------- ---- ----- ------- ------- ------- --------
Balances at October 31, 1998........... 9,235 35,261 648 5,195 2,225 (300) (450) (28,830)
Exercise of options (unaudited)........ -- -- -- 236 135 -- -- --
Issuance of stock for notes receivable
from shareholders (unaudited)........ -- -- -- 1,977 4,449 -- (4,449) --
Compensation charges (unaudited)....... -- -- -- -- 77 -- -- --
Deferred compensation (unaudited)...... -- -- -- -- 3,423 (3,423) -- --
Amortization of deferred compensation
(unaudited).......................... -- -- -- -- -- 1,157 -- --
Net loss (unaudited)................... -- -- -- -- -- -- -- (1,839)
----- ------- ---- ----- ------- ------- ------- --------
Balances at January 31, 1999
(unaudited).......................... 9,235 $35,261 $648 7,408 $10,309 $(2,566) $(4,899) $(30,669)
===== ======= ==== ===== ======= ======= ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS
EQUITY
(DEFICIT)
------------
<S> <C>
Balances at October 31, 1995........... $ (166)
Issuance of warrants related to
leases............................... --
Exercise of options.................... 48
Issuance of Series B Redeemable
Convertible Preferred Stock, net of
issuance costs of $63................ --
Forgiveness of notes receivable from
founders............................. 52
Stock in exchange for services......... 13
Issuance of common stock to officer.... 19
Deferred compensation.................. 11
Net loss............................... (3,934)
--------
Balances at October 31, 1996........... (3,957)
Exercise of options.................... 90
Issuance of stock for notes receivable
from shareholders.................... --
Repurchase of common stock............. (5)
Issuance of Series C Redeemable
Convertible Preferred Stock, net of
issuance costs of $49................ --
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $42................ --
Issuance of warrants related to leases
and notes payable.................... --
Issuance of warrants................... --
Deferred compensation.................. 33
Net loss............................... (9,619)
--------
Balances at October 31, 1997........... (13,458)
Exercise of options.................... 55
Compensation charges................... 1,155
Deferred compensation.................. --
Amortization of deferred
compensation......................... 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net of
issuance costs of $98................ --
Issuance of stock for notes receivable
from shareholders.................... --
Stock in exchange for services......... 41
Repurchase of common stock............. (44)
Net loss............................... (15,111)
--------
Balances at October 31, 1998........... (27,355)
Exercise of options (unaudited)........ 135
Issuance of stock for notes receivable
from shareholders (unaudited)........ --
Compensation charges (unaudited)....... 77
Deferred compensation (unaudited)...... --
Amortization of deferred compensation
(unaudited).......................... 1,157
Net loss (unaudited)................... (1,839)
--------
Balances at January 31, 1999
(unaudited).......................... $(27,825)
========
</TABLE>
See accompanying notes.
F-5
<PAGE> 75
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED OCTOBER 31, JANUARY 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(3,934) $ (9,619) $(15,111) $(1,355) $(1,839)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 246 1,020 2,374 494 427
Loss on disposition of equipment.......................... -- 73 -- -- --
Noncash compensation expense.............................. 11 33 1,202 71 1,234
Forgiveness of founders' notes receivable................. 52 -- -- -- --
Changes in assets and liabilities
Accounts receivable..................................... -- (2,646) (784) 587 (2,598)
Inventories............................................. -- (471) (1,273) (993) 894
Prepaid expenses and other assets....................... (40) (140) 205 (51) (1,929)
Accounts payable........................................ 12 3,023 (45) (46) 1,616
Accrued liabilities..................................... 260 1,452 1,845 340 2,573
------- -------- -------- ------- -------
Net cash provided by (used in) operating activities... (3,393) (7,275) (11,587) (953) 378
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (1,518) (3,423) (3,775) (1,624) (352)
Proceeds from disposition (purchases) of short-term
investments............................................. -- (15,920) 15,920 15,920 --
------- -------- -------- ------- -------
Net cash provided by (used in) investing activities... (1,518) (19,343) 12,145 14,296 (352)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Line of credit borrowings................................. -- 500 1,672 -- 28
Line of credit repayments................................. -- -- (500) -- --
Payments on capitalized lease obligations................. (155) (504) (677) (169) (184)
Proceeds from capital lease financing..................... 1,340 1,258 -- -- --
Proceeds from notes payable............................... -- 1,091 2,594 -- --
Repayments of notes payable............................... -- (30) (693) (92) (288)
Proceeds from issuance of redeemable convertible preferred
stock and warrants...................................... 3,202 26,070 4,902 4,911 --
Proceeds from issuance of common stock.................... 56 90 56 12 135
Repurchase of common shares............................... -- (5) (44) -- --
------- -------- -------- ------- -------
Net cash provided by (used in) financing activities... 4,443 28,470 7,310 4,662 (309)
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash equivalents........ (468) 1,852 7,868 18,005 (283)
Cash and cash equivalents, beginning of period.............. 1,168 700 2,552 2,552 10,420
------- -------- -------- ------- -------
Cash and cash equivalents, end of period.................... $ 700 $ 2,552 $ 10,420 $20,557 $10,137
======= ======== ======== ======= =======
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 109 $ 351 $ 557 $ 112 $ 136
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 76
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(R), operates at gigabit speeds
and is based on the Fibre Channel protocol. A SAN provides a networking
environment for connecting a data center's servers and storage systems.
During fiscal 1997 and 1998, Brocade sold its products and services to
original equipment manufacturers located in the United States. Brocade is
subject to a number of business risks including, but not limited to, ability to
obtain adequate financing to support growth, dependence on key individuals, key
suppliers of integral component parts, competition from substitute products and
larger companies and the need for the continued successful development,
manufacturing, marketing and selling of its SAN switching products.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unaudited Interim Financial Data
The unaudited interim financial statements for the three months ended
January 31, 1999 and 1998 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all normal
recurring adjustments necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-term Investments
For purposes of the statements of cash flows, cash and cash equivalents
consist of investments with original maturities of less than three months,
primarily commercial paper.
During 1997, Brocade classified its short-term investments as
held-to-maturity and carried them at amortized cost. At October 31, 1997, the
fair value of Brocade's investments approximated amortized cost and, as such,
unrealized holding gains and losses were insignificant. The fair value of
Brocade's investments was determined based on quoted market prices at the
reporting date for those instruments.
Concentrations of Credit Risk
Financial instruments that potentially subject Brocade to a concentration
of credit risk principally consist of accounts receivable. Brocade generally
does not require collateral on accounts receivable, as the majority of Brocade's
customers are large, well established companies. Brocade provides reserves for
credit losses and product sales returns.
F-7
<PAGE> 77
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At October 31, 1997 and 1998 and January 31, 1999, approximately 99%, 76%
and 53%, respectively, of accounts receivable was concentrated with four
customers, as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
------------ JANUARY 31,
1997 1998 1999
---- ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Customer A............................................ 83% 45% 21%
Customer B............................................ 1% 11% 5%
Customer C............................................ 15% 20% 4%
Customer D............................................ -- -- 23%
</TABLE>
Inventories
Inventories are stated at the lower of cost or market, using the first in,
first out method. Inventory costs include material, labor and overhead.
Inventories consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------- JANUARY 31,
1997 1998 1999
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials...................................... $158 $1,203 $ 238
Work-in-process.................................... 75 6 10
Finished goods..................................... 238 535 2,280
---- ------ ------
$471 $1,744 $2,528
==== ====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation for all property
and equipment is computed using the straight-line method over the estimated
useful lives of the assets, generally three to four years. Leasehold
improvements are depreciated over the shorter of their useful lives or the term
of the lease. Property and equipment consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JANUARY 31,
1997 1998 1999
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment................................. $ 4,617 $ 8,186 $ 8,514
Leasehold improvements.................................. 196 345 369
Furniture and fixtures.................................. 377 434 434
Less: Accumulated depreciation and amortization......... (1,268) (3,642) (4,069)
------- ------- -------
$ 3,922 $ 5,323 $ 5,248
======= ======= =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$2.6 million and $2.0 million, respectively, at January 31, 1999, and
approximately $2.6 million and $1.8 million, respectively, at October 31, 1998.
F-8
<PAGE> 78
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Software Development Costs
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," Brocade capitalizes eligible computer software development
costs upon the establishment of technological feasibility, which it has defined
as completion of designing, coding and testing activities. For the years ended
October 31, 1997 and October 31, 1998, and the three-month periods ended January
31, 1998 and 1999, the amount of costs eligible for capitalization, after
consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to research and
development expense in the accompanying statements of operations.
Accrued Liabilities
Accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------- JANUARY 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranty.................................. $ 750 $1,350 $1,220
Payroll, bonus, vacation.......................... 474 628 930
Deferred revenue.................................. 293 543 3,391
Accrued restructuring (see Note 5)................ -- 421 77
Sales tax......................................... -- 125 14
Other............................................. 242 537 545
------ ------ ------
$1,759 $3,604 $6,177
====== ====== ======
</TABLE>
Stock-Based Compensation
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. This accounting
standard permits the use of either a fair value based method or the method
defined in Accounting Principles Board Opinion 25, "Accounting for Stock Issued
to Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the valuation method provided in APB 25 are
required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value based method. Brocade has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB 25, and accordingly, it has included the pro forma disclosures
required under SFAS No. 123 in Note 7.
Revenue Recognition
Product revenue is generally recognized when products are shipped, with the
exception of shipments to some customers where product returns cannot be
reasonably estimated or significant support services are required to
successfully launch the customer's product. Allowances for warranty costs,
credit losses and estimated future returns are provided for upon shipment.
License revenue is recognized when
F-9
<PAGE> 79
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
collection is reasonably assured. Deferred revenues for the quarter ended
January 31, 1999 were approximately $3.4 million.
During fiscal 1997 and 1998, and the three month periods ended January 31,
1998 and 1999, approximately 91%, 89%, 98% and 76%, respectively, of Brocade's
total revenues were derived from sales of its SilkWorm(R) product. The
percentage of sales to significant customers is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
----------- THREE MONTHS ENDED JANUARY 31,
1997 1998 1998 1999
---- ---- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A....................................... 67% 72% 92% 37%
Customer B....................................... 27% 11% 3% 33%
</TABLE>
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per Share
Basic net loss per common share and diluted net loss per common share are
presented in conformity with Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share," ("SFAS No. 128") for all periods presented.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98,
common stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of the initial public
offering must be included in the calculation of basic and diluted net loss per
common share as if such stock had been outstanding for all periods presented. To
date, Brocade has not had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net loss per common share has been
computed using the weighted-average number of shares of common stock outstanding
during the period, less shares subject to repurchase. Basic pro forma net loss
per common share, as presented in the statements of operations, has been
computed as described above and also gives effect, under Securities and Exchange
Commission guidance, to the conversion of the convertible preferred stock (using
the if-converted method) from the original date of issuance.
F-10
<PAGE> 80
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED OCTOBER 31, -------------------------
-------------------------------- JANUARY 31, JANUARY 31,
1996 1997 1998 1998 1999
------- ----------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss.................................... $(3,934) $(9,619) $(15,111) $(1,355) $(1,839)
------- ------- -------- ------- -------
Basic and diluted:
Weighted average shares of common stock
outstanding............................... 3,169 4,594 5,174 4,973 6,189
Less: Weighted average shares subject to
repurchase................................ (2,755) (2,597) (1,774) (2,403) (1,840)
------- ------- -------- ------- -------
Weighted average shares used in computing
basic and diluted net loss per common
share..................................... 414 1,997 3,400 2,570 4,349
======= ======= ======== ======= =======
Basic and diluted net loss per common
share..................................... $ (9.50) $ (4.82) $ (4.44) $ (.53) $ (.42)
======= ======= ======== ======= =======
Pro forma:
Net loss.................................. $(15,111) $(1,839)
======== =======
Shares used above......................... 3,400 4,349
Pro forma adjustment to reflect weighted
effect of assumed conversion of
convertible preferred stock
(unaudited)............................ 14,218 14,327
-------- -------
Pro forma adjustment to reflect assumed
exercise and conversion of preferred
stock warrants to purchase 296,881
common shares at an exercise price of
$6.78 per share (unaudited)............ 297 297
-------- -------
Shares used in computing pro forma basic
and diluted net loss per common share
(unaudited)............................ 17,915 18,973
======== =======
Pro forma basic and diluted net loss per
common share (unaudited)............... $ (.84) $ (.10)
======== =======
</TABLE>
Brocade has excluded all convertible preferred stock, warrants for
convertible preferred stock, outstanding stock options and shares subject to
repurchase from the calculation of diluted net loss per common share because all
such securities are antidilutive for all periods presented. The total number of
shares excluded from the calculations of diluted net loss per common share were
10,895,629, 17,561,773, 19,506,313, 18,370,231, and 19,582,674 for the years
ended October 31, 1996, 1997 and 1998 and the three months ended January 31,
1998 and 1999, respectively. See Notes 6 and 7 for further information on these
securities.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 was adopted by
Brocade beginning on November 1, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. Comprehensive loss for each of the three years
F-11
<PAGE> 81
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ended October 31, 1998 and the three month periods ended January 31, 1998 and
1999 approximated net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information."
("SFAS No. 131"). SFAS No. 131 was adopted by Brocade beginning on November 1,
1997. SFAS No. 131 establishes standards for disclosures about operating
segments, products and services, geographic areas and major customers. Brocade
is organized and operates as one operating segment, the design, development
manufacturing, marketing and selling of SAN security products. Service revenues
to date have not been significant. Brocade operates in one geographic area, the
United States. Major customers are discussed above.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria have been met. Brocade adopted SOP 98-1 beginning
on November 1, 1998. The adoption did not have a material impact on Brocade's
financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal
years beginning on or before March 15, 1999. All other provisions of SOP 98-9
are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Brocade has not had significant software sales to date and
management does not expect the adoption of SOP 98-9 to have a significant effect
on our financial condition or results of operations.
3. LINE OF CREDIT AND DEBT
In June 1997, Brocade entered into a revolving line of credit agreement
with a bank under which it can borrow up to $4,000,000. The line of credit bears
interest at the bank's prime rate (7.8% at January 31, 1999) and expires in
August 1999. At January 31, 1999 there were borrowings of $1,700,000 outstanding
under the line of credit agreement. The line of credit agreement is secured by
accounts receivable and inventory and contains certain financial covenants
measured on a monthly basis.
As of January 31, 1999, Brocade had borrowed $2,674,000 from the same bank
under an equipment loan agreement. The equipment loan agreement provides for
borrowings of up to $5,000,000. Borrowings are secured by the related capital
equipment, bear interest at the bank's prime rate plus 1.0% (8.8% at January 31,
1999) and are payable through June 30, 2002. As of January 31, 1999, principal
payments of approximately $587,000, $783,000, $783,000 and $521,000,
respectively, were due in fiscal years ending October 31, 1999, 2000, 2001 and
2002.
F-12
<PAGE> 82
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. LINE OF CREDIT AND DEBT (CONTINUED)
Notes payable as of October 31, 1997 and 1998 and the three-month period
ended January 31, 1999 consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------- JANUARY 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank........................................ $1,061 $2,962 $2,674
Less: Current portion....................................... 367 1,231 1,231
------ ------ ------
Long-term portion........................................... $ 694 $1,731 $1,443
====== ====== ======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Brocade leases its facilities under operating lease agreements expiring
through November 2000. The leases require that Brocade pay all costs of
maintenance, utilities, insurance and taxes. Rent expense for the years ended
October 31, 1996, 1997 and 1998, and the three-month period ended January 31,
1999 was $110,509, $495,475, $804,057 and $191,584 respectively.
Brocade leases computers, office equipment and furniture under long-term
lease agreements that are classified as capital leases. The leases expire
through January 2001 and require a final buyout payment at the end of the lease
term.
Future minimum lease payments, including the buyout payments, at January
31, 1999 were as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED OCTOBER 31, LEASES LEASES
---------------------- --------- -------
(IN THOUSANDS)
<S> <C> <C>
1999........................................................ $ 589 $ 694
2000........................................................ 847 476
2001........................................................ -- 42
------ ------
Total minimum lease payments................................ $1,436 1,212
====== ======
Less imputed interest (15.27% -- 17.65%).................... (134)
Present value of payments under capital leases.............. 1,078
Less current portion........................................ (713)
------
Long-term lease obligations................................. $ 365
======
</TABLE>
Brocade's former contract manufacturer has filed suit against Brocade,
alleging that Brocade is liable for breaching certain contracts with the
contract manufacturer. The suit claims damages in excess of $3.0 million plus
interest, an unspecified amount of consequential and incidental damages, costs
and attorneys' fees. Brocade has filed a cross complaint against the contract
manufacturer for various credits Brocade claims on its account with the contract
manufacturer. It is management's opinion that any liability on Brocade's account
is limited to accrued and unpaid invoices totaling approximately $1,400,000 and
that this $1,400,000 is subject to the various offsets Brocade claims in its
cross-complaint.
F-13
<PAGE> 83
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Brocade is subject to various claims which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.
5. RESTRUCTURING OF OPERATIONS
In the third quarter of 1998, Brocade initiated a plan to restructure its
operations to reduce its break even revenue level. In connection with this plan,
Brocade recorded a $3.2 million charge to operating expenses as follows: $1.3
million is included in costs of revenue, $700,000 is included in research and
development expense and $1.2 million is included in general and administrative
expense in the 1998 statement of operations. The restructuring charge includes
$1.7 million of employee related expenses for 20 employee terminations, $1.2
million for the write-off of excess equipment and inventory and $300,000 for
write-offs of other tangible and intangible assets related to cancelled
development and simulation projects. As of January 31, 1999, Brocade had
incurred costs totaling $3.1 million related to the restructuring. The remaining
actions are expected to be completed within one year from the date the
restructuring plan was initiated. Accrued liabilities at January 31, 1999
include $77,000 in remaining but unpaid employee related expenses.
6. PREFERRED STOCK
Redeemable Convertible Preferred Stock
In August 1995, Brocade issued 1,425,000 shares of its Series A Redeemable
Convertible Preferred Stock (Series A). In June 1996, Brocade issued 816,250
shares of its Series B Redeemable Convertible Preferred Stock (Series B). In
December 1996, Brocade issued 3,333,333 shares of its Series C Redeemable
Convertible Preferred Stock (Series C). In fiscal years 1997 and 1998, Brocade
issued 2,795,848 shares and 865,052 shares, respectively, of its Series D
Redeemable Convertible Preferred Stock (Series D). The rights with respect to
Series A, Series B, Series C and Series D are as follows:
Redemption. At the request of the holders of the majority of voting power
of the then outstanding preferred stock any time after August 28, 2002, Brocade
shall, to the extent funds are legally available, redeem the preferred stock in
increments over a three-year period. In such event, Brocade shall pay $1.00 per
share for Series A, $4.00 per share for Series B, $3.00 per share for Series C
and $5.78 for Series D plus any declared but unpaid dividends.
Voting. Each share of Series A, Series B, Series C and Series D has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible.
Dividends. Holders of Series A, Series B, Series C and Series D are
entitled to receive noncumulative dividends when and as declared by the Board of
Directors at a rate of $0.08, $0.32, $0.24 and $0.46 per share, respectively,
per annum. After payment of such dividends, any additional dividends declared
will be paid to the holders of common stock and preferred stock in such amount
as they would be entitled to receive if their shares had been converted into
shares of common stock. No dividends have been declared.
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> 84
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.
Pro Forma Shareholders' Deficit
In January 1999, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission to register
shares of its common stock in connection with a proposed initial public offering
("IPO"). If the IPO is consummated under the terms presently anticipated, (1)
all of the currently outstanding preferred stock will be converted into
14,326,733 shares of common stock upon the closing of the IPO and (2) warrants
to purchase 296,881 shares of Series D with an exercise price of $6.78 per share
will be exercised and converted into 296,881 shares of common stock prior to the
effective date of the IPO. The effect of the conversion and exercise of warrants
has been reflected as unaudited pro forma shareholders' equity in the
accompanying balance sheet as of January 31, 1999.
F-15
<PAGE> 85
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK
At January 31, 1999, Brocade had reserved the following shares of
authorized but unissued shares of common stock for future issuance:
<TABLE>
<S> <C>
Conversion of outstanding Series A.......................... 5,700,000
Conversion of outstanding Series B.......................... 1,632,500
Conversion of outstanding Series C.......................... 3,333,333
Conversion of outstanding Series D.......................... 3,660,900
Conversion of warrants outstanding.......................... 584,669
Stock option plan........................................... 2,548,987
----------
17,460,389
==========
</TABLE>
Deferred Compensation
In connection with the grant of certain stock options to employees during
the year ended October 31, 1998 and the three months ended January 31, 1999,
Brocade recorded deferred compensation of $307,266 and $3,423,145, respectively,
representing the difference between the deemed value of the common stock for
accounting purposes and the option exercise price of such options at the date of
grant. Such amount is presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable options.
Approximately $7,000 and $1.2 million was expensed during the year ended October
31, 1998 and the three months ended January 31, 1999, respectively, and the
balance will be expensed ratably over the period the options vest. Compensation
expense is decreased in the period of forfeiture for any accrued but unvested
compensation arising from the early termination of an option holder's services.
No compensation expense related to any other periods presented has been
recorded.
Stock Options
Brocade, under various stock option plans (the "Plans"), grants stock
options for shares of common stock to employees, directors and consultants of
Brocade. In accordance with the Plans, the stated exercise price shall not be
less than 85% of the estimated fair market value of common stock on the date of
grant. Incentive Stock Options ("ISOs") may not be granted at less than 100% of
the estimated fair market value of the common stock and stock options granted to
a person owning more than 10% of the combined voting power of all classes of
stock of Brocade must be issued at 110% of the fair market value of the stock on
the date of grant. The Plans provide that the options shall be exercisable over
a period not to exceed ten years, and the options generally vest over a period
of four years. The options typically vest 25% one year after the date of grant
and the remaining shares vest in equal monthly amounts over the following 36
months.
At January 31, 1999, an aggregate of 466,516 shares were available for
future option grants under all of the Plans.
F-16
<PAGE> 86
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK (CONTINUED)
Brocade accounts for the Plans under APB No. 25 whereby the difference
between the exercise price and the fair value at the date of grant is recognized
as compensation expense. Had compensation expense for the stock option plans
been determined consistent with SFAS No. 123, net losses would have increased to
the following pro forma amounts, (in thousands except per share data):
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED OCTOBER 31, ENDED
------------------------------ JANUARY 31,
1996 1997 1998 1999
------- ------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net loss as reported........................ $(3,934) $(9,619) $(15,111) $(1,839)
Net loss Pro Forma.......................... $(3,945) $(9,666) $(15,522) $(2,068)
Net loss per share as reported.............. $ (4.44) $ (.42)
Net loss per share Pro Forma................ $ (4.57) $ (.48)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998, 1997, 1996 and the three month period ended
January 31, 1999, respectively: risk-free interest rate of 5.58 to 5.86, 5.71 to
6.63, 5.54 to 6.50 and 4.38 to 5.00 percent; expected dividend yields of zero
percent for all four periods; expected life of .5 years beyond vesting for all
four periods; and expected volatility of zero percent for all periods except the
three months ended January 31, 1999, for which a volatility factor of 60% was
used.
The following table summarizes stock option plan activity under all of the
Plans:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
JANUARY 31, 1999 OCTOBER 31, 1998
---------------------------- ---------------------------
(UNAUDITED)
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....... 3,501,622 $1.85 1,075,167 $ .33
Granted.............................. 854,512 $2.64 3,134,912 $2.19
Exercised............................ (2,213,402) $2.07 (425,570) $1.04
Cancelled............................ (60,261) $1.20 (282,887) $1.14
----------- ----------
Outstanding at period end.............. 2,082,471 $1.95 3,501,622 $1.85
=========== ==========
Exercisable at end of period........... 189,227 $3.68 465,807 $1.52
Weighted fair value per share.......... $ .7842 $ .3023
=========== ==========
</TABLE>
F-17
<PAGE> 87
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. COMMON STOCK (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1996
---------------------------- ---------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year....... 584,000 $ .19 -- --
Granted.............................. 1,335,500 $ .34 2,149,400 $ .09
Exercised............................ (630,666) $ .26 (1,565,400) $ .03
Cancelled............................ (213,667) $ .22 -- --
----------- ----------
Outstanding at year end................ 1,075,167 $ .33 584,000 $ .19
=========== ==========
Exercisable at end of year............. 36,234 $ .22 -- --
Weighted fair value per share.......... $ .0522 $ .0100
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- -------------------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------
AVERAGE WEIGHTED WEIGHTED
JANUARY 31, 1999 REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
- ---------------------------------- --------- --------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$0.20 - $1.80..................... 619,690 7.82 $ .71 52,715 $1.02
$2.25 - $5.00..................... 1,462,781 9.57 $2.48 136,512 $4.71
--------- -------
$0.20 - $5.00..................... 2,082,471 9.05 $1.95 189,227 $3.68
========= =======
</TABLE>
At January 31, 1999, 2,324,679 shares issued upon exercise of stock options
with a weighted average exercise price of $1.86 and 264,122 shares issued to
founders with a weighted average exercise price of $.025 were subject to
repurchase by Brocade.
F-18
<PAGE> 88
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
Brocade accounts for income taxes pursuant to Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", ("SFAS No.
109"). A valuation allowance has been recorded for the total deferred tax assets
as a result of uncertainties regarding realization of the assets based upon the
limited operating history of Brocade, the lack of profitability to date and the
uncertainty of future profitability. The components of net deferred tax assets
are as follows, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------- JANUARY 31
1997 1998 1999
------- -------- ----------
<S> <C> <C> <C>
Net operating loss carryforwards....................... $ 4,600 $ 8,100 $ 7,300
Tax credit carryforwards............................... 700 1,400 1,500
Capitalized startup costs.............................. 300 300 300
Reserves and accruals.................................. 300 2,200 3,100
Capitalized research expenditures...................... -- 700 800
------- -------- -------
Total deferred tax assets.................... 5,900 12,700 13,000
Valuation allowance.................................... (5,900) (12,700) (13,000)
------- -------- -------
Net deferred tax assets.............................. $ -- $ -- $ --
======= ======== =======
</TABLE>
As of January 31, 1999, Brocade had federal net operating loss
carryforwards of approximately $20.5 million and state net operating loss
carryforwards of approximately $6.5 million. The federal net operating loss and
other tax credit carryforwards expire on various dates beginning on 2010 through
2018. The state net operating loss carryforwards will expire beginning in 2003.
Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
9. RELATED PARTY TRANSACTIONS
In April 1997, Brocade sold 250,000 shares of its common stock to officers
of Brocade in consideration for full recourse promissory notes in the amount of
$75,000. Should the officers terminate employment, these shares are subject to a
right of repurchase by Brocade. The right of repurchase lapses over a four year
period. The notes bear interest at 6.5% and mature at various dates through
December 2001.
In January 1998, Brocade sold 225,000 shares of its common stock to
officers of Brocade in consideration for full recourse promissory notes in the
amount of $375,000. Should the officers terminate employment, these shares are
subject to a right of repurchase by Brocade. The right of repurchase lapses over
a four year period. The notes bear interest at 6.5% and mature at various dates
through December 2002.
F-19
<PAGE> 89
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENT
Reincorporation, Amendment to the Articles of Incorporation
In March 1999, Brocade's Board of Directors authorized the reincorporation
of the Company in the State of Delaware. This reincorporation is to be effective
prior to Brocade's initial public offering. Upon reincorporation, Brocade will
be authorized to issue 50,000,000 shares of common stock, $.001 par value and
5,000,000 shares of undesignated preferred stock, $.001 par value.
1999 Stock Plan
In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan
(the "1999 Plan"), subject to shareholder approval. The 1999 Plan provides for
the grant of incentive stock options to employees. A total of 300,000 shares of
common stock have been reserved for issuance under the 1999 Plan.
1999 Employee Stock Purchase Plan
In March 1999, the Board of Directors approved the adoption of Brocade's
1999 Employee Stock Purchase Plan (the "Purchase Plan"), subject to shareholder
approval. A total of 200,000 shares of common stock have been reserved for
issuance under the Purchase Plan. The Purchase Plan permits eligible employees
to purchase shares of common stock through payroll deductions at 85% of the fair
market value of the common stock, as defined in the Purchase Plan.
1999 Director Option Plan
In March 1999, the Board of Directors approved the 1999 Director Option
Plan (the "Director Plan"), subject to shareholder approval. The Director Plan
provides for the grant of common stock to non-employee directors. A total of
200,000 shares of common stock have been reserved for issuance under the
Director Plan.
Existing Stock Option Plans
In March 1999, the Board of Directors approved 300,000 additional shares of
common stock to be reserved for issuance under the 1998 Equity Incentive Plan.
Brocade granted approximately 182,000 options to purchase common stock under
various stock option plans during the period from February 1, 1999 to March 10,
1999.
F-20
<PAGE> 90
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> 91
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 92
[BROCADE LOGO]
<PAGE> 93
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 and
the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee........................................ $ 11,510
NASD filing fee............................................. 4,640
Nasdaq National Market listing fee.......................... 5,000
Blue sky qualification fees and expenses....................
Printing and engraving expenses.............................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Director and officer liability insurance....................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
--------
$
========
</TABLE>
- -------------------------
* To be supplied by amendment.
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> 94
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, we have issued and sold and issued the following
unregistered securities:
1. On August 25, 1995, we sold 523,250 shares of our common stock to
Kumar Malavalli, Paul R. Bonderson, Jr. and Seth D. Neiman, the founders of
the Company, for an aggregate purchase price of $52,325.
2. From inception through March 10, 1999, we granted stock options to
purchase an aggregate of 7,656,468 shares of our common stock at exercise
prices ranging from $.025 to $5.00 per share to employees, consultants,
directors and other service providers pursuant to our 1995 Equity Incentive
Plan, our 1998 Equity Incentive Plan and our 1998 Executive Equity
Incentive Plan.
3. From inception through March 10, 1999, we issued and sold an
aggregate of 4,887,825 shares of our common stock to employees,
consultants, directors and other service providers for aggregate
consideration of approximately $5,384,992 pursuant to exercise of options
granted under our 1995 Equity Incentive Plan, our 1998 Equity Incentive
Plan and our 1998 Executive Equity Incentive Plan.
4. On August 28, 1995, we sold 1,425,000 shares of Series A Preferred
Stock for $1.00 per share to a group of private investors for an aggregate
purchase price of $1,425,000.
5. On December 26, 1995, we issued two warrants to an equipment lease
financing company to purchase 15,753 and 35,444 shares of our Series A
Preferred Stock at exercise prices of $4.50 and $1.00 per share,
respectively.
6. On June 5, 1996, we sold 386,764 shares of our common stock, for
$.05 per share to Bruce L. Bergman, the former President and Chief
Executive Officer of Brocade, for an aggregate purchase price of
$19,338.20.
7. On June 17, 1996, we sold 816,250 shares of our Series B Preferred
Stock for $4.00 per share to a group of private investors for an aggregate
purchase price of $3,265,000.
8. On July 16, 1996, we issued 32,813 shares of Common Stock at $.05
per share to a then-current officer of Brocade as partial commission in
connection with the Series B Preferred Stock financing.
9. On September 11, 1996, we issued a warrant to an equipment lease
financing company to purchase 17,500 shares of our Series B Preferred Stock
at an exercise price of $4.00 per share.
10. On August 26, 1996, in connection with the lease of office space,
we issued a warrant to a real property lessor to purchase 3,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
11. On December 6, 1996, we sold 3,333,333 shares of our Series C
Preferred Stock at $3.00 per share to a group of private investors for an
aggregate purchase price of $9,999,999.
12. On May 6, 1997, in connection with a sublease agreement, we issued
a warrant to a sublessor of real property to purchase 20,000 shares of our
Series C Preferred Stock at an exercise price of $3.00 per share.
13. On June 13, 1997, in connection with a combined line of credit and
equipment lease, we issued a warrant to a bank to purchase 25,000 shares of
our Series C Preferred Stock at an exercise price of $3.00 per share.
II-2
<PAGE> 95
14. On September 29, 1997, November 17, 1997 and December 3, 1997, we
sold 3,660,900 shares of our Series D Preferred Stock for $5.78 per share
to a group of private investors for an aggregate purchase price of
$21,160,002. In addition, in connection with the Series D financing, we
issued warrants to purchase an aggregate of 296,881 shares of our Series D
Preferred Stock at an exercise price of $6.78 per share.
15. On July 13, 1998, we issued 18,000 shares of Common Stock at $2.25
per share as partial compensation for the recruitment of the Company's new
president.
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> 96
<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 forms of agreements
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 March 1, 1998.
16.1 Letter of PricewaterhouseCoopers LLP, Independent
Accountants.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants
23.2* Consent of Counsel (included in Exhibit 5.1.).
24.1 Power of Attorney (see page II-6 of the Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
(b) FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifiying 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.
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
II-4
<PAGE> 97
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> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement 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 19th day of March 1999.
BROCADE COMMUNICATIONS SYSTEMS, INC.
By: /s/ GREGORY L. REYES
------------------------------------
Gregory L. Reyes
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Gregory L. Reyes and B. Carl Lee,
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments or any abbreviated registration statement
and any amendments thereto filed pursuant to Rule 462(b) increasing the number
of securities for which registration is sought), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ SETH D. NEIMAN Chairman of the Board March 19, 1999
------------------------------------------
Seth D. Neiman
/s/ GREGORY L. REYES President and Chief Executive March 19, 1999
------------------------------------------ Officer (Principal Executive
Gregory L. Reyes Officer)
/s/ B. CARL LEE Vice President, Finance and Chief March 19, 1999
------------------------------------------ Financial Officer (Principal
B. Carl Lee Financial and Accounting Officer)
Director March , 1999
------------------------------------------
Neal Dempsey
</TABLE>
II-6
<PAGE> 99
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARK LESLIE Director March 19, 1999
------------------------------------------
Mark Leslie
/s/ LARRY W. SONSINI Director March 19, 1999
------------------------------------------
Larry W. Sonsini
</TABLE>
II-7
<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 PERIOD EXPENSES DEDUCTIONS OF PERIOD
- -------------------------------------------- ----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended October 31, 1996:
Allowance for returns and doubtful
accounts.................................. $ -- $ -- $ -- $ --
Year ended October 31, 1997:
Allowance for returns and doubtful
accounts.................................. $ -- $ 100,000 $ -- $100,000
Year ended October 31, 1998:
Allowance for returns and doubtful
accounts.................................. $100,000 $ 185,000 $ -- $285,000
Three-Month Period Ended January 31, 1999:
Allowance for returns and doubtful
accounts.................................. $285,000 $ -- $ 25,000 $260,000
Year ended October 31, 1998:
Restructuring Accrual....................... $ -- $3,200,000 $2,779,000(1) $421,000
Three-Month Period ended January 31, 1999:
Restructuring accrual....................... $421,000 $ -- $ 344,000(1) $ 77,000
</TABLE>
- -------------------------
(1) These amounts include $700,000 in cash severance payments, $1,000,000 in non
cash compensation charges related to stock severance arrangements and
$1,400,000 in asset writeoffs.
S-2
<PAGE> 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 forms of agreements
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.
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
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 March 1, 1998.
16.1 Letter of PricewaterhouseCoopers LLP, Independent
Accountants.
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
23.2* Consent of Counsel (included in Exhibit 5.1.).
24.1 Power of Attorney (see page II-6 of the Registration
Statement).
27.1 Financial Data Schedule.
</TABLE>
- -------------------------
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
Bruce J. Bergman and Dennis R. DeBroeck certify that:
1. They are the President and Secretary, respectively, of Brocade
Communications Systems, Inc., a California corporation.
2. The Articles of Incorporation of the corporation, as amended to the
date of the filing of this certificate, including amendments set forth herein
but not separately filed (and with the omissions required by Section 910 of the
California Corporations Code), are restated to read in their entirety as set
forth in Exhibit "1" attached hereto and made a part hereof by this reference.
3. The Restated Articles of Incorporation set forth herein have been
duly approved by the Board of Directors of the corporation.
4. The amendments to the Articles of Incorporation included in the
Restated Articles of Incorporation set forth herein (other than omissions
required by Section 910 of the Corporations Code) have been duly approved by the
required vote of the shareholders of the corporation in accordance with Sections
902 and 903 of the California Corporations Code. The corporation has two classes
of stock, and the number of outstanding shares is 4,913,383 shares of Common
Stock, 1,425,000 shares of Series A Preferred Stock, 816,250 of Series B
Preferred Stock, 3,333,333 Shares of Series C Preferred Stock and 2,795,848
shares of Series D Preferred Stock. The number of shares voting in favor of the
amendment to the Amended and Restated Articles of Incorporation set forth herein
equaled or exceeded the vote required. The percentage vote required was more
than 50% of the outstanding shares of Common Stock, more than 66 2/3% of the
outstanding shares of Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock, voting together as a single
class, more than 50% of the outstanding shares of Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock, voting together, and more
than 50% of the outstanding shares of Series D Preferred Stock.
(THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK)
<PAGE> 2
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this certificate are
true and correct of our knowledge.
Dated: November 25, 1997
/s/ BRUCE J. BERGMAN
----------------------------------
Bruce J. Bergman, President
/s/ DENNIS R. DEBROECK
----------------------------------
Dennis R. DeBroeck, Secretary
2
<PAGE> 3
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
ARTICLE I
The name of the corporation is Brocade Communications Systems, Inc.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
Unless applicable law otherwise provides, any amendment, repeal or modification
of this Article III shall not adversely affect any right of any director under
this Article III that existed at or prior to the time of such amendment, repeal
or modification.
ARTICLE IV
The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors or otherwise, in excess of the indemnification otherwise permitted by
Section 317 of the California Corporations Code, subject only to the applicable
limits on such excess indemnification set forth in Section 204 of the California
Corporations Code. Unless applicable law otherwise provides, any amendment,
repeal or modification of any provision of this Article IV shall not adversely
affect any contract or other right to indemnification of an agent of the
corporation that existed at or prior to the time of such amendment, repeal or
modification.
ARTICLE V
The corporation is authorized to issue two classes of stock, designated,
respectively, "Common Stock" and "Preferred Stock," both of which shall have no
par value. The number of shares of Common Stock the corporation is authorized to
issue is 30,000,000 shares. The number of shares of Preferred Stock the
corporation is authorized to issue is 9,791,280 shares, 1,476,197 of which are
designated as "Series A Preferred Stock," 833,750 of which are
<PAGE> 4
designated as "Series B Preferred Stock", 3,381,333 of which are designated
"Series C Preferred Stock" and 4,100,000 of which are designated "Series D
Preferred Stock".
ARTICLE VI
The rights, preferences, privileges and restrictions granted to and
imposed on the Preferred Stock and the Common Stock are as follows:
1. DEFINITIONS. For purposes of this Article VI, the following
definitions shall apply:
1.1 "Board" shall mean the Board of Directors of the Company.
1.2 "Company" shall mean this corporation.
1.3 "Common Stock" shall mean the Common Stock, no par value, of the
Company.
1.4 "Common Stock Dividend" shall mean a stock dividend declared and
paid on the Common Stock that is payable in shares of Common Stock.
1.5 "Dividend Rate" shall mean $0.08 per share per annum for each
share of the Series A Preferred Stock, $0.32 per share per annum for each share
of the Series B Preferred Stock, $0.24 per share per annum for each share of the
Series C Preferred Stock and $0.4624 per share per annum for each share of the
Series D Preferred Stock, as appropriately adjusted for any stock dividend,
stock split, stock combination, recapitalization, consolidation or the like with
respect to such shares.
1.6 "Original Issue Date" shall mean, with respect to the Preferred
Stock (as defined hereinafter), the date immediately following the effective
date of the filing of these Amended and Restated Articles of Incorporation.
1.7 "Original Issue Price" shall mean $1.00 per share for each share
of the Series A Preferred Stock, $4.00 per share for each share of the Series B
Preferred Stock, $3.00 per share for each share of the Series C Preferred Stock
and $5.78 per share for each share of the Series D Preferred Stock, as
appropriately adjusted for any stock dividend, stock split, stock combination,
recapitalization, consolidation or the like with respect to such shares.
1.8 "Permitted Repurchases" shall mean the repurchase by the Company
of shares of Common Stock held by employees, officers, directors, consultants,
independent contractors, advisors, or other persons performing services for the
Company or a subsidiary that are subject to restricted stock purchase agreements
or stock option exercise agreements under which the Company has the option to
repurchase such shares: (i) at cost, upon the occurrence of certain events, such
as the termination of employment or services; or (ii) at any price pursuant to
the Company's exercise of a right of first refusal to repurchase such shares.
1.9 "Preferred Stock" shall mean the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock, collectively.
2
<PAGE> 5
1.10 "Series A Preferred Stock" shall mean the Series A Preferred
Stock, without par value, of the Company.
1.11 "Series B Preferred Stock" shall mean the Series B Preferred
Stock, without par value, of the Company.
1.12 "Series C Preferred Stock" shall mean the Series C Preferred
Stock, without par value, of the Company.
1.13 "Series D Preferred Stock" shall mean the Series D Preferred
Stock, without par value, of the Company.
1.14 "Subsidiary" shall mean any corporation of which at least fifty
percent (50%) of the outstanding voting stock is at the time owned directly or
indirectly by the Company or by one or more of such subsidiary corporations.
2. DIVIDEND RIGHTS.
2.1 Dividend Preferences. In each calendar year, the holders of the
then outstanding Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and Series D Preferred Stock shall be entitled to receive, when,
as and if declared by the Board, out of any funds and assets of the Company
legally available therefor, noncumulative dividends at the annual Dividend Rate
for each such series of Preferred Stock, respectively, prior and in preference
to the payment of any dividends on the Common Stock in such calendar year (other
than a Common Stock Dividend). No dividends (other than a Common Stock Dividend)
shall be paid with respect to the Common Stock during any calendar year unless
dividends in the total amount of the annual Dividend Rate for the Series A
Preferred Stock shall have first been paid or declared and set apart for payment
to the holders of the Series A Preferred Stock, dividends in the total amount of
the annual Dividend Rate for the Series B Preferred Stock shall have first been
paid or declared and set apart for payment to the holders of the Series B
Preferred Stock, dividends in the total amount of the annual Dividend Rate for
the Series C Preferred Stock shall have first been paid or declared and set
apart for payment to the holders of the Series C Preferred Stock, and dividends
in the total amount of the annual Dividend Rate for the Series D Preferred Stock
shall have first been paid or declared and set apart for payment to the holders
of the Series D Preferred Stock, respectively, during that calendar year;
provided, however, that this restriction shall not apply to Permitted
Repurchases. Payments of any dividends to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or the Series D
Preferred Stock shall be paid pro rata, on an equal priority, pari passu basis
according to their respective dividend preferences as set forth herein.
Dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and the Series D Preferred Stock shall not be mandatory or
cumulative, and no rights or interest shall accrue to the holders of the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or the
Series D Preferred Stock by reason of the fact that the Company shall fail to
declare or pay dividends on the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or the Series D Preferred Stock in the amount of
the annual Dividend Rate for each such series or in any other amount in any
calendar year or any fiscal year of the Company, whether or not the earnings of
the
3
<PAGE> 6
Company in any calendar year or fiscal year were sufficient to pay such
dividends in whole or in part.
2.2 Participation Rights. If, after dividends in the full
preferential amounts specified in this Section 2 for the Series A Preferred
Stock, the Series B Preferred Stock, Series C Preferred Stock and the Series D
Preferred Stock have been paid or declared and set apart in any calendar year of
the Company, the Board shall declare additional dividends out of funds legally
available therefor in that calendar year, then such additional dividends shall
be declared among the holders of the then outstanding Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and the
Series D Preferred Stock pro rata according to the number of shares of Common
Stock held by such holders (where each holder of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D
Preferred Stock is to be treated for this purpose as holding (in lieu of such
shares of Preferred Stock) the greatest whole number of shares of Common Stock
then issuable upon conversion in full of, respectively, such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or
Series D Preferred Stock pursuant to Section 6).
2.3 Non-Cash Dividends. Whenever a dividend provided for in this
Section 2 shall be payable in property other than cash, the value of such
dividend shall be deemed to be the fair market value of such property as
determined in good faith by the Board.
3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the funds and
assets of the Company that may be legally distributed to the Company's
shareholders (the "Available Funds and Assets") shall be distributed to
shareholders in the following manner:
3.1 Preferred Stock. The holders of Series A Preferred Stock, Series
B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock then
outstanding shall be entitled to be paid, out of the Available Funds and Assets,
and prior and in preference to any payment or distribution (or any setting apart
of any payment or distribution) of any Available Funds and Assets on any shares
of Common Stock, an amount per share equal to the Original Issue Price for each
such series of Preferred Stock plus all declared but unpaid dividends thereon.
If upon any liquidation, dissolution or winding up of the Company, the Available
Funds and Assets shall be insufficient to permit the payment to holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock of their full preferential amount described in this
subsection, then all of the remaining Available Funds and Assets shall be
distributed among the holders of the then outstanding Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
pro rata, on an equal priority, pari passu basis, according to their respective
liquidation preferences set forth herein.
3.2 Participation Rights. If there are any Available Funds and Assets
remaining after the payment or distribution (or the setting aside for payment or
distribution) to the holders of the Preferred Stock of their full preferential
amounts described above in this Section 3, then all such remaining Available
Funds and Assets shall be distributed among the holders of the then outstanding
Common Stock pro rata according to the number of shares of Common Stock held by
each holder thereof (where, for this purpose, holders of shares of Series A
Preferred Stock,
4
<PAGE> 7
Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred
Stock will be deemed to hold (in lieu such shares of Preferred Stock) the
greatest whole number of shares of Common Stock then issuable upon conversion in
full of such shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and/or Series D Preferred Stock pursuant to Section 6).
3.3 Merger or Sale of Assets. A (i) consolidation or merger of the
Company with or into any other corporation or corporations in which the holders
of the Company's outstanding shares immediately before such consolidation or
merger do not, immediately after such consolidation or merger, retain stock
representing a majority of the voting power of the surviving corporation of such
consolidation or merger; or (ii) a sale of all or substantially all of the
assets of the Company, shall each be deemed to be a liquidation, dissolution or
winding up of the Company as those terms are used in this Section 3.
3.4 Non-Cash Consideration. If any assets of the Company distributed
to shareholders in connection with any liquidation, dissolution, or winding up
of the Company are other than cash, then the value of such assets shall be their
fair market value as determined by the Board, except that any securities to be
distributed to shareholders in a liquidation, dissolution, or winding up of the
Company shall be valued as follows:
(a) The method of valuation of securities not subject to
investment letter or other similar restrictions on free marketability shall be
as follows:
(i) if the securities are then traded on a national
securities exchange or the Nasdaq National Market (or a similar national
quotation system), then the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the 30-day
period ending three (3) days prior to the distribution; and
(ii) if actively traded over-the-counter, then the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) days prior to the distribution; and
(iii) if there is no active public market, then the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the Company.
(b) The method of valuation of securities subject to investment
letter or other restrictions on free marketability shall be to make an
appropriate discount from the market value determined as above in subparagraphs
(a)(i),(ii) or (iii) of this subsection to reflect the approximate fair market
value thereof, as determined in good faith by the Board.
4. REDEMPTION.
4.1 Mandatory Redemption.
Subject to the terms and conditions of this subsection, the
Company shall, upon receiving at any time after August 28, 2002, a written
request for the redemption of all the Preferred Stock under this Section 4.1
signed by the holders of a majority of the voting power of
5
<PAGE> 8
the then outstanding shares of Preferred Stock (determined on an as-converted
basis): (a) provided there are outstanding shares of Preferred Stock on the date
that is the first day of the first calendar quarter commencing at least one (1)
month following its receipt of such written redemption request (the "First
Redemption Date"), on such First Redemption Date, redeem a number of shares of
Preferred Stock equal to 25% of the shares of Series A Preferred Stock, 25% of
the Series B Preferred Stock, 25% of the shares of Series C Preferred Stock and
25% of the shares of Series D Preferred Stock outstanding on the First
Redemption Date; (b) provided there are outstanding shares of Preferred Stock on
the first anniversary of the First Redemption Date, then on such first
anniversary, redeem a number of shares of Preferred Stock equal to 33% of the
shares of Series A Preferred Stock, 33% of the Series B Preferred Stock, 33% of
the shares of Series C Preferred Stock and 33% of the shares of Series D
Preferred Stock outstanding on the first anniversary of the First Redemption
Date; (c) provided there are outstanding shares of Preferred Stock on the second
anniversary of the First Redemption Date, on such second anniversary, redeem a
number of shares of Preferred Stock equal to 50% of the shares of Series A
Preferred Stock, 50% of the Series B Preferred Stock, 50% of the shares of
Series C Preferred Stock and 50% of the shares of Series D Preferred Stock
outstanding on the second anniversary of the First Redemption Date; and (d)
provided there are outstanding shares of Preferred Stock on the third
anniversary of the First Redemption Date, on such third anniversary, redeem all
of the shares of Preferred Stock outstanding on the third anniversary of the
First Redemption Date; from any source of funds legally available therefor at
the redemption prices therefor described in this subsection, until all
outstanding shares of Preferred Stock have been redeemed or converted to Common
Stock as provided in Section 6; provided, however, that the Company, at its sole
option and discretion, may redeem greater numbers (including all) of the
outstanding shares of Preferred Stock, at the redemption price set forth in this
subsection at any time on or after such seventh anniversary (provided that the
Company has received such a request to redeem) to the extent permitted by law.
The redemption price for each share of Preferred Stock shall be an amount equal
to the Original Issue Price for the applicable series of Preferred Stock plus
the amount of all declared and unpaid dividends thereon. If upon any redemption
date scheduled under this subsection for the redemption of Preferred Stock, the
funds and assets of the Company legally available to redeem such stock shall be
insufficient to redeem all shares of Preferred Stock then scheduled to be
redeemed, then any such unredeemed shares shall be carried forward and shall be
redeemed (together with any other shares of Preferred Stock then scheduled to be
redeemed) at the next such scheduled redemption date to the full extent of
legally available funds of the Company at such time, and any such unredeemed
shares shall continue to be so carried forward until redeemed. Shares of
Preferred Stock which are subject to redemption hereunder but which have not
been redeemed due to insufficient legally available funds and assets of the
Company shall continue to be outstanding and entitled to all dividend,
liquidation, conversion and other rights, preferences, privileges and
restrictions of the Preferred Stock respectively until such shares have been
converted or redeemed.
4.2 Partial Redemption. No redemption shall be made under this
Section 4 of only a part of the then outstanding Preferred Stock which is to be
redeemed hereunder unless the Company shall first, as between the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, redeem an equal percentage of the outstanding shares of each
such series of Preferred Stock and then as between holders of the same series of
Preferred Stock effect such redemption pro rata among all holders of each such
series of
6
<PAGE> 9
outstanding Preferred Stock which are to be redeemed hereunder according to the
number of shares held by each holder thereof on the applicable Redemption Date.
4.3 Redemption Notice. At least twenty (20) but no more than sixty
(60) days prior to the date fixed for any redemption of Preferred Stock (the
"Redemption Date"), written notice shall be mailed by the Company, postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Preferred Stock to be
redeemed, at the address last shown on the records of the Company for such
holder or given by the holder to the Company for the purpose of notice or, if no
such address appears or is given, at the place where the principal executive
office of the Company is located, notifying such holder of the redemption to be
effected, specifying the subsection hereof under which such redemption is being
effected, the Redemption Date, the applicable redemption price, the number of
such holder's shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and/or Series D Preferred Stock to be redeemed, the
place at which payment may be obtained and the date on which such holder's
conversion rights (as set forth in Section 6) as to such shares terminate (which
date shall in no event be earlier than the close of business on the third
business day prior to the Redemption Date) and calling upon such holder to
surrender to the Company, in the manner and at the place designated, the
certificate or certificates representing the shares to be redeemed (the
"Redemption Notice"). Notwithstanding the foregoing, only one Redemption Notice
need be given for a redemption effected pursuant to subsection 4.1, provided
such redemption notice identifies all scheduled redemption dates and provided
that each new transferee who acquires shares of Preferred Stock after such
shares are first to be redeemed under subsection 4.1 shall be given a similar
Redemption Notice before redemption of any such holder's shares of Preferred
Stock under subsection 4.1.
4.4 Surrender of Certificates. On or before each designated
Redemption Date, each holder of Preferred Stock to be redeemed shall (unless
such holder has previously exercised his right to convert such shares of
Preferred Stock into Common Stock as provided in Section 6 below), surrender the
certificate(s) representing such shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock to be
redeemed to the Company, in the manner and at the place designated in the
Redemption Notice, and thereupon the redemption price for such shares shall be
payable to the order of the person whose name appears on such certificate(s) as
the owner thereof, and each surrendered certificate shall be canceled and
retired. If less than all of the shares represented by such certificate are
redeemed, then the Company shall promptly issue a new certificate representing
the unredeemed shares.
4.5 Effect of Redemption. If the Redemption Notice shall have been
duly given, and if on the Redemption Date the redemption price is either paid or
made available for payment through the deposit arrangements specified in
subsection 4.6 below, then notwithstanding that the certificates evidencing any
of the shares of Preferred Stock so called for redemption shall not have been
surrendered, all dividends with respect to such shares shall cease to accrue
after the Redemption Date, such shares shall not thereafter be transferred on
the Company's books and all of the rights of the holders of such shares with
respect to such shares shall terminate after the Redemption Date, except only
the right of the holders to receive the redemption price without interest upon
surrender of their certificate(s) therefor.
7
<PAGE> 10
4.6 Deposit of Redemption Price. On or prior to the Redemption Date,
the Company may, at its option, deposit with a bank or trust company in San
Francisco, California having a capital and surplus of at least $100,000,000, as
a trust fund, a sum equal to the aggregate redemption price for all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and/or Series D Preferred Stock called for redemption and not yet redeemed, with
irrevocable instructions and authority to the bank or trust company to pay, on
or after the Redemption Date, the redemption price to the respective holders
upon the surrender of their share certificates. From and after the date of such
deposit, the shares so called for redemption shall be redeemed. The deposit
shall constitute full payment of the shares to their holders, and from and after
the date of the deposit, the shares shall be deemed to be no longer outstanding,
and the holders thereof shall cease to be shareholders with respect to such
shares and shall have no rights with respect thereto except the right to receive
from the bank or trust company payment of the redemption price of the shares,
without interest, upon surrender of their certificates therefor, and the right
to convert such shares as provided in Section 6 below. Any funds so deposited
and unclaimed at the end of one (1) year from the Redemption Date shall be
released or repaid to the Company, after which time the holders of shares called
for redemption who have not claimed such funds shall be entitled to receive
payment of the redemption price only from the Company.
5. VOTING RIGHTS.
5.1 Common Stock. Each holder of shares of Common Stock shall be
entitled to one (1) vote for each share thereof held.
5.2 Preferred Stock. Each holder of shares of Preferred Stock shall
be entitled to the number of votes equal to the number of whole shares of Common
Stock into which such shares of Preferred Stock could be converted pursuant to
the provisions of Section 6 below at the record date for the determination of
the shareholders entitled to vote on such matters or, if no such record date is
established, the date such vote is taken or any written consent of shareholders
is solicited.
5.3 General. Subject to the foregoing provisions of this Section 5,
each holder of Preferred Stock shall have full voting rights and powers equal to
the voting rights and powers of the holders of Common Stock, and shall be
entitled to notice of any shareholders' meeting in accordance with the by laws
of the Company (as in effect at the time in question) and applicable law, and
shall be entitled to vote, together with the holders of Common Stock, with
respect to any question upon which holders of Common Stock have the right to
vote, except as may be otherwise provided by applicable law. Except as otherwise
expressly provided herein or as required by law, the holders of Preferred Stock
and the holders of Common Stock shall vote together and not as separate classes.
5.4 Board of Directors Election and Removal.
(a) Election. So long as at least 500,000 shares (such number
of shares being subject to proportional adjustment to reflect combinations or
subdivisions of such Series A, Series B, Series C or Series D Preferred Stock or
dividends declared in shares of such stock) of Preferred Stock are outstanding,
the holders of Series A Preferred Stock, Series B Preferred
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Stock and Series C Preferred Stock, voting together as a single block, shall be
entitled to elect two (2) directors of the Company; (ii) the holders of the
Common Stock, voting together as a single class, shall be entitled to elect one
(1) director of the Company; (iii) the holders of Series D Preferred Stock,
voting as a separate series, shall be entitled to elect one (1) director of the
Company provided that the outstanding shares of Preferred Stock include 750,000
shares of Series D Preferred Stock (such number of shares being subject to
proportional adjustment to reflect combinations or subdivisions of such Series D
Preferred Stock or dividends declared in shares of such stock); and (iv) the
holders of the Preferred Stock and the Common Stock, voting together as a single
class, shall be entitled to elect the remaining directors of the Company. After
such time as at least 500,000 shares (such number of shares being subject to
proportional adjustment to reflect combinations or subdivisions of such Series
A, Series B, Series C or Series D Preferred Stock or dividends declared in
shares of such stock) of Preferred Stock are no longer outstanding, then the
holders of the Preferred Stock and the Common Stock, voting together as a single
class, shall be entitled to elect all of the directors of the Company.
(b) Quorum; Required Vote.
(i) Quorum. At any meeting held for the purpose of electing
directors, the presence in person or by proxy of the holders of a majority of
the voting power of the shares of the Preferred Stock or Common Stock then
outstanding, respectively, shall constitute a quorum of the Preferred Stock or
Common Stock, as the case may be, for the election of directors to be elected
solely by the holders of the Preferred Stock or Common Stock, respectively. The
holders of Preferred Stock and Common Stock representing a majority of the
voting power of all the then outstanding shares of Preferred Stock and Common
Stock shall constitute a quorum for the election of the director to be elected
jointly by the holders of the Preferred Stock and the Common Stock.
(ii) Required Vote. With respect to the election of any
director or directors by the holders of the outstanding shares of a specified
class or classes of stock given the right to elect such director pursuant to
subsection 5.4(a) above ("Specified Stock"), that candidate or those candidates
(as applicable) shall be elected who either: (i) in the case of any such vote
conducted at a meeting of the holders of such Specified Stock, receive the
highest number of affirmative votes of the outstanding shares of such Specified
Stock, up to the number of directors to be elected by such Specified Stock; or
(ii) in the case of any such vote taken by written consent without a meeting,
are elected by the unanimous written consent of the holders of outstanding
shares of such Specified Stock.
(c) Vacancy. If there shall be any vacancy in the office of a
director elected by the holders of any Specified Stock pursuant to subsection
5.4(a), then, other than a vacancy created by removal of a director, a successor
to hold office for the unexpired term of such director may be elected by either:
(i) the remaining director or directors (if any) in office that were so elected
by the holders of such Specified Stock, by the unanimous written consent of such
directors, the affirmative vote of a majority of such directors, whether or not
less than a quorum, or by the sole remaining director elected by the holders of
such Specified Stock if there be but one, or (ii) the affirmative vote of
holders of the outstanding shares of such Specified Stock that are entitled to
elect such director under subsection 5.4(a) or in the case of any such
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<PAGE> 12
vote is taken by written consent without a meeting, by the consent of the
holders of a majority of outstanding shares of such Specified Stock.
(d) Removal. Subject to Section 303 of the California
Corporations Code, any director who shall have been elected to the Board by the
holders of any Specified Stock pursuant to subsection 5.4(a) or 5.4(c) or by any
director or directors elected by holders of any Specified Stock as provided in
subsection 5.4(c), may be removed during his or her term of office, either with
or without cause, by, and only by, the affirmative vote of shares representing a
majority of the voting power of all the outstanding shares of such Specified
Stock entitled to vote, given either at a meeting of such shareholders duly
called for that purpose or pursuant to a written consent of shareholders without
a meeting. Any vacancy created by such removal may be filled only in the manner
provided in subsection 5.4(b).
(e) Procedures. Any meeting of the holders of any Specified
Stock, and any action taken by the holders of any Specified Stock by written
consent without a meeting, in order to elect or remove a director under this
subsection 5.4, shall be held in accordance with the procedures and provisions
of the Company's Bylaws, the California Corporations Code and applicable law
regarding shareholder meetings and shareholder actions by written consent, as
such are then in effect (including but not limited to procedures and provisions
for determining the record date for shares entitled to vote).
(f) Termination. Notwithstanding anything in this subsection 5.4
to the contrary, the provisions of this subsection 5.4 shall cease to be of any
further force or effect upon the earlier to occur of: (i) the first date on
which the total number of outstanding shares of Preferred Stock is less than
500,000 shares (such number of shares being subject to proportional adjustment
to reflect combination or subdivisions of such Series A, Series B, Series C or
Series D Preferred Stock or dividends declared in shares of such stock); or (ii)
upon the merger or consolidation of the Company with or into any other
corporation or corporations in which the holders of the Company's outstanding
shares immediately before such consolidation or merger do not, immediately after
such consolidation or merger, retain stock representing a majority of the voting
power of the surviving corporation of such consolidation or merger, if such
consolidation or merger is approved by the shareholders of the Company in
compliance with applicable law and the Articles of Incorporation and Bylaws of
the Company; or (iii) a sale of all or substantially all of the Company's
assets.
6. CONVERSION RIGHTS. The outstanding shares of Preferred Stock shall be
convertible into Common Stock as follows:
6.1 Optional Conversion.
(a) At the option of the holder thereof, each share of Preferred
Stock shall be convertible, at any time or from time to time prior to the close
of business on the third business day before any date fixed for redemption of
such share, into fully paid and nonassessable shares of Common Stock as provided
herein.
(b) Each holder of Preferred Stock who elects to convert the same
into shares of Common Stock shall surrender the certificate or certificates
therefor, duly endorsed, at
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<PAGE> 13
the office of the Company or any transfer agent for the Preferred Stock or
Common Stock, and shall give written notice to the Company at such office that
such holder elects to convert the same and shall state therein the number of
shares of Preferred Stock being converted. Thereupon the Company shall promptly
issue and deliver at such office to such holder a certificate or certificates
for the number of shares of Common Stock to which such holder is entitled upon
such conversion. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the certificate
or certificates representing the shares of Preferred Stock to be converted, and
the person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on such date.
6.2 Automatic Conversion.
(a) Each share of Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock shall automatically be converted into fully
paid and nonassessable shares of Common Stock, as provided herein (i)
immediately prior to the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Company in which the aggregate public offering price
(before deduction of underwriters' discounts and commissions) equals or exceeds
$10,000,000; or (ii) upon the Company's receipt of the written consent of the
holders of not less than a majority of the then outstanding shares of Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, voting
together as a single block, to the conversion of all then outstanding Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock under
this Section 6.
(b) Each share of Series D Preferred Stock shall automatically be
converted into fully paid and nonassessable shares of Common Stock, as provided
herein (i) immediately prior to the closing of a firm commitment underwritten
public offering pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Company in which the aggregate public offering price
(before deduction of underwriters' discounts and commissions) equals or exceeds
$10,000,000 and the public offering price per share of which equals or exceeds
$8.00 per share (such price per share of Common Stock to be appropriately
adjusted to reflect Common Stock Events (as defined in Subsection 6.4); or (ii)
upon the Company's receipt of the written consent of the holders of not less
than two-thirds (2/3) of the then outstanding shares of Series D Preferred Stock
to the conversion of all then outstanding Series D Preferred Stock under this
Section 6.
(c) Upon the occurrence of any event specified in subparagraph
6.2(a) and/or 6.2(b) above, the outstanding shares of (i) Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock, if the event
fulfills one of the conditions set forth in subparagraph 6.2(a), and/or (ii) the
Series D Preferred Stock, if the event fulfills one of the conditions set forth
in subparagraph 6.2(b), shall be converted into Common Stock automatically
without the need for any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Company or its transfer agent; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon such conversion unless the certificates evidencing such
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<PAGE> 14
shares of such Preferred Stock are either delivered to the Company or its
transfer agent as provided below, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of such Preferred Stock, the holders of
the Preferred Stock shall surrender the certificates representing such shares at
the office of the Company or any transfer agent for the Preferred Stock or
Common Stock. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of the Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred.
6.3 Conversion Price. Each share of Preferred Stock shall be
convertible in accordance with subsection 6.1 or subsection 6.2 above into the
number of shares of Common Stock which results from dividing the Original Issue
Price for such series of Preferred Stock by the conversion price for such series
of Preferred Stock that is in effect at the time of conversion (the "Conversion
Price"). After giving effect to the filing of these Amended and Restated
Articles of Incorporation, the Conversion Price for the Series A Preferred Stock
shall be $0.25, the Conversion Price for the Series B Preferred Stock shall be
$2.00, the Conversion Price for the Series C Preferred Stock shall be $3.00 and
the Conversion Price for the Series D Preferred Stock shall be $5.78. The
Conversion Price of each series of Preferred Stock shall be subject to
adjustment from time to time as provided below.
6.4 Adjustment Upon Common Stock Event. Upon the happening of a
Common Stock Event (as hereinafter defined) on or after the Original Issue Date,
the Conversion Price of such series of Preferred Stock shall, simultaneously
with the happening of such Common Stock Event, be adjusted by multiplying the
Conversion Price of such series of Preferred Stock in effect immediately prior
to such Common Stock Event by a fraction, (i) the numerator of which shall be
the number of shares of Common Stock issued and outstanding immediately prior to
such Common Stock Event, and (ii) the denominator of which shall be the number
of shares of Common Stock issued and outstanding immediately after such Common
Stock Event, and the product so obtained shall thereafter be the Conversion
Price for such series of Preferred Stock. The Conversion Price for a series of
Preferred Stock shall be readjusted in the same manner upon the happening of
each subsequent Common Stock Event. As used herein, the term "Common Stock
Event" shall mean (i) the issue by the Company of additional shares of Common
Stock as a dividend or other distribution on outstanding Common Stock, (ii) a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock, or (iii) a combination of the outstanding shares of
Common Stock into a smaller number of shares of Common Stock.
6.5 Adjustments for Other Dividends and Distributions. If at any time
or from time to time after the Original Issue Date the Company pays a dividend
or makes another distribution to the holders of the Common Stock payable in
securities of the Company other than shares of Common Stock, then in each such
event provision shall be made so that the holders of the applicable series of
Preferred Stock shall receive upon conversion thereof, in addition to the number
of shares of Common Stock receivable upon conversion thereof, the amount of
securities of the Company which they would have received had their applicable
series of Preferred Stock
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<PAGE> 15
been converted into Common Stock on the date of such event (or such record date,
as applicable) and had they thereafter, during the period from the date of such
event (or such record date, as applicable) to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section 6 with respect to the rights of the holders of the applicable series of
Preferred Stock or with respect to such other securities by their terms.
6.6 Adjustment for Reclassification, Exchange and Substitution. If at
any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the applicable series of Preferred Stock is
changed into the same or a different number of shares of any class or classes of
stock, whether by recapitalization, reclassification or otherwise (other than by
a Common Stock Event or a stock dividend, reorganization, merger, consolidation
or sale of assets provided for elsewhere in this Section 6), then in any such
event each holder of such shares of Preferred Stock shall have the right
thereafter to convert such stock into the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change by holders of the number of shares of Common Stock into which
such shares of such shares of Preferred Stock could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
6.7 Sale of Shares Below Conversion Price.
(a) Adjustment Formula. If at any time or from time to time on or
after the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this subsection 6.7 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in subsection 6.4, a dividend or distribution as
provided in subsection 6.5 or a recapitalization, reclassification or other
change as provided in subsection 6.6, for an Effective Price (as hereinafter
defined) that is less than the Conversion Price for a series of Preferred Stock
in effect immediately prior to such issue or sale, then, and in each such case,
the Conversion Price for such series of Preferred Stock shall be reduced, as of
the close of business on the date of such issue or sale, to the price obtained
by multiplying such Conversion Price by a fraction:
(i) The numerator of which shall be the sum of (A) the number of
Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of
Common Stock plus (B) the quotient obtained by dividing the Aggregate
Consideration Received (as hereinafter defined) by the Company for
the total number of Additional Shares of Common Stock so issued or
sold (or deemed so issued and sold) by the Conversion Price for such
series of Preferred Stock in effect immediately prior to such issue
or sale; and
(ii) The denominator of which shall be the sum of (A) the number
of Common Stock Equivalents Outstanding immediately prior to such
issue or sale plus (B) the number of Additional Shares of Common
Stock so issued or sold (or deemed so issued and sold).
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<PAGE> 16
(b) Certain Definitions. For the purpose of making any adjustment
required under this subsection 6.7:
(i) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Company, whether or not subsequently reacquired or
retired by the Company, other than: (A) shares of Common Stock issued or
issuable upon conversion of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock or Series D Preferred Stock; (B) shares of Series A
Preferred Stock or Common Stock issued or issuable with respect to or upon
exercise of warrants to purchase 51,197 shares of Series A Preferred Stock,
17,500 shares of Series B Preferred Stock or 48,000 shares of Series C Preferred
Stock and (C) shares of Common Stock (or options, warrants or rights therefor)
issued to employees, officers, or directors of, or contractors, consultants or
advisers to, the Company or any Subsidiary pursuant to stock purchase or stock
option plans, stock bonuses or awards, warrants, contracts, agreements or other
arrangements that are approved by the Board;
(ii) The "Aggregate Consideration Received" by the Company
for any issue or sale (or deemed issue or sale) of securities shall (A) to the
extent it consists of cash, be computed at the gross amount of cash received by
the Company before deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the Company in connection with
such issue or sale and without deduction of any expenses payable by the Company;
(B) to the extent it consists of property other than cash, be computed at the
fair value of that property as determined in good faith by the Board; and (C) if
Additional Shares of Common Stock, Convertible Securities or Rights or Options
to purchase either Additional Shares of Common Stock or Convertible Securities
are issued or sold together with other stock or securities or other assets of
the Company for a consideration which covers both, be computed as the portion of
the consideration so received that may be reasonably determined in good faith by
the Board to be allocable to such Additional Shares of Common Stock, Convertible
Securities or Rights or Options.
(iii) "Common Stock Equivalents Outstanding" shall mean the
number of shares of Common Stock that is equal to the sum of (A) all shares of
Common Stock of the Company that are outstanding at the time in question, plus
(B) all shares of Common Stock of the Company issuable upon conversion of all
shares of Preferred Stock or other Convertible Securities that are outstanding
at the time in question, plus (C) all shares of Common Stock of the Company that
are issuable upon the exercise of Rights or Options that are outstanding at the
time in question assuming the full conversion or exchange into Common Stock of
all such Rights or Options that are Rights or Options to purchase or acquire
Convertible Securities into or for Common Stock.
(iv) "Convertible Securities" shall mean stock or other
securities convertible into or exchangeable for shares of Common Stock.
(v) The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, by the Company under this subsection 6.7, into the Aggregate
Consideration Received, or deemed to have been
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<PAGE> 17
received, by the Company under this subsection 6.7, for the issue of such
Additional Shares of Common Stock.
(vi) "Rights or Options" shall mean warrants, options or
other rights to purchase or acquire shares of Common Stock or Convertible
Securities.
(c) Deemed Issuances. For the purpose of making any adjustment to
the Conversion Price of any series of the Preferred Stock required under this
subsection 6.7, if the Company issues or sells any Rights or Options or
Convertible Securities and if the Effective Price of the shares of Common Stock
issuable upon exercise of such Rights or Options and/or the conversion or
exchange of Convertible Securities (computed without reference to any additional
or similar protective or antidilution clauses) is less than the Conversion Price
then in effect for a series of Preferred Stock, then the Company shall be deemed
to have issued, at the time of the issuance of such Rights, Options or
Convertible Securities, that number of Additional Shares of Common Stock that is
equal to the maximum number of shares of Common Stock issuable upon exercise or
conversion of such Rights, Options or Convertible Securities upon their issuance
and to have received, as the Aggregate Consideration Received for the issuance
of such shares, an amount equal to the total amount of the consideration, if
any, received by the Company for the issuance of such Rights or Options or
Convertible Securities, plus, in the case of such Rights or Options, the minimum
amounts of consideration, if any, payable to the Company upon the exercise in
full of such Rights or Options, plus, in the case of Convertible Securities, the
minimum amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange thereof; provided that:
(i) if the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
then the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses;
(ii) if the minimum amount of consideration payable to the
Company upon the exercise of Rights or Options or the conversion or exchange of
Convertible Securities is reduced over time or upon the occurrence or
non-occurrence of specified events other than by reason of antidilution or
similar protective adjustments, then the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is reduced; and
(iii) if the minimum amount of consideration payable to the
Company upon the exercise of such Rights or Options or the conversion or
exchange of Convertible Securities is subsequently increased, then the Effective
Price shall again be recalculated using the increased minimum amount of
consideration payable to the Company upon the exercise of such Rights or Options
or the conversion or exchange of such Convertible Securities.
No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of
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<PAGE> 18
any such Convertible Securities. If any such Rights or Options or the conversion
rights represented by any such Convertible Securities shall expire without
having been fully exercised, then the Conversion Price as adjusted upon the
issuance of such Rights or Options or Convertible Securities shall be readjusted
to the Conversion Price which would have been in effect had an adjustment been
made on the basis that the only shares of Common Stock so issued were the shares
of Common Stock, if any, that there actually issued or sold on the exercise of
such Rights or Options or rights of conversion or exchange of such Convertible
Securities, and such shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Company upon such exercise, plus the
consideration, if any, actually received by the Company for the granting of all
such Rights or Options, whether or not exercised, plus the consideration
received for issuing or selling all such Convertible Securities actually
converted or exchanged, plus the consideration, if any, actually received by the
Company (other than by cancellation of liabilities or obligations evidenced by
such Convertible Securities) on the conversion or exchange of such Convertible
Securities, provided that such readjustment shall not apply to prior conversions
of Preferred Stock.
6.8 Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for a series of Preferred Stock, the
Company, at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
the Preferred Stock at the holder's address as shown in the Company's books.
6.9 Fractional Shares. No fractional shares of Common Stock shall be
issued upon any conversion of Preferred Stock. In lieu of any fractional share
to which the holder would otherwise be entitled, the Company shall pay the
holder cash equal to the product of such fraction multiplied by the Common
Stock's fair market value as determined in good faith by the Board as of the
date of conversion.
6.10 Reservation of Stock Issuable Upon Conversion. The Company shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
6.11 Notices. Any notice required by the provisions of this Section 6
to be given to the holders of shares of the Preferred Stock shall be deemed
given upon the earlier of actual receipt or deposit in the United States mail,
by certified or registered mail, return receipt requested, postage prepaid,
addressed to each holder of record at the address of such holder appearing on
the books of the Company.
6.12 No Impairment. The Company shall not avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the
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Company, but shall at all times in good faith assist in carrying out all such
action as may be reasonably necessary or appropriate in order to protect the
conversion rights of the holders of the Preferred Stock against impairment.
7. RESTRICTIONS AND LIMITATIONS.
7.1 Protective Provisions.
So long as 400,000 shares of Preferred Stock remain outstanding, the
Company shall not, without the approval, by vote or written consent, of the
holders of two-thirds of the Preferred Stock then outstanding, voting as a
single class:
(1) amend its Articles of Incorporation in any manner that would
alter or change any of the rights, preferences, privileges or restrictions of
any series of the Preferred Stock;
(2) purchase or redeem any shares of Preferred Stock otherwise
than pursuant to Section 4 hereof;
(3) permit any subsidiary of the Company in which the Company
holds a controlling voting interest to sell or issue stock to any party other
than the Company;
(4) amend its Articles of Incorporation to increase or decrease
the authorized number of shares of Common Stock or Preferred Stock;
(5) authorize any other stock having rights or preferences senior
to or on a parity with any series of Preferred Stock;
(6) merge or consolidate with or into any corporation if such
merger or consolidation would result in the shareholders of the Company
immediately prior to such merger or consolidation holding less than majority of
the voting power of the stock of the surviving corporation immediately after
such merger or consolidation;
(7) sell all or substantially all the Company's assets in a
single transaction or series of related transactions;
(8) liquidate, dissolve or wind up the Company;
(9) Declare or pay any dividends (other than dividends payable
solely in shares of its own Common Stock) on or declare or make any other
distribution (other than Permitted Repurchases; provided that such repurchases
do not exceed $25,000 in any twelve-month period without the consent of the
Company's Board of Directors), directly or indirectly, on account of any shares
of Common Stock now or hereafter outstanding; or
(10) Amend the Company's Bylaws to change the range of the
authorized number of members of its Board of Directors.
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<PAGE> 20
8. MISCELLANEOUS.
8.1 No Reissuance of Preferred Stock. No share or shares of Preferred
Stock acquired by the Company by reason of redemption, purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue.
8.2 Consent to Certain Transactions. Each holder of shares of
Preferred Stock shall, by virtue of its acceptance of a stock certificate
evidencing such Preferred Stock, be deemed to have consented, for purposes of
Sections 502, 503 and 506 of the California Corporations Code, to all Permitted
Repurchases.
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<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
Brocade Communications Systems, Inc., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Brocade Communications Systems, Inc.
The corporation was originally incorporated under the same name and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on February 11, 1999.
B. This Certificate of Incorporation has been duly adopted in accordance
with the provisions of the General Corporation Law of the State of Delaware by
the Board of Directors and the Stockholders of the corporation.
C. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, this Certificate of Incorporation restates and integrates
and further amends the provisions of the Certificate of Incorporation of this
corporation.
D. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
<PAGE> 2
ARTICLE I
The name of the corporation is Brocade Communications Systems, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, Delaware 19801,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
ARTICLE IV
1. Authorized Capital. The corporation is authorized to issue two
classes of stock, designated, respectively, "Common Stock" and "Preferred
Stock," both of which shall have a par value of $.001 per share. The number of
shares of Common Stock the corporation is authorized to issue is 30,000,000
shares. The number of shares of Preferred Stock the corporation is authorized to
issue is 9,791,280 shares, 1,476,197 of which are designated as "Series A
Preferred Stock," 833,750 of which are designated as "Series B Preferred Stock",
3,381,333 of which are designated "Series C Preferred Stock" and 4,100,000 of
which are designated "Series D Preferred Stock".
2. Authorized Capital Following Automatic Conversion Event. Upon the
automatic conversion of all outstanding shares of Preferred in accordance with
the provisions of Article V, Section 6.2 of this Certificate of Incorporation
(the "Automatic Conversion Event"), the Company shall immediately thereafter be
authorized to issue two classes of stock to be designated, respectively, Common
Stock and Preferred Stock. The total number of shares of Common Stock which the
Company shall have the authority to issue shall be 50,000,000, $.001 par value,
and the total number of shares of Preferred Stock the Company shall have the
authority to issue shall be 5,000,000, $.001 par value. Immediately following
any Automatic Conversion Event, the Preferred Stock may be issued from time to
time in one or more series pursuant to a resolution or resolutions providing for
such issue duly adopted by the Board of Directors (authority to do so being
hereby expressly vested in the Board). The Board of Directors is further
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the
<PAGE> 3
number of shares constituting any series, may increase or decrease (but not
below the number of shares in any such series then outstanding), the number of
shares of any series subsequent to the issue of shares of that series.
3. Restatement of Certificate of Incorporation. Immediately following
any Automatic Conversion Event, the Board of Directors of the Company is
authorized, without the further consent or approval of the stockholders of the
Company to amend and restate this Certificate of Incorporation to show the
authorized classes of capital stock as set forth in the preceding paragraph and
to eliminate all references in this Certificate of Incorporation to the rights,
preferences, privileges and restrictions of the series of Preferred Stock
including those set forth in Article IV, section 1 above and Article V below
(and, in connection with any such amendment and restatement, to renumber the
remaining Articles).
ARTICLE V
The rights, preferences, privileges and restrictions granted to and
imposed on the Preferred Stock and the Common Stock are as follows:
1. DEFINITIONS. For purposes of this Article V, the following
definitions shall apply:
1.1 "Board" shall mean the Board of Directors of the Company.
1.2 "Company" shall mean this corporation.
1.3 "Common Stock" shall mean the Common Stock, par value $.001
per share, of the Company.
1.4 "Common Stock Dividend" shall mean a stock dividend declared
and paid on the Common Stock that is payable in shares of Common Stock.
1.5 "Dividend Rate" shall mean $0.08 per share per annum for each
share of the Series A Preferred Stock, $0.32 per share per annum for each share
of the Series B Preferred Stock, $0.24 per share per annum for each share of the
Series C Preferred Stock and $0.4624 per share per annum for each share of the
Series D Preferred Stock, as appropriately adjusted for any stock dividend,
stock split, stock combination, recapitalization, consolidation or the like with
respect to such shares.
1.6 "Original Issue Date" shall mean, with respect to the
Preferred Stock (as defined hereinafter), the date immediately following the
effective date of the filing of this Certificate of Incorporation.
1.7 "Original Issue Price" shall mean $1.00 per share for each
share of the Series A Preferred Stock, $4.00 per share for each share of the
Series B Preferred Stock, $3.00 per share for each share of the Series C
Preferred Stock and $5.78 per share for each share of the Series D
<PAGE> 4
Preferred Stock, as appropriately adjusted for any stock dividend, stock split,
stock combination, recapitalization, consolidation or the like with respect to
such shares.
1.8 "Remitted Repurchases" shall mean the repurchase by the
Company of shares of Common Stock held by employees, officers, directors,
consultants, independent contractors, advisors, or other persons performing
services for the Company or a subsidiary that are subject to restricted stock
purchase agreements or stock option exercise agreements under which the Company
has the option to repurchase such shares: (i) at cost, upon the occurrence of
certain events, such as the termination of employment or services; or (ii) at
any price pursuant to the Company's exercise of a right of first refusal to
repurchase such shares.
1.9 "Preferred Stock" shall mean the Series A Preferred Stock,
the Series B Preferred Stock, the Series C Preferred Stock and the Series D
Preferred Stock, collectively.
1.10 "Series A Preferred Stock" shall mean the Series A Preferred
Stock, par value $.001 per share, of the Company.
1.11 "Series B Preferred Stock" shall mean the Series B Preferred
Stock, par value $.001 per share, of the Company.
1.12 "Series C Preferred Stock" shall mean the Series C Preferred
Stock, par value $.001 per share, of the Company.
1.13 "Series D Preferred Stock" shall mean the Series D Preferred
Stock, par value $.001 per share, of the Company.
1.14 "Subsidiary" shall mean any corporation of which at least
fifty percent (50%) of the outstanding voting stock is at the time owned
directly or indirectly by the Company or by one or more of such subsidiary
corporations.
2. DIVIDEND RIGHTS.
2.1 Dividend Preferences. In each calendar year, the holders of
the then outstanding Series A Preferred Stock, Series B Preferred Stock, Series
C Preferred Stock and Series D Preferred Stock shall be entitled to receive,
when, as and if declared by the Board, out of any funds and assets of the
Company legally available therefor, noncumulative dividends at the annual
Dividend Rate for each such series of Preferred Stock, respectively, prior and
in preference to the payment of any dividends on the Common Stock in such
calendar year (other than a Common Stock Dividend). No dividends (other than a
Common Stock Dividend) shall be paid with respect to the Common Stock during any
calendar year unless dividends in the total amount of the annual Dividend Rate
for the Series A Preferred Stock shall have first been paid or declared and set
apart for payment
<PAGE> 5
to the holders of the Series A Preferred Stock, dividends in the total amount of
the annual Dividend Rate for the Series B Preferred Stock shall have first been
paid or declared and set apart for payment to the holders of the Series B
Preferred Stock, dividends in the total amount of the annual Dividend Rate for
the Series C Preferred Stock shall have first been paid or declared and set
apart for payment to the holders of the Series C Preferred Stock, and dividends
in the total amount of the annual Dividend Rate for the Series D Preferred Stock
shall have first been paid or declared and set apart for payment to the holders
of the Series D Preferred Stock, respectively, during that calendar year;
provided, however, that this restriction shall not apply to Permitted
Repurchases. Payments of any dividends to the holders of the Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock or the Series D
Preferred Stock shall be paid pro rata, on an equal priority, pari passu basis
according to their respective dividend preferences as set forth herein.
Dividends on the Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock and the Series D Preferred Stock shall not be mandatory or
cumulative, and no rights or interest shall accrue to the holders of the Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock or the
Series D Preferred Stock by reason of the fact that the Company shall fail to
declare or pay dividends on the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or the Series D Preferred Stock in the amount of
the annual Dividend Rate for each such series or in any other amount in any
calendar year or any fiscal year of the Company, whether or not the earnings of
the Company in any calendar year or fiscal year were sufficient to pay such
dividends in whole or in part.
2.2 Participation Rights. If, after dividends in the full
preferential amounts specified in this Section 2 for the Series A Preferred
Stock, the Series B Preferred Stock, Series C Preferred Stock and the Series D
Preferred Stock have been paid or declared and set apart in any calendar year of
the Company, the Board shall declare additional dividends out of funds legally
available therefor in that calendar year, then such additional dividends shall
be declared among the holders of the then outstanding Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock, Series C Preferred Stock and the
Series D Preferred Stock pro rata according to the number of shares of Common
Stock held by such holders (where each holder of shares of Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and/or Series D
Preferred Stock is to be treated for this purpose as holding (in lieu of such
shares of Preferred Stock) the greatest whole number of shares of Common Stock
then issuable upon conversion in full of, respectively, such shares of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and/or
Series D Preferred Stock pursuant to Section 6).
2.3 Non-Cash Dividends. Whenever a dividend provided for in this
Section 2 shall be payable in property other than cash, the value of such
dividend shall be deemed to be the fair market value of such property as
determined in good faith by the Board.
3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the funds and
assets of the Company that may be legally distributed to the Company's
stockholders (the "Available Funds and Assets") shall be distributed to
stockholders in the following manner:
3.1 Preferred Stock. The holders of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
then outstanding shall be entitled to be paid, out of the Available Funds and
Assets, and prior and in preference to any payment or distribution (or any
setting apart of any payment or distribution) of any Available Funds and Assets
<PAGE> 6
on any shares of Common Stock, an amount per share equal to the Original Issue
Price for each such series of Preferred Stock plus all declared but unpaid
dividends thereon. If upon any liquidation, dissolution or winding up of the
Company, the Available Funds and Assets shall be insufficient to permit the
payment to holders of the Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock of their full preferential
amount described in this subsection, then all of the remaining Available Funds
and Assets shall be distributed among the holders of the then outstanding Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock pro rata, on an equal priority, pari passu basis, according to
their respective liquidation preferences set forth herein.
3.2 Participation Rights. If there are any Available Funds and
Assets remaining after the payment or distribution (or the setting aside for
payment or distribution) to the holders of the Preferred Stock of their full
preferential amounts described above in this Section 3, then all such remaining
Available Funds and Assets shall be distributed among the holders of the then
outstanding Common Stock pro rata according to the number of shares of Common
Stock held by each holder thereof (where, for this purpose, holders of shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and/or Series D Preferred Stock will be deemed to hold (in lieu such shares of
Preferred Stock) the greatest whole number of shares of Common Stock then
issuable upon conversion in full of such shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and/or Series D Preferred
Stock pursuant to Section 6).
3.3 Merger or Sale of Assets. A (i) consolidation or merger of
the Company with or into any other corporation or corporations in which the
holders of the Company's outstanding shares immediately before such
consolidation or merger do not, immediately after such consolidation or merger,
retain stock representing a majority of the voting power of the surviving
corporation of such consolidation or merger; or (ii) a sale of all or
substantially all of the assets of the Company, shall each be deemed to be a
liquidation, dissolution or winding up of the Company as those terms are used in
this Section 3.
3.4 Non-Cash Consideration. If any assets of the Company
distributed to stockholders in connection with any liquidation, dissolution, or
winding up of the Company are other than cash, then the value of such assets
shall be their fair market value as determined by the Board, except that any
securities to be distributed to stockholders in a liquidation, dissolution, or
winding up of the Company shall be valued as follows:
(a) The method of valuation of securities not subject to
investment letter or other similar restrictions on free marketability shall be
as follows:
(i) if the securities are then traded on a national
securities exchange or the Nasdaq National Market (or a similar national
quotation system), then the value shall be deemed to be the average of the
closing prices of the securities on such exchange or system over the 30-day
period ending three (3) days prior to the distribution; and
<PAGE> 7
(ii) if actively traded over-the-counter, then the
value shall be deemed to be the average of the closing bid prices over the
30-day period ending three (3) days prior to the distribution; and
(iii) if there is no active public market, then the
value shall be the fair market value thereof, as determined in good faith by the
Board of Directors of the Company.
(b) The method of valuation of securities subject to
investment letter or other restrictions on free marketability shall be to make
an appropriate discount from the market value determined as above in
subparagraphs; (a)(i), (ii) or (iii) of this subsection to reflect the
approximate fair market value thereof, as determined in good faith by the Board.
4. REDEMPTION.
4.1 Mandatory Redemption. Subject to the terms and conditions of
this subsection, the Company shall, upon receiving at any time after August 28,
2002, a written request for the redemption of all the Preferred Stock under this
Section 4 signed by the holders of a majority of the voting power of the then
outstanding shares of Preferred Stock (determined on an as-converted basis): (a)
provided there are outstanding shares of Preferred Stock on the date that is the
first day of the first calendar quarter commencing at least one (1) month
following its receipt of such written redemption request (the "First Redemption
Date"), on such First Redemption Date, redeem a number of shares of Preferred
Stock equal to 25% of the shares of Series A Preferred Stock, 25% of the Series
B Preferred Stock, 25% of the shares of Series C Preferred Stock and 25% of the
shares of Series D Preferred Stock outstanding on the First Redemption Date; (b)
provided there are outstanding shares of Preferred Stock on the first
anniversary of the First Redemption Date, then on such first anniversary, redeem
a number of shares of Preferred Stock equal to 33% of the shares of Series A
Preferred Stock, 33% of the Series B Preferred Stock, 33% of the shares of
Series C Preferred Stock and 33% of the shares of Series D Preferred Stock
outstanding on the first anniversary of the First Redemption Date; (c) provided
there are outstanding shares of Preferred Stock on the second anniversary of the
First Redemption Date, on such second anniversary, redeem a number of shares of
Preferred Stock equal to 50% of the shares of Series A Preferred Stock, 50% of
the Series B Preferred Stock, 50% of the shares of Series C Preferred Stock and
50% of the shares of Series D Preferred Stock outstanding on the second
anniversary of the First Redemption Date; and (d) provided there are outstanding
shares of Preferred Stock on the third anniversary of the First Redemption Date,
on such third anniversary, redeem all of the shares of Preferred Stock
outstanding on the third anniversary of the First Redemption Date; from any
source of funds legally available therefor at the redemption prices therefor
described in this subsection, until all outstanding shares of Preferred Stock
have been redeemed or converted to Common Stock as provided in Section 6;
provided, however, that the Company, at its sole option and discretion, may
redeem greater numbers (including all) of the outstanding shares of Preferred
Stock, at the redemption price set forth in this subsection at any time on or
after such seventh anniversary (provided that the Company has received such a
request to redeem) to the extent permitted by law. The redemption price for each
share of Preferred Stock shall be an amount equal to the Original Issue Price
for the applicable series of Preferred Stock plus the amount of all declared and
unpaid dividends thereon. If upon any
<PAGE> 8
redemption date scheduled under this subsection for the redemption of Preferred
Stock, the funds and assets of the Company legally available to redeem such
stock shall be insufficient to redeem all shares of Preferred Stock then
scheduled to be redeemed, then any such unredeemed shares shall be carried
forward and shall be redeemed (together with any other shares of Preferred Stock
then scheduled to be redeemed) at the next such scheduled redemption date to the
full extent of legally available funds of the Company at such time, and any such
unredeemed shares shall continue to be so carried forward until redeemed. Shares
of Preferred Stock which are subject to redemption hereunder but which have not
been redeemed due to insufficient legally available funds and assets of the
Company shall continue to be outstanding and entitled to all dividend,
liquidation, conversion and other rights, preferences, privileges and
restrictions of the Preferred Stock respectively until such shares have been
converted or redeemed.
4.2 Partial Redemption. No redemption shall be made under this
Section 4 of only a part of the then outstanding Preferred Stock which is to be
redeemed hereunder unless the Company shall first, as between the Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock, redeem an equal percentage of the outstanding shares of each
such series of Preferred Stock and then as between holders of the same series of
Preferred Stock effect such redemption pro rata among all holders of each such
series of outstanding Preferred Stock which are to be redeemed hereunder
according to the number of shares held by each holder thereof on the applicable
Redemption Date.
4.3 Redemption Notice. At least twenty (20) but no more than
sixty (60) days prior to the date fixed for any redemption of Preferred Stock
(the "Redemption Date"), written notice shall be mailed by the Company, postage
prepaid, to each holder of record (at the close of business on the business day
next preceding the day on which notice is given) of the Preferred Stock to be
redeemed, at the address last shown on the records of the Company for such
holder or given by the holder to the Company for the purpose of notice or, if no
such address appears or is given, at the place where the principal executive
office of the Company is located, notifying such holder of the redemption to be
effected, specifying the subsection hereof under which such redemption is being
effected, the Redemption Date, the applicable redemption price, the number of
such holder's shares of Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and/or Series D Preferred Stock to be redeemed, the
place at which payment may be obtained and the date on which such holder's
conversion rights (as set forth in Section 6) as to such shares terminate (which
date shall in no event be earlier than the close of business on the third
business day prior to the Redemption Date) and calling upon such holder to
surrender to the Company, in the manner and at the place designated, the
certificate or certificates representing the shares to be redeemed (the
"Redemption Notice"). Notwithstanding the foregoing, only one Redemption Notice
need be given for a redemption effected pursuant to subsection 4.1, provided
such redemption notice identifies all scheduled redemption dates and provided
that each new transferee who acquires shares of Preferred Stock after such
shares are first to be redeemed under subsection 4.1 shall be given a similar
Redemption Notice before redemption of any such holder's shares of Preferred
Stock under subsection 4.1.
<PAGE> 9
4.4 Surrender of Certificates. On or before each designated
Redemption Date, each holder of Preferred Stock to be redeemed shall (unless
such holder has previously exercised his right to convert such shares of
Preferred Stock into Common Stock as provided in Section 6 below), surrender the
certificate(s) representing such shares of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and/or Series D Preferred Stock to be
redeemed to the Company, in the manner and at the place designated in the
Redemption Notice, and thereupon the redemption price for such shares shall be
payable to the order of the person whose name appears on such certificate(s) as
the owner thereof, and each surrendered certificate shall be canceled and
retired. If less than all of the shares represented by such certificate are
redeemed, then the Company shall promptly issue a new certificate representing
the unredeemed shares.
4.5 Effect of Redemption. If the Redemption Notice shall have
been duly given, and if on the Redemption Date the redemption price is either
paid or made available for payment through the deposit arrangements specified in
subsection 4.6 below, then notwithstanding that the certificates evidencing any
of the shares of Preferred Stock so called for redemption shall not have been
surrendered, all dividends with respect to such shares shall cease to accrue
after the Redemption Date, such shares shall not thereafter be transferred on
the Company's books and all of the rights of the holders of such shares with
respect to such shares shall terminate after the Redemption Date, except only
the right of the holders to receive the redemption price without interest upon
surrender of their certificate(s) therefor.
4.6 Deposit of Redemption Price. On or prior to the Redemption
Date, the Company may, at its option, deposit with a bank or trust company in
San Francisco, California having a capital and surplus of at least $100,000,000,
as a trust fund, a sum equal to the aggregate redemption price for all shares of
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and/or Series D Preferred Stock called for redemption and not yet redeemed, with
irrevocable instructions and authority to the bank or trust company to pay, on
or after the Redemption Date, the redemption price to the respective holders
upon the surrender of their share certificates. From and after the date of such
deposit, the shares so called for redemption shall be redeemed. The deposit
shall constitute full payment of the shares to their holders, and from and after
the date of the deposit, the shares shall be deemed to be no longer outstanding,
and the holders thereof shall cease to be stockholders with respect to such
shares and shall have no rights with respect thereto except the right to receive
from the bank or trust company payment of the redemption price of the shares,
without interest, upon surrender of their certificates therefor, and the right
to convert such shares as provided in Section 6 below. Any funds so deposited
and unclaimed at the end of one (1) year from the Redemption Date shall be
released or repaid to the Company, after which time the holders of shares called
for redemption who have not claimed such funds shall be entitled to receive
payment of the redemption price only from the Company.
5. VOTING RIGHTS.
5.1 Common Stock. Each holder of shares of Common Stock shall be
entitled to one (1) vote for each share thereof held.
<PAGE> 10
5.2 Preferred Stock. Each holder of shares of Preferred Stock
shall be entitled to the number of votes equal to the number of whole shares of
Common Stock into which such shares of Preferred Stock could be converted
pursuant to the provisions of Section 6 below at the record date for the
determination of the stockholders entitled to vote on such matters or, if no
such record date is established, the date such vote is taken or any written
consent of stockholders is solicited.
5.3 General. Subject to the foregoing provisions of this Section
5, each holder of Preferred Stock shall have full voting rights and powers equal
to the voting rights and powers of the holders of Common Stock, and shall be
entitled to notice of any stockholders' meeting in accordance with the bylaws of
the Company (as in effect at the time in question) and applicable law, and shall
be entitled to vote, together with the holders of Common Stock, with respect to
any question upon which holders of Common Stock have the right to vote, except
as may be otherwise provided by applicable law. Except as otherwise expressly
provided herein or as required by law, the holders of Preferred Stock and the
holders of Common Stock shall vote together and not as separate classes.
5.4 Board of Directors Election and Removal.
(a) Election. So long as at least 500,000 shares (such number
of shares being subject to proportional adjustment to reflect combinations or
subdivisions of such Series A, Series B, Series C or Series D Preferred Stock or
dividends declared in shares of such stock) of Preferred Stock are outstanding,
the holders of Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock, voting together as a single block, shall be entitled to elect
two (2) directors of the Company; (ii) the holders of the Common Stock, voting
together as a single class, shall be entitled to elect one (1) director of the
Company; (iii) the holders of Series D Preferred Stock, voting as a separate
series, shall be entitled to elect one (1) director of the Company provided that
the outstanding shares of Preferred Stock include 750,000 shares of Series D
Preferred Stock (such number of shares being subject to proportional adjustment
to reflect combinations or subdivisions of such Series D Preferred Stock or
dividends declared in shares of such stock); and (iv) the holders of the
Preferred Stock and the Common Stock, voting together as a single class, shall
be entitled to elect the remaining directors of the Company. After such time as
at least 500,000 shares (such number of shares being subject to proportional
adjustment to reflect combinations or subdivisions of such Series A, Series B,
Series C or Series D Preferred Stock or dividends declared in shares of such
stock) of Preferred Stock are no longer outstanding, then the holders of the
Preferred Stock and the Common Stock, voting together as a single class, shall
be entitled to elect all of the directors of the Company.
(b) Quorum; Required Vote.
(i) Quorum. At any meeting held for the purpose of
electing directors, the presence in person or by proxy of the holders of a
majority of the voting power of the shares of the Preferred Stock or Common
Stock then outstanding, respectively, shall constitute a quorum of the Preferred
Stock or Common Stock, as the case may be, for the election of directors to be
elected solely by the holders of the Preferred Stock or Common Stock,
respectively. The holders of Preferred Stock and Common Stock representing a
majority of the voting power of all the then
<PAGE> 11
outstanding shares of Preferred Stock and Common Stock shall constitute a quorum
for the election of the director to be elected jointly by the holders of the
Preferred Stock and the Common Stock.
(ii) Required Vote. With respect to the election of any
director or directors by the holders of the outstanding shares of a specified
class or classes of stock given the right to elect such director pursuant to
subsection 5.4(a) above ("Specified Stock"), that candidate or those candidates
(as applicable) shall be elected who either: (i) in the case of any such vote
conducted at a meeting of the holders of such Specified Stock, receive the
highest number of affirmative votes of the outstanding shares of such Specified
Stock, up to the number of directors to be elected by such Specified Stock; or
(ii) in the case of any such vote taken by written consent without a meeting,
are elected by the unanimous written consent of the holders of outstanding
shares of such Specified Stock.
(iii) Vacancy. If there shall be any vacancy in the
office of a director elected by the holders of any Specified Stock pursuant to
subsection 5.4(a), then, other than a vacancy created by removal of a director,
a successor to hold office for the unexpired term of such director may be
elected by either: (i) the remaining director or directors (if any) in office
that were so elected by the holders of such Specified Stock, by the unanimous
written consent of such directors, the affirmative vote of a majority of such
directors, whether or not less than a quorum, or by the sole remaining director
elected by the holders of such Specified Stock if there be but one, or (ii) the
affirmative vote of holders of the outstanding shares of such Specified Stock
that are entitled to elect such director under subsection 5.4(a) or in the case
of any such vote is taken by written consent without a meeting, by the consent
of the holders of a majority of outstanding shares of such Specified Stock.
(iv) Removal. Subject to Section 303 of the Delaware
General Corporation Law, any director who shall have been elected to the Board
by the holders of any Specified Stock pursuant to subsection 5.4(a) or 5.4(c) or
by any director or directors elected by holders of any Specified Stock as
provided in subsection 5.4(c), may be removed during his or her term of office,
either with or without cause, by, and only by, the affirmative vote of shares
representing a majority of the voting power of all the outstanding shares of
such Specified Stock entitled to vote, given either at a meeting of such
stockholders duly called for that purpose or pursuant to a written consent of
stockholders without a meeting. Any vacancy created by such removal may be
filled only in the manner provided in subsection 5.4(b).
(v) Procedures. Any meeting of the holders of any
Specified Stock, and any action taken by the holders of any Specified Stock by
written consent without a meeting, in order to elect or remove a director under
this subsection 5.4, shall be held in accordance with the procedures and
provisions of the Company's Bylaws, the Delaware General Corporation Law and
applicable law regarding stockholder meetings and stockholder actions by written
consent, as such are then in effect (including but not limited to procedures and
provisions for determining the record date for shares entitled to vote).
<PAGE> 12
(vi) Termination. Notwithstanding anything in this
subsection 5.4 to the contrary, the provisions of this subsection 5.4 shall
cease to be of any further force or effect upon the earlier to occur of: (i) the
first date on which the total number of outstanding shares of Preferred Stock is
less than 500,000 shares (such number of shares being subject to proportional
adjustment to reflect combination or subdivisions of such Series A, Series B,
Series C or Series D Preferred Stock or dividends declared in shares of such
stock); or (ii) upon the merger or consolidation of the Company with or into any
other corporation or corporations in which the holders of the Company's
outstanding shares immediately before such consolidation or merger do not,
immediately after such consolidation or merger, retain stock representing a
majority of the voting power of the surviving corporation of such consolidation
or merger, if such consolidation or merger is approved by the stockholders of
the Company in compliance with applicable law and the Articles of Incorporation
and Bylaws of the Company; or (iii) a sale of all or substantially all of the
Company's assets.
6. CONVERSION RIGHTS. The outstanding shares of Preferred Stock shall be
convertible into Common Stock as follows:
6.1 Optional Conversion.
(a) At the option of the holder thereof, each share of
Preferred Stock shall be convertible, at any time or from time to time prior to
the close of business on the third business day before any date fixed for
redemption of such share, into fully paid and nonassessable shares of Common
Stock as provided herein.
(b) Each holder of Preferred Stock who elects to convert the
same into shares of Common Stock shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Company or any transfer agent for
the Preferred Stock or Common Stock, and shall give written notice to the
Company at such office that such holder elects to convert the same and shall
state therein the number of shares of Preferred Stock being converted.
Thereupon, the Company shall promptly issue and deliver at such office to such
holder a certificate or certificates for the number of shares of Common Stock to
which such holder is entitled upon such conversion, Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the certificate or certificates representing the shares of
Preferred Stock to be converted, and the person entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder of such shares of Common Stock on such date.
6.2 Automatic Conversion.
(a) Each share of Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock shall automatically be converted
into fully paid and nonassessable shares of Common Stock, as provided herein (i)
immediately prior to the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Company in which the aggregate public offering price
(before deduction of underwriters' discounts
<PAGE> 13
and commissions) equals or exceeds $10,000,000; or (ii) upon the Company's
receipt of the written consent of the holders of not less than a majority of the
then outstanding shares of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock, voting together as a single block, to the
conversion of all then outstanding Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock under this Section 6.
(b) Each share of Series D Preferred Stock shall
automatically be converted into fully paid and nonassessable shares of Common
Stock, as provided herein (i) immediately prior to the closing of a firm
commitment underwritten public offering pursuant to an effective registration
statement filed under the Securities Act of 1933, as amended, covering the offer
and sale of Common Stock for the account of the Company in which the aggregate
public offering price (before deduction of underwriters' discounts and
commissions) equals or exceeds $10,000,000 and the public offering price per
share of which equals or exceeds $8.00 per share (such price per share of Common
Stock to be appropriately adjusted to reflect Common Stock Events (as defined in
Subsection 6.4); or (ii) upon the Company's receipt of the written consent of
the holders of not less than two-thirds (2/3) of the then outstanding shares of
Series D Preferred Stock to the conversion of all then outstanding Series D
Preferred Stock under this Section 6.
(c) Upon the occurrence of any event specified in
subparagraph 6.2(a) and/or 6.2(b) above, the outstanding shares of (i) Series A
Preferred Stock, Series B Preferred Stock and Series C Preferred Stock, if the
event fulfills one of the conditions set forth in subparagraph 6.2(a), and/or
(ii) the Series D Preferred Stock, if the event fulfills one of the conditions
set forth in subparagraph 6.2(b), shall be converted into Common Stock
automatically without the need for any further action by the holders of such
shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided, however, that the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the certificates evidencing
such shares of such Preferred Stock are either delivered to the Company or its
transfer agent as provided below, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates. Upon the
occurrence of such automatic conversion of such Preferred Stock, the holders of
the Preferred Stock shall surrender the certificates representing such shares at
the office of the Company or any transfer agent for the Preferred Stock or
Common Stock. Thereupon, there shall be issued and delivered to such holder
promptly at such office and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of the Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred.
6.3 Conversion Price. Each share of Preferred Stock shall be
convertible in accordance with subsection 6.1 or subsection 6.2 above into the
number of shares of Common Stock which results from dividing the Original Issue
Price for such series of Preferred Stock by the conversion price for such series
of Preferred Stock that is in effect at the time of conversion (the "Conversion
Price"). After giving effect to the filing of these Amended and Restated
Articles of Incorporation, the Conversion Price for the Series A Preferred Stock
shall be $0.25, the Conversion
<PAGE> 14
Price for the Series B Preferred Stock shall be $2.00, the Conversion Price for
the Series C Preferred Stock shall be $3.00 and the Conversion Price for the
Series D Preferred Stock shall be $5.78. The Conversion Price of each series of
Preferred Stock shall be subject to adjustment from time to time as provided
below.
6.4 Adjustment Upon Common Stock Event. Upon the happening of a
Common Stock Event (as hereinafter defined) on or after the Original Issue Date,
the Conversion Price of such series of Preferred Stock shall, simultaneously
with the happening of such Common Stock Event, be adjusted by multiplying the
Conversion Price of such series of Preferred Stock in effect immediately prior
to such Common Stock Event by a fraction, (i) the numerator of which shall be
the number of shares of Common Stock issued and outstanding immediately prior to
such Common Stock Event, and (ii) the denominator of which shall be the number
of shares of Common Stock issued and outstanding immediately after such Common
Stock Event, and the product so obtained shall thereafter be the Conversion
Price for such series of Preferred Stock. The Conversion Price for a series of
Preferred Stock shall be readjusted in the same manner upon the happening of
each subsequent Common Stock Event. As used herein, the term "Common Stock
Event" shall mean (i) the issue by the Company of additional shares of Common
Stock as a dividend or other distribution on outstanding Common Stock, (ii) a
subdivision of the outstanding shares of Common Stock into a greater number of
shares of Common Stock, or (iii) a combination of the outstanding shares of
Common Stock into a smaller number of shares of Common Stock.
6.5 Adjustments for Other Dividends and Distributions. If at any
time or from time to time after the Original Issue Date the Company pays a
dividend or makes another distribution to the holders of the Common Stock
payable in securities of the Company other than shares of Common Stock, then in
each such event provision shall be made so that the holders of the applicable
series of Preferred Stock shall receive upon conversion thereof, in addition to
the number of shares of Common Stock receivable upon conversion thereof, the
amount of securities of the Company which they would have received had their
applicable series of Preferred Stock been converted into Common Stock on the
date of such event (or such record date, as applicable) and had they thereafter,
during the period from the date of such event (or such record date, as
applicable) to and including the conversion date, retained such securities
receivable by them as aforesaid during such period, subject to all other
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the applicable series of Preferred Stock or with
respect to such other securities by their terms.
6.6 Adjustment for Reclassification, Exchange and Substitution.
If at any time or from time to time after the Original Issue Date the Common
Stock issuable upon the conversion of the applicable series of Preferred Stock
is changed into the same or a different number of shares of any class or classes
of stock, whether by recapitalization, reclassification or otherwise (other than
by a Common Stock Event or a stock dividend, reorganization, merger,
consolidation or sale of assets provided for elsewhere in this Section 6), then
in any such event each holder of such shares of Preferred Stock shall have the
right thereafter to convert such stock into the kind and amount of stock and
other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the number of shares of Common
Stock into which such shares of such shares
<PAGE> 15
of Preferred Stock could have been converted immediately prior to such
recapitalization, reclassification or change, all subject to further adjustment
as provided herein or with respect to such other securities or property by the
terms thereof.
6.7 Sale of Shares Below Conversion Price.
(a) Adjustment Formula. If at any time or from time to time
on or after the Original Issue Date the Company issues or sells, or is deemed by
the provisions of this subsection 6.7 to have issued or sold, Additional Shares
of Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in subsection 6.4, a dividend or distribution as
provided in subsection 6.5 or a recapitalization, reclassification or other
change as provided in subsection 6.6, for an Effective Price (as hereinafter
defined) that is less than the Conversion Price for a series of Preferred Stock
in effect immediately prior to such issue or sale, then, and in each such case,
the Conversion Price for such series of Preferred Stock shall be reduced, as of
the close of business on the date of such issue or sale, to the price obtained
by multiplying such Conversion Price by a fraction:
(i) The numerator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of Common Stock
plus (B) the quotient obtained by dividing the Aggregate Consideration Received
(as hereinafter defined) by the Company for the total number of Additional
Shares of Common Stock so issued or sold (or deemed so issued and sold) by the
Conversion Price for such series of Preferred Stock in effect immediately prior
to such issue or sale; and
(ii) The denominator of which shall be the sum of (A)
the number of Common Stock Equivalents Outstanding immediately prior to such
issue or sale plus (B) the number of Additional Shares of Common Stock so issued
or sold (or deemed so issued and sold).
(b) Certain Definitions. For the purpose of making any
adjustment required under this subsection 6.7:
(i) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued by the Company, whether or not subsequently
reacquired or retired by the Company, other than: (A) shares of Common Stock
issued or issuable upon conversion of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock or Series D Preferred Stock; (B)
shares of Series A Preferred Stock or Common Stock issued or issuable with
respect to or upon exercise of warrants to purchase 51,197 shares of Series A
Preferred Stock, 17,500 shares of Series B Preferred Stock or 48,000 shares of
Series C Preferred Stock and (C) shares of Common Stock (or options, warrants or
rights therefor) issued to employees, officers. or directors of, or contractors,
consultants or advisers to, the Company or any Subsidiary pursuant to stock
purchase or stock option plans, stock bonuses or awards, warrants, contracts,
agreements or other arrangements that are approved by the Board;
<PAGE> 16
(ii) The "Aggregate Consideration Received" by the
Company for any issue or sale (or deemed issue or sale) of securities shall (A)
to the extent it consists of cash, be computed at the gross amount of cash
received by the Company before deduction of any underwriting or similar
commissions, compensation or concessions paid or allowed by the Company in
connection with such issue or sale and without deduction of any expenses payable
by the Company; (B) to the extent it consists of property other than cash, be
computed at the fair value of that property as determined in good faith by the
Board; and (C) if Additional Shares of Common Stock, Convertible Securities or
Rights or Options to purchase either Additional Shares of Common Stock or
Convertible Securities are issued or sold together with other stock or
securities or other assets of the Company for a consideration which covers both,
be computed as the portion of the consideration so received that may be
reasonably determined in good faith by the Board to be allocable to such
Additional Shares of Common Stock, Convertible Securities or Rights or Options.
(iii) "Common Stock Equivalents Outstanding" shall mean
the number of shares of Common Stock that is equal to the sum of (A) all shares
of Common Stock of the Company that are outstanding at the time in question,
plus (B) all shares of Common Stock of the Company issuable upon conversion of
all shares of Preferred Stock or other Convertible Securities that are
outstanding at the time in question, plus (C) all shares of Common Stock of the
Company that are issuable upon the exercise of Rights or Options that are
outstanding at the time in question assuming the full conversion or exchange
into Common Stock of all such Rights or Options that are Rights or Options to
purchase or acquire Convertible Securities into or for Common Stock.
(iv) "Convertible Securities" shall mean stock or other
securities convertible into or exchangeable for shares of Common Stock.
(v) The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, by the Company under this subsection 6.7, into the Aggregate
Consideration Received, or deemed to have been received, by the Company under
this subsection 6.7, for the issue of such Additional Shares of Common Stock.
(vi) "Rights or Options" shall mean warrants, options or
other rights to purchase or acquire shares of Common Stock or Convertible
Securities.
(c) Deemed Issuances. For the purpose of making any
adjustment to the Conversion Price of any series of the Preferred Stock required
under this subsection 6.7, if the Company issues or sells any Rights or Options
or Convertible Securities and if the Effective Price of the shares of Common
Stock issuable upon exercise of such Rights or Options and/or the conversion or
exchange of Convertible Securities (computed without reference to any additional
or similar protective or antidilution clauses) is less than the Conversion Price
then in effect for a series of Preferred Stock, then the Company shall be deemed
to have issued, at the time of the issuance of such Rights, Options or
Convertible Securities, that number of Additional Shares of Common Stock that is
equal to the maximum number of shares of Common Stock issuable upon exercise or
conversion of such Rights, Options or Convertible Securities upon their issuance
and to have
<PAGE> 17
received, as the Aggregate Consideration Received for the issuance of such
shares, an amount equal to the total amount of the consideration, if any,
received by the Company for the issuance of such Rights or Options or
Convertible Securities, plus, in the case of such Rights or Options, the minimum
amounts of consideration, if any, payable to the Company upon the exercise in
full of such Rights or Options, plus, in the case of Convertible Securities, the
minimum amounts of consideration, if any, payable to the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion or exchange thereof; provided that:
(i) if the minimum amounts of such consideration cannot
be ascertained, but are a function of antidilution or similar protective
clauses, then the Company shall be deemed to have received the minimum amounts
of consideration without reference to such clauses;
(ii) if the minimum amount of consideration payable to
the Company upon the exercise of Rights or Options or the conversion or exchange
of Convertible Securities is reduced over time or upon the occurrence or
non-occurrence of specified events other than by reason of antidilution or
similar protective adjustments, then the Effective Price shall be recalculated
using the figure to which such minimum amount of consideration is reduced; and
(iii) if the minimum amount of consideration payable to
the Company upon the exercise of such Rights or Options or the conversion or
exchange of Convertible Securities is subsequently increased, then the Effective
Price shall again be recalculated using the increased minimum amount of
consideration payable to the Company upon the exercise of such Rights or Options
or the conversion or exchange of such Convertible Securities.
No further adjustment of the Conversion Price, adjusted upon the issuance of
such Rights or Options or Convertible Securities, shall be made as a result of
the actual issuance of shares of Common Stock on the exercise of any such Rights
or Options or the conversion or exchange of any such Convertible Securities. If
any such Rights or Options or the conversion rights represented by any such
Convertible Securities shall expire without having been fully exercised, then
the Conversion Price as adjusted upon the issuance of such Rights or Options or
Convertible Securities shall be readjusted to the Conversion Price which would
have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any, that
there actually issued or sold on the exercise of such Rights or Options or
rights of conversion or exchange of such Convertible Securities, and such shares
of Common Stock, if any, were issued or sold for the consideration actually
received by the Company upon such exercise, plus the consideration, if any,
actually received by the Company for the granting of all such Rights or Options,
whether or not exercised, plus the consideration received for issuing or selling
all such Convertible Securities actually converted or exchanged, plus the
consideration, if any, actually received by the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion or exchange of such Convertible Securities,
provided that such readjustment shall not apply to prior conversions of
Preferred Stock.
<PAGE> 18
6.8 Certificate of Adjustment. In each case of an adjustment or
readjustment of the Conversion Price for a series of Preferred Stock, the
Company, at its expense, shall cause its Chief Financial Officer to compute such
adjustment or readjustment in accordance with the provisions hereof and prepare
a certificate showing such adjustment or readjustment, and shall mail such
certificate, by first class mail, postage prepaid, to each registered holder of
the Preferred Stock at the holder's address as shown in the Company's books.
6.9 Fractional Shares. No fractional shares of Common Stock shall
be issued upon any conversion of Preferred Stock. In lieu of any fractional
share to which the holder would otherwise be entitled, the Company shall pay the
holder cash equal to the product of such fraction multiplied by the Common
Stock's fair market value as determined in good faith by the Board as of the
date of conversion.
6.10 Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
6.11 Notices. Any notice required by the provisions of this
Section 6 to be given to the holders of shares of the Preferred Stock shall be
deemed given upon the earlier of actual receipt or deposit in the United States
mail, by certified or registered mail, return receipt requested, postage
prepaid, addressed to each holder of record at the address of such holder
appearing on the books of the Company.
6.12 No Impairment. The Company shall not avoid or seek to avoid
the observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Preferred Stock
against impairment.
7. RESTRICTIONS AND LIMITATIONS.
7.1 Protective Provisions.
(a) So long as 400,000 shares of Preferred Stock remain
outstanding, the Company shall not, without the approval, by vote or written
consent, of the holders of two-thirds of the Preferred Stock then outstanding,
voting as a single class:
<PAGE> 19
(i) amend its Articles of Incorporation in any manner
that would alter or change any of the rights, preferences, privileges or
restrictions of any series of the Preferred Stock;
(ii) purchase or redeem any shares of Preferred Stock
otherwise than pursuant to Section 4 hereof;
(iii) permit any subsidiary of the Company in which the
Company holds a controlling voting interest to sell or issue stock to any party
other than the Company;
(iv) amend its Articles of Incorporation to increase or
decrease the authorized number of shares of Common Stock or Preferred Stock;
(v) authorize any other stock having rights or
preferences senior to or on a parity with any series of Preferred Stock;
(vi) merge or consolidate with or into any corporation if
such merger or consolidation would result in the stockholders of the Company
immediately prior to such merger or consolidation holding less than majority of
the voting power of the stock of the surviving corporation immediately after
such merger or consolidation;
(vii) sell all or substantially all the Company's assets
in a single transaction or series of related transactions;
(viii) liquidate, dissolve or wind up the Company;
(ix) declare or pay any dividends (other than dividends
payable solely in shares of its own Common Stock) on or declare or make any
other distribution (other than Permitted Repurchases; provided that such
repurchases do not exceed $25,000 in any twelve-month period without the consent
of the Company's Board of Directors), directly or indirectly, on account of any
shares of Common Stock now or hereafter outstanding; or
(x) amend the Company's Bylaws to change the range of the
authorized number of members of its Board of Directors.
8. NO REISSUANCE OF PREFERRED STOCK. No share or shares of Preferred
Stock acquired by the Company by reason of redemption, purchase, conversion or
otherwise shall be reissued, and all such shares shall be canceled, retired and
eliminated from the shares which the Company shall be authorized to issue.
ARTICLE VI
The Corporation is to have perpetual existence.
<PAGE> 20
ARTICLE VII
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the corporation shall so provide.
ARTICLE VIII
1. The management of the business and the conduct of the affairs of the
corporation shall be vested in its Board of Directors. The number of directors
which constitute the whole Board of Directors of the corporation shall be
designated in the Bylaws of the corporation.
2. At such time as a Registration Statement regarding the sale of the
corporation's Common Stock to the public is declared effective by the Securities
and Exchange Commission, the Board of Directors shall be divided into three
classes designated as Class I, Class II and Class III, respectively. Directors
shall be assigned to each class in accordance with a resolution or resolutions
adopted by the Board of Directors. At the first annual meeting of stockholders
following the date hereof, the term of office of the Class I directors shall
expire and Class I directors shall be elected for a full term of three years. At
the second annual meeting of stockholders following the date hereof, the term of
office of the Class II directors shall expire and Class II directors shall be
elected for a full term of three years. At the third annual meeting of
stockholders following the date hereof, the term of office of the Class III
directors shall expire and Class III directors shall be elected for a full term
of three years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of three years to succeed the directors of the
class whose terms expire at such annual meeting.
3. Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
4. Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) the affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of voting stock of the corporation entitled to
vote generally in the election of directors ("Voting Stock") voting together as
a single class; or (ii) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors. Newly created directorships resulting from any increase in the number
of directors shall, unless the Board of Directors determines by resolution that
any such newly created directorship shall be filled by the stockholders, be
filled only by the affirmative vote of the directors then in office, even though
less than a quorum of the Board of Directors. Any director elected in accordance
with the preceding sentence shall hold office for the remainder of the full term
of the class of directors in which the new directorship was created or the
vacancy occurred and until such director's successor shall have been elected and
qualified.
<PAGE> 21
5. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the corporation's Bylaws by the stockholders of this
corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
6. No action shall be taken by the stockholders of the corporation
except at an annual or special meeting of the stockholders called in accordance
with the Bylaws.
7. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with cause by the affirmative vote of the holders of at
least a majority of the voting power of all of the then-outstanding shares of
the Voting Stock, voting together as a single class; or (ii) without cause by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the voting power of all of the then-outstanding shares of the
Voting Stock.
ARTICLE IX
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal ARTICLE VIII or
this ARTICLE IX.
ARTICLE X
The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in ARTICLE IX of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.
ARTICLE XI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
ARTICLE XII
1. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall be indemnified by the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
<PAGE> 22
2. The Corporation shall indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
3. Neither any amendment nor repeal of this Article XII, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article XII, shall eliminate or reduce the effect of this
Article XII, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article XII, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE XIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XIV
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.
ARTICLE XV
Until a Registration Statement regarding the sale of the Corporation's
Common Stock to the public is declared effective by the Securities and Exchange
Commission, stockholders shall be entitled to cumulative voting rights as set
forth in this Article XV and the Bylaws of the Corporation. At all elections of
directors of the Corporation, each holder of stock or of any class or classes or
of a series or series thereof shall be entitled to as many votes as shall equal
the number of votes which (except for this provision as to cumulative voting)
such stockholder would be entitled to cast for the election of directors with
respect to such stockholder's shares of stock multiplied by the number of
directors to be elected, and such stockholder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such stockholder may see fit. As of the
date that a Registration Statement regarding the sale of the Corporation's
Common Stock to the public is declared effective by the Securities and Exchange
Commission, this Article XV shall no longer be effective and may be deleted
herefrom upon any restatement of this Certificate of Incorporation.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Incorporation to be signed by Gregory L. Reyes, its Chief Executive Officer,
effective as of ________ __, 1999.
<PAGE> 23
BROCADE COMMUNICATIONS SYSTEMS, INC.
By:
-------------------------------------
Gregory L. Reyes
President and Chief Executive Officer
<PAGE> 1
Exhibit 3.3
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
(A CALIFORNIA CORPORATION)
(AS ADOPTED AUGUST 24, 1995)
(AS AMENDED NOVEMBER 25, 1996 AND SEPTEMBER 19, 1997)
<PAGE> 2
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
A California Corporation
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article I OFFICES ................................................... 1
Section 1.1: Principal Office ............................... 1
Section 1.2: Other Offices .................................. 1
Article II DIRECTORS ................................................ 1
Section 2.1: Exercise of Corporate Powers ................... 1
Section 2.2: Number ......................................... 1
Section 2.3: Need Not Be Shareholders ....................... 2
Section 2.4: Compensation ................................... 2
Section 2.5: Election and Term of Office .................... 2
Section 2.6: Vacancies ...................................... 2
Section 2.7: Removal ........................................ 3
Section 2.8: Powers and Duties .............................. 3
Article III MEETINGS OF DIRECTORS ................................... 5
Section 3.1: Place of Meetings .............................. 5
Section 3.2: Regular Meetings ............................... 5
Section 3.3: Special Meetings ............................... 6
Section 3.4: Notice of Special Meetings ..................... 6
Section 3.5: Quorum ......................................... 6
Section 3.6: Conference Telephone ........................... 6
</TABLE>
- i -
<PAGE> 3
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
A California Corporation
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 3.7: Waiver of Notice and Consent .................. 6
Section 3.8: Action Without a Meeting ...................... 6
Section 3.9: Committees .................................... 7
Article IV COMMITTEES .............................................. 7
Section 4.1: Appointment and Procedure ..................... 7
Section 4.2: Executive Committee Powers .................... 7
Section 4.3: Powers of Other Committees .................... 7
Section 4.4: Limitations on Powers of Committees ........... 7
Article V OFFICERS ................................................. 8
Section 5.1: Election and Qualifications ................... 8
Section 5.2: Term of Office and Compensation ............... 8
Section 5.3: Chief Executive Officer ....................... 8
Section 5.4: Chairman of the Board ......................... 9
Section 5.5: President ..................................... 9
Section 5.6: President Pro Term ............................ 9
Section 5.7: Vice President ................................ 9
Section 5.8: Secretary ..................................... 9
Section 5.9: Chief Financial Officer ....................... 10
Section 5.10: Instruments in Writing ....................... 11
</TABLE>
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<PAGE> 4
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
A California Corporation
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Article VI INDEMNIFICATION ......................................... 11
Section 6.1: Indemnification of Directors and Officers ..... 11
Section 6.2: Advancement of Expenses ....................... 12
Section 6.3: Non-Exclusivity of Rights ..................... 12
Section 6.4: Indemnification Contracts ..................... 12
Section 6.5: Effect of Amendment ........................... 12
Article VII MEETINGS OF, AND REPORTS TO, SHAREHOLDERS .............. 12
Section 7.1: Place of Meetings ............................. 12
Section 7.2: Annual Meetings ............................... 13
Section 7.3: Special Meetings .............................. 13
Section 7.4: Notice of Meetings ............................ 13
Section 7.5: Consent to Shareholders' Meetings ............. 14
Section 7.6: Quorum ........................................ 14
Section 7.7: Adjourned Meetings ............................ 15
Section 7.8: Voting Rights ................................. 15
Section 7.9: Action by Written Consents .................... 15
Section 7.10: Election of Directors ........................ 16
Section 7.11: Proxies ...................................... 16
Section 7.12: Inspectors of Election ....................... 17
</TABLE>
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<PAGE> 5
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
A California Corporation
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Section 7.13: Annual Reports ............................... 17
Article VIII SHARES AND SHARE CERTIFICATES ......................... 18
Section 8.1: Shares Held By the Company .................... 18
Section 8.2: Certificates for Shares ....................... 18
Section 8.3: Lost Certificates ............................. 18
Section 8.4: Restrictions on Transfer of Shares ............ 18
Section 8.5: Termination of Article VIII ................... 19
Article IX CONSTRUCTION OF BYLAWS WITH REFERENCE TO PROVISIONS
OF LAW ............................................... 19
Section 9.1: Bylaw Provisions Construed as Additional and
Supplemental to Provisions of Law ............. 19
Section 9.2: Bylaw Provisions Contrary to or Inconsistent
with Provisions of Law ........................ 19
Article X CERTIFICATION, ADOPTION, AMENDMENT OR REPEAL OF BYLAWS ... 19
Section 10.1: By Shareholders .............................. 19
Section 10.2: By the Board of Directors .................... 20
Section 10.3: Certification and Inspection of Bylaws ....... 20
</TABLE>
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<PAGE> 6
BYLAWS
OF
Brocade Communications Systems, Inc.
(a California corporation)
As Adopted August 24, 1995
As Amended November 25, 1996 and September 19, 1997
Article I
OFFICES
Section 1.1: Principal Office. The principal executive office for the
transaction of the business of this corporation (the "Company") shall be located
at such place as the Board of Directors may from time to time decide. The Board
of Directors is hereby granted full power and authority to change the location
of the principal executive office from one location to another.
Section 1.2: Other Offices. One or more branch or other subordinate
offices may at any time be fixed and located by the Board of Directors at such
place or places within or outside the State of California as it deems
appropriate.
Article II
DIRECTORS
Section 2.1: Exercise of Corporate Powers. Except as otherwise provided
by these Bylaws, by the Articles of Incorporation of the Company or by the laws
of the State of California now or hereafter in force, the business and affairs
of the Company shall be managed and all corporate powers shall be exercised by
or under the ultimate direction of a board of directors (the "Board of
Directors").
Section 2.2: Number. The authorized number of directors of the Company
shall be five (5). The authorized number of directors may be varied from time to
time by resolution of the
<PAGE> 7
Board of Directors, provided that the authorized number shall not be fewer than
four (4) nor more than seven (7). The authorized numbers of directors of the
Company shall be variable by the Board of Directors within such range until
changed by an amendment of this Section by the shareholders of the Company. Any
amendment to these Bylaws reducing the minimum number of authorized directors to
a number less than five (5) cannot be adopted if the votes cast against its
adoption at a meeting, or the shares not consenting in the case of action by
written consent, are equal to more than 16-2/3% of the outstanding shares
entitled to vote.
Section 2.3: Need Not Be Shareholders. The directors of the Company need
not be shareholders of this Company.
Section 2.4: Compensation. Directors and members of committees may
receive such compensation, if any, for their services as may be fixed or
determined by resolution of the Board of Directors. Nothing herein contained
shall be construed to preclude any director from serving the Company in any
other capacity and receiving compensation therefor.
Section 2.5: Election and Term of Office. The directors shall be elected
annually by the shareholders at the annual meeting of the shareholders. The term
of office of the directors shall begin immediately after their election and
shall continue until the next annual meeting of the shareholders and until their
respective successors are elected. A reduction of the authorized number of
directors shall not shorten the term of any incumbent director or remove any
incumbent director prior to the expiration of such director's term of office.
Section 2.6: Vacancies. A vacancy or vacancies on the Board of Directors
shall exist:
(a) in the case of the death of any director; or
(b) in the case of the resignation or removal of any director; or
(c) if the authorized number of directors is increased; or
(d) if the shareholders fail, at any annual meeting of shareholders
at which any director is elected, to elect the full authorized number of
directors at that meeting.
The Board of Directors may declare vacant the office of a director if he or she
is declared of unsound mind by an order of court or convicted of a felony or if,
within 60 days after notice of his or her election, he or she does not accept
the office. Any vacancy, except for a vacancy created by removal of a director
as provided in Section 2.7 hereof, may be filled by a person selected by a
majority of the remaining directors then in office, whether or not less than a
quorum, or by a sole remaining director. Vacancies occurring in the Board of
Directors by reason of removal of directors shall be filled only by approval of
shareholders. The shareholders may elect a director at any time to fill any
vacancy not filled by the directors. Any such election by the written consent of
shareholders, other than to fill a vacancy created by removal, requires the
consent of shareholders holding a majority of the outstanding shares entitled to
vote. If, after the filling of any vacancy by the directors, the directors then
in office who have been elected by the shareholders shall constitute less than a
majority of the directors then in office, any holder or
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<PAGE> 8
holders of an aggregate of 5% or more of the total number of shares at that time
having the right to vote for such directors may call a special meeting of
shareholders to be held to elect the entire Board of Directors. The term of
office of any director then in office shall terminate upon the election of such
director's successor. Any director may resign effective upon giving written
notice to the Chairman of the Board, if any, the President, the Secretary or the
Board of Directors, unless the notice specifies a later time for the
effectiveness of such resignation. After the notice is given and if the
resignation is effective at a future time, a successor may be elected or
appointed to take office when the resignation becomes effective.
Section 2.7: Removal. The entire Board of Directors or any individual
director may be removed from office without cause by an affirmative vote of
shareholders holding a majority of the outstanding shares entitled to vote. If
the entire Board of Directors is not removed, however, then no individual
director shall be removed if the votes cast against removal of that director,
plus the votes not consenting in writing to such removal, would be sufficient to
elect that director if voted cumulatively in an election at which the following
were true:
(a) the same total number of votes were cast, or, if such action is
taken by written consent, all shares entitled to vote were voted; and
(b) the entire number of directors authorized at the time of the
director's most recent election were then being elected.
If any or all directors are so removed, new directors may be elected at the same
meeting or at a subsequent meeting. If at any time a class or series of shares
is entitled to elect one or more directors under authority granted by the
Articles of Incorporation, the provisions of this Section 2.7 shall apply to the
vote of that class or series and not to the vote of the outstanding shares as a
whole.
Section 2.8: Powers and Duties. Without limiting the generality or
extent of the general corporate powers to be exercised by the Board of Directors
pursuant to Section 2.1 of these Bylaws, it is hereby provided that the Board of
Directors shall have full power with respect to the following matters:
(a) To purchase, lease and acquire any and all kinds of property, real,
personal or mixed, and at its discretion to pay therefor in money, in property
and/or in stocks, bonds, debentures or other securities of the Company.
(b) To enter into any and all contracts and agreements which in its
judgment may be beneficial to the interests and purposes of the Company.
(c) To fix and determine and to vary from time to time the amount or
amounts to be set aside or retained as reserve funds or as working capital of
the Company or for maintenance, repairs, replacements or enlargements of its
properties.
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<PAGE> 9
(d) To declare and pay dividends in cash, shares and/or property out of
any funds of the Company at the time legally available for the declaration and
payment of dividends on its shares.
(e) To adopt such rules and regulations for the conduct of its meetings
and the management of the affairs of the Company as it may deem proper.
(f) To prescribe the manner in which and the person or persons by whom
any or all of the checks, drafts, notes, bills of exchange, contracts and other
corporate instruments shall be executed.
(g) To accept resignations of directors; to declare vacant the office of
a director as provided in Section 2.6 hereof; and, in case of vacancy in the
office of directors, to fill the same to the extent provided in Section 2.6
hereof.
(h) To create offices in addition to those for which provision is made
by law or these Bylaws; to elect and remove at pleasure all officers of the
Company, fix their terms of office, prescribe their titles, powers and duties,
limit their authority and fix their salaries in any way it may deem advisable
that is not contrary to law or these Bylaws.
(i) To designate one or more persons to perform the duties and exercise
the powers of any officer of the Company during the temporary absence or
disability of such officer.
(j) To appoint or employ and to remove at pleasure such agents and
employees as it may see fit, to prescribe their titles, powers and duties, limit
their authority and fix their salaries in any way it may deem advisable that is
not contrary to law or these Bylaws.
(k) To fix a time in the future, which shall not be more than 60 days
nor less than 10 days prior to the date of the meeting nor more than 60 days
prior to any other action for which it is fixed, as a record date for the
determination of the shareholders entitled to notice of and to vote at any
meeting, or entitled to receive any payment of any dividend or other
distribution, or allotment of any rights, or entitled to exercise any rights in
respect of any other lawful action; and in such case only shareholders of record
on the date so fixed shall be entitled to notice of and to vote at the meeting
or to receive the dividend, distribution or allotment of rights or to exercise
the rights, as the case may be, notwithstanding any transfer of any shares on
the books of the Company after any record date fixed as aforesaid. The Board of
Directors may close the books of the Company against transfers of shares during
the whole or any part of such period.
(l) To fix and locate from time to time the principal office for the
transaction of the business of the Company and one or more branch or other
subordinate offices of the Company within or without the State of California; to
designate any place within or without the State of California for the holding of
any meeting or meetings of the shareholders or the Board of Directors, as
provided in Sections 3.1 and 7.1 hereof; to adopt, make and use a corporate
seal, and to prescribe the forms of certificates for shares and to alter the
form of such seal and of such certificates from time to time as in its judgment
it may deem best, provided such seal and such certificates shall at all times
comply with the provisions of law now or hereafter in effect.
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<PAGE> 10
(m) To authorize the issuance of shares of stock of the Company in
accordance with the laws of the State of California and the Articles of
Incorporation.
(n) Subject to the limitation provided in Section 10.2 hereof, to adopt,
amend or repeal from time to time and at any time these Bylaws and any and all
amendments thereof.
(o) To borrow money, make guarantees of indebtedness or other
obligations of third parties and incur indebtedness on behalf of the Company,
including the power and authority to borrow money from any of the shareholders,
directors or officers of the Company; and to cause to be executed and delivered
therefor in the corporate name promissory notes, bonds, debentures, deeds of
trust, mortgages, pledges (or other transfers of property as security or
collateral for a debt), or other evidences of debt and securities therefor; and
the note or other obligation given for any indebtedness of the Company, signed
officially by any officer or officers thereunto duly authorized by the Board of
Directors, shall be binding on the Company.
(p) To approve a loan of money or property to any officer or director of
the Company or any parent or subsidiary company, guarantee the obligation of any
such officer or director, or approve an employee benefit plan authorizing such a
loan or guaranty to any such officer or director; provided that, on the date of
approval of such loan or guaranty, the Company has outstanding shares held of
record by 100 or more persons. Such approval shall require a determination by
the Board of Directors that the loan or guaranty may reasonably be expected to
benefit the Company and must be by vote sufficient without counting the vote of
any interested director.
(q) Generally to do and perform every act and thing whatsoever that may
pertain to the office of a director or to a board of directors.
Article III
MEETINGS OF DIRECTORS
Section 3.1: Place of Meetings. Meetings (whether regular, special or
adjourned) of the Board of Directors of the Company shall be held at the
principal executive office of the Company or at any other place within or
outside the State of California which may be designated from time to time by
resolution of the Board of Directors or which is designated in the notice of the
meeting.
Section 3.2: Regular Meetings. Regular meetings of the Board of
Directors shall be held after the adjournment of each annual meeting of the
shareholders (which regular directors' meeting shall be designated the "Regular
Annual Meeting") and at such other times as may be designated from time to time
by resolution of the Board of Directors. Notice of the time and place of all
regular meetings shall be given in the same manner as for special meetings,
except that no such notice need be given if (a) the time and place of such
meetings are fixed by the Board of Directors or (b) the Regular Annual Meeting
is held at the principal executive office of this Corporation and on the date
specified by the Board of Directors.
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<PAGE> 11
Section 3.3: Special Meetings. Special meetings of the Board of
Directors may be called at any time by the Chairman of the Board, if any, or the
President, or any Vice President, or the Secretary or by any two or more
directors.
Section 3.4: Notice of Special Meetings. Special meetings of the Board
of Directors shall be held upon no less than 4 days' notice by mail or 48 hours'
notice delivered personally or by telephone or telegraph to each director.
Notice need not be given to any director who signs a waiver of notice or a
consent to holding the meeting or an approval of the minutes thereof, whether
before or after the meeting, or who attends the meeting without protesting,
prior thereto or at its commencement, the lack of notice to such director. All
such waivers, consents and approvals shall be filed with the corporate records
or made a part of the minutes of the meeting. Any oral notice given personally
or by telephone may be communicated either to the director or to a person at the
home or office of the director who the person giving the notice has reason to
believe will promptly communicate it to the director. A notice or waiver of
notice need not specify the purpose of any meeting of the Board of Directors. If
the address of a director is not shown on the records of the Company and is not
readily ascertainable, notice shall be addressed to him or her at the city or
place in which meetings of the directors are regularly held. If a meeting is
adjourned for more than 24 hours, notice of any adjournment to another time or
place shall be given prior to the time of the adjourned meeting to all directors
not present at the time of adjournment.
Section 3.5: Quorum. A majority of the authorized number of directors
constitutes a quorum of the Board of Directors for the transaction of business.
Every act or decision done or made by a majority of the directors present at a
meeting duly held at which a quorum is present is the act of the Board of
Directors subject to provisions of law relating to interested directors and
indemnification of agents of the Company. A majority of the directors present,
whether or not a quorum is present, may adjourn any meeting to another time and
place. A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for such meeting.
Section 3.6: Conference Telephone. Members of the Board of Directors may
participate in a meeting through use of conference telephone or similar
communications equipment, so long as all directors participating in such meeting
can hear one another. Participation in a meeting pursuant to this Section
constitutes presence in person at such meeting.
Section 3.7: Waiver of Notice and Consent. The transactions of any
meeting of the Board of Directors, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and
notice if a quorum is present, and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, a consent to
holding such meeting or an approval of the minutes thereof. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
Section 3.8: Action Without a Meeting. Any action required or permitted
by law to be taken by the Board of Directors may be taken without a meeting, if
all members of the Board of
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<PAGE> 12
Directors shall individually or collectively consent in writing to the taking of
such action. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Directors. Such action by written consent shall
have the same force and effect as a unanimous vote of such directors at a duly
held meeting.
Section 3.9: Committees. The provisions of this Article apply also to
committees of the Board of Directors and action by such committees.
Article IV
COMMITTEES
Section 4.1: Appointment and Procedure. The Board of Directors may, by
resolution adopted by a majority of the authorized number of directors, appoint
from among its members one or more committees, including without limitation an
executive committee, an audit committee and a compensation committee, of two or
more directors. Each committee may make its own rules of procedure subject to
Section 3.9 hereof, and shall meet as provided by such rules or by a resolution
adopted by the Board of Directors (which resolution shall take precedence). A
majority of the members of the committee shall constitute a quorum, and in every
case the affirmative vote of a majority of all members of the committee shall be
necessary to the adoption of any resolution.
Section 4.2: Executive Committee Powers. During the intervals between
the meetings of the Board of Directors, the Executive Committee, if any, in all
cases in which specific directions shall not have been given by the Board of
Directors, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Company in
such manner as the Executive Committee may deem best for the interests of the
Company.
Section 4.3: Powers of Other Committees. Other committees shall have
such powers as are given them in a resolution of the Board of Directors.
Section 4.4: Limitations on Powers of Committees. No committee shall
have the power to act with respect to:
(a) any action for which the laws of the State of California also
require shareholder approval or approval of the outstanding shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
(c) the fixing of compensation of the directors for serving on the Board
of Directors or on any committee;
(d) the amendment or repeal of these Bylaws or the adoption of new
Bylaws;
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<PAGE> 13
(e) the amendment or repeal of any resolution of the Board of Directors
which by its express terms is not amendable or repealable;
(f) a distribution to the shareholders of the Company, except at a rate
or in a periodic amount or within a price range as set forth in the Articles of
Incorporation or determined by the Board of Directors; and
(g) the appointment of other committees of the Board of Directors or the
members thereof.
Article V
OFFICERS
Section 5.1: Election and Qualifications. The officers of the Company
shall consist of a President and/or a Chief Executive Officer, a Secretary, a
Chief Financial Officer and such other officers, including, but not limited to,
a Chairman of the Board of Directors, one or more Vice Presidents, a Treasurer,
and Assistant Vice Presidents, Assistant Secretaries and Assistant Treasurers,
as the Board of Directors shall deem expedient, who shall be chosen in such
manner and hold their offices for such terms as the Board of Directors may
prescribe. Any number of offices may be held by the same person. Any Vice
President, Assistant Treasurer or Assistant Secretary, respectively, may
exercise any of the powers of the President, the Chief Financial Officer or the
Secretary, respectively, as directed by the Board of Directors, and shall
perform such other duties as are imposed upon him or her by these Bylaws or the
Board of Directors.
Section 5.2: Term of Office and Compensation. The term of office and
salary of each of said officers and the manner and time of the payment of such
salaries shall be fixed and determined by the Board of Directors and may be
altered by said Board of Directors from time to time at its pleasure, subject to
the rights, if any, of any officer under any contract of employment. Any officer
may resign at any time upon written notice to the Company, without prejudice to
the rights, if any, of the Company under any contract to which the officer is a
party. If any vacancy occurs in any office of the Company, the Board of
Directors may appoint a successor to fill such vacancy.
Section 5.3: Chief Executive Officer. Subject to the control of the
Board of Directors and such supervisory powers, if any, as may be given by the
Board of Directors, the powers and duties of the Chief Executive Officer of the
Company are:
(a) To act as the general manager and, subject to the control of the
Board of Directors, to have general supervision, direction and control of the
business and affairs of the Company.
(b) To preside at all meetings of the shareholders and, in the absence
of the Chairman of the Board of Directors or if there be no Chairman, at all
meetings of the Board of Directors.
- 8 -
<PAGE> 14
(c) To call meetings of the shareholders and meetings of the Board of
Directors to be held at such times and, subject to the limitations prescribed by
law or by these Bylaws, at such places as he or she shall deem proper.
(d) To affix the signature of the Company to all deeds, conveyances,
mortgages, leases, obligations, bonds, certificates and other papers and
instruments in writing which have been authorized by the Board of Directors or
which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Company; to sign certificates for shares of stock of the Company;
and, subject to the direction of the Board of Directors, to have general charge
of the property of the Company and to supervise and control all officers, agents
and employees of the Company.
The President shall be the Chief Executive Officer of the Company unless
the Board of Directors shall designate the Chairman of the Board or another
officer to be the Chief Executive Officer. If there is no President, then the
Chairman of the Board shall be the Chief Executive Officer.
Section 5.4: Chairman of the Board. The Chairman of the Board of
Directors, if there be one, shall have the power to preside at all meetings of
the Board of Directors and shall have such other powers and shall be subject to
such other duties as the Board of Directors may from time to time prescribe.
Section 5.5: President. Subject to the supervisory powers of the Chief
Executive Officer, if not the President, and to such supervisory powers as may
be given by the Board of Directors to the Chairman of the Board, if one is
elected, or to any other officer, the President shall have the general powers
and duties of management usually vested in the office of president of a
corporation and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
Section 5.6: President Pro Tem. If neither the Chairman of the Board of
Directors, the President, nor any Vice President is present at any meeting of
the Board of Directors, a President pro tem may be chosen by the directors
present at the meeting to preside and act at such meeting. If neither the
President nor any Vice President is present at any meeting of the shareholders,
a President pro tem may be chosen by the shareholders present at the meeting to
preside at such meeting.
Section 5.7: Vice President. The titles, powers and duties of the Vice
President or Vice Presidents, if any, shall be as prescribed by the Board of
Directors. In case of the resignation, disability or death of the President, the
Vice President, or one of the Vice Presidents, shall exercise all powers and
duties of the President. If there is more than one Vice President, the order in
which the Vice Presidents shall succeed to the powers and duties of the
President shall be as fixed by the Board of Directors.
Section 5.8: Secretary. The powers and duties of the Secretary are:
- 9 -
<PAGE> 15
(a) To keep a book of minutes at the principal executive office of the
Company, or such other place as the Board of Directors may order, of all
meetings of its directors and shareholders with the time and place of holding of
such meeting, whether regular or special, and, if special, how authorized, the
notice thereof given, the names of those present at directors' meetings, the
number of shares present or represented at shareholders' meetings and the
proceedings thereof.
(b) To keep the seal of the Company and to affix the same to all
instruments which may require it.
(c) To keep or cause to be kept at the principal executive office of the
Company, or at the office of the transfer agent or agents, a record of the
shareholders of the Company, giving the names and addresses of all shareholders
and the number and class of shares held by each, the number and date of
certificates issued for shares and the number and date of cancellation of every
certificate surrendered for cancellation.
(d) To keep a supply of certificates for shares of the Company, to fill
in all certificates issued, and to make a proper record of each such issuance;
provided that, so long as the Company shall have one or more duly appointed and
acting transfer agents of the shares, or any class or series of shares, of the
Company, such duties with respect to such shares shall be performed by such
transfer agent or transfer agents.
(e) To transfer upon the share books of the Company any and all shares
of the Company; provided that, so long as the Company shall have one or more
duly appointed and acting transfer agents of the shares, or any class or series
of shares, of the Company, such duties with respect to such shares shall be
performed by such transfer agent or transfer agents, and the method of transfer
of each certificate shall be subject to the reasonable regulations of the
transfer agent to whom the certificate is presented for transfer and, if the
Company then has one or more duly appointed and acting registrars, subject to
the reasonable regulations of the registrar to which a new certificate is
presented for registration; and, provided further, that no certificate for
shares of stock shall be issued or delivered or, if issued or delivered, shall
have any validity whatsoever until and unless it has been signed or
authenticated in the manner provided in Section 8.2 hereof.
(f) To make service and publication of all notices that may be necessary
or proper in connection with meetings of the Board of Directors of the
shareholders of the Company. In case of the absence, disability, refusal or
neglect of the Secretary to make service or publication of any notices, then
such notices may be served and/or published by the President or a Vice
President, or by any person thereunto authorized by either of them, or by the
Board of Directors, or by the holders of a majority of the outstanding shares of
the Company.
(g) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
Section 5.9: Chief Financial Officer. The powers and duties of the Chief
Financial Officer are:
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<PAGE> 16
(a) To supervise and control the keeping and maintaining of adequate and
correct accounts of the Company's properties and business transactions,
including accounts of its assets, liabilities, receipts, disbursements, gains,
losses, capital, surplus and shares. The books of account shall at all
reasonable times be open to inspection by any director.
(b) To have the custody of all funds, securities, evidences of
indebtedness and other valuable documents of the Company and, at his or her
discretion, to cause any or all thereof to be deposited for the account of the
Company with such depository as may be designated from time to time by the Board
of Directors.
(c) To receive or cause to be received, and to give or cause to be
given, receipts and acquittances for monies paid in for the account of the
Company.
(d) To disburse, or cause to be disbursed, all funds of the Company as
may be directed by the President or the Board of Directors, taking proper
vouchers for such disbursements.
(e) To render to the President or to the Board of Directors, whenever
either may require, accounts of all transactions as Chief Financial Officer and
of the financial condition of the Company.
(f) Generally to do and perform all such duties as pertain to such
office and as may be required by the Board of Directors.
Section 5.10: Instruments in Writing. All checks, drafts, demands for
money, notes and written contracts of the Company shall be signed by such
officer or officers, agent or agents, as the Board of Directors may from time to
time designate. No officer, agent, or employee of the Company shall have the
power to bind the Company by contract or otherwise unless authorized to do so by
these Bylaws or by the Board of Directors.
Article VI
INDEMNIFICATION
Section 6.1: Indemnification of Directors and Officers. The Company
shall indemnify each person who was or is a party, or is threatened to be made a
party, to any threatened, pending or completed action or proceeding, whether
civil, criminal, administrative or investigative (a "Proceeding") by reason of
the fact that such person is or was a director or officer of the Company, or is
or was serving at the request of the Company as a director or officer of another
foreign or domestic corporation, partnership, joint venture, trust or other
enterprise, or was a director or officer of a foreign or domestic corporation
which was a predecessor corporation of the Company or of another enterprise at
the request of such predecessor corporation, to the fullest extent permitted by
the California Corporations Code, against all expenses, including, without
limitation, attorneys' fees and any expenses of establishing a right to
indemnification, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with such Proceeding, and such indemnification
shall continue as to a person who has ceased to be such a
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<PAGE> 17
director or officer, and shall inure to the benefit of the heirs, executors and
administrators of such person; provided, however, that the Company shall
indemnify any such person seeking indemnity in connection with a Proceeding (or
part thereof) initiated by such person only if such Proceeding (or part thereof)
was authorized by the Board of Directors of the Company.
Section 6.2: Advancement of Expenses. The Company shall pay all expenses
incurred by such a director or officer in defending any Proceeding as they are
incurred in advance of its final disposition; provided, however, that the
payment of such expenses incurred by a director or officer in advance of the
final disposition of a Proceeding shall be made only upon receipt by the Company
of an agreement by or on behalf of such director or officer to repay such amount
if it shall be determined ultimately that such person is not entitled to be
indemnified under this Article VI or otherwise; and provided further that the
Company shall not be required to advance any expenses to a person against whom
the Company brings an action, alleging that such person committed an act or
omission not in good faith or that involved intentional misconduct or a knowing
violation of law, or that was contrary to the best interest of the Company, or
derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
person in this Article VI shall not be deemed exclusive of any other rights that
such person may have or hereafter acquire under any statute, by law, agreement,
vote of shareholders or disinterested directors or otherwise, both as to action
in an official capacity and as to action in another capacity while holding such
office. Additionally, nothing in this Article VI shall limit the ability of the
Company, in its discretion, to indemnify or advance expenses to persons whom the
Company is not obligated to indemnify or advance expenses to pursuant to this
Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
authorized to cause the Company to enter into a contract with any director,
officer, employee or agent of the Company, or any person serving at the request
of the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, providing for
indemnification rights equivalent to or, if the Board of Directors so
determines, greater than (to the extent permitted by the Company's Articles of
Incorporation and the California Corporations Code) those provided for in this
Article VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
Article VII
MEETINGS OF, AND REPORTS TO, SHAREHOLDERS
Section 7.1: Place of Meetings. Meetings (whether regular, special or
adjourned) of the shareholders of the Company shall be held at the principal
executive office for the transaction of business of the Company, or at any place
within or outside the State of California which may
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<PAGE> 18
be designated by written consent of all the shareholders entitled to vote
thereat, or which may be designated by resolution of the Board of Directors. Any
meeting shall be valid wherever held if held by the written consent of all the
shareholders entitled to vote thereat, given either before or after the meeting
and filed with the Secretary of the Company.
Section 7.2: Annual Meetings. The annual meetings of the shareholders
shall be held at the place provided pursuant to Section 7.1 hereof and at such
time in a particular year as may be designated by written consent of all the
shareholders entitled to vote thereat or which may be designated by resolution
of the Board of Directors of the Company. Said annual meetings shall be held for
the purpose of the election of directors, for the making of reports of the
affairs of the Company and for the transaction of such other business as may
properly come before the meeting.
Section 7.3: Special Meetings. Special meetings of the shareholders for
any purpose or purposes whatsoever may be called at any time by the President,
the Chairman of the Board of Directors or by the Board of Directors, or by two
or more members thereof, or by one or more holders of shares entitled to cast
not less than 10% of the votes at the meeting. Upon request in writing sent by
registered mail to the Chairman of the Board of Directors, President, Vice
President or Secretary, or delivered to any such officer in person, by any
person entitled to call a special meeting of shareholders, it shall be the duty
of such officer forthwith to cause notice to be given to the shareholders
entitled to vote that a meeting will be held at a time requested by the person
or persons calling the meeting, which (except where called by the Board of
Directors) shall be not less than 35 days nor more than 60 days after the
receipt of such request. If the notice is not given within 20 days after receipt
of the request, the person entitled to call the meeting may give the notice.
Notices of meetings called by the Board of Directors shall be given in
accordance with Section 7.4.
Section 7.4: Notice of Meetings. Notice of any meeting of shareholders
shall be given in writing not less than 10 (or, if sent by third-class mail, 30)
nor more than 60 days before the date of the meeting to each shareholder
entitled to vote thereat by the Secretary or an Assistant Secretary, or such
other person charged with that duty, or if there be no such officer or person,
or in case of his or her neglect or refusal, by any director or shareholder. The
notice shall state the place, date and hour of the meeting and (a) in the case
of a special meeting, the general nature of the business to be transacted, and
no other business may be transacted, or (b) in the case of the annual meeting,
those matters which the Board of Directors, at the time of the mailing of the
notice, intends to present for action by the shareholders, but any proper matter
may be presented at the meeting for such action, except that notice must be
given or waived in writing of any proposal relating to approval of contracts
between the Company and any director of the Company, amendment of the Articles
of Incorporation, reorganization of the Company or winding up of the affairs of
the Company. The notice of any meeting at which directors are to be elected
shall include the names of nominees intended at the time of the notice to be
presented by the Board of Directors for election. Notice of a shareholders'
meeting or any report shall be given to any shareholder, either (a) personally
or (b) by first-class mail, or, in case the Company has outstanding shares held
of record by 500 or more persons on the record date for the shareholders'
meeting, notice may be sent by third-class mail, or other means of written
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<PAGE> 19
communication, charges prepaid, addressed to such shareholder at such
shareholder's address appearing on the books of the Company or given by such
shareholder to the Company for the purpose of notice. If a shareholder gives no
address or no such address appears on the books of the Company, notice shall be
deemed to have been given if sent by mail or other means of written
communication addressed to the place where the principal executive office of the
Company is located, or if published at least once in a newspaper of general
circulation in the county in which such office is located. The notice or report
shall be deemed to have been given at the time when delivered personally or
deposited in the United States mail, postage prepaid, or sent by other means of
written communication and addressed as hereinbefore provided. An affidavit or
declaration of delivery or mailing of any notice or report in accordance with
the provisions of this Section 7.4, executed by the Secretary, Assistant
Secretary or any transfer agent, shall be prima facie evidence of the giving of
the notice or report. If any notice or report addressed to the shareholder at
the address of such shareholder appearing on the books of the Company is
returned to the Company by the United States Postal Service marked to indicate
that the United States Postal Service is unable to deliver the notice or report
to the shareholder at such address, all future notices or reports shall be
deemed to have been duly given without further mailing if the same shall be
available for the shareholder upon written demand of the shareholder at the
principal executive office of the Company for a period of one year from the date
of the giving of the notice or report to all other shareholders.
Section 7.5: Consent to Shareholders' Meetings. The transactions of any
meeting of shareholders, however called and noticed, and wherever held, are as
valid as though they had taken place at a meeting duly held after regular call
and notice, if the following conditions are met:
(a) a quorum is present, either in person or by proxy, and
(b) either before or after the meeting, each of the shareholders
entitled to vote, who was not present in person or by proxy, signs a written
waiver of notice or a consent to the holding of such meeting or an approval of
the minutes thereof. All such waivers, consents or approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
Attendance of a person at a meeting shall constitute both a waiver of notice of
and presence at such meeting, except: (a) when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened; or (b) when the person expressly makes an
objection at some time during the meeting to the consideration of matters
required by law to be included in the notice but not so included.
Neither the business to be transacted at, nor the purpose of, any regular or
special meeting of shareholders need be specified in any written waiver of
notice, consent to the holding of the meeting or approval of the minutes
thereof, except as to approval of contracts between the Company and any of its
directors, amendment of the Articles of Incorporation, reorganization of the
Company or winding up the affairs of the Company.
Section 7.6: Quorum. The presence in person or by proxy of the holders
of a majority of the shares entitled to vote at any meeting of the shareholders
shall constitute a quorum for the
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<PAGE> 20
transaction of business. Shares shall not be counted to make up a quorum for a
meeting if voting of such shares at the meeting has been enjoined or for any
reason they cannot be lawfully voted at the meeting. Shareholders present at a
duly called or held meeting at which a quorum is present may continue to
transact business until adjournment notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. Except as provided herein, the affirmative vote of a
majority of the shares represented and voting at a duly held meeting at which a
quorum is present (which shares voting affirmatively also constitute at least a
majority of the required quorum) shall be the act of the shareholders, unless
the vote of a greater number or voting by classes is required.
Section 7.7: Adjourned Meetings. Any shareholders' meeting, whether or
not a quorum is present, may be adjourned from time to time by the vote of a
majority of the shares, the holders of which are either present in person or
represented by proxy thereat, but, except as provided in Section 7.6 hereof, in
the absence of a quorum, no other business may be transacted at such meeting.
When a meeting is adjourned for more than 45 days or if after adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each shareholder of record entitled to vote at a
meeting. Except as aforesaid, it shall not be necessary to give any notice of
the time and place of the adjourned meeting or of the business to be transacted
thereat other than by announcement at the meeting at which such adjournment is
taken. At any adjourned meeting the shareholders may transact any business which
might have been transacted at the original meeting.
Section 7.8: Voting Rights. Only persons in whose names shares entitled
to vote stand on the stock records of the Company at:
(a) the close of business on the business day immediately preceding the
day on which notice is given; or
(b) if notice is waived, at the close of business on the business day
immediately preceding the day on which the meeting is held; or
(c) if some other day be fixed for the determination of shareholders of
record pursuant to Section 2.8(k) hereof, then on such other day, shall be
entitled to vote at such meeting.
The record date for determining shareholders entitled to give consent to
corporate action in writing without a meeting, when no prior action by the Board
of Directors has been taken, shall be the day on which the first written consent
is given. In the absence of any contrary provision in the Articles of
Incorporation or in any applicable statute relating to the election of directors
or to other particular matters, each such person shall be entitled to one vote
for each share.
Section 7.9: Action by Written Consents. Any action which may be taken
at any annual or special meeting of shareholders may be taken without a meeting
and without prior notice, if a consent in writing, setting forth the action so
taken, shall be signed by holders of outstanding shares having not less than the
minimum number of votes that would be necessary to
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<PAGE> 21
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. Unless the consents of all shareholders entitled
to vote have been solicited in writing, the Company shall provide notice of any
shareholder approval obtained without a meeting by less than unanimous written
consent to those shareholders entitled to vote but who have not yet consented in
writing at least 10 days before the consummation of the following actions
authorized by such approval: (a) contracts between the Company and any of its
directors; (b) indemnification of any person; (c) reorganization of the Company;
or (d) distributions to shareholders upon the winding-up of the affairs of the
Company. In addition, the Company shall provide, to those shareholders entitled
to vote who have not consented in writing, prompt notice of the taking of any
other corporate action approved by the shareholders without a meeting by less
than unanimous written consent. All notices given hereunder shall conform to the
requirements of Section 7.4 hereto and applicable law. When written consents are
given with respect to any shares, they shall be given by and accepted from the
persons in whose names such shares stand on the books of the Company at the time
such respective consents are given, or their proxies. Any shareholder giving a
written consent (including any shareholder's proxy holder, or a transferee of
the shares or a personal representative of the shareholder, or their respective
proxy holders) may revoke the consent by a writing. This writing must be
received by the Company prior to the time that written consents of the number of
shares required to authorize the proposed action have been filed with the
Secretary of the Company. Such revocation is effective upon its receipt by the
Secretary of the Company. Notwithstanding anything herein to the contrary, and
subject to Section 305(b) of the California Corporations Code, directors may not
be elected by written consent except by unanimous written consent of all shares
entitled to vote for the election of directors.
Section 7.10: Election of Directors. Every shareholder entitled to vote
at any election of directors of the Company may cumulate such shareholder's
votes and give one candidate a number of votes equal to the number of directors
to be elected multiplied by the number of votes to which the shareholder's
shares are normally entitled, or distribute the shareholder's votes on the same
principle among as many candidates as such shareholder thinks fit. No
shareholder, however, may cumulate such shareholder's votes for one or more
candidates unless such candidate's or candidates' names have been placed in
nomination prior to the voting and the shareholder has given notice at the
meeting, prior to voting, of such shareholder's intention to cumulate such
shareholder's votes. If any one shareholder has given such notice, all
shareholders may cumulate their votes for candidates in nomination. The
candidates receiving the highest number of affirmative votes of the shares
entitled to be voted for them up to the number of directors to be elected by
such shares shall be declared elected. Votes against the director and votes
withheld shall have no legal effect. Election of directors need not be by ballot
except upon demand made by a shareholder at the meeting and before the voting
begins.
Section 7.11: Proxies. Every person entitled to vote or execute consents
shall have the right to do so either in person or by one or more agents
authorized by a written proxy executed by such person or such person's duly
authorized agent and filed with the Secretary of the Company. No proxy shall be
valid (a) after revocation thereof, unless the proxy is specifically made
irrevocable and otherwise conforms to this Section and applicable law, or (b)
after the expiration of eleven months from the date thereof, unless the person
executing it specifies therein
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<PAGE> 22
the length of time for which such proxy is to continue in force. Revocation may
be effected by a writing delivered to the Secretary of the Company stating that
the proxy is revoked or by a subsequent proxy executed by the person executing
the prior proxy and presented to the meeting, or as to any meeting by attendance
at the meeting and voting in person by the person executing the proxy. A proxy
is not revoked by the death or incapacity of the maker unless, before the vote
is counted, a written notice of such death or incapacity is received by the
Secretary of the Company. In addition, a proxy may be revoked, notwithstanding a
provision making it irrevocable, by a transferee of shares without knowledge of
the existence of the provision unless the existence of the proxy and its
irrevocability appears on the certificate representing such shares.
Section 7.12: Inspectors of Election. Before any meeting of
shareholders, the Board of Directors may appoint any persons other than nominees
for office as inspectors of election. This appointment shall be valid at the
meeting and at any subsequent meeting that is a continuation of the meeting at
which the persons were originally appointed to be inspectors. If no inspectors
of election are so appointed, the Chairman of the meeting may, and on the
request of any shareholder or a shareholder's proxy shall, appoint inspectors of
election at the meeting. The number of inspectors shall be either one or three.
If inspectors are appointed at a meeting on the request of one or more
shareholders or proxies, the holders of a majority of shares or their proxies
present at the meeting shall determine whether one or three inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, the Chairman of the meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy. These inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) receive votes, ballots, or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
Section 7.13: Annual Reports. Provided that the Company has 100 or fewer
shareholders, the making of annual reports to the shareholders is dispensed with
and the requirement that such annual reports be made to shareholders is
expressly waived, except as may be directed from time to time by the Board of
Directors or the President.
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<PAGE> 23
Article VIII
SHARES AND SHARE CERTIFICATES
Section 8.1: Shares Held By the Company. Shares in other companies
standing in the name of the Company may be voted or represented and all rights
incident thereto may be exercised on behalf of the Company by any officer of the
Company authorized to do so by resolution of the Board of Directors.
Section 8.2: Certificates for Shares. There shall be issued to every
holder of shares in the Company a certificate or certificates signed in the name
of the Company by the Chairman of the Board, if any, or the President or a Vice
President and by the Chief Financial Officer or an Assistant Chief Financial
Officer or the Secretary or any Assistant Secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the Company
with the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.
Section 8.3: Lost Certificates. Where the owner of any certificate for
shares of the Company claims that the certificate has been lost, stolen or
destroyed, a new certificate shall be issued in place of the original
certificate if the owner (a) so requests before the Company has notice that the
original certificate has been acquired by a bona fide purchaser and (b)
satisfies any reasonable requirements imposed by the Company, including without
limitation the filing with the Company of an indemnity bond or agreement in such
form and in such amount as shall be required by the President or a Vice
President of the Company. The Board of Directors may adopt such other provisions
and restrictions with reference to lost certificates, not inconsistent with
applicable law, as it shall in its discretion deem appropriate.
Section 8.4: Restrictions on Transfer of Shares.
(a) Before any shareholder of the Company may sell, assign, gift, pledge
or otherwise transfer any shares of the Company's capital stock, such
shareholder shall first notify the Company in writing of such transfer and such
transfer may not be effected unless and until legal counsel for the Company has
concluded that such transfer, when effected as proposed by such shareholder (i)
will comply with all applicable provisions of any applicable state and federal
securities laws, including but not limited to the Securities Act of 1933, as
amended, and the California Corporate Securities Law of 1968, as amended, and
(ii) will not jeopardize, terminate or adversely affect the Company's status as
an S Corporation, if applicable, as that term is defined in the Internal Revenue
Code of 1986, as amended. The Company may require that certificates representing
shares of stock of the Company be endorsed with a legend describing the
restrictions set forth in this Section.
(b) If (i) any two or more shareholders of the Company shall enter into
any agreement abridging, limiting or restricting the rights of any one or more
of them to sell, assign, transfer,
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<PAGE> 24
mortgage, pledge, hypothecate or transfer on the books of the Company any or all
of the shares of the Company held by them, and if a copy of said agreement shall
be filed with the Company, or if (ii) shareholders entitled to vote shall adopt
any Bylaw provision abridging, limiting or restricting the rights of any
shareholders mentioned above, then, and in either of such events, all
certificates of shares of stock subject to such abridgments, limitations or
restrictions shall have a reference thereto endorsed thereon by an officer of
the Company and such certificates shall not thereafter be transferred on the
books of the Company except in accordance with the terms and provisions of such
as the case may be; however, no restriction shall be binding with respect to
shares issued prior to adoption of the restriction unless the holders of such
shares voted in favor of, or consented in writing to, the restriction.
Section 8.5: Termination of Article VIII.
The provisions of this Article VIII will terminate in their entirety on
the effective date of a registration statement filed with the Securities and
Exchange Commission under the Act with respect to registration of shares of the
Company's capital stock for sale to the public.
Article IX
CONSTRUCTION OF BYLAWS WITH
REFERENCE TO PROVISIONS OF LAW
Section 9.1: Bylaw Provisions Construed as Additional and Supplemental
to Provisions of Law. All restrictions, limitations, requirements and other
provisions of these Bylaws shall be construed, insofar as possible, as
supplemental and additional to all provisions of law applicable to the subject
matter thereof and shall be fully complied with in addition to the said
provisions of law unless such compliance shall be illegal.
Section 9.2: Bylaw Provisions Contrary to or Inconsistent with
Provisions of Law. Any article, section, subsection, subdivision, sentence,
clause or phrase of these Bylaws which, upon being construed in the manner
provided in Section 9.1 hereof, shall be contrary to or inconsistent with any
applicable provision of law, shall not apply so long as said provisions of law
shall remain in effect, but such result shall not affect the validity or
applicability of any other portion of these Bylaws, it being hereby declared
that these Bylaws, and each article, section, subsection, subdivision, sentence,
clause or phrase thereof, would have been adopted irrespective of the fact that
any one or more articles, sections, subsections, subdivisions, sentences,
clauses or phrases is or are illegal.
Article X
CERTIFICATION, ADOPTION, AMENDMENT OR REPEAL OF BYLAWS
Section 10.1: By Shareholders. Bylaws may be adopted, amended or
repealed by the vote or written consent of holders of a majority of the
outstanding shares entitled to vote.
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<PAGE> 25
Bylaws specifying or changing a fixed number of directors or the maximum or
minimum number or changing from a fixed to a variable board or vice versa may be
adopted only by the shareholders.
Section 10.2: By the Board of Directors. Subject to the right of
shareholders to adopt, amend or repeal Bylaws, and other than a Bylaw or
amendment thereof specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa, these Bylaws may be adopted, amended or repealed by the Board of
Directors. A Bylaw adopted by the shareholders may restrict or eliminate the
power of the Board of Directors to adopt, amend or repeal Bylaws.
Section 10.3: Certification and Inspection of Bylaws. The Company shall
keep at its principal executive office the original or a copy of these Bylaws as
amended or otherwise altered to date, which shall be open to inspection by the
shareholders at all reasonable times during office hours.
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<PAGE> 26
CERTIFICATION OF BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
(A CALIFORNIA CORPORATION)
KNOW ALL BY THESE PRESENTS:
I, Dennis R. DeBroeck, certify that I am Secretary of Brocade
Communications Systems, Inc., a California corporation (the "Company"), that I
am duly authorized to make and deliver this certification and that the attached
Bylaws are a true and correct copy of the Bylaws of the Company in effect as of
the date of this certificate.
Dated: September 19, 1997
/s/ Dennis R. DeBroeck
----------------------------------
Dennis R. DeBroeck, Secretary
<PAGE> 1
EXHIBIT 3.4
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be 1209 Orange Street,
in the City of Wilmington, County of New Castle, State of Delaware, 19801. The
name of the registered agent of the Corporation at such location is The
Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date
and at a time designated by the board of directors. At the meeting, directors
shall be elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
(i) board of directors, (ii) the chairman of the board, (iii) the president, or
(iv) the chief executive officer.
If a special meeting is called by any person other than the board of
directors, the request shall be in writing, specifying the time of such meeting
and the general nature of the business proposed to
<PAGE> 2
be transacted, and shall be delivered personally or sent by registered mail or
by telegraphic or other facsimile transmission to the chairman of the board, the
president, any vice president, or the secretary of the corporation. No business
may be transacted at such special meeting otherwise than specified in such
notice. The officer receiving the request shall cause notice to be promptly
given to the stockholders entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons who called the meeting, not less than
thirty-five (35) nor more than sixty (60) days after the receipt of the request.
If the notice is not given within twenty (20) days after the receipt of the
request, the person or persons requesting the meeting may give the notice.
Nothing contained in this paragraph of this Section 3 shall be construed as
limiting, fixing, or affecting the time when a meeting of stockholders called by
action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.6 of these Bylaws not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notice shall specify the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 90 days prior to the meeting;
provided, however, that in the event that less than 100 days notice or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. To be in
proper form, a stockholder's notice to the secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations, propose the business, and, as the
case may be, the name and address of the person or
persons to be nominated or the nature of the business to
be proposed;
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<PAGE> 3
(ii) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at
such meeting and, if applicable, intends to appear in
person or by proxy at the meeting to nominate the person
or persons specified in the notice or introduce the
business specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee
and any other person or persons (naming such person or
persons) pursuant to which the nomination or nominations
are to be made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as
would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed, or
intended to be proposed by the board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting, or
(ii) the stockholders entitled to vote thereat, present in person or represented
by proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
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When a quorum is present or represented at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provisions of the statutes or
of the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of the question.
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Sections 2.12 and 2.14 of
these Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of
incorporation, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Except as otherwise provided in this Section 2.11, any action required
by this chapter to be taken at any annual or special meeting of stockholders of
a Corporation, or any action that may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice, and
without a vote if a consent in writing, setting forth the action so taken, is
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signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
Notwithstanding the foregoing, effective upon the listing of the Common
Stock of the Corporation on the Nasdaq Stock Market and the registration of any
class of securities of the Corporation pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, the stockholders of the Corporation
may not take action by written consent without a meeting but must take any such
actions at a duly called annual or special meeting.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or entitled to express consent to corporate action in writing without a
meeting, or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than 60 nor less than 10 days before the date of such meeting, nor
more than 60 days prior to any other action.
If the board of directors does not so fix a record date, the fixing of
such record date shall be governed by the provisions of Section 213 of the
General Corporation Law of Delaware.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the Corporation, but no such
proxy shall be voted or acted upon after 3 years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder
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or the stockholder's attorney-in-fact. The revocability of a proxy that states
on its face that it is irrevocable shall be governed by the provisions of
Section 212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stock ledger shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 CONDUCT OF BUSINESS
Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The chairman of any meeting of stockholders shall
determine the order of business and the procedures at the meeting, including
such matters as the regulation of the manner of voting and conduct of business.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware
and any limitations in the certificate of incorporation or these Bylaws relating
to action required to be approved by the stockholders or by the outstanding
shares, the business and affairs of the Corporation shall be managed and all
corporate powers shall be exercised by or under the direction of the board of
directors.
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3.2 NUMBER
The authorized number of directors of the Corporation shall be five
(5). No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 CLASSES OF DIRECTORS
At such time as a Registration Statement regarding the sale of the
Corporation's Common Stock to the public is declared effective by the Securities
and Exchange Commission, the Directors shall be divided into three classes
designated as Class I, Class II and Class III, respectively. Directors shall be
assigned to each class in accordance with a resolution or resolutions adopted by
the Board of Directors. At the first annual meeting of stockholders following
the closing of the Initial Public Offering, the term of office of the Class I
Directors shall expire and Class I Directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the closing
of the Initial Public Offering, the term of office of the Class II Directors
shall expire and Class II Directors shall be elected for a full term of three
years. At the third annual meeting of stockholders following the closing of the
Initial Public Offering, the term of office of the Class III Directors shall
expire and Class III Directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, Directors shall be elected
for a full term of three years to succeed the Directors of the class whose terms
expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
Corporation. Stockholders may remove directors with or without cause. Any
vacancy occurring in the board of directors with or without cause may be filled
by a majority of the remaining members of the board of directors, although such
majority is less than a quorum, or by a plurality of the votes cast at a meeting
of stockholders, and each director so elected shall hold office until the
expiration of the term of office of the director whom he has replaced.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors
elected by all of the stockholders having the right to
vote as a single class may be filled by a majority of the
directors then in office, although less than a quorum, or
by a sole remaining director.
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(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation Law
of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10% of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, members of the board of directors, or any committee designated by
the board of directors, may participate in a meeting of the board of directors,
or any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice
at such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
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Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least 4 days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
3.10 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.11 CONDUCT OF BUSINESS
Meetings of the board of directors shall be presided over by the
chairman of the board, if any, or in his absence by the chief executive officer,
or in their absence by a chairman chosen at the meeting. The secretary shall act
as secretary of the meeting, but in his absence the chairman of the
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meeting may appoint any person to act as secretary of the meeting. The chairman
of any meeting shall determine the order of business and the procedures at the
meeting.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
board of directors, or of any committee thereof, may be taken without a meeting
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or
these Bylaws, the board of directors shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and may be paid a fixed sum
for attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.14 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors. If at any time a class
or series of shares is entitled to elect one or more directors, the provisions
of this Article 3.14 shall apply to the vote of that class or series and not to
the vote of the outstanding shares as a whole.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the Corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the Bylaws of the Corporation, shall have and may
exercise
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all the powers and authority of the board of directors in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers that may require it; but no such
committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the Corporation or a revocation
of a dissolution, or (v) amend the Bylaws of the Corporation; and, unless the
board resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report
the same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of
adjournment), Section 3.11 (conduct of business) and 3.12 (action without a
meeting), with such changes in the context of those Bylaws as are necessary to
substitute the committee and its members for the board of directors and its
members; provided, however, that the time of regular meetings of committees may
also be called by resolution of the board of directors and that notice of
special meetings of committees shall also be given to all alternate members, who
shall have the right to attend all meetings of the committee. The board of
directors may adopt rules for the government of any committee not inconsistent
with the provisions of these Bylaws.
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ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a chief executive officer, one
or more vice presidents, a secretary and a chief financial officer. The
Corporation may also have, at the discretion of the board of directors, a
chairman of the board, a president, a chief operating officer, one or more
executive, senior or assistant vice presidents, assistant secretaries and any
such other officers as may be appointed in accordance with the provisions of
Section 5.2 of these Bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
Except as otherwise provided in this Section 5.2, the officers of the
Corporation shall be appointed by the board of directors, subject to the rights,
if any, of an officer under any contract of employment. The board of directors
may appoint, or empower an officer to appoint, such officers and agents of the
business as the Corporation may require (whether or not such officer or agent is
described in this Article V), each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these Bylaws or
as the board of directors may from time to time determine. Any vacancy occurring
in any office of the Corporation shall be filled by the board of directors or
may be filled by the officer, if any, who appointed such officer.
5.3 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors or, in the case of an officer appointed by
another officer, by such other officer.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
5.4 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Bylaws. If there
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is no chief executive officer, then the chairman of the board shall also be the
chief executive officer of the Corporation and shall have the powers and duties
prescribed in Section 5.5 of these Bylaws.
5.5 CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the Corporation shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and the officers of the Corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a Chairman of the Board at all meetings of the Board of Directors. He or she
shall have the general powers and duties of management usually vested in the
chief executive officer of a Corporation, including general supervision,
direction and control of the business and supervision of other officers of the
Corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
The Chief Executive Officer shall, without limitation, have the
authority to execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
5.6 PRESIDENT
Subject to such supervisory powers as may be given by these Bylaws or
the Board of Directors to the Chairman of the Board or the Chief Executive
Officer, if there be such officers, the president shall have general
supervision, direction and control of the business and supervision of other
officers of the Corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws. In the event a Chief
Executive Officer shall not be appointed, the President shall have the duties of
such office.
5.7 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the chief executive officer and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the chief executive
officer. The vice presidents shall have such other powers and perform such other
duties as from time to time may be prescribed for them respectively by the board
of directors, these Bylaws, the chief executive officer or the chairman of the
board.
5.8 SECRETARY
The secretary shall keep or cause to be kept, at the principal
executive office of the Corporation or such other place as the board of
directors may direct, a book of minutes of all meetings and actions of
directors, committees of directors, and stockholders. The minutes shall
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show the time and place of each meeting, whether regular or special (and, if
special, how authorized and the notice given), the names of those present at
directors' meetings or committee meetings, the number of shares present or
represented at stockholders' meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these Bylaws. He shall keep the seal of the Corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these Bylaws.
5.9 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be
kept and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the Corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
Corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his transactions as treasurer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these Bylaws.
5.10 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
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5.11 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper.
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6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that the indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted
pursuant to the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another while holding such office.
6.7 INSURANCE INDEMNIFICATION
The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article VI.
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6.8 THE CORPORATION
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting Corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
and subject to the provisions of this Article VI (including, without limitation
the provisions of Section 6.4) with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advanced of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
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<PAGE> 18
Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the Corporation
to permit the director to inspect any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with reference
to the inspection, or award such other and further relief as the Court may deem
just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, any vice
president, the chief financial officer, the secretary or assistant secretary of
this Corporation, or any other person authorized by the board of directors or
the chief executive officer or a vice president, is authorized to vote,
represent, and exercise on behalf of this Corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this Corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
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8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and"or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General
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<PAGE> 20
Corporation Law of Delaware, in lieu of the foregoing requirements there may be
set forth on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and"or
rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.
8.7 DIVIDENDS
The directors of the Corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the Corporation's
capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
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8.9 SEAL
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the Corporation to restrict the transfer of shares of stock of the Corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other Bylaws of the Corporation may be adopted, amended
or repealed by the stockholders entitled to vote; provided, however, that the
Corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal Bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal Bylaws.
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ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the Corporation that the Corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the Corporation shall be dissolved.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to
elect successors to directors whose terms have expired or
would have expired upon qualification of their
successors; or
(ii) the business of the Corporation is suffering or is
threatened with irreparable injury because the directors
are so divided respecting the management of the affairs
of the Corporation that the required vote for action by
the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the Corporation has abandoned its business and has failed
within a reasonable time to take steps to dissolve,
liquidate or distribute its assets.
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11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the Corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
ARTICLE XII
LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiaries, including any officer or employee who is a Director of the
Corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the Corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Bylaw shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.
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EXHIBIT 3.4
BYLAWS
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
A DELAWARE CORPORATION
<PAGE> 25
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I CORPORATE OFFICES...........................................................................................1
1.1 REGISTERED OFFICE...................................................................................1
1.2 OTHER OFFICES.......................................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS...................................................................................1
2.1 PLACE OF MEETINGS...................................................................................1
2.2 ANNUAL MEETING......................................................................................1
2.3 SPECIAL MEETING.....................................................................................1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................................................2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS.....................................2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................................................3
2.7 QUORUM..............................................................................................3
2.8 ADJOURNED MEETING; NOTICE...........................................................................4
2.9 VOTING..............................................................................................4
2.10 WAIVER OF NOTICE....................................................................................4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.............................................4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.........................................5
2.13 PROXIES.............................................................................................5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE...............................................................6
2.15 CONDUCT OF BUSINESS.................................................................................6
ARTICLE III DIRECTORS.................................................................................................6
3.1 POWERS..............................................................................................6
3.2 NUMBER..............................................................................................7
3.3 CLASSES OF DIRECTORS................................................................................7
3.4 RESIGNATION AND VACANCIES...........................................................................7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................................................8
3.6 REGULAR MEETINGS....................................................................................8
3.7 SPECIAL MEETINGS; NOTICE............................................................................8
3.8 QUORUM..............................................................................................9
3.9 WAIVER OF NOTICE....................................................................................9
3.10 ADJOURNED MEETING; NOTICE...........................................................................9
3.11 CONDUCT OF BUSINESS.................................................................................9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING..................................................10
3.13 FEES AND COMPENSATION OF DIRECTORS.................................................................10
3.14 REMOVAL OF DIRECTORS...............................................................................10
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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ARTICLE IV COMMITTEES................................................................................................10
4.1 COMMITTEES OF DIRECTORS............................................................................10
4.2 COMMITTEE MINUTES..................................................................................11
4.3 MEETINGS AND ACTION OF COMMITTEES..................................................................11
ARTICLE V OFFICERS...................................................................................................12
5.1 OFFICERS...........................................................................................12
5.2 APPOINTMENT OF OFFICERS............................................................................12
5.3 REMOVAL AND RESIGNATION OF OFFICERS................................................................12
5.4 CHAIRMAN OF THE BOARD..............................................................................12
5.5 CHIEF EXECUTIVE OFFICER............................................................................13
5.6 PRESIDENT..........................................................................................13
5.7 VICE PRESIDENT.....................................................................................13
5.8 SECRETARY..........................................................................................13
5.9 CHIEF FINANCIAL OFFICER............................................................................14
5.10 ASSISTANT SECRETARY................................................................................14
5.11 AUTHORITY AND DUTIES OF OFFICERS...................................................................15
ARTICLE VI INDEMNITY.................................................................................................15
6.1 THIRD PARTY ACTIONS................................................................................15
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION......................................................15
6.3 SUCCESSFUL DEFENSE.................................................................................16
6.4 DETERMINATION OF CONDUCT...........................................................................16
6.5 PAYMENT OF EXPENSES IN ADVANCE.....................................................................16
6.6 INDEMNITY NOT EXCLUSIVE............................................................................16
6.7 INSURANCE INDEMNIFICATION..........................................................................16
6.8 THE CORPORATION....................................................................................17
6.9 EMPLOYEE BENEFIT PLANS.............................................................................17
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES........................................17
ARTICLE VII RECORDS AND REPORTS......................................................................................17
7.1 MAINTENANCE AND INSPECTION OF RECORDS..............................................................17
7.2 INSPECTION BY DIRECTORS............................................................................18
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS.....................................................18
ARTICLE VIII GENERAL MATTERS.........................................................................................18
8.1 CHECKS.............................................................................................18
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS...................................................19
</TABLE>
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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8.3 STOCK CERTIFICATES; PARTLY PAID SHARES.............................................................19
8.4 SPECIAL DESIGNATION ON CERTIFICATES................................................................19
8.5 LOST CERTIFICATES..................................................................................20
8.6 CONSTRUCTION; DEFINITIONS..........................................................................20
8.7 DIVIDENDS..........................................................................................20
8.8 FISCAL YEAR........................................................................................20
8.9 SEAL...............................................................................................21
8.10 TRANSFER OF STOCK..................................................................................21
8.11 STOCK TRANSFER AGREEMENTS..........................................................................21
8.12 REGISTERED STOCKHOLDERS............................................................................21
ARTICLE IX AMENDMENTS................................................................................................21
ARTICLE X DISSOLUTION...............................................................................................22
ARTICLE XI CUSTODIAN.................................................................................................22
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES........................................................22
11.2 DUTIES OF CUSTODIAN................................................................................23
ARTICLE XII LOANS TO OFFICERS........................................................................................23
</TABLE>
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EXHIBIT 4.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE
35,444 SHARES OF SERIES A PREFERRED STOCK OF BROCADE COMMUNICATIONS
SYSTEMS, INC.
(Void after March 31, 2002)
This certifies that VENTURE LENDING & LEASING, INC., a Maryland corporation, or
assigns (the "Holder"), for value received, is entitled to purchase from BROCADE
COMMUNICATIONS SYSTEMS, INC., a California corporation (the "Company"), 35,444
fully paid and nonassessable shares of the Company's Series A Preferred Stock
("preferred Stock') for cash at a price of $1.00 per share (the "Stock Purchase
Price") at any time or from time to time up to and including 5:00 p.m. (Pacific
Time) on March 31, 2002 (the "Expiration Date"), upon surrender to the Company
at its principal office at 457 East Evelyn Avenue, Suite E, Sunnyvale,
California 94086 (or at such other location as the Company may advise Holder in
writing) of this Warrant properly endorsed with the Form of Subscription
attached hereto duly filled in and signed and upon payment in cash or by check
of the aggregate Stock Purchase Price for the number of shares for which this
Warrant is being exercised determined in accordance with the provisions hereof.
The Stock Purchase Price and the number of shares purchasable hereunder are
subject to adjustment as provided in Section 4 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
(a) Unless an election is made pursuant to clause (b) of this Section 1,
this Warrant shall be exercisable at the option of the Holder, at anytime or
from time to time, on or before the Expiration Date for all or any portion
of the shares of Preferred Stock (but not for a fraction of a share) which
may be purchased hereunder for the Stock Purchase Price multiplied by the
number of shares to be purchased. In the event, however, that pursuant to
the Company's Certificate of Incorporation, as amended, an event causing
automatic conversion of the Company's Preferred Stock into Common Stock
shall have occurred prior to the exercise of this Warrant, in whole or in
part, then this Warrant shall be exercisable for the number of shares of
Common Stock of the Company into which the Preferred Stock not purchased
upon any prior exercise of the Warrant would have been so converted (and,
where the context requires, reference to "preferred Stock" shall be deemed
to include such Common Stock). The Company agrees that the shares of
Preferred Stock purchased under this Warrant shall be and are deemed to be
issued to the holder hereof as the record owner of such shares as of the
close of business on the date on which this Warrant shall have been
surrendered and payment made for such shares. Subject to the provisions of
Section 2, certificates for the shares o f Preferred Stock so purchased,
together with any other securities or property to which the Holder hereof is
entitled upon such exercise, shall be delivered to the Holder hereof by the
Company at the Company's expense within a reasonable time after the rights
represented by this Warrant have been so exercised. Except as provided in
clause (b) of this Section 1, in case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall cancel
this Warrant and execute and deliver a new Warrant or Warrants of like tenor
for the balance of the shares purchasable under the Warrant surrendered upon
such purchase to the Holder hereof within a reasonable time. Each stock
certificate so delivered shall be in such denominations of Preferred Stock
as may be requested by the Holder hereof and shall be registered in the name
of such Holder or such other name as shall be designated by such Holder,
subject to the limitations contained in Section 2.
(b) The Holder, in lieu of exercising this Warrant by the payment of the
Stock purchase Price pursuant to clause (a) of this Section 1, may elect, at
any time on or before the Expiration Date, to receive that number of shares
of Preferred Stock equal to the quotient of: (I) the difference between
<PAGE> 2
(A) the Per Share Price (as hereinafter defined) of the Preferred Stock,
less (B) the Stock Purchase Price then in effect, multiplied by the number
of shares of Preferred Stock the Holder would otherwise have been entitled
to purchase hereunder pursuant to clause (a) of this Section 1 (or such
lesser number of shares as the Holder may designate in the case of a partial
exercise of this Warrant); over (ii) the Per Share Price.
(C) For purposes of clause (b) of this Section 1, "Per Share Price"
means the product of: (I) the greater of (A) the average of the closing bid
and asked prices of the Company's Common Stock as quoted by NASDAQ or listed
on any exchange, whichever is applicable, as published in the Western
Edition of the Wall Street Journal for the ten (10 trading days prior to the
date of the Holder's election hereunder or, (B) if applicable at the time of
or in connection with the exercise under clause (b) of this Section 1, the
gross sales price of one share of the Company's Common Stock pursuant to a
registered public offering or that amount which shareholders of the Company
will receive for each share of Common Stock pursuant to a merger,
reorganization or sale of assets; and (ii) that number of shares of Common
Stock into which each share of Preferred Stock is convertible. If the
company's Common Stock is not quoted by NASDAQ or listed on an exchange, the
Per Share Price of the Preferred Stock (or the equivalent number of shares
of Common Stock into which such Preferred Stock is convertible) shall be the
price per share which the Company would obtain from a willing buyer for
shares sold by the Company from authorized but unissued shares as such price
shall be agreed upon by the Holder and the company or, if agreement cannot
be reached within ten (10) business days of the Holder' selection hereunder,
as such price shall be determined by a panel of three (3) appraisers, one
(1) to be chosen by the company, one (1) to be chosen by the Holder and the
third to be chosen by the first two (2) appraisers. If the appraisers cannot
reach agreement within 30 days of the Holder's election hereunder, then each
appraiser shall deliver its appraisal and the appraisal which is neither the
highest nor the lowest shall constitute the Per Share Price. In the event
either party fails to choose an appraiser within 30 days of the Holder's
election hereunder, then the appraisal of the sole appraiser shall
constitute the Per Share Price. Each party shall bear the cost of the
appraiser selected by such party and the cost of the third appraiser shall
be borne one-half by each party. In the event either party fails to choose
an appraiser, the cost of the sole appraiser shall be borne one-half by each
party.
2. Limitation on Transfer.
(a) the Warrant and the Preferred Stock shall not be transferable except
upon the conditions specified in this Section 2 and in compliance with the
provisions of the Securities Act. Each holder of this Warrant or the
Preferred Stock issuable hereunder and the Common Stock issuable upon
conversion of such Preferred stock will cause any proposed transferee of the
Warrant or Preferred Stock or such Common Stock to agree to take and hold
such securities subject to the provisions and upon the conditions specified
in this Section 2.
(b) Each certificate representing (I) this Warrant, (ii) the Preferred
Stock, (iii) shares of the Company's Common Stock issued upon conversion of
the Preferred Stock and (iv) any other securities issued in respect of the
Preferred Stock or Common Stock issued upon conversion of the Preferred
Stock upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of this Section 2 or unless such securities have been registered
under the Securities Act or sold under Rule 144) be stamped or otherwise
imprinted with a legend substantially in the following form (in addition to
any legend required under applicable state securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICAT HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN RGISTERED UNDER THE SECURITIES ACT OF 1933
OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFORM UNDER SAID ACT
AND ANY APPLICABLE STATE SECURITIES LAWS.
<PAGE> 3
(c) the Holder of this Warrant and each person to whom this Warrant is
subsequently transferred represents and warrants to the Company (by
acceptance of such transfer) that it will not transfer the Warrant (or
securities issuable upon exercise hereof unless a registration statement
under the Securities Act was in effect with respect to such securities at
the time of issuance thereof) except pursuant to (I) an effective
registration statement under the Securities Act, (ii) Rule 144 under the
Securities Act (or any other rule under the Securities Act relating to the
disposition of securities), or (iii) an opinion of counsel, reasonably
satisfactory to counsel for the company, that an exemption from such
registration is available.
3. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Preferred Stock which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be
duly authorized, validly issued, fully paid and nonassessable and free from
all preemptive rights of any shareholder and free of all taxes, liens and
charges with respect to the issue thereof. The Company further covenants and
agrees that during the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved, for the purpose of issue or transfer upon exercise of the
subscription rights evidenced by this Warrant, a sufficient number of share
so authorized but unissued Preferred Stock or other securities and property,
when and as required to provide for the exercise of the rights represented
by this Warrant. The company will take all such action as may be necessary
to assure that such shares of Preferred Stock may be issued as provided
herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Preferred
Stock may be listed. The Company will not take nay action which would result
in any adjustment of the Stock Purchase Price (as defined in Section 4
hereof) (I) if the total number of shares of preferred Stock issuable after
such action upon exercise of all outstanding warrants, together with all
shares of Preferred Stock then outstanding and all shares of Preferred Stock
then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding, would exceed the total number of
shares of Preferred Stock then authorized by the Company's Certificate of
Incorporation, or (ii) if the total number of shares of Common Stock
issuable after such action upon the conversion of all such shares of
preferred Stock together with all shares of Common Stock then outstanding
and then issuable upon exercise of all options and upon the conversion of
all convertible securities then outstanding would exceed the total number of
shares of Common Stock then authorized by the company's Certificate of
Incorporation.
4. Adjustment of Stock Purchase Price Number of Shares The Stock
Purchase Price and the number of shares purchasable upon the exercise of
this Warrant shall be subject to adjustment form time to time upon the
occurrence eof certain events described in this Section 4. Upon each
adjustment of the Stock Purchase Price, the Holder of this Warrant shall
thereafter be entitled to purchase, at the Stock Purchase Price resulting
from such adjustment, the number of shares obtained by multiplying the Stock
Purchase Price in effect immediately prior to such adjustment by the number
of shares purchasable pursuant hereto immediately prior to such adjustment,
and dividing the product thereof by the Stock Purchase Price resulting from
such adjustment.
4.1 subdivision or Combination of Stock. In case the company
shall at any time subdivide its outstanding shares of Preferred Stock into a
greater number of shares, the Stock Purchase Price in effect immediately
prior to such subdivision shall be proportionately reduced, and conversely,
in case the outstanding shares of preferred Stock of the Company shall be
combined into a smaller number of shares, the Stock Purchase Price in effect
immediately prior to such combination shall be proportionately increased.
4.2 dividends in Preferred Stock Other Stock, property,
Reclassification. If at any time or from time to time the holders of
Preferred Stock (or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have received or become
entitled to receive, without payment therefor,
(a) Preferred Stock, or any shares of stock or other securities whether
or not such securities are at any time directly or indirectly convertible
into or exchangeable for Preferred Stock, or any rights
<PAGE> 4
or options to subscribe for, purchase or otherwise acquire any of the
foregoing by way of dividend or other distribution, or
(b) any cash paid or payable otherwise than as a cash
dividend, or
(c) Preferred Stock or other or additional tock or other
securities or property (including cash) by way of spin-off, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of preferred Stock issued as a stock split, adjustments
in respect of which shall be covered by the terms of Section 4.1 above),
then and in each such case, the Holder hereof shall, upon the exercise
of this Warrant, be entitled to receive, in addition to the number of shares
of Preferred Stock receivable thereupon, and without payment of any
additional consideration therefore, the amount o stock and other securities
and property (including cash in the cases referred to in clauses (b) and (c)
above) which such Holder would hold on the date of such exercise had he been
the holder of record of such Preferred Stock as of the date on which holders
of Preferred Stock received or became entitled to receive such shares and/or
all other additional stock and other securities and property.
4.3 Reorganization, Reclassification, Consolidation, Merger or
Sale. If any capital reorganization of the capital stock of the Company, or
any consolidation or merger of the Company with another corporation, or the
sale of all or substantially all of its assets to another corporation shall
be effected in such a way that holders of Preferred Stock shall be entitled
to receive stock, securities or assets with respect to or in exchange for
Preferred Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate
provisions shall be made whereby the holder hereof shall thereafter have the
right to purchase and receive (in lieu of the shares of the Preferred Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented hereby) such shares of stock, securities
or assets as may be issued or payable with respect to or in exchange for a
number of outstanding shares of such Preferred Stock equal to the number of
shares of such stock immediately theretofore purchasable and receivable upon
the exercise of the rights represented hereby; provided, however, that in
the event the effective price of such reorganization is in excess of the
exercise price hereof effective at the time of the merger and securities
received in such reorganization are publicly traded and resaleable by the
holder pursuant to the terms of SEC rule 145, without regard to volume
limitations or holding period requirements (other than a reasonable lockup
period imposed in order to account for such reorganization as a pooling of
interests), then this Warrant shall expire unless exercised prior to the
effective day of the reorganization. In any such case, appropriate provision
shall be made with respect to the rights and interest of the holder of this
Warrant to the end that the provisions hereof (including, without
limitation, provisions for adjustments of the Stock Purchase Price and of
the number of share purchasable and receivable upon the exercise of this
Warrant) shall thereafter be applicable, as nearly as may be possible, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise hereof. The Company will not effect any such
consolidation, merger or sale unless, prior to the consummation thereof, the
successor corporation (if other than the Company) resulting from such
consolidation or the corporation purchasing such assets hall assume by
written instrument, executed and mailed or delivered to the registered
Holder hereof at the last address of such Holder appearing on the books of
the Company, the obligation to deliver to such Holder such shares of stock,
securities or assets as, in accordance with the foregoing provisions, such
Holder may be entitled to purchase.
4.4 (Deleted).
4.5 Notice of Adjustment. Upon any adjustment of the Stock
Purchase Price, and/or any increase or decrease in the number of shares
purchasable upon the exercise of this Warrant the Company shall give written
notice thereof, by first class mail, postage prepaid, addressed to the
registered holder of this Warrant at the address of such holder as shown on
the books of the Company. The notice shall be signed by the Company's chief
financial officer and shall state the Stock purchase Price resulting form
such adjustment and the increase or decrease, if any, in the number of
shares
<PAGE> 5
purchasable at such price upon the exercise of this Warrant, setting forth
in reasonable detail the method of calculation and the facts upon which such
calculation is based.
4.6 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its Preferred
Stock;
(b) The Company shall declare nay dividend upon its Preferred Stock
payable in stock or make any special dividend or other distribution to the
holders of its Preferred Stock;
(c) the Company shall offer for subscription pro rata to the holders of
its Preferred Stock any additional shares of stock of any class or other
rights;
(d) there shall be any capital reorganization or reclassification of the
capital stock of the company, or consolidation or merger of the company
with, or sale of all or substantially all of its assets to, another
corporation;
(e) the Company shall take or propose to take any other action, notice
of which is actually provided to holders of the Preferred Stock;
then, in any one or more of said cases, Holder shall be entitled to the
same notice with respect to such events as provided to holders of the
Company's Preferred Stock as set forth in the Company's Certificate of
Incorporation.
4.7 (Deleted).
5. Issue Tax. The issuance of certificates for shares of Preferred Stock
upon the exercise of the Warrant shall be made without charge to the Holder
of the Warrant for any issue tax in respect thereof provided however, that
the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the then Holder of the Warrant
being exercised.
6. Closing of Books. The Company will at no time close its transfer
books against the transfer of any Warrant or of any shares of Preferred
Stock issued or issuable upon the exercise of any warrant in any manner
which interferes with the timely exercise of this Warrant in accordance with
its terms.
7. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Warrant shall be construed as conferring upon the Holder
hereof the right to vote or to consent as a shareholder in respect of
meetings of shareholders for the election of directors of the company or any
other matters or any rights whatsoever as a shareholder of the Company. No
dividends or interest shall be payable or accrued in respect of this Warrant
or the interest represented hereby or the shares purchasable hereunder
until, and only to the extent that, this Warrant shall have been exercised.
No provisions hereof, in the absence of affirmative action by the holder to
purchase shares of Preferred Stock, and no mere enumeration herein of the
rights or privileges of the holder hereof, shall give rise to any liability
of such Holder for the Stock Purchase Price or as a shareholder of the
company, whether such liability is asserted by the company or by its
creditors.
8. (Deleted).
9. Registration Rights. The Holder hereof shall be entitled, with
respect to the shares of Preferred Stock issued upon exercise hereof (or the
shares of Common Stock or other securities issued upon conversion of such
Preferred Stock as the case may be,) to become a party to, and as such be
entitled to receive, all of the registration rights set forth in Section 2
of that certain Investors Rights Agreement dated as of August 31, 995 to the
same extent an on the same terms and conditions as possessed by the class of
Investors thereunder. The company shall take such action as may be
<PAGE> 6
reasonably necessary to assure that the granting of such registration rights
to the Holder does not violate the provisions of such agreement or any of
the Company's charter documents or rights of prior Grantees of registration
rights.
10. Rights and Obligations Survive Exercise of Warrant. The rights and
obligations of the company, of the Holder of this Warrant and of the holder
of shares of Preferred Stock issued upon exercise of this Warrant, contained
in Sections 6 and 9 shall survive the exercise of this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
12. Notices. Any notice, request or other document required or permitted
to be given or delivered to the holder hereof or the Company shall be deemed
to have been given (I) upon receipt if delivered personally or by courier
(ii) upon confirmation of receipt if by telecopy or (iii) three business
days after deposit in the US mail, with postage prepaid and certified or
registered, to each such holder at its address a shown on the books of the
Company or to the Company at the address indicated therefor in the first
paragraph of this Warrant.
13. binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the company by merger, consolidation or acquisition
of all or substantially all of the company's assts. All of the obligations
of the company relating to the Preferred Stock issuable upon the exercise of
this Warrant shall survive the exercise and termination of this Warrant. All
of the covenants and agreements of the Company shall inure to the benefit of
the successors and assign of the holder hereof. The Company will, at the
time of the exercise of this Warrant, in whole or in part, upon request of
the Holder hereof but at the Company's expense, acknowledge in writing its
continuing obligation to the holder hereof in respect to any rights
(including, without limitation, any right to registration of the shares of
Common Stock) to which the holder hereof shall continue to be entitled after
such exercise in accordance with this Warrant; provided, that the failure of
the holder hereof to make any such request shall not affect the continuing
obligation of the company tot he Holder hereof in respect of such rights.
14. Descriptive Headings and Governing Law. The descriptive headings of
the several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This Warrant
shall be construed and enforced in accordance with, and the rights of the
parties shall be governed by, the laws of the State of California.
15. Lost Warrants or Stock Certificates. The Company represents and
warrants to the Holder hereof that upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation
of any Warrant or stock certificate and, in the case of any such loss, theft
or destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate the company at its expense
will make and deliver a new Warrant or stock certificate, of like tenor, in
lieu of the lost, stolen, destroyed or mutilated Warrant or stock
certificate.
16. Fractional Shares. No fractional shares shall be issued upon
exercise of this Warrant. The Company shall, in lieu of issuing any
fractional share, pay the holder entitled to such fraction a sum in cash
equal to such fraction multiplied by the then effective Stock Purchase
Price.
17. Representations of Holder. With respect to this Warrant, Holder
represents and warrants to the Company as follows (which representations and
warranties will be reaffirmed upon any exercise of this Warrant):
17.1 Experience. It is experienced in evaluating and investing in
companies engaged in businesses similar to that of the Company' it
understands that investment in the Warrant involves substantial risks; it
has made detailed inquiries concerning the Company, its business and
services, its
<PAGE> 7
officers and its personnel; the officers of the Company have made available
to Holder any and all written information it has requested; the officers of
the Company have answered to Holder's satisfaction all inquiries made by it;
in making this investment it has relied upon information made available to
it by the Company' and it has such knowledge and experience in financial and
business smatters that it is capable of evaluating the merits and risks of
investment in the Company and it is able to bear the economic risks of that
investment.
17.2 Investment. It is acquiring the Warrant for investment for
its own account and not with a view to, or for resale in connection with,
any distribution thereof. It understands that the Warrant, the shares of
Preferred Stock issuable upon exercise thereof and the shares of Common
Stock issuable upon conversion of the preferred Stock, have not been
registered under the Securities Act of 1933, as amended, nor qualified under
applicable state securities laws.
17.3 Rule 144. It acknowledges that the Warrant, the Preferred
Stock and the Common Stock must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. It has been advised or is aware of the provisions
of Rule 144 promulgated under the Securities Act.
17.4 Access to Data. It has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and has had the opportunity to inspect the Company" facilities.
17.5 Accredited Investor. Holder is an "accredited investor"
within the meaning of the Securities and Exchange Commission Rule 501 of
Regulation D, as in effect on the issue date of this Warrant.
17.6 No Substitutions. At no time was Holder presented with any
advertisement or other form of solicitation with respect to this Warrant or
the Securities issuable hereunder.
18. Additional Representations and Covenants of the Company. The Company
hereby represents, warrants and agrees as follows:
18.1 Corporate Power. The Company has all requisite corporate
power and corporate authority to issue this Warrant and to carry out and
perform its obligations hereunder.
18.2 Authorization. All corporate action on the part of the
Company, its directors and shareholders necessary for the authorization,
execution, delivery and performance by the company of this has been taken.
This Warrant is a valid and binding obligation of the Company, enforceable
in accordance with its terms.
18.3 Offering. Subject in part to the truth and accuracy of
Holder's representations set forth in Section 17 hereof, the offer, issuance
and sale of the Warrant is, and the issuance of Preferred Stock upon
exercise of the Warrant and the issuance of Common Stock upon conversion of
the Preferred Stock will be exempt from the registration requirements of the
Securities Act, and are exempt from the qualification requirements of any
applicable state securities laws; and neither the Company nor anyone acting
on its behalf will take any action hereafter that would cause the loss of
such exemptions.
18.4 Stock Issuance. Upon exercise of the Warrant, the Company
will use its best efforts to cause stock certificates representing the
shares of Preferred Stock purchased pursuant to the exercise to be issued in
the individual names of Holder, its nominees or assignees, as appropriate at
the time of such exercise. Upon conversion of the shares of Preferred Stock
to shares of Common Stock, the Company will issue the Common Stock in the
individual names of Holder, its nominees or assignees, as appropriate.
<PAGE> 8
18.5 articles and By-Laws. The Company has provided Holder with true and
complete copies of the company's Articles or Certificate of Incorporation,
By-Laws, and each Certificate of Determination or other charter document
setting, forth any rights, preferences and privileges of Company's capital
stock, each as amended and in effect on the date of issuance of this
Warrant.
18.6 conversion of Preferred Stock. As of the ate hereof, each share of
the Preferred Stock is convertible into one share of the Common Stock.
18.7 financial and other Reports. From time to time upon to the earlier
of the Expiration Date or the complete exercise of this Warrant, the Company
shall furnish to Holder (I) within 120 days after the close of each fiscal
year of the company an audited balance sheet and statement of changes in
financial position at and as of the end of such fiscal year, together with
an audited statement of income for such fiscal year; (ii) within 45 days
after the close of each fiscal quarter of the Company, an unaudited balance
sheet and statement of cash flows at and as of the end of such quarter,
together with an unaudited statement of income for such quarter; and (iii)
promptly after sending, making available, or filing, copies of all reports,
proxy statements, and financial statements that the Company sends or makes
available to its shareholders.
IN WITNESS WHEREOF , the Company has caused this Warrant to be
duly executed by its officers, thereunto duly authorized this 26 day of
December, 1995.
BROCADE COMMUNICATIONS SYSTEM, INC.
By: /s/ BRUCE J. BERGMAN
--------------------------------
Title: CEO
Acknowledged and Agreed:
VENTURE LENDING & LEASING, INC.
By: /s/ RONALD W. SWENSON
--------------------------------
Title: President
<PAGE> 9
FORM OF SUBSCRIPTION
(to be signed only upon exercise of Warrant)
To: __________________________________
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such
Warrant for, and to purchase thereunder, __________________________ (_____)
(1) shares of Preferred Stock of ___________________________ and herewith
makes payment of _______________________ Dollars ($______) therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to, _______________________________________, whose address is
______________________________________.
The undersigned represents and warrants that it is acquiring such
Preferred Stock for its own account for investment and not with a view to or
for sale in connection with any distribution thereof within the meaning of
the Securities Act of 1933, as amended. The undersigned further renews as of
the date hereof the representations and warranties set forth in Section 17
of the Warrant.
DATED: ____________________________
________________________________________________________________________________
Signature must conform in all respects to name of holder as specified on the
face of the Warrant)
________________________________________________________________________________
________________________________________________________________________________
(1) Insert here the number of shares called for on the face of the
Warrant (or, in the case of a partial exercise, the portion thereof as to
which the Warrant is being exercised), in either case without making any
adjustment for additional Preferred Stock or any other stock or other
securities or property or cash which, pursuant to the adjustment provisions
of the Warrant, may be deliverable upon exercise.
<PAGE> 10
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned
under the within Warrant, with respect to the number of shares of Preferred
Stock covered thereby set forth hereinbelow, unto:
Name of Assignee Address No. of Shares
Dated: __________________________
(Signature must conform in all respect to name of holder as specified on the
face of the Warrant)
<PAGE> 1
EXHIBIT 4.3
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
FIRST AMENDED AND RESTATED
WARRANT TO PURCHASE
15,753 SHARES OF SERIES A PREFERRED STOCK OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
(Void after March 31, 2002)
This First Amended and Restated Warrant (the "Warrant") certifies that
VENTURE LENDING & LEASING, INC., a Maryland corporation, or assigns (the
"Holder"), for value received, is entitled to purchase from BROCADE
COMMUNICATIONS SYSTEMS, INC., a California corporation (the "Company"), 15,753
fully paid and nonassessable shares of the Company's Series A Preferred Stock
("Preferred Stock") for cash at a price of $4.50 per share (the "Stock Purchase
Price") at any time or from time to time up to and including 5:00 p.m. (Pacific
time) on March 31, 2002 (the "Expiration Date"), upon surrender to the Company
at its principal office at 2231-B Calle De Luna, Santa Clara, California 95054
(or at such other location as the Company may advise Holder in writing) of this
Warrant properly endorsed with the Form of Subscription attached hereto duly
filled in and signed and upon payment in cash or by check of the aggregate Stock
Purchase Price for the number of shares for which this Warrant is being
exercised determined in accordance with the provisions hereof. The Stock
Purchase Price and the number of shares of Preferred Stock purchasable hereunder
are subject to adjustment as provided in Section 4 of this Warrant.
This Warrant amends, restates and supersedes in its entirety that
certain Warrant to Purchase Shares of Brocade Communications Systems, Inc.
originally issued to Holder and dated December 26, 1995, which is terminated and
of no further force or effect.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
(a) Unless an election is made pursuant to clause (b) of this Section
1, this Warrant shall be exercisable at the option of the Holder, at any time or
from time to time, on or before the Expiration Date for all or any portion of
the shares of Preferred Stock (but not for a fraction of a share) which may be
purchased hereunder for the Stock Purchase Price multiplied by the number of
shares to be purchased. In the event, however, that pursuant to the Company's
Certificate of Incorporation, as amended, an event causing automatic conversion
of the Company's Preferred Stock into Common Stock shall have occurred prior to
the exercise of this Warrant, in whole or in part, then this Warrant shall be
exercisable for the number of shares of Common Stock of the Company into which
the Preferred Stock not purchased upon any prior exercise of the Warrant would
have been so converted (and, where the context requires, reference
<PAGE> 2
to "Preferred Stock" shall be deemed to include such Common Stock). The Company
agrees that the shares of Preferred Stock purchased under this Warrant shall be
and are deemed to be issued to the holder hereof as the record owner of such
shares as of the close of business on the date on which this Warrant shall have
been surrendered and payment made for such shares. Subject to the provisions of
Section 2, certificates for the shares of Preferred Stock so purchased, together
with any other securities or property to which the Holder hereof is entitled
upon such exercise, shall be delivered to the Holder hereof by the Company at
the Company's expense within a reasonable time after the rights represented by
this Warrant have been so exercised. Except as provided in clause (b) of this
Section 1, in case of a purchase of less than all the shares which may be
purchased under this Warrant, the Company shall cancel this Warrant and execute
and deliver a new Warrant or Warrants of like tenor for the balance of the
shares purchasable under the Warrant surrendered upon such purchase to the
Holder hereof within a reasonable time. Each stock certificate so delivered
shall be in such denominations of Preferred Stock as may be requested by the
Holder hereof and shall be registered in the name of such Holder or such other
name as shall be designated by such Holder, subject to the limitations contained
in Section 2.
(b) The Holder, in lieu of exercising this Warrant by the payment of
the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at
any time on or after the First Exercise Date and on or before the Expiration
Date, to receive that number of shares of Preferred Stock equal to the quotient
of: (i) the difference between (A) the Per Share Price (as hereinafter defined)
of the Preferred Stock, less (B) the Stock Purchase Price then in effect,
multiplied by the number of shares of Preferred Stock the Holder would otherwise
have been entitled to purchase hereunder pursuant to clause (a) of this Section
1 (or such lesser number of shares as the Holder may designate in the case of a
partial exercise of this Warrant); over (ii) the Per Share Price.
(c) For purposes of clause (b) of this Section 1, "Per Share Price"
means the product of: (i) the greater of (A) the average of the closing bid and
asked prices of the Company's Common Stock as quoted by NASDAQ or listed on any
exchange, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the ten (10) trading days prior to the date of the
Holder's election hereunder or, (B) if applicable at the time of or in
connection with the exercise under clause (b) of this Section 1, the gross sales
price of one share of the Company's Common Stock pursuant to a registered public
offering or that amount which shareholders of the Company will receive for each
share of Common Stock pursuant to a merger, reorganization or sale of assets;
and (ii) that number of shares of Common Stock into which each share of
Preferred Stock is convertible. If the Company's Common Stock is not quoted by
NASDAQ or listed on an exchange, the Per Share Price of the Preferred Stock (or
the equivalent number of shares of Common Stock into which such Preferred Stock
is convertible) shall be the price per share which the Company would obtain from
a willing buyer for shares sold by the Company from authorized but unissued
shares as such price shall be agreed upon by the Holder and the Company or, if
agreement cannot be reached within ten (10) business days of the Holder's
election hereunder, as such price shall be determined by a panel of three (3)
appraisers, one (1) to be chosen by the Company, one (1) to be chosen by the
Holder and the third to be chosen by the first two (2) appraisers. If the
appraisers cannot reach agreement within 30 days of the Holder's election
hereunder, then each appraiser shall deliver its appraisal and the appraisal
which is neither the highest nor the lowest shall constitute the Per Share
Price. In the event either party fails to choose an appraiser within 30 days of
the Holder's election hereunder, then
2
<PAGE> 3
the appraisal of the sole appraiser shall constitute the Per Share Price. Each
party shall bear the cost of the appraiser selected by such party and the cost
of the third appraiser shall be borne one-half by each party. In the event
either party fails to choose an appraiser, the cost of the sole appraiser shall
be borne one-half by each party.
2. Limitation on Transfer.
(a) The Warrant and the Preferred Stock shall not be transferable
except upon the conditions specified in this Section 2 and in compliance with
the provisions of the Securities Act. Each holder of this Warrant or the
Preferred Stock issuable hereunder and the Common Stock issuable upon conversion
of such Preferred Stock will cause any proposed transferee of the Warrant or
Preferred Stock or such Common Stock to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Section 2.
(b) Each certificate representing (i) this Warrant, (ii) the Preferred
Stock, (iii) shares of the Company's Common Stock issued upon conversion of the
Preferred Stock and (iv) any other securities issued in respect of the Preferred
Stock or Common Stock issued upon conversion of the Preferred Stock upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall (unless otherwise permitted by the provisions of this Section 2 or
unless such securities have been registered under the Securities Act or sold
under Rule 144) be stamped or otherwise imprinted with a legend substantially in
the following form (in addition to any legend required under applicable state
securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(c) The Holder of this Warrant and each person to whom this Warrant is
subsequently transferred represents and warrants to the Company (by acceptance
of such transfer) that it will not transfer the Warrant (or securities issuable
upon exercise hereof unless a registration statement under the Securities Act
was in effect with respect to such securities at the time of issuance thereof)
except pursuant to (i) an effective registration statement under the Securities
Act, (ii) Rule 144 under the Securities Act (or any other rule under the
Securities Act relating to the disposition of securities), or (iii) an opinion
of counsel, reasonably satisfactory to counsel for the Company, that an
exemption from such registration is available.
3. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Preferred Stock which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved, for the
purpose of issue or transfer upon
3
<PAGE> 4
exercise of the subscription rights evidenced by this Warrant, a sufficient
number of shares of authorized but unissued Preferred Stock, or other securities
and property, when and as required to provide for the exercise of the rights
represented by this Warrant. The Company will take all such action as may be
necessary to assure that such shares of Preferred Stock may be issued as
provided herein without violation of any applicable law or regulation, or of any
requirements of any domestic securities exchange upon which the Preferred Stock
may be listed. The Company will not take any action which would result in any
adjustment of the Stock Purchase Price (as defined in Section 4 hereof) (i) if
the total number of shares of Preferred Stock issuable after such action upon
exercise of all outstanding warrants, together with all shares of Preferred
Stock then outstanding and all shares of Preferred Stock then issuable upon
exercise of all options and upon the conversion of all convertible securities
then outstanding, would exceed the total number of shares of Preferred Stock
then authorized by the Company's Certificate of Incorporation, or (ii) if the
total number of shares of Common Stock issuable after such action upon the
conversion of all such shares of Preferred Stock together with all shares of
Common Stock then outstanding and then issuable upon exercise of all options and
upon the conversion of all convertible securities then outstanding would exceed
the total number of shares of Common Stock then authorized by the Company's
Certificate of Incorporation.
4. Adjustment of Stock Purchase Price Number of Shares. The Stock Purchase
Price and the number of shares purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the occurrence of certain
events described in this Section 4. Upon each adjustment of the Stock Purchase
Price, the Holder of this Warrant shall thereafter be entitled to purchase, at
the Stock Purchase Price resulting from such adjustment, the number of shares
obtained by multiplying the Stock Purchase Price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment, and dividing the product thereof by the Stock Purchase
Price resulting from such adjustment.
4.1 Subdivision or Combination of Stock. In case the Company shall at
any time subdivide its outstanding shares of Preferred Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Preferred Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
4.2 Dividends in Preferred Stock, Other Stock, Property,
Reclassification. If at any time or from time to time the holders of Preferred
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Preferred Stock, or any shares of stock or other securities
whether or not such securities are at any time directly or indirectly
convertible into or exchangeable for Preferred Stock, or any rights or options
to subscribe for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution, or
(b) any cash paid or payable otherwise than as a cash dividend,
or
4
<PAGE> 5
(c) Preferred Stock or other or additional stock or other
securities or property (including cash) by way of spinoff, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of Preferred Stock issued as a stock split, adjustments in
respect of which shall be covered by the terms of Section 4.1 above), then and
in each such case, the Holder hereof shall, upon the exercise of this Warrant,
be entitled to receive, in addition to the number of shares of Preferred Stock
receivable thereupon, and without payment of any additional consideration
therefor, the amount of stock and other securities and property (including cash
in the cases referred to in clauses (b) and (c) above) which such Holder would
hold on the date of such exercise had he been the holder of record of such
Preferred Stock as of the date on which holders of Preferred Stock received or
became entitled to receive such shares and/or all other additional stock and
other securities and property.
4.3 Reorganization, Reclassification, Consolidation, Merger or Sale.
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation shall be effected
in such a way that holders of Preferred Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Preferred Stock,
then, as a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provisions shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive (in lieu of the
shares of the Preferred Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby) such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Preferred Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the effective price of such reorganization is in
excess of the exercise price hereof effective at the time of the merger and
securities received in such reorganization are publicly traded and resaleable by
the holder pursuant to the terms of SEC Rule 145, without regard to volume
limitations or holding period requirements (other than a reasonable lockup
period imposed in order to account for such reorganization as a pooling of
interests), then this Warrant shall expire unless exercised prior to the
effective day of the reorganization. In any such case, appropriate provision
shall be made with respect to the rights and interests of the holder of this
Warrant to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be possible, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if other
than the Company) resulting from such consolidation or the corporation
purchasing such assets shall assume by written instrument, executed and mailed
or delivered to the registered Holder hereof at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such Holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to purchase.
4.4 (Deleted).
5
<PAGE> 6
4.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase
Price, and/or any increase or decrease in the number of shares purchasable upon
the exercise of this Warrant the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
4.6 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its
Preferred Stock;
(b) the Company shall declare any dividend upon its Preferred
Stock payable in stock or make any special dividend or other distribution to the
holders of its Preferred Stock;
(c) the Company shall offer for subscription pro rata to the
holders of its Preferred Stock any additional shares of stock of any class or
other rights;
(d) there shall be any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another corporation;
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(f) the Company shall take or propose to take any other action,
notice of which is actually provided to holders of the Preferred Stock; then, in
any one or more of said cases, Holder shall be entitled to the same notice with
respect to such events as provided to holders of the Company's Preferred Stock
as set forth in the Company's Certificate of Incorporation.
4.7 (Deleted).
5. Issue Tax. The issuance of certificates for shares of Preferred Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax in respect thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance and delivery of any certificate in a name
other than that of the then Holder of the Warrant being exercised.
6. Closing of Books. The Company will at no time close its transfer books
against the transfer of any Warrant or of any shares of Preferred Stock issued
or issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant in accordance with its terms.
6
<PAGE> 7
7. No Voting or Dividend Rights; Limitation of Liability. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof the
right to vote or to consent as a shareholder in respect of meetings of
shareholders for the election of directors of the Company or any other matters
or any rights whatsoever as a shareholder of the Company. No dividends or
interest shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised. No provisions hereof, in
the absence of affirmative action by the holder to purchase shares of Preferred
Stock, and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Stock Purchase
Price or as a shareholder of the Company, whether such liability is asserted by
the Company or by its creditors.
8. (Deleted).
9. Registration Rights. The Holder hereof shall be entitled, with respect
to the shares of Preferred Stock issued upon exercise hereof (or the shares of
Common Stock or other securities issued upon conversion of such Preferred Stock
as the case may be,) to become a party to, and as such be entitled to receive,
all of the registration rights set forth in Section 2 of that certain Investors
Rights Agreement dated as of August 31, 1995, as amended, to the same extent and
on the same terms and conditions as possessed by the class of Investors
thereunder. The Company shall take such action as may be reasonably necessary to
assure that the granting of such registration rights to the Holder does not
violate the provisions of such agreement or any of the Company's charter
documents or rights of prior Grantees of registration rights.
10. Rights and Obligations Survive Exercise of Warrant. The rights and
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Preferred Stock issued upon exercise of this Warrant, contained in
Sections 6 and 9 shall survive the exercise of this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
12. Notices. Any notice, request or other document required or permitted to
be given or delivered to the holder hereof or the Company shall be deemed to
have been given (i) upon receipt if delivered personally or by courier (ii) upon
confirmation of receipt if by telecopy or (iii) three business days after
deposit in the US mail, with postage prepaid and certified or registered, to
each such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this
Warrant.
13. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Preferred Stock issuable upon the exercise of this
Warrant shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assign of the holder hereof. The Company will, at the time of the
exercise of this Warrant, in whole or in part, upon request of the Holder hereof
but at the
7
<PAGE> 8
Company's expense, acknowledge in writing its continuing obligation to the
Holder hereof in respect of any rights (including, without limitation, any right
to registration of the shares of Common stock) to which the holder hereof shall
continue to be entitled after such exercise in accordance with this Warrant;
provided, that the failure of the holder hereof to make any such request shall
not affect the continuing obligation of the Company to the Holder hereof in
respect of such rights.
14. Descriptive Headings and Governing Law. The descriptive headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
15. Lost Warrants or Stock Certificates. The Company represents and
warrants to the Holder hereof that upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant or stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company at its expense will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
16. Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
multiplied by the then effective Stock Purchase Price.
17. Representations of Holder. With respect to this Warrant, Holder
represents and warrants to the Company as follows (which representations and
warranties will be reaffirmed upon any exercise of this Warrant):
17.1 Experience. It is experienced in evaluating and investing in
companies engaged in business similar to that of the Company; it understands
that investment in the Warrant involves substantial risks; it has made detailed
inquiries concerning the Company, its business and services, its officers and
its personnel; the officers of the Company have made available to Holder any and
all written information it has requested; the officers of the Company have
answered to Holder's satisfaction all inquiries made by it; in making this
investment it has relied upon information made available to it by the Company;
and it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of investment in the Company
and it is able to bear the economic risk of that investment.
17.2 Investment. It is acquiring the Warrant for investment for its
own account and not with a view to, or for resale in connection with, any
distribution thereof. It understands that the Warrant, the shares of Preferred
Stock issuable upon exercise thereof and the shares of Common Stock issuable
upon conversion of the Preferred Stock, have not been registered under the
Securities Act of 1933, as amended, nor qualified under applicable state
securities laws.
17.3 Rule 144. It acknowledges that the Warrant, the Preferred Stock
and the Common Stock must be held indefinitely unless they are subsequently
registered under the
8
<PAGE> 9
Securities Act or an exemption from such registration is available. It has been
advised or is aware of the provisions of Rule 144 promulgated under the
Securities Act.
17.4 Access to Data. It has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and has had the opportunity to inspect the Company's facilities.
17.5 Accredited Investor. Holder is an "accredited investor" within
the meaning of the Securities and Exchange Commission Rule 501 of Regulation D,
as in effect on the issue date of this Warrant.
17.6 No Substitutions. At no time was Holder presented with any
advertisement or other form of solicitation with respect to this Warrant or the
Securities issuable hereunder.
18. Additional Representations and Covenants of the Company. The Company
hereby represents, warrants and agrees as follows:
18.1 Corporate Power. The Company has all requisite corporate power
and corporate authority to issue this Warrant and to carry out and perform its
obligations hereunder.
18.2 Authorization. All corporate action on the part of the Company,
its directors and shareholders necessary for the authorization, execution,
delivery and performance by the Company of this has been taken. This Warrant is
a valid and binding obligation of the Company, enforceable in accordance with
its terms.
18.3 Offering. Subject in part to the truth and accuracy of Holder's
representations set forth in Section 17 hereof, the offer, issuance and sale of
the Warrant is, and the issuance of Preferred Stock upon exercise of the Warrant
and the issuance of Common Stock upon conversion of the Preferred Stock will be
exempt from the registration requirements of the Securities Act, and are exempt
from the qualification requirements of any applicable state securities laws; and
neither the Company nor anyone acting on its behalf will take any action
hereafter that would cause the loss of such exemptions.
18.4 Stock Issuance. Upon exercise of the Warrant, the Company will
use its best efforts to cause stock certificates representing the shares of
Preferred Stock purchased pursuant to the exercise to be issued in the
individual names of Holder, its nominees or assignees, as appropriate at the
time of such exercise. Upon conversion of the shares of Preferred Stock to
shares of Common Stock, the Company will issue the Common Stock in the
individual names of Holder, its nominees or assignees, as appropriate.
18.5 Articles and By-Laws. The Company has provided Holder with true
and complete copies of the Company's Articles or Certificate of Incorporation,
By-Laws, and each Certificate of Determination or other charter document
setting, forth any rights, preferences and privileges of Company's capital
stock, each as amended and in effect on the date of issuance of this Warrant.
9
<PAGE> 10
18.6 Conversion of Preferred Stock. As of the date hereof, each share
of the Preferred Stock is convertible into two share of the Common Stock.
18.7 Financial and Other Reports. From time to time up to the earlier
of the Expiration Date or the complete exercise of this Warrant, the Company
shall furnish to Holder (i) within 120 days after the close of each fiscal year
of the Company an audited balance sheet and statement of changes in financial
position at and as of the end of such fiscal year, together with an audited
statement of income for such fiscal year; (ii) within 45 days after the close of
each fiscal quarter of the Company, an unaudited balance sheet and statement of
cash flows at and as of the end of such quarter, together with an unaudited
statement of income for such quarter; and (iii) promptly after sending, making
available, or filing, copies of all reports, proxy statements, and financial
statements that the Company sends or makes available to its shareholders.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized as of this 3rd day of
October, 1996.
BROCADE COMMUNICATIONS SYSTEMS, INC.
By: /s/ Bruce J. Bergman
------------------------------------
Title: CEO
---------------------------------
Acknowledged and Agreed:
VENTURE LENDING & LEASING, INC.
By: /s/ Ronald W. Swenson
------------------------------------
Title: CEO
---------------------------------
10
<PAGE> 11
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: __________________________________
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise the purchase right represented by such Warrant
for, and to purchase thereunder, _________________________________ (__________)
(1) shares of Preferred Stock of _____________________________________ and
herewith makes payment of _______________________________ Dollars ($___________)
therefor, and requests that the certificates for such shares be issued in the
name of, and delivered to, ___________________________________________, whose
address is __________________________________________________.
The undersigned represents and warrants that it is acquiring such
Preferred Stock for its own account for investment and not with a view to or for
sale in connection with any distribution thereof within the meaning of the
Securities Act of 1933, as amended. The undersigned further renews as of the
date hereof the representations and warranties set forth in Section 17 of the
Warrant.
DATED: _______________________
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
____________________________________
____________________________________
(Address)
- ----------
(1) Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for additional Preferred Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the
Warrant, may be deliverable upon exercise.
11
<PAGE> 12
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Preferred Stock
covered thereby set forth hereinbelow, unto:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
<S> <C> <C>
</TABLE>
DATED:______________________________
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
12
<PAGE> 1
EXHIBIT 4.4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
WARRANT TO PURCHASE
17,500 SHARES OF SERIES B PREFERRED STOCK OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
(Void after December 31, 2002)
This certifies that VENTURE LENDING & LEASING, INC., a Maryland
corporation, or assigns (the "Holder"), for value received, is entitled to
purchase from BROCADE COMMUNICATIONS SYSTEMS, INC., a California corporation
(the "Company"), 17,500 fully paid and nonassessable shares of the Company's
Series B Preferred Stock ("Preferred Stock") for cash at a price of $4.00 per
share (the "Stock Purchase Price") at any time or from time to time up to and
including 5:00 p.m. (Pacific time) on December 31, 2002 (the "Expiration Date"),
upon surrender to the Company at its principal office at 457 East Evelyn Avenue,
Suite E, Sunnyvale, California 94086 (or at such other location as the Company
may advise Holder in writing) of this Warrant properly endorsed with the Form of
Subscription attached hereto duly filled in and signed and upon payment in cash
or by check of the aggregate Stock Purchase Price for the number of shares for
which this Warrant is being exercised determined in accordance with the
provisions hereof. The Stock Purchase Price and the number of shares purchasable
hereunder are subject to adjustment as provided in Section 4 of this Warrant.
This Warrant is subject to the following terms and conditions:
1. Exercise; Issuance of Certificates; Payment for Shares.
(a) Unless an election is made pursuant to clause (b) of this Section
1, this Warrant shall be exercisable at the option of the Holder, at any time or
from time to time, on or before the Expiration Date for all or any portion of
the shares of Preferred Stock (but not for a fraction of a share) which may be
purchased hereunder for the Stock Purchase Price multiplied by the number of
shares to be purchased. In the event, however, that pursuant to the Company's
Certificate of Incorporation, as amended, an event causing automatic conversion
of the Company's Preferred Stock into Common Stock shall have occurred prior to
the exercise of this Warrant, in whole or in part, then this Warrant shall be
exercisable for the number of shares of Common Stock of
<PAGE> 2
the Company into which the Preferred Stock not purchased upon any prior exercise
of the Warrant would have been so converted (and, where the context requires,
reference to "Preferred Stock" shall be deemed to include such Common Stock).
The Company agrees that the shares of Preferred Stock purchased under this
Warrant shall be and are deemed to be issued to the holder hereof as the record
owner of such shares as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such shares. Subject to
the provisions of Section 2, certificates for the shares of Preferred Stock so
purchased, together with any other securities or property to which the Holder
hereof is entitled upon such exercise, shall be delivered to the Holder hereof
by the Company at the Company's expense within a reasonable time after the
rights represented by this Warrant have been so exercised. Except as provided in
clause (b) of this Section 1, in case of a purchase of less than all the shares
which may be purchased under this Warrant, the Company shall cancel this Warrant
and execute and deliver a new Warrant or Warrants of like tenor for the balance
of the shares purchasable under the Warrant surrendered upon such purchase to
the Holder hereof within a reasonable time. Each stock certificate so delivered
shall be in such denominations of Preferred Stock as may be requested by the
Holder hereof and shall be registered in the name of such Holder or such other
name as shall be designated by such Holder, subject to the limitations contained
in Section 2.
(b) The Holder, in lieu of exercising this Warrant by the payment of
the Stock Purchase Price pursuant to clause (a) of this Section 1, may elect, at
any time on or before the Expiration Date, to receive that number of shares of
Preferred Stock equal to the quotient of: (i) the difference between (A) the Per
Share Price (as hereinafter defined) of the Preferred Stock, less (B) the Stock
Purchase Price then in effect, multiplied by the number of shares of Preferred
Stock the Holder would otherwise have been entitled to purchase hereunder
pursuant to clause (a) of this Section 1 (or such lesser number of shares as the
Holder may designate in the case of a partial exercise of this Warrant); over
(ii) the Per Share Price.
(c) For purposes of clause (b) of this Section 1, "Per Share Price"
means the product of: (i) the greater of (A) the average of the closing bid and
asked prices of the Company's Common Stock as quoted by NASDAQ or listed on any
exchange, whichever is applicable, as published in the Western Edition of The
Wall Street Journal for the ten (10) trading days prior to the date of the
Holder's election hereunder or, (B) if applicable at the time of or in
connection with the exercise under clause (b) of this Section 1, the gross sales
price of one share of the Company's Common Stock pursuant to a registered public
offering or that amount which shareholders of the Company will receive for each
share of Common Stock pursuant to a merger, reorganization or sale of assets;
and (ii) that number of shares of Common Stock into which each share of
Preferred Stock is convertible. If
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<PAGE> 3
the Company's Common Stock is not quoted by NASDAQ or listed on an exchange, the
Per Share Price of the Preferred Stock (or the equivalent number of shares of
Common Stock into which such Preferred Stock is convertible) shall be the price
per share which the Company would obtain from a willing buyer for shares sold by
the Company from authorized but unissued shares as such price shall be agreed
upon by the Holder and the Company or, if agreement cannot be reached within ten
(10) business days of the Holder's election hereunder, as such price shall be
determined by a panel of three (3) appraisers, one (1) to be chosen by the
Company, one (1) to be chosen by the Holder and the third to be chosen by the
first two (2) appraisers. If the appraisers cannot reach agreement within 30
days of the Holder's election hereunder, then each appraiser shall deliver its
appraisal and the appraisal which is neither the highest nor the lowest shall
constitute the Per Share Price. In the event either party fails to choose an
appraiser within 30 days of the Holder's election hereunder, then the appraisal
of the sole appraiser shall constitute the Per Share Prica. Each party shall
bear the cost of the appraiser selected by such party and the cost of the third
appraiser shall be borne one-half by each party. In the event either party fails
to choose an appraiser, the cost of the sole appraiser shall be borne one-half
by each party.
2. Limitation on Transfer.
(a) The Warrant and the Preferred Stock shall not be transferable
except upon the conditions specified in this Section 2 and in compliance with
the provisions of the Securities Act. Each holder of this Warrant or the
Preferred Stock issuable hereunder and the Common Stock issuable upon conversion
of such Preferred Stock will cause any proposed transferee of the Warrant or
Preferred Stock or such Common Stock to agree to take and hold such securities
subject to the provisions and upon the conditions specified in this Section 2.
(b) Each certificate representing (i) this Warrant, (ii) the Preferred
Stock, (iii) shares of the Company's Common Stock issued upon conversion of the
Preferred Stock and (iv) any other securities issued in respect of the Preferred
Stock or Common Stock issued upon conversion of the Preferred Stock upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event, shall (unless otherwise permitted by the provisions of this Section 2 or
unless such securities have been registered under the Securities Act or sold
under Rule 144) be stamped or otherwise imprinted with a legend substantially in
the following form (in addition to any legend required under applicable state
securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD
3
<PAGE> 4
OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION
THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
(c) The Holder of this Warrant and each person to whom this Warrant is
subsequently transferred represents and warrants to the Company (by acceptance
of such transfer) that it will not transfer the Warrant (or securities issuable
upon exercise hereof unless a registration statement under the Securities Act
was in effect with respect to such securities at the time of issuance thereof)
except pursuant to (i) an effective registration statement under the Securities
Act, (ii) Rule 144 under the Securities Act (or any other rule under the
Securities Act relating to the disposition of securities), or (iii) an opinion
of counsel, reasonably satisfactory to counsel for the Company, that an
exemption from such registration is available.
3. Shares to be Fully Paid; Reservation of Shares. The Company covenants
and agrees that all shares of Preferred Stock which may be issued upon the
exercise of the rights represented by this Warrant will, upon issuance, be duly
authorized, validly issued, fully paid and nonassessable and free from all
preemptive rights of any shareholder and free of all taxes, liens and charges
with respect to the issue thereof. The Company further covenants and agrees that
during the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized and reserved, for the
purpose of issue or transfer upon exercise of the subscription rights evidenced
by this Warrant, a sufficient number of shares of authorized but unissued
Preferred Stock, or other Securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant. The Company
will take all such action as may be necessary to assure that such shares of
Preferred Stock may be issued as provided herein without violation of any
applicable law or regulation, or of any requirements of any domestic securities
exchange upon which the Preferred Stock may be listed. The Company will not take
any action which would result in any adjustment of the Stock Purchase Price (as
defined in Section 4 hereof) (i) if the total number of shares of Preferred
Stock issuable after such action upon exercise of all outstanding warrants,
together with all shares of Preferred Stock then outstanding and all shares of
Preferred Stock then issuable upon exercise of all options and upon the
conversion of all convertible securities then outstanding, would exceed the
total number of shares of Preferred Stock then authorized by the Company's
Certificate of Incorporation, or (ii) if the total number of shares of Common
Stock issuable after such action upon the conversion of all such shares of
Preferred Stock together with all shares of Common Stock then outstanding and
then issuable upon exercise of all options and upon the conversion of all
convertible securities then outstanding would exceed the total number of shares
of Common Stock then authorized by the Company's Certificate of Incorporation.
4
<PAGE> 5
4. Adjustment of Stock Purchase Price Number of Shares. The Stock Purchase
Price and the number of shares purchasable upon the exercise of this Warrant
shall be subject to adjustment from time to time upon the occurrence of certain
events described in this Section 4. Upon each adjustment of the Stock Purchase
Price, the Holder of this Warrant shall thereafter be entitled to purchase, at
the Stock Purchase Price resulting from such adjustment, the number of shares
obtained by multiplying the Stock Purchase Price in effect immediately prior to
such adjustment by the number of shares purchasable pursuant hereto immediately
prior to such adjustment, and dividing the product thereof by the Stock Purchase
Price resulting from such adjustment.
4.1 Subdivision or Combination of Stock. In case the Company shall at
any time subdivide its outstanding shares of Preferred Stock into a greater
number of shares, the Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in case the
outstanding shares of Preferred Stock of the Company shall be combined into a
smaller number of shares, the Stock Purchase Price in effect immediately prior
to such combination shall be proportionately increased.
4.2 Dividends in Preferred Stock, Other Stock, Property,
Reclassification. If at any time or from time to time the holders of Preferred
Stock (or any shares of stock or other securities at the time receivable upon
the exercise of this Warrant) shall have received or become entitled to receive,
without payment therefor,
(a) Preferred Stock, or any shares of stock or other securities
whether or not such securities are at any time directly or indirectly
convertible into or exchangeable for Preferred Stock, or any rights or options
to subscribe for, purchase or otherwise acquire any of the foregoing by way of
dividend or other distribution, or
(b) any cash paid or payable otherwise than as a cash dividend,
or
(c) Preferred Stock or other or additional stock or other
securities or property (including cash) by way of spinoff, split-up,
reclassification, combination of shares or similar corporate rearrangement,
(other than shares of Preferred Stock issued as a stock split, adjustments in
respect of which shall be covered by the terms of Section 4.1 above), then and
in each such case, the Holder hereof shall, upon the exercise of this Warrant,
be entitled to receive, in addition to the number of shares of Preferred Stock
receivable thereupon, and without payment of any additional consideration
therefore, the amount of stock and other
5
<PAGE> 6
securities and property (including cash in the cases referred to in clauses (b)
and (c) above) which such Holder would hold on the date of such exercise had he
been the holder of record of such Preferred Stock as of the date on which
holders of Preferred Stock received or became entitled to receive such shares
and/or all other additional stock and other securities and property.
4.3 Reorganization, Reclassification, Consolidation, Merger or Sale.
If any capital reorganization of the capital stock of the Company, or any
consolidation or merger of the Company with another corporation, or the sale of
all or substantially all of its assets to another corporation shall be effected
in such a way that holders of Preferred Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for Preferred Stock,
then, as a condition of such reorganization, reclassification, consolidation,
merger or sale, lawful and adequate provisions shall be made whereby the holder
hereof shall thereafter have the right to purchase and receive (in lieu of the
shares of the Preferred Stock of the Company immediately theretofore purchasable
and receivable upon the exercise of the rights represented hereby) such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of such Preferred Stock equal to the
number of shares of such stock immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby; provided,
however, that in the event the effective price of such reorganization is in
excess of the exercise price hereof effective at the time of the merger and
securities received in such reorganization are publicly traded and resaleable by
the holder pursuant to the terms of SEC Rule 145, without regard to volume
limitations or holding period requirements (other than a reasonable lockup
period imposed in order to account for such reorganization as a pooling of
interests), then this Warrant shall expire unless exercised prior to the
effective day of the reorganization. In any such case, appropriate provision
shall be made with respect to the rights and interests of the holder of this
Warrant to the end that the provisions hereof (including, without limitation,
provisions for adjustments of the Stock Purchase Price and of the number of
shares purchasable and receivable upon the exercise of this Warrant) shall
thereafter be applicable, as nearly as may be possible, in relation to any
shares of stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company will not effect any such consolidation, merger or sale
unless, prior to the consummation thereof, the successor corporation (if other
than the Company) resulting from such consolidation or the corporation
purchasing such assets shall assume by written instrument, executed and mailed
or delivered to the registered Holder hereof at the last address of such Holder
appearing on the books of the Company, the obligation to deliver to such Holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to purchase.
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<PAGE> 7
4.4 (Deleted).
4.5 Notice of Adjustment. Upon any adjustment of the Stock Purchase
Price, and/or any increase or decrease in the number of shares purchasable upon
the exercise of this Warrant the Company shall give written notice thereof, by
first class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company. The
notice shall be signed by the Company's chief financial officer and shall state
the Stock Purchase Price resulting from such adjustment and the increase or
decrease, if any, in the number of shares purchasable at such price upon the
exercise of this Warrant, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
4.6 Other Notices. If at any time:
(a) the Company shall declare any cash dividend upon its
Preferred Stock;
(b) the Company shall declare any dividend upon its Preferred
Stock payable in stock or make any special dividend or other distribution to the
holders of its Preferred Stock;
(c) the Company shall offer for subscription pro rata to the
holders of its Preferred Stock any additional shares of stock of any class or
other rights;
(d) there shall be any capital reorganization or reclassification
of the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another corporation;
(e) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(f) the Company shall take or propose to take any other action,
notice of which is actually provided to holders of the Preferred Stock; then, in
any one or more of said cases, Holder shall be entitled to the same notice with
respect to such events as provided to holders of the Company's Preferred Stock
as set forth in the Company's Certificate of Incorporation.
4.7 (Deleted).
5. Issue Tax. The issuance of certificates for shares of Preferred Stock
upon the exercise of the Warrant shall be made without charge to the Holder of
the Warrant for any issue tax in respect thereof; provided, however, that the
Company shall not be required to pay any tax which may be payable in respect of
any transfer involved in the issuance
7
<PAGE> 8
and delivery of any certificate in a name other than that of the then Holder of
the Warrant being exercised.
6. Closing of Books. The Company will at no time close its transfer books
against the transfer of any Warrant or of any shares of Preferred Stock issued
or issuable upon the exercise of any warrant in any manner which interferes with
the timely exercise of this Warrant in accordance with its terms.
7. No voting or Dividend Rights: Limitation of Liability. Nothing contained
in this Warrant shall be construed as conferring upon the Holder hereof the
right to vote or to consent as a shareholder in respect of meetings of
shareholders for the election of directors of the Company or any other matters
or any rights whatsoever as a shareholder of the Company. No dividends or
interest shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only to the
extent that, this Warrant shall have been exercised. No provisions hereof, in
the absence of affirmative action by the holder to purchase shares of Preferred
Stock, and no mere enumeration herein of the rights or privileges of the Holder
hereof, shall give rise to any liability of such Holder for the Stock Purchase
Price or as a shareholder of the Company, whether such liability is asserted by
the Company or by its creditors.
8. (Deleted).
9. Registration Rights. The Holder hereof shall be entitled, with respect
to the shares of Preferred Stock issued upon exercise hereof (or the shares of
Common Stock or other securities issued upon conversion of such Preferred Stock
as the case may be,) to become a party to, and as such be entitled to receive,
all of the registration rights set forth in Section 2 of that certain First
Amended and Restated Investors' Rights Agreement dated as of June 17, 1996 to
the same extent and on the same terms and conditions as possessed by the class
of Investors thereunder. The Company shall take such action as may be reasonably
necessary to assure that the granting of such registration rights to the Holder
does not violate the provisions of such agreement or any of the Company's
charter documents or rights of prior Grantees of registration rights.
10. Rights and obligations Survive Exercise of Warrant. The rights and
obligations of the Company, of the Holder of this Warrant and of the holder of
shares of Preferred Stock issued upon exercise of this Warrant, contained in
Sections 6 and 9 shall survive the exercise of this Warrant.
11. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
8
<PAGE> 9
12. Notices. Any notice, request or other document required or permitted to
be given or delivered to the holder hereof or the Company shall be deemed to
have been given (i) upon receipt if delivered personally or by courier (ii) upon
confirmation of receipt if by telecopy or (iii) three business days after
deposit in the US mail, with postage prepaid and certified or registered, to
each such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefor in the first paragraph of this
Warrant.
13. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or acquisition of
all or substantially all of the Company's assets. All of the obligations of the
Company relating to the Preferred Stock issuable upon the exercise of this
Warrant shall survive the exercise and termination of this Warrant. All of the
covenants and agreements of the Company shall inure to the benefit of the
successors and assign of the holder hereof. The Company will, at the time of the
exercise of this Warrant, in whole or in part, upon request of the Holder hereof
but at the Company's expense, acknowledge in writing its continuing obligation
to the Holder hereof in respect of any rights (including, without limitation,
any right to registration of the shares of Common Stock) to which the holder
hereof shall continue to be entitled after such exercise in accordance with this
Warrant; provided, that the failure of the holder hereof to make any such
request shall not affect the continuing obligation of the Company to the Holder
hereof in respect of such rights.
14. Descriptive Headings and Governing Law. The descriptive headings of the
several sections and paragraphs of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. This Warrant shall be
construed and enforced in accordance with, and the rights of the parties shall
be governed by, the laws of the State of California.
15. Lost Warrants or Stock Certificates. The Company represents and
warrants to the Holder hereof that upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant or stock certificate and, in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation upon surrender and cancellation
of such Warrant or stock certificate, the Company at its expense will make and
deliver a new Warrant or stock certificate, or like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
16. Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional share, pay
the holder entitled to such fraction a sum in cash equal to such fraction
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<PAGE> 10
multiplied by the then effective Stock Purchase Price.
17. Representations of Holder. With respect to this Warrant, Holder
represents and warrants to the Company as follows (which representations and
warranties will be reaffirmed upon any exercise of this Warrant):
17.1 Experience. It is experienced in evaluating and investing in
companies engaged in businesses similar to that of the Company; it understands
that investment in the Warrant involves substantial risks; it has made detailed
inquiries concerning the Company, its business and services, its officers and
its personnel; the officers of the Company have made available to Holder any and
all written information it has requested; the officers of the Company have
answered to Holder's satisfaction all inquiries made by it; in making this
investment it has relied upon information made available to it by the Company;
and it has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of investment in the Company
and it is able to bear the economic risk of that investment.
17.2 Investment. It is acquiring the Warrant for investment for its
own account and not with a view to, or for resale in connection with, any
distribution thereof. It understands that the Warrant, the shares of Preferred
Stock issuable upon exercise thereof and the shares of Common Stock issuable
upon conversion of the Preferred Stock, have not been registered under the
Securities Act of 1933, as amended, nor qualified under applicable state
securities laws.
17.3 Rule 144. It acknowledges that the Warrant, the Preferred Stock
and the Common Stock must be held indefinitely unless they are subsequently
registered under the Securities Act or an exemption from such registration is
available. It has been advised or is aware of the provisions of Rule 144
promulgated under the Securities Act.
17.4 Access to Data. It has had an opportunity to discuss the
Company's business, management and financial affairs with the Company's
management and has had the opportunity to inspect the Company's facilities.
17.5 Accredited Investor. Holder is an "accredited investor" within
the meaning of the Securities and Exchange Commission Rule 501 of Regulation D,
as in effect on the issue date of this Warrant.
17.6 No Substitutions. At no time was Holder presented with any
advertisement m of solicitation with respect to this Warrant or the Securities
issuable hereunder.
18. Additional Representations and Covenants of the Company. The Company
hereby ents, warrants and agrees as follows:
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<PAGE> 11
18.1 Corporate Power. The Company has all requisite corporate power
and corporate authority to issue this Warrant and to carry out and perform its
obligations hereunder.
18.2 Authorization. All corporate action on the part of the Company,
its directors and shareholders necessary for the authorization, execution,
delivery and performance by the Company of this has been taken. This Warrant is
a valid and binding obligation of the Company, enforceable in accordance with
its terms.
18.3 Offering. Subject in part to the truth and accuracy of Holder's
representations set forth in Section 17 hereof, the offer, issuance and sale of
the Warrant is, and the issuance of Preferred Stock upon exercise of the Warrant
and the issuance of Common Stock upon conversion of the Preferred Stock will be
exempt from the registration requirements of the Securities Act, and are exempt
from the qualification requirements of any applicable state securities laws; and
neither the Company nor anyone acting on its behalf will take any action
hereafter that would cause the loss of such exemptions.
18.4 Stock Issuance. Upon exercise of the Warrant, the Company will
use its best efforts to cause stock certificates representing the shares of
Preferred Stock purchased pursuant to the exercise to be issued in the
individual names of Holder, its nominees or assignees, as appropriate at the
time of such exercise. Upon conversion of the shares of Preferred Stock to
shares of Common Stock, the Company will issue the Common Stock in the
individual names of Holder, its nominees or assignees, as appropriate.
18.5 Articles and By-Laws. The Company has provided Holder with true
and complete copies of the Company's Articles or Certificate of Incorporation,
By-Laws, and each Certificate of Determination or other charter document
setting, forth any rights, preferences and privileges of Company's capital
stock, each as amended and in effect on the date of issuance of this Warrant.
18.6 Conversion of Preferred Stock. As of the date hereof, each share
of the Preferred Stock is convertible into one share of the Common Stock.
18.7 Financial and Other Reports. From time to time up to the earlier
of the Expiration Date or the complete exercise of this Warrant, the Company
shall furnish to Holder (i) within 120 days after the close of each fiscal year
of the Company an audited balance sheet and statement of changes in financial
position at and as of the end of such fiscal year, together with an audited
statement of income for such fiscal year; (ii) within 45 days after the close of
each fiscal quarter of the Company, an unaudited balance sheet and statement of
cash flows at and as of the end of such quarter,
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<PAGE> 12
together with an unaudited statement of income for such quarter; and (iii)
promptly after sending, making available, or filing, copies of all reports,
proxy statements, and financial statements that the Company sends or makes
available to its shareholders.
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed by its officers, thereunto duly authorized this 11 day of September,
1996.
BROCADE COMMUNICATIONS SYSTEMS, INC.
By: /s/ Bruce J. Bergman
-------------------------------
Title: CEO
----------------------------
Acknowledged and Agreed:
VENTURE LENDING & LEASING, INC.
By: /s/ Ronald W. Swenson
-------------------------------
Title: CEO
----------------------------
12
<PAGE> 13
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: _______________________
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________________________________ (_____) (1) shares of
Preferred Stock of __________________________________ and herewith makes payment
of _____________________________________ Dollars ($ ________) therefor, and
requests that the certificates for such shares be issued in the name of, and
delivered to, __________________________________________, whose address is
____________________________________.
The undersigned represents and warrants that it is acquiring such
Preferred Stock for its own account for investment and not with a view to or for
sale in connection with any distribution thereof within the meaning of the
Securities Act of 1933, as amended. The undersigned further renews as of the
date hereof the representations and warranties set forth in Section 17 of the
Warrant.
DATED: _____________________________
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
____________________________________
____________________________________
(Address)
(1) Insert here the number of shares called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the
Warrant is being exercised), in either case without making any adjustment
for additional Preferred Stock or any other stock or other securities or
property or cash which, pursuant to the adjustment provisions of the
Warrant, may be deliverable upon exercise.
13
<PAGE> 14
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned, the holder of the within Warrant,
hereby sells, assigns and transfers all of the rights of the undersigned under
the within Warrant, with respect to the number of shares of Preferred Stock
covered thereby set forth hereinbelow, unto:
<TABLE>
<CAPTION>
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
<S> <C> <C>
</TABLE>
Dated: __________________________
____________________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant)
14
<PAGE> 1
EXHIBIT 4.5
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY
BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
WARRANT TO PURCHASE PREFERRED STOCK
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
THIS CERTIFIES THAT in consideration of certain leasehold improvements
provided to Brocade Communications Systems, Inc., a California corporation (the
"COMPANY"), receipt of which is hereby acknowledged, Mason Calle De Luna L.P., a
California limited partnership, or its permitted registered assigns ("REGISTERED
HOLDER"), is entitled, subject to the terms and conditions of this Warrant, to
purchase from the Company at any time after the Commencement Date (as defined in
Section 2) of this Warrant and prior to 5:00 p.m. Pacific Time on August 31,
1999, unless terminated earlier under Section 12 hereof (the "EXPIRATION DATE"),
up to Three Thousand (3,000) shares of Warrant Stock (as defined below) at a
price per share equal to the Warrant Price (as defined below), upon surrender of
this Warrant at the principal office of the Company, together with a duly
executed subscription form in the form attached hereto as Exhibit 1 and
simultaneous payment of the full Warrant Price for the shares of Warrant Stock
so purchased in lawful money of the United States. The Warrant Price is subject
to adjustment as provided herein.
1. CERTAIN DEFINITIONS. The following definitions shall apply for purposes
of this Warrant:
(a) "CONVERSION STOCK" shall mean Common Stock of the Company or other
securities issuable upon conversion of the Warrant Stock.
(b) "FINANCING" shall mean the Closing (or first closing if multiple
closings) of the Company's next sale of its Preferred Stock in one transaction
or series of related transactions occurring on or before August 31, 1997 for
aggregate gross proceeds (calculated
<PAGE> 2
before the payment of any discounts or commissions to brokers or underwriters)
of no less than One Million Dollars ($1,000,000.00) paid to the Company on or
before August 31, 1997.
(c) "ISSUE DATE" shall mean the date of this Warrant.
(d) "MAXIMUM NUMBER OF PURCHASABLE SHARES" shall be Three Thousand
(3,000) shares, subject to adjustment as provided herein.
(e) "WARRANT PRICE" shall mean: (i) if the Warrant Stock is Preferred
Stock of the Company sold in the Financing, an amount equal to the per share
selling price of shares of Warrant Stock issued in the Financing, or (ii) if the
Warrant Stock is Series B Preferred Stock of the Company, Four Dollars ($4.00)
per share. The Warrant Price is subject to adjustment as provided herein.
(f) "WARRANT" shall mean this Warrant and any warrant(s) delivered in
substitution or exchange therefor, as provided herein.
(g) "WARRANT STOCK" shall mean the Company's class or series of
Preferred Stock that is sold in the Financing, but if the Financing has not
occurred by the earlier of August 31, 1997 or immediately prior to the
effectiveness of a Terminating Transaction under Section 12, "Warrant Stock"
shall instead mean Series B Preferred Stock of the Company.
2. EXERCISE. Subject to compliance with all applicable securities laws,
this Warrant may be exercised in whole or in part, at any time or from time to
time, on any business day commencing on the earlier of (i) the closing (or first
closing if multiple closings) of the Financing, (ii) August 31, 1997, or (iii)
immediately prior to a Terminating Transaction under Section 12 (such date being
herein referred to as "Commencement Date") and before the Expiration Date, for
up to the Maximum Number of Purchasable Shares by surrendering this Warrant at
the principal office of the Company at 457 East Evelyn Avenue, Suite E,
Sunnyvale, California 94086, with the subscription form attached hereto duly
executed by the Registered Holder, and payment, in cash and/or cancellation of
bona fide indebtedness of the Company to the Registered Holder, of an amount
equal to the product obtained by multiplying (i) the number of shares of Warrant
Stock to be purchased by the Registered Holder by (ii) the Warrant Price or
adjusted Warrant Price therefor, if applicable, as determined in accordance with
the terms hereof. Upon a partial exercise of this Warrant: (i) the Maximum
Purchasable Number of Shares immediately prior to such partial exercise shall be
reduced by the number of shares of Warrant Stock purchased upon such exercise of
this Warrant, and (ii) this Warrant shall be surrendered by the Registered
Holder and replaced with a new Warrant of like tenor with respect to which the
new Maximum Purchasable Number of Shares Amount is the former Maximum
Purchasable Number of Shares Amount as so reduced. This Warrant shall be deemed
to have been exercised immediately prior to the close of business on the date of
its surrender for exercise as provided above, and the person entitled to receive
the shares of Warrant Stock issuable upon such exercise shall be treated for all
purposes as the holder of record of such shares as of the close of business on
such date. As soon as practicable on or after such date, the Company shall issue
and deliver to the person or persons entitled to receive the same a certificate
or certificates for the number of whole shares of Warrant Stock issuable upon
such exercise.
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<PAGE> 3
3. FULLY PAID SHARES. All shares of Warrant Stock issued upon the exercise
of this Warrant shall be validly issued, fully paid and nonassessable.
4. TRANSFER AND EXCHANGE. Subject to the foregoing and terms and conditions
of this Warrant and compliance with all applicable securities laws, this Warrant
and all rights hereunder are transferable, in whole or in part, on the books of
the Company maintained for such purpose at the principal office of the Company
referred to above, by the Registered Holder hereof in person, or by duly
authorized attorney, upon surrender of this Warrant properly endorsed, the
Registered Holder's written instructions as to what quantity of the Maximum
Number of Purchasable Shares is being transferred to each transferee's Warrant
and upon payment of any necessary transfer tax or other governmental charge
imposed upon such transfer. Upon any partial transfer, the Company will issue
and deliver to the Registered Holder and its transferee(s), respectively, a new
Warrant or Warrants (of like tenor entitling the Registered Holder and its
transferees to purchase shares of Warrant Stock equal in the aggregate to the
Maximum Number of Purchasable Shares as determined immediately prior to such
transfer, with the portions of the Maximum Number of Purchasable Shares
allocated to each such Warrant to be determined by the Registered Holder's
written instructions to the Company regarding such transfer not so transferred.
Until a transfer of this Warrant is registered on the books of the Company, the
Company may treat the Registered Holder hereof as the owner for all purposes.
Notwithstanding the foregoing, this Warrant and the rights hereunder may not be
transferred unless such transfer complies with all applicable securities laws
and the provisions of Section 10 hereof.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Maximum Number of
Purchasable Shares, and the number and character of shares of Warrant Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities or property at the time receivable or issuable upon exercise of this
Warrant) and the Warrant Price therefor, are subject to adjustment upon the
occurrence of the following events:
5.1 Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
etc. The Maximum Number of Purchasable Shares, the Warrant Price of this Warrant
and the number of shares of Warrant Stock issuable upon exercise of this Warrant
shall each be proportionally adjusted to reflect any stock dividend, stock
split, reverse stock split, combination of shares, reclassification,
recapitalization or other similar event affecting the number of outstanding
shares of Warrant Stock that occurs after the date of the Warrant.
5.2 Adjustment for Other Dividends and Distributions. In case the
Company shall make or issue, or shall fix a record date for the determination of
eligible holders entitled to receive, a dividend or other distribution payable
respect to the Warrant Stock payable in securities of the Company (other than
issuances with respect to which adjustment is made under Section 5.1), then, and
in each such case, the Registered Holder of this Warrant, upon exercise of this
Warrant at any time after the consummation, effective date or record date of
such event, shall receive, in addition to the shares of Warrant Stock issuable
upon such exercise prior to such date, the securities or such other assets of
the Company to which such Registered Holder would have been entitled upon such
date if such Registered Holder had exercised this Warrant immediately prior
thereto (all subject to further adjustment as provided in this Warrant).
3
<PAGE> 4
5.3 Adjustment for Reorganization, Consolidation, Merger. Except in
the event this Warrant is terminated pursuant to Section 12 hereof, in case of
any reorganization of the Company (or of any other corporation, the stock or
other securities of which are at the time receivable on the exercise of this
Warrant) after the date of this Warrant, or in case, after such date, the
Company (or any such corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then, and in each such case, the Registered Holder of this Warrant,
upon the exercise of this Warrant (as provided in Section 2), at any time after
the consummation of such reorganization, consolidation, merger, or conveyance,
shall be entitled to receive, in lieu of the stock or other securities and
property receivable upon the exercise of this Warrant prior to such
consummation, the stock or other securities or property to which such Registered
Holder would have been entitled upon the consummation of such reorganization,
consolidation, merger or conveyance if such Registered Holder had exercised this
Warrant immediately prior thereto, all subject to further adjustment as provided
in this Section 5, and the successor or purchasing corporation in such
reorganization, consolidation, merger or conveyance (if other than the Company)
shall duly execute and deliver to the Registered Holder a supplement hereto
acknowledging such corporation's obligations under this Warrant; and in each
such case, the terms of this Warrant shall be applicable to the shares of stock
or other securities or property receivable upon the exercise of this Warrant
after the consummation of such reorganization, consolidation, merger or
conveyance.
5.4 Conversion of Warrant Stock. In case all the authorized class or
series constituting the Warrant Stock of the Company is converted, pursuant to
the Company's Articles of Incorporation, into Common Stock or other securities
or property (the "PRIOR WARRANT STOCK CONVERSION PROCEEDS"), or the Warrant
Stock otherwise ceases to exist, then, in such case, the Registered Holder of
this Warrant, upon exercise of this Warrant at any time after the date on which
the Warrant Stock is so converted or ceases to exist (the "WARRANT STOCK
TERMINATION DATE"), shall receive, in lieu of the number of shares of Warrant
Stock that would have been issuable upon such exercise immediately prior to the
Warrant Stock Termination Date (the "FORMER WARRANT STOCK"), the Prior Warrant
Stock Conversion Proceeds to which such Registered Holder would have been
entitled to receive upon the Warrant Stock Termination Date if such Registered
Holder had exercised this Warrant with respect to the Former Warrant Stock
immediately prior to the Warrant Stock Termination Date (all subject to further
adjustment as provided in this Warrant).
6. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or Bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale or assets or any other voluntary
action, willfully avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Registered Holder
under this Warrant against wrongful impairment. Without limiting the generality
of the foregoing, the Company: (i) will not set nor increase the par value of
any shares of stock issuable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and (ii) will take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares of Warrant Stock upon the exercise of
this Warrant.
4
<PAGE> 5
7. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in either
the Maximum Number of Purchasable Shares, the Warrant Price or in the number of
shares of Warrant Stock, or other stock, securities or property receivable upon
the exercise of this Warrant, the Chief Financial Officer of the Company shall
compute such adjustment in accordance with the terms of this Warrant and prepare
a certificate setting forth such adjustment and showing in detail the facts upon
which such adjustment is based, including a statement of the adjusted Maximum
Number of Purchasable Shares and the adjusted Warrant Price. The Company will
cause copies of such certificate to be mailed (by first class mail, postage
prepaid) to the Registered Holder.
8. LOSS OR MUTILATION. Upon receipt by the Company of evidence reasonably
satisfactory to it of the ownership, and the loss, theft, destruction or
mutilation, of this Warrant, and of indemnity reasonably satisfactory to it, and
(in the case of mutilation) upon surrender and cancellation of this Warrant, the
Company will execute and deliver in lieu thereof a new Warrant of like tenor.
9. RESERVATION OF WARRANT STOCK. If at any time the number of authorized
but unissued shares of the Company's class or series of Warrant Stock (or Prior
Warrant Stock Conversion Proceeds) or other securities of the Company shall not
be sufficient to effect the exercise of this Warrant, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of such class or series of Warrant Stock or
other securities to such number of shares of such class or series of Warrant
Stock or other securities as shall be sufficient for such purpose.
10. RESTRICTIONS ON TRANSFER.
10.1 The Registered Holder understands that neither this Warrant nor
the shares of Warrant Stock or Conversion Stock have been registered under the
Securities Act of 1933, as amended (the "ACT"), or any state securities laws. As
a condition to the issuance of this Warrant and to its exercise the Registered
Holder hereby represents and warrants to the Company that:
(a) The Warrant and, if applicable, the shares of Warrant Stock
and Conversion Stock (collectively, the "SECURITIES") have been acquired by the
Registered Holder for investment and not with a view to the sale or other
distribution thereof within the meaning of the Act and the Registered Holder has
no present intention of selling or otherwise disposing of all or any portion of
the Securities.
(b) The Registered Holder has acquired (and will acquire) the
Securities for the Registered Holder's own account only and no one else has any
beneficial ownership in the Securities.
(c) The Registered Holder is capable of evaluating the merits and
risks of any investment in the Securities, is financially capable of bearing a
total loss of this investment and has either: (i) a preexisting personal or
business relationship with the Company or its principals; (ii) by reason of the
Registered Holder's business or financial experience, has the capacity to
protect his or its own interests in connection with this investment; or (iii) is
an
5
<PAGE> 6
"accredited investor" within the meaning of Regulation D promulgated under the
Act, as amended.
(d) The Registered Holder has had access to all information
regarding the Company, its present and prospective business, assets, liabilities
and financial condition that the Registered Holder considers important to making
the decision to acquire the Securities and has had ample opportunity to ask
questions of and receive answers from the Company's representatives concerning
an investment in the Securities and to obtain any and all documents requested in
order to supplement or verify any of the information supplied.
(e) The Registered Holder understands that the Securities shall
be deemed restricted securities under the Act and may not be resold unless they
are registered under the Act and any applicable State securities law, or in the
opinion of counsel in form and substance satisfactory to the Company, an
exemption from such registration is available.
(f) The Registered Holder is aware of Rule 144 promulgated under
the Act, which rule provides, in substance, that: (i) after two years from the
date restricted securities have been purchased and fully paid for, a holder may
transfer restricted securities provided certain conditions are met (e.g.,
certain public information is available about the Company), and specific
limitations on the amount of shares which can be sold within certain periods and
the manner in which such shares must be sold are complied with; and (ii) after
three years from the date the securities have been purchased and fully paid for,
holders who are not "affiliates" of the Company may sell restricted securities
without satisfying such conditions.
(g) The Registered Holder further understands that if the
requirements of Rule 144 are not met, registration under the Act, compliance
with Regulation A, or some other registration exemption will be required for any
disposition of the Securities; and that, although Rule 144 is not exclusive, the
Securities and Exchange Commission ("SEC") has expressed its opinion that
persons proposing to sell restricted securities other than in a registered
offering or other than pursuant to Rule 144 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales and such persons and the brokers who participate in the
transactions do so at their own risk.
10.2 The Registered Holder of this Warrant, by acceptance hereof,
agrees that, absent an effective registration statement filed with the SEC under
the Act, covering the disposition or sale of this Warrant or the Warrant Stock
(or Conversion Stock) issued or issuable upon exercise hereof, such Registered
Holder will not sell or transfer any or all of such Warrant Stock or Conversion
Stock, as the case may be, without first providing the Company with an opinion
of counsel satisfactory to the Company to the effect that such sale or transfer
will be exempt from the registration and prospectus delivery requirements of the
Act, and such Registered Holder consents to the Company making a notation on its
records, or giving instructions to any transfer agent of this Warrant, or such
Warrant Stock (or Conversion Stock), in order to implement such restriction on
transfer. The shares issued upon exercise of this Warrant shall bear legends
referring to the restrictions or transfer set forth in this Section 10. As a
condition to the transfer of this Warrant or transfer of the shares issuable on
exercise hereof, any permitted transferee must execute and deliver to the
Company representations and warranties
6
<PAGE> 7
similar to these set forth in this Section 10 and agree in writing to accept and
be bound by all the terms and conditions of this Warrant.
11. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. This Warrant does not by
itself entitle the Registered Holder to any voting rights or other rights as a
shareholder of the Company. In the absence of affirmative action by Registered
Holder to purchase Warrant Stock by exercise of this Warrant, no provisions of
this Warrant, and no enumeration herein of the rights or privileges of the
Registered Holder shall cause such Registered Holder to be a shareholder of the
Company for any purpose.
12. TERMINATION. The right to exercise this Warrant shall terminate upon
the effective date of a merger or consolidation of the Company into or with
another corporation, or the sale of all or substantially all of the Company's
assets to another corporation or person, if, immediately after any such merger,
consolidation or sale of assets, at least fifty percent (50%) of the voting
power of the surviving corporation or such other person, as the case may be, is
owned by persons who are not shareholders of the Company immediately prior to
such merger, consolidation or sale (the "TERMINATING TRANSACTION"). In such
event, the Company shall, at least fifteen (15) days prior to the effective date
of the Terminating Transaction, give written notice pursuant to Section 14
hereof of the imminence of such Terminating Transaction.
13. LOCK-UP AGREEMENT. The Registered Holder agrees, upon request of the
Company or the underwriters managing any firmly underwritten public offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any shares of the Warrant
Stock or Common Stock issuable upon conversion of the Warrant Stock acquired
pursuant to the exercise of this Warrant (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as the Company or
underwriters may specify.
14. AMENDMENT; WAIVER. Any term of this Warrant may be amended, and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) by the written
consent of the Company and the Registered Holder.
15. NOTICES. All notices and other communications from the Company to the
Registered Holder shall be deemed given when mailed by first-class registered or
certified mail, postage prepaid, to the address furnished to the Company in
writing by the last Registered Holder who shall have furnished an address to the
Company in writing.
16. ATTORNEYS' FEES. In the event any party is required to engage the
services of any attorneys for the purpose of enforcing this Warrant, or any
provision thereof, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and any other related cost or expenses.
17. HEADINGS. The headings in this Warrant are for purposes of convenience
in reference only, and shall not be deemed to constitute a part hereof.
7
<PAGE> 8
18. LAW GOVERNING. This Warrant shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of California,
excluding that body of law applicable to conflicts of laws.
8
<PAGE> 9
19. TERMS BINDING. By acceptance of this Warrant, the Registered Holder of
this Warrant (and each subsequent assignee, transferee or Registered Holder of
this Warrant) accepts and agrees to be bound by all the terms and conditions of
this Warrant.
Dated: August 26, 1996
BROCADE COMMUNICATIONS ACKNOWLEDGED AND ACCEPTED
SYSTEMS, INC. BY REGISTERED HOLDER:
By: /s/ Bruce J. Bergman By: /s/ Steve D. Mason
------------------------ ------------------------
Name: Name: The Mason Property Co.
---------------------- ----------------------
Title: President & CEO Title: President
--------------------- ---------------------
9
<PAGE> 10
EXHIBIT 1
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: Brocade Communications Systems, Inc.
457 East Evelyn Avenue, Suite E
Sunnyvale, CA 94086
(1) The undersigned hereby elects to purchase _________ shares of that
class or series of Warrant Stock of Brocade Communications Systems, Inc. (or, if
applicable, such Prior Warrant Stock Conversion Proceeds, pursuant to the terms
of the attached Warrant) and tenders herewith payment of the purchase price for
such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the representations and warranties of the undersigned set
forth in Section 10 of the Warrant are true and correct as of this date.
(3) Please issue a certificate or certificates representing such
shares of that class or series of Warrant Stock of Brocade Communications
Systems, Inc. (or, if applicable, such Prior Warrant Stock Conversion Proceeds,
pursuant to the terms of the attached Warrant) in the name or names specified
below:
_______________________________ ________________________________
(Name) (Name)
_______________________________ ________________________________
(Address) (Address)
_______________________________ ________________________________
(City, State, Zip Code) (City, State, Zip Code)
(4) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned or in such other name as is
specified below:
_______________________________
(Name)
_______________________________ ________________________________
(Date) (Signature of Registered Holder)
<PAGE> 11
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned Registered Holder of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under the within Warrant, with respect to the number
of shares of Warrant Stock set forth below:
<TABLE>
<CAPTION>
Name of Assignee Address Number of Shares of Warrant Stock Transferred
---------------- ------- ---------------------------------------------
<S> <C> <C>
</TABLE>
and does hereby irrevocably constitute and
appoint_________________________ Attorney to make such transfer on the
books of _____________________________, maintained for the purpose, with
full power of substitution in the premises.
Dated: ______________
REGISTERED HOLDER
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE> 1
EXHIBIT 4.6
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
UNDER THE SECURITIES LAWS OF ANY STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD
EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT
TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY
BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE
PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL
IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
WARRANT TO PURCHASE PREFERRED STOCK
OF
BROCADE COMMUNICATIONS SYSTEMS, INC.
THIS CERTIFIES THAT in partial consideration of that certain
leasehold provided to Brocade Communications Systems, Inc., a California
corporation (the "COMPANY"), receipt of which is hereby acknowledged,
Symmetricom, Inc., a California corporation, or its permitted registered assigns
("REGISTERED HOLDER"), is entitled, subject to the terms and conditions of this
Warrant, to purchase from the Company at any time after the Commencement Date
(as defined in Section 2) of this Warrant and prior to 5:00 p.m. Pacific Time on
May ___, 2002, unless terminated earlier under Section 12 hereof (the
"EXPIRATION DATE"), up to Twenty Thousand (20,000) shares of Warrant Stock (as
defined below) at a price per share equal to the Warrant Price (as defined
below), upon surrender of this Warrant at the principal office of the Company,
together with a duly executed subscription form in the form attached hereto as
Exhibit 1 and simultaneous payment of the full Warrant Price for the shares of
Warrant Stock so purchased in lawful money of the United States. The Warrant
Price is subject to adjustment as provided herein.
1. CERTAIN DEFINITIONS. The following definitions shall apply for
purposes of this Warrant:
(a) "CONVERSION STOCK" shall mean Common Stock of the Company or
other securities issuable upon conversion of the Warrant Stock.
(b) "ISSUE DATE" shall mean the date of this Warrant.
<PAGE> 2
(c) "MAXIMUM NUMBER OF PURCHASABLE SHARES" shall be Twenty
Thousand (20,000) shares, subject to adjustment as provided herein.
(d) "WARRANT PRICE" shall mean Three Dollars ($3.00) per share.
The Warrant Price is subject to adjustment as provided herein.
(e) "WARRANT" shall mean this Warrant and any warrant(s)
delivered in substitution or exchange therefor, as provided herein.
(f) "WARRANT STOCK" shall mean Series C Preferred Stock of the
Company.
2. EXERCISE. Subject to compliance with all applicable securities laws,
this Warrant may be exercised in whole or in part, at any time or from time to
time, on any business day commencing on the earlier of (i) May __, 1998, or (ii)
immediately prior to a Terminating Transaction under Section 12 (such date being
herein referred to as "Commencement Date") and before the Expiration Date, for
up to the Maximum Number of Purchasable Shares by surrendering this Warrant at
the principal office of the Company at 1901 Guadalupe Parkway, San Jose,
California, 95110, with the subscription form attached hereto duly executed by
the Registered Holder, and payment, in cash and/or cancellation of bona fide
indebtedness of the Company to the Registered Holder, of an amount equal to the
product obtained by multiplying (i) the number of shares of Warrant Stock to be
purchased by the Registered Holder by (ii) the Warrant Price or adjusted Warrant
Price therefor, if applicable, as determined in accordance with the terms
hereof. Upon a partial exercise of this Warrant: (i) the Maximum Purchasable
Number of Shares immediately prior to such partial exercise shall be reduced by
the number of shares of Warrant Stock purchased upon such exercise of this
Warrant, and (ii) this Warrant shall be surrendered by the Registered Holder and
replaced with a new Warrant of like tenor with respect to which the new Maximum
Purchasable Number of Shares Amount is the former Maximum Purchasable Number of
Shares Amount as so reduced. This Warrant shall be deemed to have been exercised
immediately prior to the close of business on the date of its surrender for
exercise as provided above, and the person entitled to receive the shares of
Warrant Stock issuable upon such exercise shall be treated for all purposes as
the holder of record of such shares as of the close of business on such date. As
soon as practicable on or after such date, the Company shall issue and deliver
to the person or persons entitled to receive the same a certificate or
certificates for the number of whole shares of Warrant Stock issuable upon such
exercise.
3. FULLY PAID SHARES. All shares of Warrant Stock issued upon the
exercise of this Warrant shall be validly issued, fully paid and nonassessable.
4. TRANSFER AND EXCHANGE. Subject to the foregoing and terms and
conditions of this Warrant and compliance with all applicable securities laws,
this Warrant and all rights hereunder are transferable, in whole or in part, on
the books of the Company maintained for such purpose at the principal office of
the Company referred to above, by the Registered Holder hereof in person, or by
duly authorized attorney, upon surrender of this Warrant properly endorsed, the
Registered Holder's written instructions as to what quantity of the Maximum
Number of Purchasable Shares
2
<PAGE> 3
is being transferred to each transferee's Warrant and upon payment of any
necessary transfer tax or other governmental charge imposed upon such transfer.
Upon any partial transfer, the Company will issue and deliver to the Registered
Holder and its transferee(s), respectively, a new Warrant or Warrants (of like
tenor entitling the Registered Holder and its transferees to purchase shares of
Warrant Stock equal in the aggregate to the Maximum Number of Purchasable Shares
as determined immediately prior to such transfer, with the portions of the
Maximum Number of Purchasable Shares allocated to each such Warrant to be
determined by the Registered Holder's written instructions to the Company
regarding such transfer not so transferred. Until a transfer of this Warrant is
registered on the books of the Company, the Company may treat the Registered
Holder hereof as the owner for all purposes. Notwithstanding the foregoing, this
Warrant and the rights hereunder may not be transferred unless such transfer
complies with all applicable securities laws and the provisions of Section 10
hereof.
5. ADJUSTMENT OF WARRANT PRICE AND NUMBER OF SHARES. The Maximum Number
of Purchasable Shares, and the number and character of shares of Warrant Stock
issuable upon exercise of this Warrant (or any shares of stock or other
securities or property at the time receivable or issuable upon exercise of this
Warrant) and the Warrant Price therefor, are subject to adjustment upon the
occurrence of the following events:
5.1 Adjustment for Stock Splits, Stock Dividends,
Recapitalizations, etc. The Maximum Number of Purchasable Shares, the Warrant
Price of this Warrant and the number of shares of Warrant Stock issuable upon
exercise of this Warrant shall each be proportionally adjusted to reflect any
stock dividend, stock split, reverse stock split, combination of shares,
reclassification, recapitalization or other similar event affecting the number
of outstanding shares of Warrant Stock that occurs after the date of the
Warrant.
5.2 Adjustment for Other Dividends and Distributions. In case the
Company shall make or issue, or shall fix a record date for the determination of
eligible holders entitled to receive, a dividend or other distribution payable
with respect to the Warrant Stock payable in securities of the Company (other
than issuances with respect to which adjustment is made under Section 5.1),
then, and in each such case, the Registered Holder of this Warrant, upon
exercise of this Warrant at any time after the consummation, effective date or
record date of such event, shall receive, in addition to the shares of Warrant
Stock issuable upon such exercise prior to such date, the securities or such
other assets of the Company to which such Registered Holder would have been
entitled upon such date if such Registered Holder had exercised this Warrant
immediately prior thereto (all subject to further adjustment as provided in this
Warrant).
5.3 Adjustment for Reorganization, Consolidation, Merger. Except
in the event this Warrant is terminated pursuant to Section 12 hereof, in case
of any reorganization of the Company (or of any other corporation, the stock or
other securities of which are at the time receivable on the exercise of this
Warrant) after the date of this Warrant, or in case, after such date, the
Company (or any such corporation) shall consolidate with or merge into another
corporation or convey all or substantially all of its assets to another
corporation, then, and in each such case, the Registered Holder of this Warrant,
upon the exercise of this Warrant (as provided in Section 2), at any time after
the consummation of such reorganization, consolidation, merger,
3
<PAGE> 4
or conveyance, shall be entitled to receive, in lieu of the stock or other
securities and property receivable upon the exercise of this Warrant prior to
such consummation, the stock or other securities or property to which such
Registered Holder would have been entitled upon the consummation of such
reorganization, consolidation, merger or conveyance if such Registered Holder
had exercised this Warrant immediately prior thereto, all subject to further
adjustment as provided in this Section 5, and the successor or purchasing
corporation in such reorganization, consolidation, merger or conveyance (if
other than the Company) shall duly execute and deliver to the Registered Holder
a supplement hereto acknowledging such corporation's obligations under this
Warrant; and in each such case, the terms of this Warrant shall be applicable to
the shares of stock or other securities or property receivable upon the exercise
of this Warrant after the consummation of such reorganization, consolidation,
merger or conveyance.
5.4 Conversion of Warrant Stock. In case all the authorized class
or series constituting the Warrant Stock of the Company is converted, pursuant
to the Company's Articles of Incorporation, into Common Stock or other
securities or property (the "PRIOR WARRANT STOCK CONVERSION PROCEEDS"), or the
Warrant Stock otherwise ceases to exist, then, in such case, the Registered
Holder of this Warrant, upon exercise of this Warrant at any time after the date
on which the Warrant Stock is so converted or ceases to exist (the "WARRANT
STOCK TERMINATION DATE"), shall receive, in lieu of the number of shares of
Warrant Stock that would have been issuable upon such exercise immediately prior
to the Warrant Stock Termination Date (the "FORMER WARRANT STOCK"), the Prior
Warrant Stock Conversion Proceeds to which such Registered Holder would have
been entitled to receive upon the Warrant Stock Termination Date if such
Registered Holder had exercised this Warrant with respect to the Former Warrant
Stock immediately prior to the Warrant Stock Termination Date (all subject to
further adjustment as provided in this Warrant).
6. NO IMPAIRMENT. The Company will not, by amendment of its Articles of
Incorporation or Bylaws, or through reorganization, consolidation, merger,
dissolution, issue or sale of securities, sale of assets or any other voluntary
action, willfully avoid or seek to avoid the observance or performance of any of
the terms of this Warrant, but will at all times in good faith assist in the
carrying out of all such terms and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Registered Holder
under this Warrant against wrongful impairment. Without limiting the generality
of the foregoing, the Company: (i) will not set nor increase the par value of
any shares of stock issuable upon the exercise of this Warrant above the amount
payable therefor upon such exercise, and (ii) will take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and non-assessable shares of Warrant Stock upon the exercise of
this Warrant.
7. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment in
either the Maximum Number of Purchasable Shares, the Warrant Price or in the
number of shares of Warrant Stock, or other stock, securities or property
receivable upon the exercise of this Warrant, the Chief Financial Officer of the
Company shall compute such adjustment in accordance with the terms of this
Warrant and prepare a certificate setting forth such adjustment and showing in
detail the facts upon which such adjustment is based, including a statement of
the adjusted Maximum Number of Purchasable Shares and the adjusted Warrant
Price. The Company will
4
<PAGE> 5
cause copies of such certificate to be mailed (by first class mail, postage
prepaid) to the Registered Holder.
8. LOSS OR MUTILATION. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership, and the loss, theft, destruction
or mutilation, of this Warrant, and of indemnity reasonably satisfactory to it,
and (in the case of mutilation) upon surrender and cancellation of this Warrant,
the Company will execute and deliver in lieu thereof a new Warrant of like
tenor.
9. RESERVATION OF WARRANT STOCK. If at any time the number of authorized
but unissued shares of the Company's class or series of Warrant Stock (or Prior
Warrant Stock Conversion Proceeds) or other securities of the Company shall not
be sufficient to effect the exercise of this Warrant, the Company will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of such class or series of Warrant Stock or
other securities to such number of shares of such class or series of Warrant
Stock or other securities as shall be sufficient for such purpose.
10. RESTRICTIONS ON TRANSFER.
10.1 The Registered Holder understands that neither this Warrant
nor the shares of Warrant Stock or Conversion Stock have been registered under
the Securities Act of 1933, as amended (the "Act"), or any state securities
laws. As a condition to the issuance of this Warrant and to its exercise the
Registered Holder hereby represents and warrants to the Company that:
(a) The Warrant and, if applicable, the shares of Warrant
Stock and Conversion Stock (collectively, the "Securities") have been acquired
by the Registered Holder for investment and not with a view to the sale or other
distribution thereof within the meaning of the Act and the Registered Holder has
no present intention of selling or otherwise disposing of all or any portion of
the Securities.
(b) The Registered Holder has acquired (and will acquire)
the Securities for the Registered Holder's own account only and no one else has
any beneficial ownership in the Securities.
(c) The Registered Holder is capable of evaluating the
merits and risks of any investment in the Securities, is financially capable of
bearing a total loss of this investment and has either: (i) a preexisting
personal or business relationship with the Company or its principals; (ii) by
reason of the Registered Holder's business or financial experience, has the
capacity to protect his or its own interests in connection with this investment;
or (iii) is an "accredited investor" within the meaning of Regulation D
promulgated under the Act, as amended.
(d) The Registered Holder has had access to all
information regarding the Company, its present and prospective business, assets,
liabilities and financial condition that the Registered Holder considers
important to making the decision to acquire the Securities and
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<PAGE> 6
has had ample opportunity to ask questions of and receive answers from the
Company's representatives concerning an investment in the Securities and to
obtain any and all documents requested in order to supplement or verify any of
the information supplied.
(e) The Registered Holder understands that the Securities
shall be deemed restricted securities under the Act and may not be resold unless
they are registered under the Act and any applicable State securities law, or in
the opinion of counsel in form and substance satisfactory to the Company, an
exemption from such registration is available.
(f) The Registered Holder is aware of Rule 144 promulgated
under the Act, which rule provides, in substance, that: (i) after two years from
the date restricted securities have been purchased and fully paid for, a holder
may transfer restricted securities provided certain conditions are met (e.g.,
certain public information is available about the Company), and specific
limitations on the amount of shares which can be sold within certain periods and
the manner in which such shares must be sold are complied with; and (ii) after
three years from the date the securities have been purchased and fully paid for,
holders who are not "affiliates" of the Company may sell restricted securities
without satisfying such conditions.
(g) The Registered Holder further understands that if the
requirements of Rule 144 are not met, registration under the Act, compliance
with Regulation A, or some other registration exemption will be required for any
disposition of the Securities; and that, although Rule 144 is not exclusive, the
Securities and Exchange Commission ("SEC") has expressed its opinion that
persons proposing to sell restricted securities other than in a registered
offering or other than pursuant to Rule 144 will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales and such persons and the brokers who participate in the
transactions do so at their own risk.
10.2 The Registered Holder of this Warrant, by acceptance hereof,
agrees that, absent an effective registration statement filed with the SEC under
the Act, covering the disposition or sale of this Warrant or the Warrant Stock
(or Conversion Stock) issued or issuable upon exercise hereof, such Registered
Holder will not sell or transfer any or all of such Warrant Stock or Conversion
Stock, as the case may be, without first providing the Company with an opinion
of counsel satisfactory to the Company to the effect that such sale or transfer
will be exempt from the registration and prospectus delivery requirements of the
Act, and such Registered Holder consents to the Company making a notation on its
records, or giving instructions to any transfer agent of this Warrant, or such
Warrant Stock (or Conversion Stock), in order to implement such restriction on
transfer. The shares issued upon exercise of this Warrant shall bear legends
referring to the restrictions or transfer set forth in this Section 10. As a
condition to the transfer of this Warrant or transfer of the shares issuable on
exercise hereof, any permitted transferee must execute and deliver to the
Company representations and warranties similar to these set forth in this
Section 10 and agree in writing to accept and be bound by all the terms and
conditions of this Warrant.
11. NO RIGHTS OR LIABILITIES AS SHAREHOLDER. This Warrant does not by
itself entitle the Registered Holder to any voting rights or other rights as a
shareholder of the Company. In
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<PAGE> 7
the absence of affirmative action by Registered Holder to purchase Warrant Stock
by exercise of this Warrant, no provisions of this Warrant, and no enumeration
herein of the rights or privileges of the Registered Holder shall cause such
Registered Holder to be a shareholder of the Company for any purpose.
12. TERMINATION. The right to exercise this Warrant shall terminate upon
the effective date of a merger or consolidation of the Company into or with
another corporation, or the sale of all or substantially all of the Company's
assets to another corporation or person, if, immediately after any such merger,
consolidation or sale of assets, at least fifty percent (50%) of the voting
power of the surviving corporation or such other person, as the case may be, is
owned by persons who are not shareholders of the Company immediately prior to
such merger, consolidation or sale (the "Terminating Transaction"). In such
event, the Company shall, at least fifteen (15) days prior to the effective date
of the Terminating Transaction, give written notice pursuant to Section 14
hereof the imminence of such Terminating Transaction.
13. LOCK-UP AGREEMENT. The Registered Holder agrees, upon request of the
Company or the underwriters managing any firmly underwritten public offering of
the Company's securities, not to sell, make any short sale of, loan, grant any
option for the purchase of, or otherwise dispose of any shares of the Warrant
Stock or Common Stock issuable upon conversion of the Warrant Stock acquired
pursuant to the exercise of this Warrant (other than those included in the
registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed 180
days) from the effective date of such registration as the Company or
underwriters may specify.
14. AMENDMENT; WAIVER. Any term of this Warrant may be amended, and the
observance of any term of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively) by the written
consent of the Company and the Registered Holder.
15. NOTICES. All notices and other communications from the Company to
the Registered Holder shall be deemed given when mailed by first-class
registered or certified mail, postage prepaid, to the address furnished to the
Company in writing by the last Registered Holder who shall have furnished an
address to the Company in writing.
16. ATTORNEYS' FEES. In the event any party is required to engage the
services of any attorneys for the purpose of enforcing this Warrant, or any
provision thereof, the prevailing party shall be entitled to recover its
reasonable attorneys' fees and any other related cost or expenses.
17. HEADINGS. The headings in this Warrant are for purposes of
convenience in reference only, and shall not be deemed to constitute a part
hereof.
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<PAGE> 8
18. LAW GOVERNING. This Warrant shall be construed and enforced in
accordance with, and governed by, the internal laws of the State of California,
excluding that body of law applicable to conflicts of laws.
19. TERMS BINDING. By acceptance of this Warrant, the Registered Holder
of this Warrant (and each subsequent assignee, transferee or Registered Holder
of this Warrant) accepts and agrees to be bound by all the terms and conditions
of this Warrant.
Dated: May 6, 1997
BROCADE COMMUNICATIONS ACKNOWLEDGED AND ACCEPTED
SYSTEMS, INC. BY REGISTERED HOLDER:
By: /s/ B. Carl Lee By: /s/ J. Scott Kamsler
------------------------------- --------------------------------
Name: B. Carl Lee Name: J. Scott Kamsler
----------------------------- ------------------------------
Title: VP & CFO Title: VP & CEO
---------------------------- -----------------------------
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<PAGE> 9
EXHIBIT 1
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: Brocade Communications Systems, Inc.
1901 Guadalupe Parkway
San Jose, CA 95110
(1) The undersigned hereby elects to purchase _____ shares of
that class or series of Warrant Stock of Brocade Communications Systems, Inc.
(or, if applicable, such Prior Warrant Stock Conversion Proceeds, pursuant to
the terms of the attached Warrant) and tenders herewith payment of the purchase
price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms
and acknowledges that the representations and warranties of the undersigned set
forth in Section 10 of the Warrant are true and correct as of this date.
(3) Please issue a certificate or certificates representing such
shares of that class or series of Warrant Stock of Brocade Communications
Systems, Inc. (or, if applicable, such Prior Warrant Stock Conversion Proceeds,
pursuant to the terms of the attached Warrant) in the name or names specified
below:
- -------------------------------- --------------------------------
(Name) (Name)
- -------------------------------- --------------------------------
(Address) (Address)
- -------------------------------- --------------------------------
(City, State, Zip Code) (City, State, Zip Code)
(4) Please issue a new Warrant for the unexercised portion of
the attached Warrant in the name of the undersigned or in such other name as is
specified below:
- --------------------------------
(Name)
- -------------------------------- --------------------------------
(Date) (Signature of Registered Holder)
<PAGE> 10
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned Registered Holder of this
Warrant hereby sells, assigns and transfers unto the Assignee named below all of
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Warrant Stock set forth below:
Name of Assignee Address Number of Shares of Warrant Stock Transferred
and does hereby irrevocably constitute and appoint ___________________________
Attorney to make such transfer on the books of ____________________________,
maintained for the purpose, with full power of substitution in the premises.
Dated: _________________
REGISTERED HOLDER
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE> 1
EXHIBIT 4.8
SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
This Seventh Amended and Restated Investors' Rights Agreement (this
"Agreement") is made and entered into effective as of December 3, 1997 by and
among Brocade Communications Systems, Inc., a California corporation (the
"Company"), and the persons and entities listed on Exhibit A attached hereto
(the "Investors").
RECITALS
A. The existing Investors and warrantholders who are identified
on the signature page to this Agreement as "Previous Investors Who Are Not
Investing in the Second Series D Transaction" or "Previous Investors Who Are
Investing in the Second Series D Transaction" (collectively, the "Previous
Investors") are parties to the Sixth Amended and Restated Investors' Rights
Agreement entered into as of October 24, 1997 (the "Prior Rights Agreement");
such Previous Investors include persons who purchased Series D Preferred Stock
of the Company on or about September 29, 1997, pursuant to which purchase such
investors were granted warrants to purchase shares of the Company's Series D
Preferred Stock equal to ten percent (10%) of the number of shares of Series D
Preferred Stock purchased by each such Investor (the "First Series D Transaction
Investors").
B. The Company desires for those certain Investors who are or
will be identified on the signature page to this Agreement as either "Previous
Investors Who Are Investing in the Second Series D Transaction" or "Second
Series D Transaction Investors" (collectively, the "Second Series D Transaction
Investors") to purchase shares of the Company's Series D Preferred Stock
pursuant to that certain Series D Preferred Stock Purchase Agreement made
effective on or about the date hereof between the Company and the Second Series
D Transaction Investors, as may be amended from time to time (the "Second Series
D Agreement").
C. As a condition of such investment by the Second Series D
Transaction Investors, and to induce such investment, the Investors and the
Company wish to enter into this Agreement which shall supersede the Prior Rights
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual promises hereinafter set forth, the parties hereto agree as follows:
1. INFORMATION RIGHTS.
1.1 Financial Information. The Company covenants and agrees that,
commencing on the date of this Agreement, for so long as any Investor holds
shares of Preferred Stock convertible into at least 50,000 shares of Common
Stock of the Company issued pursuant to that certain Series A Preferred Stock
Purchase Agreement dated August 28, 1995 (the "Series A Agreement"), that
certain Series B Preferred Stock Purchase Agreement dated June 17, 1996 (the
"Series B Agreement"), that certain Series C Preferred Stock Purchase Agreement
dated December 6, 1996, that certain Series D Preferred Stock Purchase Agreement
dated September 29, 1997 and/or the Second Series D Agreement (such agreements,
including any future amendments thereto, are collectively referred to as the
"Preferred Stock Purchase
<PAGE> 2
Agreements" and any single such agreement is referred to as a "Preferred Stock
Purchase Agreement") and/or the equivalent number (on an as-converted basis) of
shares of Common Stock of the Company ("Common Stock") issued upon the
conversion of such shares of Preferred Stock ("Conversion Stock"), or any
combination thereof, the Company will:
(a) Annual Reports. Furnish to such Investor, as soon as
practicable and in any event within 120 days after the end of each fiscal year
of the Company, a consolidated Balance Sheet as of the end of such fiscal year,
a consolidated Statement of Income and a consolidated Statement of Cash Flows of
the Company and its subsidiaries for such year, setting forth in each case in
comparative form the figures from the Company's previous fiscal year (if any),
all prepared in accordance with generally accepted accounting principles and
practices and audited by nationally recognized independent certified public
accountants;
(b) Quarterly Reports. Furnish to such Investor as soon as
practicable, and in any case within forty-five (45) days of the end of each
fiscal quarter of the Company (except the last quarter of the Company's fiscal
year), quarterly unaudited financial statements, including an unaudited Balance
Sheet and an unaudited Statement of Income and an unaudited Statement of Cash
Flows;
(c) Monthly Reports. Furnish to such Investor as soon as
practicable, and in any case within forty-five (45) days of the end of each
calendar month (except the last month of the Company's fiscal year), monthly
unaudited financial statements, including an unaudited Balance Sheet and an
unaudited Statement of Income and an unaudited Statement of Cash Flows; and
(d) Annual Budget. Furnish to such Investor as soon as
practicable and in any event no later than thirty (30) days after the close of
each fiscal year of the Company, an annual operating plan and budget, prepared
on a monthly basis, for the next immediate fiscal year. The Company shall also
furnish to such Investor, within a reasonable time of its preparation,
amendments to the annual budget, if any.
(e) Confidentiality. Each Investor agrees to hold all
information received pursuant to this Section in confidence, and not to use or
disclose any of such information to any third party, except to the extent such
information may be made publicly available by the Company.
1.2 Inspection Rights. The Company shall permit each Investor
holding shares of the Company's Preferred Stock convertible into at least
500,000 shares of Common Stock of the Company issued pursuant to any one or more
of the Preferred Stock Purchase Agreements and/or the equivalent number (on an
as-converted basis) of shares of Conversion Stock, or any combination thereof,
at such Investor's expense and at such reasonable times as may be requested by
such Investor, to visit and inspect the Company's properties, to examine its
books of account and records and to discuss the Company's affairs, finances and
accounts with its officers. Each Investor agrees to hold all information
received from such inspections in confidence, and not to use or disclose any of
such information to any third party, except to the extent such information may
be made publicly available by the Company. The Company shall have no obligation
under this Section 1.2 to disclose any information to an Investor who is a
competitor, works or consults for or is an investor in a competitor, and further
shall have no obligation to disclose confidential information to any Investor.
2
<PAGE> 3
1.3 Termination of Rights. The Company's obligations under
Sections 1.1 and 1.2 above will terminate upon the earlier of (i) the closing of
the Company's initial public offering of Common Stock pursuant to an effective
registration statement filed under the U.S. Securities Act of 1933, as amended
(the "Securities Act") or (ii) upon (a) the acquisition of all or substantially
all the assets of the Company or (b) an acquisition of the Company by another
corporation or entity by consolidation, merger or other reorganization in which
the holders of the Company's outstanding voting stock immediately prior to such
transaction own, immediately after such transaction, securities representing
less than fifty percent (50%) of the voting power of the corporation or other
entity surviving such transaction.
2. REGISTRATION RIGHTS.
2.1 Definitions. For purposes of this Section 2:
(a) Registration. The terms "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act, and the
declaration or ordering of effectiveness of such registration statement.
(b) Registrable Securities. The term "Registrable
Securities" means: (1) all the shares of Common Stock of the Company issued or
issuable upon the conversion of: (A) any shares of Preferred Stock issued under
any Preferred Stock Purchase Agreement, (B) any shares of Series A Preferred
Stock that are issued or issuable upon exercise of those certain warrants issued
by the Company as of December 26, 1995 to purchase 35,444 and 15,753 shares of
the Company's Series A Preferred Stock (which warrant to purchase 15,753 shares
of Series A Preferred Stock was amended and restated as of October 3, 1996) (the
"Series A Warrants"), (C) any shares of Series B Preferred Stock that are issued
or issuable upon exercise of that certain warrant issued by the Company as of
September 11, 1996 (the "Series B Warrant"), (D) any shares of Series C
Preferred Stock that are issued or issuable upon exercise of that certain
warrant issued by the Company as of June 13, 1997 (the "Series C Warrant"), and
(E) any shares of Series D Preferred Stock that are issued or issuable upon
exercise of those certain warrants issued by the Company pursuant to the Series
D Agreement (the "Series D Warrants") and (2) any shares of Common Stock of the
Company issued as (or issuable upon the conversion or exercise of any warrant,
right or other security which is issued as) a dividend or other distribution
with respect to, or in exchange for or in replacement of, all such shares of
Common Stock described in clause (1) of this subsection (b); excluding in all
cases, however, any Registrable Securities sold by a person in a transaction in
which rights under this Section 2 are not assigned in accordance with this
Agreement or any Registrable Securities sold to the public or sold pursuant to
Rule 144 promulgated under the Securities Act.
(c) Registrable Securities Then Outstanding. The number of
shares of "Registrable Securities then outstanding" shall mean the number of
shares of Common Stock which are Registrable Securities and (1) are then issued
and outstanding or (2) are then issuable pursuant to the exercise or conversion
of then outstanding and then exercisable options, warrants or convertible
securities.
(d) Holder. For purposes of this Section 2 and Sections 3
and 4 hereof, the term "Holder" means any person owning of record Registrable
Securities that have not been sold to the public or pursuant to Rule 144
promulgated under the Securities Act or any assignee of record of such
Registrable Securities to whom rights under this Section 2 have been
3
<PAGE> 4
duly assigned in accordance with this Agreement; provided, however, that for
purposes of this Agreement, a record holder of shares of Preferred Stock shall
be deemed to be the Holder of Registrable Securities into which such Preferred
Stock is convertible solely for the purposes of Sections 2 and 3 of this
Agreement; provided, further, that for purposes of this Agreement, a record
holder of Series A Warrants, the Series B Warrant or the Series D Warrants
exercisable for such Registrable Securities shall be deemed to be the Holder of
such Registrable Securities solely for purposes of Section 2 of this Agreement;
and provided further, that for purposes of this Agreement, a record holder of
the Series C Warrant exercisable for such Registrable Securities shall be deemed
to be the Holder of such Registrable Securities solely for purposes of Section 2
of this Agreement excluding Subsection 2.2; provided, further, that the Company
shall in no event be obligated to register shares of Preferred Stock, the Series
A Warrants, the Series B Warrant, the Series C Warrant or the Series D Warrants,
and that Holders of Registrable Securities will not be required to convert their
shares of Preferred Stock into Common Stock or exercise their Series A Warrants,
Series B Warrant, Series C Warrant or Series D Warrants in order to exercise the
registration rights granted hereunder, until immediately before the closing of
the offering to which the registration relates.
(e) Form S-3. The term "Form S-3" means such form under
the Securities Act as is in effect on the date hereof or any successor
registration form under the Securities Act subsequently adopted by the SEC which
permits inclusion or incorporation of substantial information by reference to
other documents filed by the Company with the SEC.
(f) SEC. The term "SEC" or "Commission" means the U.S.
Securities and Exchange Commission.
2.2 Demand Registration.
(a) Request by Holders. If the Company shall receive at
any time after six (6) months after the effective date of the Company's initial
public offering of its securities pursuant to a registration filed under the
Securities Act, a written request from the Holders of at least a majority of the
Registrable Securities then outstanding that the Company file a registration
statement under the Securities Act covering the registration of Registrable
Securities pursuant to this Section 2.2, then the Company shall, within ten (10)
business days of the receipt of such written request, give written notice of
such request ("Request Notice") to all Holders, and effect, as soon as
practicable, the registration under the Securities Act of all Registrable
Securities which Holders request to be registered and included in such
registration by written notice given such Holders to the Company within twenty
(20) days after receipt of the Request Notice, subject only to the limitations
of this Section 2.2; provided that the Registrable Securities requested by all
Holders to be registered pursuant to such request must either (i) be at least
fifty percent (50%) of all Registrable Securities then outstanding or (ii) have
an anticipated aggregate public offering price (before any underwriting
discounts and commissions) of not less than $2,000,000.
(b) Underwriting. If the Holders initiating the
registration request under this Section 2.2 ("Initiating Holders") intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, then they shall so advise the Company as a part of their request
made pursuant to this Section 2.2 and the Company shall include such information
in the Request Notice. In such event, the right of any Holder to include his
4
<PAGE> 5
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the managing underwriter or underwriters selected for such underwriting by
the Company. Notwithstanding any other provision of this Section 2.2, if the
underwriter(s) advise(s) the Company in writing that marketing factors require a
limitation of the number of securities to be underwritten then the Company shall
so advise all Holders of Registrable Securities which would otherwise be
registered and underwritten pursuant hereto, and the number of Registrable
Securities that may be included in the underwriting shall be reduced as required
by the underwriter(s) and allocated among the Holders of Registrable Securities
on a pro rata basis according to the number of Registrable Securities then
outstanding held by each Holder requesting registration (including the
Initiating Holders); provided, however, that the number of shares of Registrable
Securities to be included in such underwriting and registration shall not be
reduced unless all other securities of the Company are first entirely excluded
from the underwriting and registration. Any Registrable Securities excluded and
withdrawn from such underwriting shall be withdrawn from the registration.
(c) Maximum Number of Demand Registrations. The Company is
obligated to effect only two (2) such registrations pursuant to this Section
2.2.
(d) Deferral. Notwithstanding the foregoing, if the
Company shall furnish to Holders requesting the filing of a registration
statement pursuant to this Section 2.2, a certificate signed by the President or
Chief Executive Officer of the Company stating that in the good faith judgment
of the Board of Directors of the Company, it would be seriously detrimental to
the Company and its shareholders for such registration statement to be filed and
it is therefore essential to defer the filing of such registration statement,
then the Company shall have the right to defer such filing for a period of not
more than 180 days after receipt of the request of the Initiating Holders;
provided, however, that the Company may not utilize this right more than once in
any twelve (12) month period.
(e) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.2, including without limitation all
registration and qualification fees, printers' and accounting fees, fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of one counsel for the selling Holders (but excluding
underwriters' discounts and commissions), shall be borne by the Company. Each
Holder participating in a registration pursuant to this Section 2.2 shall bear
such Holder's proportionate share (based on the total number of shares sold in
such registration other than for the account of the Company) of all discounts,
commissions or other amounts payable to underwriters or brokers in connection
with such offering. Notwithstanding the foregoing, the Company shall not be
required to pay for any expenses of any registration proceeding begun pursuant
to this Section 2.2 if the registration request is subsequently withdrawn at the
request of the Holders of a majority of the Registrable Securities to be
registered, unless the Holders of a majority of the Registrable Securities then
outstanding agree to forfeit their right to one (1) demand registration pursuant
to this Section 2.2 (in which case such right shall be forfeited by all Holders
of Registrable Securities); provided, further, however, that if at the time of
such withdrawal, the Holders have learned of a material adverse change in the
condition, business, or prospects of the
5
<PAGE> 6
Company not known to the Holders at the time of their request for such
registration and have withdrawn their request for registration with reasonable
promptness after learning of such material adverse change, then the Holders
shall not be required to pay any of such expenses and shall retain their rights
pursuant to this Section 2.2.
2.3 Piggyback Registrations. The Company shall notify all Holders
of Registrable Securities in writing at least thirty (30) days prior to filing
any registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to any registration
under Section 2.2 or Section 2.4 of this Agreement or to any employee benefit
plan or a corporate reorganization) and will afford each such Holder an
opportunity to include in such registration statement all or any part of the
Registrable Securities then held by such Holder. Each Holder desiring to include
in any such registration statement all or any part of the Registrable Securities
held by such Holder shall, within twenty (20) days after receipt of the
above-described notice from the Company, so notify the Company in writing, and
in such notice shall inform the Company of the number of Registrable Securities
such Holder wishes to include in such registration statement. If a Holder
decides not to include all of its Registrable Securities in any registration
statement thereafter filed by the Company, such Holder shall nevertheless
continue to have the right to include any Registrable Securities in any
subsequent registration statement or registration statements as may be filed by
the Company with respect to offerings of its securities, all upon the terms and
conditions set forth herein.
(a) Underwriting. If a registration statement under which
the Company gives notice under this Section 2.3 is for an underwritten offering,
then the Company shall so advise the Holders of Registrable Securities. In such
event, the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 2.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s) selected for such underwriting.
Notwithstanding any other provision of this Agreement, if the managing
underwriter determine(s) in good faith that marketing factors require a
limitation of the number of shares to be underwritten, then the managing
underwriter(s) may exclude shares (including Registrable Securities) from the
registration and the underwriting, and the number of shares that may be included
in the registration and the underwriting shall be allocated, first, to the
Company, and second, to each of the Holders requesting inclusion of their
Registrable Securities in such registration statement on a pro rata basis based
on the total number of Registrable Securities then held by each such Holder;
provided however, that the right of the underwriters to exclude shares
(including Registrable Securities) from the registration and underwriting as
described above shall be restricted so that the number of Registrable Securities
included in any such registration is not reduced below twenty percent (20%) of
the shares included in the registration, except for a registration relating to
the Company's initial public offering from which all Registrable Securities may
be excluded. If any Holder disapproves of the terms of any such underwriting,
such Holder may elect to withdraw therefrom by written notice to the Company and
the underwriter, delivered at least ten (10) business days prior to the
effective date of the registration statement. Any Registrable Securities
excluded or withdrawn from such underwriting shall be excluded and withdrawn
from the registration. For any Holder which is a
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partnership or corporation, the partners, retired partners and shareholders of
such Holder, or the estates and family members of any such partners and retired
partners and any trusts for the benefit of any of the foregoing persons shall be
deemed to be a single "Holder", and any pro rata reduction with respect to such
"Holder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"Holder", as defined in this sentence.
(b) Expenses. All expenses incurred in connection with a
registration pursuant to this Section 2.3 (excluding underwriters' and brokers'
discounts and commissions), including, without limitation all federal and "blue
sky" registration and qualification fees, printers' and accounting fees, fees
and disbursements of counsel for the Company and reasonable fees and
disbursements of one counsel for the selling Holders shall be borne by the
Company.
2.4 Form S-3 Registration. In case the Company shall receive from
any Holder or Holders of at least twenty percent (20%) of all Registrable
Securities then outstanding a written request or requests that the Company
effect a registration on Form S-3 and any related qualification or compliance
with respect to all or a part of the Registrable Securities owned by such Holder
or Holders, then the Company will:
(a) Notice. Promptly give written notice of the proposed
registration and the Holder's or Holders' request therefor, and any related
qualification or compliance, to all other Holders of Registrable Securities; and
(b) Registration. As soon as practicable, effect such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holder's or Holders' Registrable Securities as are specified in
such request, together with all or such portion of the Registrable Securities of
any other Holder or Holders joining in such request as are specified in a
written request given within twenty (20) days after receipt of such written
notice from the Company; provided, however, that the Company shall not be
obligated to effect any such registration, qualification or compliance pursuant
to this Section 2.4:
(1) if Form S-3 is not available for such offering by
the Holders;
(2) if the Holders, together with the holders of any
other securities of the Company entitled to inclusion in such registration,
propose to sell Registrable Securities and such other securities (if any) at an
aggregate price to the public of less than $500,000;
(3) if the Company shall furnish to the Holders a
certificate signed by the President or Chief Executive Officer of the Company
stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company and its shareholders
for such Form S-3 Registration to be effected at such time, in which event the
Company shall have the right to defer the filing of the Form S-3 registration
statement no more than once during any twelve month period for a period of not
more than 120 days after receipt of the request of the Holder or Holders under
this Section 2.4;
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(4) if the Company has, within the twelve (12) month
period preceding the date of such request, already effected any registration on
Form S-3 for the Holders pursuant to this Section 2.4; or
(5) in any particular jurisdiction in which the
Company would be required to qualify to do business or to execute a general
consent to service of process in effecting such registration, qualification or
compliance.
(c) Expenses. Subject to the foregoing, the Company shall
file a Form S-3 registration statement covering the Registrable Securities and
other securities so requested to be registered pursuant to this Section 2.4 as
soon as practicable after receipt of the request or requests of the Holders for
such registration. The Company shall pay all expenses incurred in connection
with registrations requested pursuant to this Section 2.4 (excluding
underwriters' or brokers' discounts and commissions), including without
limitation all filing, registration and qualification, printers' and accounting
fees and the reasonable fees and disbursements of one counsel for the selling
Holder or Holders and counsel for the Company.
(d) Not Demand Registration. Form S-3 registrations shall
not be deemed to be demand registrations as described in Section 2.2 above.
2.5 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement
with respect to such Registrable Securities and use its best efforts to cause
such registration statement to become effective, and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder, keep
such registration statement effective for up to ninety (90) days.
(b) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
with such registration statement as may be necessary to comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such number of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of the Registrable
Securities owned by them that are included in such registration.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering,
enter into and perform its obligations under an underwriting agreement, in usual
and customary form, with the managing underwriter(s) of such offering. Each
Holder participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
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(f) Notify each Holder of Registrable Securities covered
by such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(g) Furnish, at the request of any Holder requesting
registration of Registrable Securities, on the date that such Registrable
Securities are delivered to the underwriters for sale, if such securities are
being sold through underwriters, or, if such securities are not being sold
through underwriters, on the date that the registration statement with respect
to such securities becomes effective, (i) an opinion, dated as of such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities and (ii) a
"comfort" letter dated as of such date, from the independent certified public
accountants of the Company, in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering and reasonably satisfactory to a majority in interest of the
Holders requesting registration, addressed to the underwriters, if any, and to
the Holders requesting registration of Registrable Securities.
2.6 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or
2.4 that the selling Holders shall furnish to the Company such information
regarding themselves, the Registrable Securities held by them, and the intended
method of disposition of such securities as shall be required to timely effect
the registration of their Registrable Securities.
2.7 Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Section 2.
2.8 Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 2.2, 2.3 or 2.4:
(a) By the Company. To the extent permitted by law, the
Company will indemnify and hold harmless each Holder, the partners, officers and
directors of each Holder, any underwriter (as defined in the Securities Act) for
such Holder and each person, if any, who controls such Holder or underwriter
within the meaning of the Securities Act or the Securities Exchange Act of 1934,
as amended, (the "1934 Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the 1934 Act or other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue
statement of a material fact contained in such
registration statement, including any preliminary
prospectus or final prospectus contained therein or any
amendments or supplements thereto;
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(ii) the omission or alleged omission to state
therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading,
or
(iii) any violation or alleged violation by the
Company of the Securities Act, the 1934 Act, any federal
or state securities law or any rule or regulation
promulgated under the Securities Act, the 1934 Act or any
federal or state securities law in connection with the
offering covered by such registration statement;
and the Company will reimburse each such Holder, partner, officer or director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating or defending any
such loss, claim, damage, liability or action; provided however, that the
indemnity agreement contained in this subsection 2.8(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld), nor shall the Company be liable in any such
case for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by such Holder, partner, officer, director, underwriter
or controlling person of such Holder.
(b) By Selling Holders. To the extent permitted by law,
each selling Holder will indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the registration statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any underwriter and any other Holder selling securities under such
registration statement or any of such other Holder's partners, directors or
officers or any person who controls such Holder within the meaning of the
Securities Act or the 1934 Act, against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, underwriter or other such Holder, partner or
director, officer or controlling person of such other Holder may become subject
under the Securities Act, the 1934 Act or other federal or state law, insofar as
such losses, claims, damages or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for use
in connection with such registration; and each such Holder will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, controlling person, underwriter or other Holder, partner, officer,
director or controlling person of such other Holder in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this subsection
2.8(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of the Holder, which consent shall not be unreasonably withheld; and provided
further, that the total amounts payable in indemnity by a Holder under this
Section 2.8(b) in respect of any Violation shall not exceed the net proceeds
received by such Holder in the registered offering out of which such Violation
arises.
(c) Notice. Promptly after receipt by an indemnified party
under this Section 2.8 of notice of the commencement of any action (including
any governmental action),
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such indemnified party will, if a claim in respect thereof is to be made against
any indemnifying party under this Section 2.8, deliver to the indemnifying party
a written notice of the commencement thereof and the indemnifying party shall
have the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential conflict of
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
2.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 2.8.
(d) Defect Eliminated in Final Prospectus. The foregoing
indemnity agreements of the Company and Holders are subject to the condition
that, insofar as they relate to any Violation made in a preliminary prospectus
but eliminated or remedied in the amended prospectus on file with the SEC at the
time the registration statement in question becomes effective or the amended
prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and
equitable contribution to joint liability under the Securities Act in any case
in which either (i) any Holder exercising rights under this Agreement, or any
controlling person of any such Holder, makes a claim for indemnification
pursuant to this Section 2.8 but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the fact that
this Section 2.8 provides for indemnification in such case, or (ii) contribution
under the Securities Act may be required on the part of any such selling Holder
or any such controlling person in circumstances for which indemnification is
provided under this Section 2.8; then, and in each such case, the Company and
such Holder will contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after contribution from others) in
such proportion so that such Holder is responsible for the portion represented
by the percentage that the public offering price of its Registrable Securities
offered by and sold under the registration statement bears to the public
offering price of all securities offered by and sold under such registration
statement, and the Company and other selling Holders are responsible for the
remaining portion; provided, however, that, in any such case, (A) no such Holder
will be required to contribute any amount in excess of the public offering price
of all such Registrable Securities offered and sold by such Holder pursuant to
such registration statement; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
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(f) Survival. The obligations of the Company and Holders
under this Section 2.8 shall survive the completion of any offering of
Registrable Securities in a registration statement, and otherwise.
2.9 "Market Stand-Off" Agreement. Each Holder hereby agrees that
it shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any
Registrable Securities or other shares of stock of the Company then owned by
such Holder (other than to donees or partners of the Holder who agree to be
similarly bound) for up to one hundred eighty (180) days following the effective
date of a registration statement of the Company filed under the Securities Act;
provided, however, that:
(a) such agreement shall be applicable only to the first
such registration statement of the Company which covers securities to be sold on
its behalf to the public in an underwritten offering but not to Registrable
Securities sold pursuant to such registration statement; and
(b) all executive officers and directors of the Company
then holding Common Stock of the Company enter into similar agreements.
In order to enforce the foregoing covenant, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to the
Registrable Securities and such other shares of stock of each Holder (and the
shares or securities of every other person subject to the foregoing restriction)
until the end of such period.
2.10 Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Registrable Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date of the first registration under the Securities
Act filed by the Company for an offering of its securities to the general
public;
(b) Use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Company under the
Securities Act and the 1934 Act (at any time after it has become subject to such
reporting requirements); and
(c) So long as a Holder owns any Registrable Securities,
to furnish to the Holder forthwith upon request a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the 1934 Act (at any time after it has
become subject to the reporting requirements of the 1934 Act), a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents of the Company as a Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing a Holder to sell any
such securities without registration (at any time after the Company has become
subject to the reporting requirements of the 1934 Act).
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2.11 Termination of the Company's Obligations. The Company shall
have no obligations pursuant to Sections 2.2 through 2.4 with respect to: (i)
any request or requests for registration made by any Holder on a date more than
five (5) years after the closing date of the Company's initial public offering;
or (ii) any Registrable Securities proposed to be sold by a Holder in a
registration pursuant to Section 2.2, 2.3 or 2.4 if, in the opinion of counsel
to the Company, all such Registrable Securities proposed to be sold by a Holder
may be sold in a three-month period without registration under the Securities
Act pursuant to Rule 144 under the Securities Act.
3. RIGHT OF FIRST REFUSAL.
3.1 General. Each Holder (as defined in Section 2.1(d) but not
including any parties that are not under such Section deemed Holders for
purposes of this Section 3) and any party to whom such Holder's rights under
this Section 3 have been duly assigned in accordance with Section 4.1(b) (each
such Holder or assignee being hereinafter referred to as a "Rights Holder") has
the right of first refusal to purchase such Rights Holder's Pro Rata Share (as
defined below), of all (or any part) of any "New Securities" (as defined in
Section 3.2) that the Company may from time to time issue after the date of this
Agreement. A Rights Holder's "Pro Rata Share" for purposes of this right of
first refusal is the ratio of (a) the number of Registrable Securities as to
which such Rights Holder is the Holder (and/or is deemed to be the Holder under
Section 2.1(d)), to (b) a number of shares of Common Stock of the Company equal
to the sum of (i) the total number of shares of Common Stock of the Company then
outstanding plus (ii) the total number of shares of Common Stock of the Common
Stock of the Company into which all then outstanding shares of Preferred Stock
of the Company are then convertible plus (iii) the number of shares of Common
Stock of the Company reserved for issuance under outstanding options and
warrants plus (iv) the number of shares of Common Stock of the Company reserved
for issuance upon conversion of Preferred Stock issuable under outstanding
options or warrants.
3.2 New Securities. "New Securities" shall mean any Common Stock
or Preferred Stock of the Company, whether now authorized or not, and rights,
options or warrants to purchase such Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible or
exchangeable into such Common Stock or Preferred Stock; provided, however, that
the term "New Securities" does not include:
(i) shares of the Company's Common Stock (and/or
options or warrants therefor) issued to employees,
officers, directors, contractors, advisors or consultants
of the Company pursuant to agreements or plans approved by
the Board of Directors of the Company;
(ii) shares of Preferred Stock and Series D
Warrants issued under the Preferred Stock Purchase
Agreements, as such agreements may be amended, or any
securities issued or issuable upon conversion or exercise
with respect to any Preferred Stock or Series D Warrants
issued under the Preferred Stock Agreements, as such
agreements may be amended;
(iii) any securities issuable upon conversion of
or with respect to any then outstanding shares of
Preferred Stock of the Company or Common Stock or other
securities issuable upon conversion thereof;
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(iv) any securities issuable upon exercise of any
options, warrants or rights to purchase any securities of
the Company outstanding on the date of this Agreement
("Warrant Securities") and any securities issuable upon
the conversion of any Warrant Securities;
(v) shares of the Company's Common Stock or
Preferred Stock issued in connection with any stock split
or stock dividend;
(vi) securities offered by the Company to the
public pursuant to a registration statement filed under
the Securities Act;
(vii) shares of the Company's stock (and/or
options or warrants therefor) issued or issuable to
parties providing the Company with equipment leases, real
property leases, loans, credit lines, guaranties of
indebtedness, cash price reductions or similar financing;
or
(viii) securities issued pursuant to the
acquisition of another corporation or entity by the
Company by consolidation, merger, purchase of all or
substantially all of the assets, or other reorganization
in which the Company acquires, in a single transaction or
series of related transactions, all or substantially all
of the assets of such other corporation or entity or fifty
percent (50%) or more of the voting power of such other
corporation or entity or fifty percent (50%) or more of
the equity ownership of such other entity.
3.3 Procedures. In the event that the Company proposes to
undertake an issuance of New Securities, it shall give to each Rights Holder
written notice of its intention to issue New Securities (the "Notice"),
describing the type of New Securities and the price and the general terms upon
which the Company proposes to issue such New Securities. Each Rights Holder
shall have fifteen (15) days from the date of mailing of any such Notice to
agree in writing to purchase such Rights Holder's Pro Rata Share of such New
Securities for the price and upon the general terms specified in the Notice by
giving written notice to the Company and stating therein the quantity of New
Securities to be purchased (not to exceed such Rights Holder's Pro Rata Share).
If any Rights Holder fails to so agree in writing within such fifteen (15) day
period to purchase such Rights Holder's full Pro Rata Share of an offering of
New Securities (a "Nonpurchasing Holder"), then such Nonpurchasing Holder shall
forfeit the right hereunder to purchase that part of his Pro Rata Share of such
New Securities that he did not so agree to purchase.
3.4 Failure to Exercise. In the event that the Rights Holders
fail to exercise in full the right of first refusal within such fifteen (15) day
period, then the Company shall have 120 days thereafter to sell the New
Securities with respect to which the Rights Holders' rights of first refusal
hereunder were not exercised, at a price and upon general terms not materially
more favorable to the purchasers thereof than specified in the Company's Notice
to the Rights Holders. In the event that the Company has not issued and sold the
New Securities within such 120 day period, then the Company shall not thereafter
issue or sell any New Securities without again first offering such New
Securities to the Rights Holders pursuant to this Section 3.
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3.5 Termination. This right of first refusal shall terminate (and
not be applicable to such terminating transaction) upon the earlier of (i)
immediately before the closing of the first underwritten sale of Common Stock of
the Company to the public pursuant to a registration statement filed with, and
declared effective by, the SEC under the Securities Act, covering the offer and
sale of Common Stock to the public, or (ii) upon (a) the acquisition of all or
substantially all the assets of the Company or (b) an acquisition of the Company
by another corporation or entity by consolidation, merger or other
reorganization in which the holders of the Company's outstanding voting stock
immediately prior to such transaction own, immediately after such transaction,
securities representing less than fifty percent (50%) of the voting power of the
corporation or other entity surviving such transaction.
4. ASSIGNMENT AND AMENDMENT.
4.1 Assignment. Notwithstanding anything herein to the contrary:
(a) Information Rights. The rights of an Investor under
Section 1.1 or 1.2 hereof may be assigned only to a party who acquires from an
Investor (or an Investor's permitted assigns) at least that number of shares of
Preferred Stock and/or an equivalent number (on an as-converted basis) of shares
of Conversion Stock described in Section 1.1 or 1.2 hereof, respectively.
(b) Registration Rights; Refusal Rights. The registration
rights of a Holder under Section 2 hereof and the rights of first refusal of a
Rights Holder under Section 3 hereof may be assigned only to a party who
acquires shares of Preferred Stock issued under any Preferred Stock Purchase
Agreement or pursuant to the Series A Warrants, Series B Warrant, Series C
Warrant or Series D Warrants which are convertible into at least 50,000 shares
of Common Stock and/or an equivalent number (on an as-converted basis) of
Registrable Securities issued upon conversion thereof.
(c) Notice. Notwithstanding Section 4.1(a) and (b) no
party may be assigned any of the foregoing rights unless the Company is given
written notice by the assigning party at the time of such assignment stating the
name and address of the assignee and identifying the securities of the Company
as to which the rights in question are being assigned; and provided further that
any such assignee shall receive such assigned rights subject to all the terms
and conditions of this Agreement, including without limitation the provisions of
this Section 4.
4.2 Amendment of Rights. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Investors (and/or any of their permitted
successors or assigns) holding shares of Preferred Stock and/or Conversion Stock
representing and/or convertible into a majority of all the Investors' Shares (as
defined below); provided, however, that no such amendment shall affect any
Investor in any manner different from other Investors without such Investor's
consent; provided, further, that no such amendment shall affect the rights of
holders of the Company's Series D Preferred Stock without the consent of the
holders of a majority of the Series D Preferred Stock and Common Stock issued
upon conversion of Series D Preferred Stock outstanding. As used herein, the
term "Investors' Shares" shall mean (i) the shares of Common Stock then issuable
upon conversion of all (x) then outstanding shares of Preferred Stock issued
under the any Preferred Stock Purchase Agreement or (y) shares of Preferred
Stock issuable and/or then issued upon exercise of the
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Series A Warrants, the Series B Warrant, the Series C Warrant or the Series D
Warrants, plus (ii) all then outstanding shares of Conversion Stock that were
issued upon the conversion of any shares of Preferred Stock issued under any
Preferred Stock Purchase Agreement, the Series A Warrants, the Series B Warrant,
the Series C Warrant or the Series D Warrants. Any amendment or waiver effected
in accordance with this Section 4.2 shall be binding upon each Investor, each
Holder, each permitted successor or assignee of such Investor or Holder and the
Company.
5. GENERAL PROVISIONS.
5.1 Notices. Any notice, request or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or if deposited in the U.S. mail by registered or
certified mail, return receipt requested, postage prepaid, as follows:
(a) if to an Investor, at such Investor's respective
address as set forth on Exhibit A hereto.
(b) if to the Company, at 1901 Guadalupe Parkway, San
Jose, California 95131.
Any party hereto (and such party's permitted assigns) may
by notice so given change its address for future notices hereunder. Notice shall
conclusively be deemed to have been given when personally delivered or when
deposited in the mail in the manner set forth above.
5.2 Entire Agreement. This Agreement, together with all the
Exhibits hereto, constitutes and contains the entire agreement and understanding
of the parties with respect to the subject matter hereof and supersedes any and
all prior negotiations, correspondence, agreements, understandings, duties or
obligations between the parties respecting the subject matter hereof. This
Agreement will amend and restate the Prior Rights Agreement to read as set forth
herein, when it has been duly executed by parties having the right to so amend
and restate the Prior Rights Agreement.
5.3 Governing Law. This Agreement shall be governed by and
construed exclusively in accordance with the internal laws of the State of
California as applied to agreements among California residents entered into and
to be performed entirely within California, excluding that body of law relating
to conflict of laws and choice of law.
5.4 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, then such provision(s) shall be
excluded from this Agreement and the balance of this Agreement shall be
interpreted as if such provision(s) were so excluded and shall be enforceable in
accordance with its terms.
5.5 Third Parties. Nothing in this Agreement, express or implied,
is intended to confer upon any person, other than the parties hereto and their
successors and assigns, any rights or remedies under or by reason of this
Agreement.
16
<PAGE> 17
5.6 Successors And Assigns. Subject to the provisions of Section
4.1, the provisions of this Agreement shall insure to the benefit of, and shall
be binding upon, the successors and permitted assigns of the parties hereto.
5.7 Captions. The captions to sections of this Agreement have
been inserted for identification and reference purposes only and shall not be
used to construe or interpret this Agreement.
5.8 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
5.9 Costs And Attorneys' Fees. In the event that any action, suit
or other proceeding is instituted concerning or arising out of this Agreement or
any transaction contemplated hereunder, the prevailing party shall recover all
of such party's costs and attorneys' fees incurred in each such action, suit or
other proceeding, including any and all appeals or petitions therefrom.
5.10 Adjustments for Stock Splits, Etc. Wherever in this
Agreement there is a reference to a specific number of shares of Common Stock or
Preferred Stock of the Company of any class or series, then, upon the occurrence
of any subdivision, combination or stock dividend of such class or series of
stock, the specific number of shares so referenced in this Agreement shall
automatically be proportionally adjusted to reflect the affect on the
outstanding shares of such class or series of stock by such subdivision,
combination or stock dividend.
5.11 Aggregation of Stock. All shares held or acquired by
affiliated entities or persons shall be aggregated together for the purpose of
determining the availability of any rights under this Agreement.
5.12 Prior Rights Agreement Superseded and Waived. Pursuant to
Section 4.2 of the Prior Rights Agreement, the undersigned parties who are
parties to such Prior Rights Agreement hereby (i) amend and restate the Prior
Rights Agreement to read in its entirety as set forth in this Agreement, all
with the intent and effect that the Prior Rights Agreement shall be hereby
terminated and entirely replaced and superseded by this Agreement and (ii) waive
any rights under such Prior Rights Agreement or any predecessor to such Prior
Rights Agreement relating to the purchase of the Series D Preferred Stock, or
the Series D Warrants.
[The rest of this page left intentionally blank]
17
<PAGE> 18
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
and year first above written.
THE COMPANY
BROCADE COMMUNICATIONS
SYSTEMS, INC.
By: /s/ Bruce J. Bergman
---------------------------
Name:
-------------------------
Title:
------------------------
SIGNATURE PAGE #1 TO SEVENTH AMENDED AND RESTATED
INVESTOR'S RIGHTS AGREEMENT
18
<PAGE> 19
PREVIOUS INVESTORS WHO ARE NOT ALSO INVESTING
IN THE SECOND SERIES D TRANSACTION
MOHR, DAVIDOW VENTURES IV, L.P. CROSSPOINT VENTURE PARTNERS 1993
By: Fourth MDV Partners, By: /s/ Seth D. Neiman
L.L.C., General Partner ________________________________
____________________________
Name: /s/ Jonathan D. Fei Name: Seth D. Neiman
____________________________ ______________________________
Title: Member Title:_____________________________
___________________________
MDV IV ENTREPRENEURS' CROSSPOINT 1993 ENTREPRENEURS' FUND
NETWORK FUND, L.P.
By: Fourth MDV Partners, By: /s/ Seth D. Neiman
L.L.C., General Partner ________________________________
____________________________
Name: /s/ Jonathan D. Fei Name: Seth D. Neiman
____________________________ ______________________________
Title: Member Title:_____________________________
___________________________
WILLIAM N. JOY VENTURE LENDING & LEASING, INC.
/s/ W. N. Joy By:________________________________
_________________________________
Name:______________________________
Title:_____________________________
JAPAN ASSOCIATED FINANCE CO., LTD.
By: /s/ Mitsumasa Murase
________________________________
Name: Mitsumasa Murase
Title: President
JAFCO Co., Ltd.
Its Executive Partner
SIGNATURE PAGE #2 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
19
<PAGE> 20
BAY PARTNERS SBIC, L.P. J.F. SHEA CO. INC,
By: Bay Management Company 1995
General Partner By: /s/ E. H. SHEA, JR.
----------------------------
By: /s/ [SIG] Name:
-------------------------------- --------------------------
Title: General Partner Title: Vice President
-------------------------
JAFCO R-2 INVESTMENT JAFCO R-3 INVESTMENT
ENTERPRISE PARTNERSHIP ENTERPRISE PARTNERSHIP
By: /s/ MITSUMASA MURASE By: /s/ MITSUMASA MURASE
-------------------------------- ----------------------------
Name: Mitsumasa Murase Name: Mitsumasa Murase
Title: President Title: President
JAFCO Co., Ltd. JAFCO Co., Ltd.
Its Executive Partner Its Executive Partner
LSI LOGIC CORPORATION U.S. INFORMATION TECHNOLOGY
INVESTMENT ENTERPRISE
PARTNERSHIP
By: /s/ R. D. NORBY By: /s/ MITSUMASA MURASE
-------------------------------- ---------------------------
Name: Mitsumasa Murase
Name: R. Douglas Norby Title: President
------------------------------ JAFCO Co., Ltd.
Title: Executive Vice President/CFO Its Executive Partner
-----------------------------
F&W INVESTMENTS 1996 II
By: /s/ JOEL D. KELLER
--------------------------------
Name:
------------------------------
Title:
-----------------------------
SIGNATURE PAGE #3 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
20
<PAGE> 21
WPG ENTERPRISE FUND III, L.P. WEISS, PECK & GREER VENTURE
ASSOCIATES IV, L.P.
By: WPG Venture Partners IV, L.L.C., By: WPG Venture Partners IV, L.L.C.,
General Partner General Partner
By: /s/ Christopher J. Schaepe By: /s/ Christopher J. Schaepe
---------------------------------- ---------------------------------
Christopher J. Schaepe, Christopher J. Schaepe,
Managing Member Managing Member
WEISS, PECK & GREER VENTURE NORWEST EQUITY PARTNERS V
ASSOCIATES IV CAYMAN, L.P. A Minnesota Limited Partnership
By: WPG Venture Advisors, Ltd., By: Itasca Partners V, L.L.P.,
Administrative General Partner General Partner
By: /s/ Ian Dungate By: /s/ Kevin Hall
---------------------------------- ---------------------------------
Ian Dungate, Kevin Hall, Partner,
Director General Partner
(strike out name of non-signatory)
THE JOHN D. HAMM AND IMPERIAL VENTURES, INC.
GRETA R. HAMM TRUST
By: /s/ John Hamm By: /s/ Christian Hobbs
Name:________________________________ Name:_______________________________
Title: Trustee Title: VP
SIGNATURE PAGE #4 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
21
<PAGE> 22
JAFCO CO., LTD.
By: /s/ MITSUMASA MURASE
--------------------------
Name: Mitsumasa Murase
Title: President
JAFCO Co., Ltd.
Its Executive Partner
SIGNATURE PAGE #5 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
22
<PAGE> 23
PREVIOUS INVESTORS WHO ARE INVESTING
IN THE SECOND SERIES D TRANSACTION
ANDREAS V. BECHTOLSHEIM
/s/ Andreas V. Bechtolsheim
- -----------------------------------
TPK UNITRUST
By: /s/ Andreas V. Bechtolsheim
-------------------------------
Andreas V. Bechtolsheim, Trustee
SIGNATURE PAGE #6 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
<PAGE> 24
SECOND SERIES D TRANSACTION INVESTORS
CROSSPOINT VENTURE PARTNERS L.S. 1997 FUND
By: /s/ SETH NEIMAN
------------------------
Name: Seth Neiman
-----------------------
Title: General Partner
----------------------
SIGNATURE PAGE #7 TO SEVENTH AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
<PAGE> 25
EXHIBIT A
LIST OF INVESTORS
<TABLE>
<CAPTION>
INVESTOR NUMBER OF SHARES
<S> <C>
WPG Enterprise Fund III, L.P. 537,111 (Series D)
c/o Weiss, Peck & Greer, LLC 53,711 (Series D Warrants)
555 California Street, Suite 3130
San Francisco, CA 94104
Attn: Christopher J. Schaepe
General Partner
Ph. (415) 622-6864
Fax: (415) 989-5108
Weiss, Peck & Greer Venture 596,453 (Series D)
Associates IV, L.P. 59,645 (Series D Warrants)
c/o Weiss, Peck & Greer, LLC
555 California Street, Suite 3130
San Francisco, CA 94104
Attn: Christopher J. Schaepe
General Partner
Ph. (415) 622-6864
Fax: (415) 989-5108
Weiss, Peck & Greer Venture 77,509 (Series D)
Associates IV Cayman, L.P. 7,750 (Series D Warrants)
c/o Mr. Patrick Keating
BankAmerica Trust & Banking Corporation
(Cayman) Limited
Fort Street
George Town, Grand Cayman
British West Indies
Ph. (345) 949-7888
Fax: (345) 949-7883
WPG Information Services Entrepreneur Fund, 20,762 (Series D)
L.P. 2,076 (Series D Warrants)
c/o Weiss, Peck & Greer, LLC
555 California Street, Suite 3130
San Francisco, CA 94104
Attn: Christopher J. Schaepe
General Partner
Ph. (415) 622-6864
Fax: (415) 989-5108
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
INVESTOR NUMBER OF SHARES
<S> <C>
RHB Management 152,248 (Series D)
373 First Street 15,224 (Series D Warrants)
Los Altos, CA 94022
Attn: Rajiv Bahl
Norwest Equity Partners, V 1,000,000 (Series D)
A Minnesota Limited Partnership 100,000 (Series D Warrants)
245 Lytton Avenue, Suite 250
Palo Alto, CA 94301
Attn: Kevin Hall, Partner
at Norwest Venture Capital
Ph. (415) 321-8000
Fax: (415) 321-8010
The John D. Hamm and 43,253 (Series D)
Greta R. Hamm Trust 4,325 (Series D Warrants)
24292 Elise Court
Los Altos Hills, CA 94024
Attn: John D. Hamm
Bay Partners SBIC, L.P. 114,187 (Series D)
10600 N. De Anza Blvd., Suite 100 666,667 (Series C)
Cupertino, CA 95014 11,418 (Series D Warrants)
Attn: Bay Management Company, 1995
John Freidenrich, General Partner
J.F. Shea Co. Inc. 86,505 (Series D)
655 Brea Canyon Road 333,333 (Series C)
Walnut, CA 91789 8,650 (Series D Warrants)
Attn: Edmond Shea
JAFCO Co., Ltd. (formerly known as Japan 5,190 (Series D)
Associated Finance Co., Ltd.) 26,667 (Series C)
505 Hamilton Avenue, Ste. 310 519 (Series D Warrants)
Palo Alto, CA 94301
Contact: Mitsumasa Murase, President
Tekko Building
1-8-2 Marunouchi, Chiyoda-ku
Tokyo 100, Japan
</TABLE>
2
<PAGE> 27
<TABLE>
<CAPTION>
INVESTOR NUMBER OF SHARES
<S> <C>
JAFCO R-2 Investment Enterprise 10,640 (Series D)
Partnership 54,481 (Series C)
505 Hamilton Avenue, Ste. 310 1,064 (Series D Warrants)
Palo Alto, CA 94301
Attn: Mitsumasa Murase, President
Tekko Building
1-8-2 Marunouchi, Chiyoda-ku
Tokyo 100, Japan
JAFCO R-3 Investment Enterprise 10,122 (Series D)
Partnership 52,185 (Series C)
505 Hamilton Avenue, Ste. 310 1,012 (Series D Warrants)
Palo Alto, CA 94301
Attn: Mitsumasa Murase, President
Tekko Building
1-8-2 Marunouchi, Chiyoda-ku
Tokyo 100, Japan
U.S. Information Technology 103,806 (Series D)
Investment Enterprise Partnership 533,333 (Series C)
505 Hamilton Avenue, Ste. 310 10,380 (Series D Warrants)
Palo Alto, CA 94301
Attn: Mitsumasa Murase, President
Tekko Building
1-8-2 Marunouchi, Chiyoda-ku
Tokyo 100, Japan
Mohr, Davidow Ventures IV, L.P. 315,959 (Series C)
600,000 (Series B)
MDV IV Entrepreneurs' Network Fund, L.P. 13,164 (Series C)
25,000 (Series B)
3000 Sand Hill Road
Building 1, Suite 240
Menlo Park, CA 94028
</TABLE>
3
<PAGE> 28
<TABLE>
<CAPTION>
INVESTOR NUMBER OF SHARES
<S> <C>
Andreas V. Bechtolsheim 105,650 (Series D)
1140 Hamilton Avenue 1,000,000 (Series C)
Palo Alto, CA 94301
William N. Joy 13,164 (Series C)
0057 Sabin Drive 75,000 (Series B)
Aspen, CO 81611
TPK Unitrust 13,164 (Series C)
1140 Hamilton Avenue 25,000 (Series B)
Palo Alto, CA 94301
Crosspoint Venture Partners L.S. 1997 Fund 586,392 (Series D)
Crosspoint Venture Partners 1993 283,932 (Series C)
56,250 (Series B)
Crosspoint 1993 Entrepreneurs' Fund 1,381,906 (Series A)
8,854 (Series C)
One First Street, Suite Two 43,094 (Series A)
Los Altos, CA 94022
LSI Logic Corporation 173,010 (Series D)
1551 McCarthy Blvd. 16,456 (Series C)
Milpitas, CA 95035 31,250 (Series B)
Attn: Dave Sanders 17,301 (Series D Warrants)
F&W Investments 1996 II 3,460 (Series D)
Two Palo Alto Square, Suite 800 1,974 (Series C)
Palo Alto, CA 94306 3,750 (Series B)
346 (Series D Warrants)
Venture Lending & Leasing, Inc. 51,197 (Series A Warrants)
2010 North First Street, Suite 310 17,500 (Series B Warrants)
San Jose, CA 95131
Imperial Ventures, Inc. 34,602 (Series D)
9920 S. La Cienega Blvd., 14th Floor 25,000 (Series C Warrants)
Inglewood, CA 90301 3,460 (Series D Warrants)
Attn: Christian Hobbs
TOTAL 1,476,197 (SERIES A OR EQUIVALENTS)
833,750 (SERIES B OR EQUIVALENTS)
3,358,333 (SERIES C OR EQUIVALENTS)
3,957,781 (SERIES D OR EQUIVALENTS)
</TABLE>
4
<PAGE> 1
EXHIBIT 10.1
BROCADE COMMUNICATIONS SYSTEMS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (the "Agreement") is made as of
___________, 1999, by and between Brocade Communications Systems, Inc. (the
"Company"), a Delaware corporation, and _____________ (the "Indemnitee"), and
shall become effective as of the time the Securities and Exchange Commission
declares effective the Company's Registration Statement on Form S-1 relative to
its initial underwritten public offering of Common Stock.
WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and its
related entities;
WHEREAS, in order to induce Indemnitee to continue to provide services
to the Company, the Company wishes to provide for the indemnification of, and
advancement of expenses to, Indemnitee to the maximum extent permitted by law;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and the Indemnitee and other
directors, officers, employees, agents and fiduciaries of the Company may not be
willing to continue to serve in such capacities without additional protection;
WHEREAS, the Company and Indemnitee recognize the continued difficulty
in obtaining liability insurance for the Company's directors, officers,
employees, agents and fiduciaries, the significant increases in the cost of such
insurance and the general reductions in the coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited; and
WHEREAS, in view of the considerations set forth above, the Company
desires that Indemnitee shall be indemnified by the Company as set forth herein;
NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth
below.
1. Certain Definitions.
(a) "Change in Control" shall mean, and shall be deemed to have
occurred if, on or after the date of this Agreement, (i) any "person" (as such
term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same
<PAGE> 2
proportions as their ownership of stock of the Company, becomes the "beneficial
owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of
securities of the Company representing more than 50% of the total voting power
represented by the Company's then outstanding Voting Securities, (ii) during any
period of two consecutive years, individuals who at the beginning of such period
constitute the Board of Directors of the Company and any new director whose
election by the Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds (2/3) of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least 80% of the total voting
power represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in one
transaction or a series of related transactions) all or substantially all of the
Company's assets.
(b) "Claim" shall mean any threatened, pending or completed action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee in good faith believes might lead to
the institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other.
(c) References to the "Company" shall include, in addition to Brocade
Communications Systems, Inc., any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger to which
Brocade Communications Systems, Inc. (or any of its wholly owned subsidiaries)
is a party which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees, agents or
fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(d) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of any Claim regarding any
Indemnifiable Event and any federal, state, local or foreign
<PAGE> 3
taxes imposed on the Indemnitee as a result of the actual or deemed receipt of
any payments under this Agreement.
(e) "Expense Advance" shall mean an advance payment of Expenses to
Indemnitee pursuant to Section 3(a).
(f) "Indemnifiable Event" shall mean any event or occurrence related
to the fact that Indemnitee is or was a director, officer, employee, agent or
fiduciary of the Company, or any subsidiary of the Company, or is or was serving
at the request of the Company as a director, officer, employee, agent or
fiduciary of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action or inaction on the part of Indemnitee
while serving in such capacity.
(g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(c) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).
(h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(i) "Reviewing Party" shall mean any appropriate person or body
consisting of a member or members of the Company's Board of Directors or any
other person or body appointed by the Board of Directors who is not a party to
the particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
(j) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.
2. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify
Indemnitee to the fullest extent permitted by law if Indemnitee was or is or
becomes a party to or witness or other participant in, or is threatened to be
made a party to or witness or other participant in, any Claim by reason of (or
arising in part out of) any Indemnifiable Event against Expenses, including all
interest, assessments and other charges paid or payable in connection with or in
respect of such Expenses. Such payment of Expenses shall be made by the Company
as soon as practicable but in any event no
<PAGE> 4
later than five (5) business days after written demand by Indemnitee therefor is
presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
obligations of the Company under Section 2(a) shall be subject to the condition
that the Reviewing Party shall not have determined (in a written opinion, in any
case in which the Independent Legal Counsel referred to in Section 2(c) hereof
is involved) that Indemnitee would not be permitted to be indemnified under
applicable law, and (ii) the obligation of the Company to make an Expense
Advance shall be subject to the condition that, if, when and to the extent that
the Reviewing Party determines that Indemnitee would not be permitted to be so
indemnified under applicable law, the Company shall be entitled to be reimbursed
by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts
theretofore paid; provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent jurisdiction to
secure a determination that Indemnitee should be indemnified under applicable
law, any determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expense
Advance until a final judicial determination is made with respect thereto (as to
which all rights of appeal therefrom have been exhausted or lapsed).
Indemnitee's obligation to reimburse the Company for any Expense Advance shall
be unsecured and no interest shall be charged thereon. If there has not been a
Change in Control, the Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), the
Reviewing Party shall be the Independent Legal Counsel. If there has been no
determination by the Reviewing Party or if the Reviewing Party determines that
Indemnitee substantively would not be permitted to be indemnified in whole or in
part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by the Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), then with respect to all matters
thereafter arising concerning the rights of Indemnitee to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel, if desired by Indemnitee, shall be selected by
Indemnitee and approved by the Company (which approval shall not be unreasonably
withheld). Such counsel, among other things, shall render its written opinion to
the Company and Indemnitee as to whether and to what extent Indemnitee would be
permitted to be indemnified under applicable law and the Company agrees to abide
by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
<PAGE> 5
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the Company otherwise determines or (ii) any
Indemnitee shall provide a written statement setting forth in detail a
reasonable objection to such Independent Legal Counsel representing other
Indemnitees.
(d) Mandatory Payment of Expenses. Notwithstanding any other
provision of this Agreement other than Section 10 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
Claim regarding any Indemnifiable Event, Indemnitee shall be indemnified against
all Expenses incurred by Indemnitee in connection therewith.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
(5) business days after written demand by Indemnitee therefor to the Company.
Expenses incurred in defending any proceeding may be advanced by the Company
prior to the final disposition of the proceeding upon receipt of an undertaking
by or on behalf of Indemnitee to repay the Expenses incurred, if it shall be
determined ultimately that Indemnitee is not entitled to be indemnified.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement,
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by applicable law. In addition,
neither the failure of the Reviewing Party to have made a determination as to
whether Indemnitee has met any particular standard of conduct or had any
particular belief, nor an actual determination by the Reviewing Party that
Indemnitee has not met such standard of conduct or did not have such belief,
prior to the commencement of legal proceedings by Indemnitee to secure a
judicial determination that Indemnitee should be indemnified under applicable
law, shall be a defense to Indemnitee's claim or create a presumption that
Indemnitee has not met any particular standard of conduct or did not have any
particular belief.
<PAGE> 6
(d) Notice to Insurers. If, at the time of the receipt by the Company
of a notice of a Claim pursuant to Section 3(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the Indemnitee, all amounts payable as a result of such Claim in
accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
hereunder to pay the Expenses of any Claim the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(not to be unreasonably withheld) upon the delivery to Indemnitee of written
notice of the Company's election so to do. After delivery of such notice,
approval of such counsel by Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to Indemnitee under this Agreement for
any fees of counsel subsequently incurred by Indemnitee with respect to the same
Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's
separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the
employment of separate counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's separate counsel
shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify the Indemnitee to
the fullest extent permitted by law, notwithstanding that such indemnification
is not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its board of directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 9(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any other agreement, any
vote of stockholders or disinterested directors, the General Corporation Law of
the State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though Indemnitee may have ceased
to serve in such capacity.
<PAGE> 7
5. No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, bylaw or otherwise) of the amounts otherwise indemnifiable
hereunder.
6. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
7. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
8. Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
9. Exceptions. Notwithstanding any other provision of this Agreement,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
omissions or transactions from which Indemnitee may not be indemnified under
applicable law.
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be.
<PAGE> 8
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect, and whether by purchase, merger,
consolidation or otherwise) to all, substantially all, or a substantial part, of
the business or assets of the Company, by written agreement in form and
substance satisfactory to Indemnitee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform if no such succession had taken place. This Agreement
shall continue in effect regardless of whether Indemnitee continues to serve as
a director, officer, employee, agent or fiduciary (as applicable) of the Company
or of any other enterprise at the Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless as a part of such action a court
of competent jurisdiction over such action determines that each of the material
assertions made by Indemnitee as a basis for such action were not made in good
faith or were frivolous. In the event of an action instituted by or in the name
of the Company under this Agreement to enforce or interpret any of the terms of
this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee in defense of such action (including costs and expenses incurred with
respect to Indemnitee's counterclaims and cross-claims made in such action),
<PAGE> 9
and shall be entitled to the advancement of Expenses with respect to such
action, unless as a part of such action a court having jurisdiction over such
action determines that each of Indemnitee's material defenses to such action
were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its
provisions construed and enforced in accordance with the laws of the State of
Delaware as applied to contracts between Delaware residents entered into and to
be performed entirely within the State of Delaware.
18. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination
or cancellation of this Agreement shall be effective unless it is in writing
signed by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed to be or shall constitute a waiver of any other
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations,
<PAGE> 10
commitments, understandings and agreements relating to the subject matter hereof
between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries or affiliated entities.
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this
Indemnification Agreement as of the date first above written.
"COMPANY" BROCADE COMMUNICATIONS SYSTEMS, INC.
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Address: 1901 Guadalupe Parkway
San Jose, CA 95131
-------------------------------
"INDEMNITEE"
-------------------------------
Address:
--------------------------------
--------------------------------
--------------------------------
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC.
INDEMNIFICATION AGREEMENT]
<PAGE> 1
EXHIBIT 10.2
BROCADE COMMUNICATIONS SYSTEMS, INC.
1995 EQUITY INCENTIVE PLAN
As Adopted August 24, 1995
and amended on March 21, 1996, July 18, 1996, November 25, 1996, and
August 28, 1997
1. PURPOSE. The purpose of the Plan is to provide incentives to attract, retain
and motivate eligible persons whose present and potential contributions are
important to the success of the Company, its Parent, Subsidiaries and
Affiliates, by offering them an opportunity to participate in the Company's
future performance through awards of Options, Restricted Stock and Stock
Bonuses. Capitalized terms not defined in the text are defined in Section 24.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the
total number of Shares reserved and available for grant and issuance pursuant to
the Plan shall be 3,807,000 Shares. Subject to Sections 2.2 and 18, Shares shall
again be available for grant and issuance in connection with future Awards under
the Plan that: (a) are subject to issuance upon exercise of an Option but cease
to be subject to such Option for any reason other than exercise of such Option,
(b) are subject to an Award granted hereunder but are forfeited or are
repurchased by the Company at the original issue price, or (c) are subject to an
Award that otherwise terminates without Shares being issued.
2.2 Adjustment of Shares. In the event that the number of outstanding
Shares is changed by a stock dividend, recapitalization, stock split, reverse
stock split, subdivision, combination, reclassification or similar change in the
capital structure of the Company without consideration, then (a) the number of
Shares reserved for issuance under the Plan, (b) the Exercise Prices of and
number of Shares subject to outstanding Options, and (c) the number of Shares
subject to other outstanding Awards shall be proportionately adjusted, subject
to any required action by the Board or the shareholders of the Company and
compliance with applicable securities laws; provided, however, that fractions of
a Share shall not be issued but shall either be paid in cash at Fair Market
Value or shall be rounded up to the nearest Share, as determined by the
Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to
employees (including officers and directors who are also employees) of the
Company or of a Parent or Subsidiary of the Company. All other Awards may be
granted to employees, officers, directors, consultants, independent contractors
and advisers of the Company or any Parent, Subsidiary or Affiliate of the
Company; provided such consultants, contractors and advisers render bona fide
services not in connection with the offer and sale of securities in a
capital-raising transaction. A person may be granted more than one Award under
the Plan.
<PAGE> 2
4. ADMINISTRATION.
4.1 Committee Authority. The Plan shall be administered by the Committee
or the Board acting as the Committee. Subject to the general purposes, terms and
conditions of the Plan, and to the direction of the Board, the Committee shall
have full power to implement and carry out the Plan. The Committee shall have
the authority to:
(a) construe and interpret the Plan, any Award Agreement and any
other agreement or document executed pursuant to the Plan;
(b) prescribe, amend and rescind rules and regulations relating to
the Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
(f) determine whether Awards will be granted singly, in combination,
in tandem with, in replacement of, or as alternatives to, other
Awards under the Plan or any other incentive or compensation
plan of the Company or any Parent, Subsidiary or Affiliate of
the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in the Plan, any Award or any Award Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of the Plan.
4.2 Committee Discretion. Any determination made by the Committee with
respect to any Award shall be made in its sole discretion at the time of grant
of the Award or, unless in contravention of any express term of the Plan or
Award, at any later time, and such determination shall be final and binding on
the Company and all persons having an interest in any Award under the Plan. The
Committee may delegate to one or more officers of the Company the authority to
grant an Award under the Plan to Participants who are not Insiders of the
Company.
4.3 Exchange Act Requirements. If the Company is subject to the Exchange
Act, the Company will take appropriate steps to comply with the disinterested
director requirements of Section 16(b) of the Exchange Act, including but not
limited to, the appointment by the Board of a Committee consisting of not less
than two persons (who are members of the Board), each of whom is a Disinterested
Person.
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<PAGE> 3
5. OPTIONS. The Committee may grant Options to eligible persons and shall
determine whether such Options shall be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under the Plan shall be
evidenced by an Award Agreement which shall expressly identify the Option as an
ISO or NQSO ("Stock Option Agreement"), and be in such form and contain such
provisions (which need not be the same for each Participant) as the Committee
shall from time to time approve, and which shall comply with and be subject to
the terms and conditions of the Plan.
5.2 Date of Grant. The date of grant of an Option shall be the date on
which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
the Plan will be delivered to the Participant within a reasonable time after the
granting of the Option.
5.3 Exercise Period. Options shall be exercisable within the times or
upon the events determined by the Committee as set forth in the Stock Option
Agreement; provided, however, that no Option shall be exercisable after the
expiration of ten (10) years from the date the Option is granted, and provided
further that no Option granted to a person who directly or by attribution owns
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent
Shareholder") shall be exercisable after the expiration of five (5) years from
the date the Option is granted. The Committee also may provide for the exercise
of Options to become exercisable at one time or from time to time, periodically
or otherwise, in such number or percentage as the Committee determines.
5.4 Exercise Price. The Exercise Price shall be determined by the
Committee when the Option is granted and may be not less than 85% of the Fair
Market Value of the Shares on the date of grant; provided that (i) the Exercise
Price of an ISO shall be not less than 100% of the Fair Market Value of the
Shares on the date of grant and (ii) the Exercise Price of any Option granted to
a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value
of the Shares on the date of grant. Payment for the Shares purchased may be made
in accordance with Section 8 of the Plan.
5.5 Method of Exercise. Options may be exercised only by delivery to the
Company of a written stock option exercise agreement (the "Exercise Agreement")
in a form approved by the Committee (which need not be the same for each
Participant), stating the number of Shares being purchased, the restrictions
imposed on the Shares, if any, and such representations and agreements regarding
Participant's investment intent and access to information, if any, as may be
required or desirable by the Company to comply with applicable securities laws,
together with payment in full of the Exercise Price for the number of Shares
being purchased.
5.6 Termination. Notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option shall always be subject to the
following:
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<PAGE> 4
(a) If the Participant is Terminated for any reason except death or
Disability, then Participant may exercise such Participant's
Options only to the extent that such Options would have been
exercisable upon the Termination Date no later than three (3)
months after the Termination Date (or such shorter time period,
but not less than thirty (30) days, as may be specified in the
Stock Option Agreement), but in any event, no later than the
expiration date of the Options.
(b) If the Participant is terminated because of death or Disability
(or the Participant dies within three (3) months of such
termination), then Participant's Options may be exercised only
to the extent that such Options would have been exercisable by
Participant on the Termination Date and must be exercised by
Participant (or Participant's legal representative or authorized
assignee) no later than twelve (12) months after the Termination
Date (or such shorter time period, but not less than six (6)
months, as may be specified in the Stock Option Agreement), but
in any event no later than the expiration date of the Options.
5.7 Limitations on Exercise. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as
of the date of grant) of Shares with respect to which ISOs are exercisable for
the first time by a Participant during any calendar year (under the Plan or
under any other incentive stock option plan of the Company or any Affiliate,
Parent or Subsidiary of the Company) shall not exceed $100,000. If the Fair
Market Value of Shares on the date of grant with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year exceeds
$100,000, the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year shall be ISOs and the Options for the amount
in excess of $100,000 that become exercisable in that calendar year shall be
NQSOs. In the event that the Code or the regulations promulgated thereunder are
amended after the Effective Date of the Plan to provide for a different limit on
the Fair Market Value of Shares permitted to be subject to ISOs, such different
limit shall be automatically incorporated herein and shall apply to any Options
granted after the effective date of such amendment.
5.9 Modification, Extension or Renewal. The Committee may modify, extend
or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of Participant, impair any of Participant's rights under any
Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered shall be treated in accordance with Section 424(h)
of the Code. The Committee may reduce the Exercise Price of outstanding Options
without the consent of Participants affected by a written notice to them;
provided, however, that the Exercise Price may not be reduced below the minimum
Exercise Price that would be permitted under Section 5.4 of the Plan for Options
granted on the date the action is taken to reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in the
Plan, no term of the Plan relating to ISOs shall be interpreted, amended or
altered, nor shall any discretion or
4
<PAGE> 5
authority granted under the Plan be exercised, so as to disqualify the Plan
under Section 422 of the Code or, without the consent of the Participant
affected, to disqualify any ISO under Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell
to an eligible person Shares that are subject to restrictions. The Committee
shall determine to whom an offer will be made, the number of Shares the person
may purchase, the price to be paid (the "Purchase Price"), the restrictions to
which the Shares shall be subject, and all other terms and conditions of the
Restricted Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a Restricted
Stock Award made pursuant to the Plan shall be evidenced by an Award Agreement
("Restricted Stock Purchase Agreement") that shall be in such form (which need
not be the same for each Participant) as the Committee shall from time to time
approve, and shall comply with and be subject to the terms and conditions of the
Plan. The offer of the Restricted Stock shall be accepted by the Participant's
execution and delivery of the Restricted Stock Purchase Agreement and full
payment for the Shares to the Company within thirty (30) days from the date of
the Restricted Stock Purchase Agreement is delivered to the person. If such
person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within thirty (30) days,
then the offer shall terminate, unless otherwise determined by the Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
Restricted Stock Award shall be determined by the Committee and shall be at
least 85% of the Fair Market Value of the Shares on the date the Restricted
Stock Award is granted, except in the case of a sale to a Ten Percent
Shareholder, in which case the Purchase Price shall be 100% of the Fair Market
Value. Payment of the Purchase Price may be made in accordance with Section 8 of
the Plan.
6.3 Restrictions. Restricted Stock Awards shall be subject to such
restrictions as the Committee may impose. The Committee may provide for the
lapse of such restrictions in installments and may accelerate or waive such
restrictions, in whole or part, based on length of service, performance or such
other factors or criteria as the Committee may determine; provided that
Restricted Stock Awards containing restrictions which are subject to lapse at a
rate of less than 20% of the shares per year may be granted only to employees of
the Company earning at least $60,000 per year and having adequate sophistication
and sufficient empowerment to enable such employees to achieve the performance
goals.
7. STOCK BONUSES.
7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which
may consist of Restricted Stock) for services rendered to the Company or any
Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be awarded for
past services already rendered to the Company, or any Parent, Subsidiary or
Affiliate of the Company pursuant to an Award Agreement (the "Stock Bonus
Agreement") that shall be in such form (which need not be the same for each
Participant) as the Committee shall from time to time approve, and shall comply
with and be subject to the terms and conditions of the Plan. A Stock Bonus may
be awarded upon satisfaction of such performance goals as are set out in advance
in Participant's individual
5
<PAGE> 6
Award Agreement (the "Performance Stock Bonus Agreement") that shall be in such
form (which need not be the same for each Participant) as the Committee shall
from time to time approve, and shall comply with and be subject to the terms and
conditions of the Plan. Stock Bonuses may vary from Participant to Participant
and between groups of Participants, and may be based upon the achievement of the
Company, Parent, Subsidiary or Affiliate and/or individual performance factors
or upon such other criteria as the Committee may determine; provided, however,
that performance-based bonuses that do not vest at least as to 20% of the shares
per year shall be restricted to individuals earnings at least $60,000 per year
and having adequate sophistication and sufficient empowerment to enable such
individuals to achieve the performance goals.
7.2 Terms of Stock Bonuses. The Committee shall determine the number of
Shares to be awarded to the Participant and whether such Shares shall be
Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of
performance goals pursuant to a Performance Stock Bonus Agreement, then the
Committee shall determine: (a) the nature, length and starting date of any
period during which performance is to be measured (the "Performance Period") for
each Stock Bonus; (b) the performance goals and criteria to be used to measure
the performance, if any; (c) the number of Shares that may be awarded to the
Participant; and (d) the extent to which such Stock Bonuses have been earned.
Performance Periods may overlap and Participants may participate simultaneously
with respect to Stock Bonuses that are subject to different Performance Periods
and different performance goals and other criteria. The number of Shares may be
fixed or may vary in accordance with such performance goals and criteria as may
be determined by the Committee. The Committee may adjust the performance goals
applicable to the Stock Bonuses to take into account changes in law and
accounting or tax rules and to make such adjustments as the Committee deems
necessary or appropriate to reflect the impact of extraordinary or unusual
items, events or circumstances to avoid windfalls or hardships.
7.3 Form of Payment. The earned portion of a Stock Bonus may be paid
currently or on a deferred basis with such interest or dividend equivalent, if
any, as the Committee may determine. Payment may be made in the form of cash,
whole Shares, including Restricted Stock, or a combination thereof, either in a
lump sum payment or in installments, all as the Committee shall determine.
7.4 Termination During Performance Period. If a Participant is
Terminated during a Performance Period for any reason, then such Participant
shall be entitled to payment (whether in Shares, cash or otherwise) with respect
to the Stock Bonus only to the extent earned as of the date of Termination in
accordance with the Performance Stock Bonus Agreement, unless the Committee
shall determine otherwise.
8. PAYMENT FOR SHARE PURCHASES.
8.1 Payment. Payment for Shares purchased pursuant to the Plan may be
made in cash (by check) or, where expressly approved for the Participant by the
Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
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<PAGE> 7
(b) by surrender of Shares that either: (1) have been owned by
Participant for more than six (6) months and have been paid for
within the meaning of SEC Rule 144 (and, if such shares were
purchased from the Company by use of a promissory note, such
note has been fully paid with respect to such Shares); or (2)
were obtained by Participant in the public market;
(c) by tender of a full recourse promissory note having such terms
as may be approved by the Committee and bearing interest at a
rate sufficient to avoid imputation of income under Sections 483
and 1274 of the Code; provided, however, that Participants who
are not employees of the Company shall not be entitled to
purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares;
(d) by waiver of compensation due or accrued to Participant for
services rendered;
(e) by tender of property;
(f) with respect only to purchases upon exercise of an Option, and
provided that a public market for the Company's stock exists:
(1) through a "same day sale" commitment from Participant and
a broker-dealer that is a member of the National
Association of Securities Dealers (an "NASD Dealer")
whereby the Participant irrevocably elects to exercise the
Option and to sell a portion of the Shares so purchased to
pay for the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to forward
the Exercise Price directly to the Company; or
(2) through a "margin" commitment from Participant and an NASD
Dealer whereby Participant irrevocably elects to exercise
the Option and to pledge the Shares so purchased to the
NASD Dealer in a margin account as security for a loan
from the NASD Dealer in the amount of the Exercise Price,
and whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the exercise price
directly to the Company;
or
(g) by any combination of the foregoing.
8.2 Loan Guarantees. The Committee may help the Participant pay for
Shares purchased under the Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
9. WITHHOLDING TAXES.
9.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under the Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements
7
<PAGE> 8
prior to the delivery of any certificate or certificates for such Shares.
Whenever, under the Plan, payments in satisfaction of Awards are to be made in
cash, such payment shall be net of an amount sufficient to satisfy federal,
state, and local withholding tax requirements.
9.2 Stock Withholding. When, under applicable tax laws, a Participant
incurs tax liability in connection with the exercise or vesting of any Award
that is subject to tax withholding and the Participant is obligated to pay the
Company the amount required to be withheld, the Committee may in its sole
discretion, allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to be withheld, determined on the date that the amount of tax to be
withheld is to be determined (the "Tax Date"). All elections by a Participant to
have Shares withheld for this purpose shall be made in writing in a form
acceptable to the Committee and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, then except as provided below, the election shall be
irrevocable as to the particular Shares as to which the election
is made;
(c) all elections shall be subject to the consent or disapproval of
the Committee;
(d) if the Participant is an Insider and if the Company is subject
to Section 16(b) of the Exchange Act: (1) the election may not
be made within six (6) months of the date of grant of the Award,
except as otherwise permitted by SEC Rule 16b-3(e) under the
Exchange Act, and (2) either (A) the election to use stock
withholding must be irrevocably made at least six (6) months
prior to the Tax Date (although such election may be revoked at
any time at least six (6) months prior to the Tax Date) or (B)
the exercise of the Option or election to use stock withholding
must be made in the ten (10) day period beginning on the third
day following the release of the Company's quarterly or annual
summary statement of sales or earnings;
(e) in the event that the Tax Date is deferred until six (6) months
after the delivery of Shares under Section 83(b) of the Code,
the Participant shall receive the full number of Shares with
respect to which the exercise occurs, but such Participant shall
be unconditionally obligated to tender back to the Company the
proper number of Shares on the Tax Date.
10. PRIVILEGES OF STOCK OWNERSHIP.
10.1 Voting and Dividends. No Participant shall have any of the rights
of a shareholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant shall
be a shareholder and have all the rights of a shareholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become
8
<PAGE> 9
entitled to receive with respect to such Shares by virtue of a stock dividend,
stock split or any other change in the corporate or capital structure of the
Company shall be subject to the same restrictions as the Restricted Stock;
provided, further, that the Participant shall have no right to retain such stock
dividends or stock distributions with respect to Shares that are later
repurchased at the Participant's original Purchase Price pursuant to Section 12.
10.2 Financial Statements. The Company shall provide financial
statements to each Participant prior to such Participant's purchase of Shares
under the Plan, and to each Participant annually during the period such
Participant has Awards outstanding; provided, however, the Company shall not be
required to provide such financial statements to Participants whose services in
connection with the Company assure them access to equivalent information.
11. TRANSFERABILITY. Awards granted under the Plan, and any interest therein,
shall not be transferable or assignable by Participant, and may not be made
subject to execution, attachment or similar process, otherwise than by will or
by the laws of descent and distribution or as consistent with the specific Plan
and Award Agreement provisions relating thereto. During the lifetime of the
Participant an Award shall be exercisable only by the Participant, and any
elections with respect to an Award, may be made only by the Participant.
12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may
reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of
first refusal to purchase all Shares that a Participant (or a subsequent
transferee) may propose to transfer to a third party, and/or (b) a right to
repurchase all, or if the Participant consents a portion, of the Shares held by
a Participant following such Participant's Termination at any time within ninety
(90) days after the later of Participant's Termination Date and the date
Participant purchases Shares under the Plan, for cash or cancellation of
purchase money indebtedness, at: (A) with respect to Shares that are "Vested"
(as defined in the Award Agreement), the higher of: (l) Participant's original
Purchase Price, or (2) the Fair Market Value of such Shares on Participant's
Termination Date, provided, such right of repurchase terminates when the
Company's securities become publicly traded; or (B) with respect to Shares that
are not "Vested" (as defined in the Award Agreement), at the Participant's
original Purchase Price, provided, that except with respect to Awards granted to
employees of the Company earning at least $60,000 per year and having adequate
sophistication and sufficient empowerment to enable such employees to achieve
the performance goals, the right to repurchase at the original Purchase Price
lapses at the rate of at least 20% per year over 5 years from the date the
Shares were purchased, and if the right to repurchase is assignable, the
assignee must pay the Company, upon assignment of the right to repurchase, cash
equal to the excess of the Fair Market Value of the Shares over the original
Purchase Price.
13. CERTIFICATES. All certificates for Shares or other securities delivered
under the Plan shall be subject to such stock transfer orders, legends and other
restrictions as the Committee may deem necessary or advisable, including
restrictions under any applicable federal, state or foreign securities law, or
any rules, regulations and other requirements of the SEC or any stock exchange
or automated quotation system upon which the Shares may be listed.
14. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's
Shares, the Committee may require the Participant to deposit all certificates
representing Shares,
9
<PAGE> 10
together with stock powers or other instruments of transfer approved by the
Committee, appropriately endorsed in blank, with the Company or an agent
designated by the Company to hold in escrow until such restrictions have lapsed
or terminated, and the Committee may cause a legend or legends referencing such
restrictions to be placed on the certificates. Any Participant who is permitted
to execute a promissory note as partial or full consideration for the purchase
of Shares under the Plan shall be required to pledge and deposit with the
Company all or part of the Shares so purchased as collateral to secure the
payment of Participant's obligation to the Company under the promissory note;
provided, however, that the Committee may require or accept other or additional
forms of collateral to secure the payment of such obligation and, in any event,
the Company shall have full recourse against the Participant under the
promissory note notwithstanding any pledge of the Participant's Shares or other
collateral. In connection with any pledge of the Shares, Participant shall be
required to execute and deliver a written pledge agreement in such form as the
Committee shall from time to time approve. The Shares purchased with the
promissory note may be released from the pledge on a prorata basis as the
promissory note is paid.
15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time
to time, authorize the Company, with the consent of the respective Participants,
to issue new Awards in exchange for the surrender and cancellation of any or all
outstanding Awards. The Committee may at any time buy from a Participant an
Award previously granted with payment in cash, Shares (including Restricted
Stock) or other consideration, based on such terms and conditions as the
Committee and the Participant shall agree.
16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed, as they are in effect on the date of grant of the
Award and also on the date of exercise or other issuance. Notwithstanding any
other provision in the Plan, the Company shall have no obligation to issue or
deliver certificates for Shares under the Plan prior to (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable, and/or (b) completion of any registration or other qualification
of such shares under any state or federal law or ruling of any governmental body
that the Company determines to be necessary or advisable. The Company shall be
under no obligation to register the Shares with the SEC or to effect compliance
with the registration, qualification or listing requirements of any state
securities laws, stock exchange or automated quotation system, and the Company
shall have no liability for any inability or failure to do so.
17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted under the
Plan shall confer or be deemed to confer on any Participant any right to
continue in the employ of, or to continue any other relationship with, the
Company or any Parent, Subsidiary or Affiliate of the Company or limit in any
way the right of the Company or any Parent, Subsidiary or Affiliate of the
Company to terminate Participant's employment or other relationship at any time,
with or without cause.
10
<PAGE> 11
18. CORPORATE TRANSACTIONS.
18.1 Assumption or Replacement of Awards by Successor. In the event of
(a) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders of
the Company and the Awards granted under the Plan are assumed or replaced by the
successor corporation, which assumption shall be binding on all Participants),
(b) a dissolution or liquidation of the Company, (c) the sale of substantially
all of the assets of the Company, or (d) any other transaction which qualifies
as a "corporate transaction" under Section 424(a) of the Code wherein the
shareholders of the Company give up all of their equity interest in the Company
(except for the acquisition, sale or transfer of all or substantially all of the
outstanding shares of the Company) any or all outstanding Awards may be assumed
or replaced by the successor corporation (if any), which assumption or
replacement shall be binding on all Participants. In the alternative, the
successor corporation may substitute equivalent Awards or provide substantially
similar consideration to Participants as was provided to shareholders (after
taking into account the existing provisions of the Awards). The successor
corporation may also issue, in place of outstanding Shares of the Company held
by the Participant, substantially similar shares or other property subject to
repurchase restrictions no less favorable to the Participant.
In the event such successor corporation, if any, refuses to assume or
substitute the Options, as provided above, pursuant to a transaction described
in this Subsection 18.1, such Awards shall expire in connection with such
transaction at such time and such conditions as the Board shall determine.
18.2 Other Treatment of Awards. Subject to any greater rights granted to
Participants under the foregoing provisions of this Section 18, in the event of
the occurrence of any transaction described in Section 18.1, any outstanding
Awards shall be treated as provided in the applicable agreement or plan of
merger, consolidation, dissolution, liquidation, sale of assets or other
"corporate transaction."
18.3 Assumption of Awards by the Company. The Company, from time to
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under the Plan in substitution of
such other company's award, or (b) assuming such award as if it had been granted
under the Plan if the terms of such assumed award could be applied to an Award
granted under the Plan. Such substitution or assumption shall be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under the Plan if the other company had applied the rules of
the Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award shall remain unchanged
(except that the exercise price and the number and nature of Shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
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<PAGE> 12
19. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become effective on the
date that it is adopted by the Board (the "Effective Date"). The Plan shall be
approved by the shareholders of the Company (excluding Shares issued pursuant to
this Plan), consistent with applicable laws, within twelve months before or
after the Effective Date. Upon the Effective Date, the Board may grant Awards
pursuant to the Plan; provided, however, that: (a) no Option may be exercised
prior to initial shareholder approval of the Plan; (b) no Option granted
pursuant to an increase in the number of Shares approved by the Board shall be
exercised prior to the time such increase has been approved by the shareholders
of the Company; and (c) in the event that shareholder approval is not obtained
within the time period provided herein, all Awards granted hereunder shall be
cancelled, any Shares issued pursuant to any Award shall be cancelled and any
purchase of Shares hereunder shall be rescinded. After the Company becomes
subject to Section 16(b) of the Exchange Act, the Company will comply with the
requirements of Rule 16b-3 (or its successor), as amended, with respect to
shareholder approval.
20. TERM OF PLAN. The Plan will terminate ten (10) years from the Effective Date
or, if earlier, the date of shareholder approval.
21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or
amend the Plan in any respect, including without limitation amendment of any
form of Award Agreement or instrument to be executed pursuant to the Plan;
provided, however, that the Board shall not, without the approval of the
shareholders of the Company, amend the Plan in any manner that requires such
shareholder approval pursuant to the Code or the regulations promulgated
thereunder as such provisions apply to ISO plans or pursuant to the Exchange Act
or Rule 16b-3 (or its successor), as amended, thereunder.
22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board,
the submission of the Plan to the shareholders of the Company for approval, nor
any provision of the Plan shall be construed as creating any limitations on the
power of the Board to adopt such additional compensation arrangements as it may
deem desirable, including, without limitation, the granting of stock options and
bonuses otherwise than under the Plan, and such arrangements may be either
generally applicable or applicable only in specific cases.
23. GOVERNING LAW. The Plan and all agreements, documents and instruments
entered into pursuant to the Plan shall be governed by and construed in
accordance with the internal laws of the State of California, excluding that
body of law pertaining to conflict of laws.
24. DEFINITIONS. As used in the Plan, the following terms shall have the
following meanings:
"Affiliate" means any corporation that directly, or indirectly through
one or more intermediaries, controls or is controlled by, or is under common
control with, another corporation, where "control" (including the terms
"controlled by" and "under common control with") means the possession, direct or
indirect, of the power to cause the direction of the management and policies of
the corporation, whether through the ownership of voting securities, by contract
or otherwise.
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<PAGE> 13
"Award" means any award under the Plan, including any Option, Restricted
Stock or Stock Bonus.
"Award Agreement" means, with respect to each Award, the signed written
agreement between the Company and the Participant setting forth the terms and
conditions of the Award.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means the committee appointed by the Board to administer the
Plan, or if no committee is appointed, the Board.
"Company" means Brocade Communications Systems, Inc., a corporation
organized under the laws of the State of California or any successor
corporation.
"Disability" means a permanent or total disability, whether temporary or
permanent, partial or total, within the meaning of Section 22(e)(3) of the Code
or a temporary or partial disability as determined by the Committee.
"Disinterested Person" means a director who has not, during the period
that person is a member of the Committee and for one year prior to service as a
member of the Committee, been granted or awarded equity securities pursuant to
the Plan or any other plan of the Company or any Parent, Subsidiary or Affiliate
of the Company, except in accordance with the requirements set forth in Rule
16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC
under Section 16(b) of the Exchange Act, as such rule is amended from time to
time and as interpreted by the SEC.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exercise Price" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"Fair Market Value" means, as of any date, the value of a share of the
Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its last reported sale price on the Nasdaq National
Market or, if no such reported sale takes place on such date, the
average of the closing bid and asked prices;
(b) if such Common Stock is publicly traded and is then listed on a
national securities exchange, the last reported sale price or, if
no such reported sale takes place on such date, the average of
the closing bid and asked prices on the principal national
securities exchange on which the Common Stock is listed or
admitted to trading;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a
national securities exchange, the
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<PAGE> 14
average of the closing bid and asked prices on such date, as
reported by The Wall Street Journal, for the over-the-counter
market; or
(d) if none of the foregoing is applicable, by the Board of
Directors of the Company in good faith.
"Insider" means an officer or director of the Company or any other
person whose transactions in the Company's Common Stock are subject to Section
16 of the Exchange Act.
"Option" means an award of an option to purchase Shares pursuant to
Section 5.
"Parent" means any corporation (other than the Company) in an unbroken
chain of corporations ending with the Company, if at the time of the granting of
an Award under the Plan, each of such corporations other than the Company owns
stock possessing 50% or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"Participant" means a person who receives an Award under the Plan.
"Plan" means this Brocade Communications Systems, Inc., 1995 Equity
Incentive Plan, as amended from time to time.
"Restricted Stock Award" means an award of Shares pursuant to Section 6.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means shares of the Company's Common Stock reserved for
issuance under the Plan, as adjusted pursuant to Sections 2 and 15, and any
successor security.
"Stock Bonus" means an award of Shares, or cash in lieu of Shares,
pursuant to Section 7.
"Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if, at the time of
granting of the Award, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
"Termination" or "Terminated" means, for purposes of the Plan with
respect to a Participant, that the Participant has ceased to provide services as
an employee, director, consultant, independent contractor or adviser, to the
Company or a Parent, Subsidiary or Affiliate of the Company, except in the case
of sick leave, military leave, or any other leave of absence approved by the
Committee, provided, that such leave is for a period of not more than ninety
(90) days, or reinstatement upon the expiration of such leave is guaranteed by
contract or statute. The Committee shall have sole discretion to determine
whether a Participant has ceased to provide services and the effective date on
which the Participant ceased to provide services (the "Termination Date").
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<PAGE> 15
BROCADE COMMUNICATIONS SYSTEMS, INC.
1995 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is made and entered
into as of the date of grant set forth below (the "Date of Grant") by and
between Brocade Communications Systems, Inc., a California corporation (the
"Company"), and the participant named below ("Participant"). Capitalized terms
not defined herein shall have the meaning ascribed to them in the Company's
Equity Incentive Plan (the "Plan").
<TABLE>
<S> <C>
PARTICIPANT:
-------------------------------------------------
SOCIAL SECURITY NUMBER:
-------------------------------------------------
ADDRESS:
-------------------------------------------------
TOTAL OPTION SHARES:
-------------------------------------------------
EXERCISE PRICE PER SHARE:
-------------------------------------------------
DATE OF GRANT:
-------------------------------------------------
FIRST VESTING DATE:
-------------------------------------------------
EXPIRATION DATE:
-------------------------------------------------
TYPE OF STOCK OPTION
(CHECK ONE): [ ] INCENTIVE STOCK OPTION
[ ] NONQUALIFIED STOCK OPTION
</TABLE>
1. GRANT OF OPTION. The Company hereby grants to Participant an
option (the "Option") to purchase the total number of shares of Common Stock of
the Company set forth above (the "Shares") at the Exercise Price Per Share set
forth above (the "Exercise Price"), subject to all of the terms and conditions
of this Agreement and the Plan. If designated as an Incentive Stock Option
above, the Option is intended to qualify as an "incentive stock option" ("ISO")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
<PAGE> 16
2. EXERCISE PERIOD.
2.1 Exercise Period of Option. Provided Participant continues to
provide services to the Company or any Subsidiary, Parent or Affiliate of the
Company throughout the specified period, the Option will become vested and
exercisable as to portions of the Shares as follows: (a) This Option shall not
vest nor be exercisable with respect to any of the Shares until the First
Vesting Date set forth on page 1 hereof (the "First Vesting Date"); (b) on the
First Vesting Date the Option will become vested and exercisable as to
twenty-five percent (25%) of the Shares and (c) thereafter at the end of each
full succeeding month the Option shall become vested and exercisable as to two
and eighty-three one thousandths percent (2.083%) of the Shares. If application
of the vesting percentage causes a fractional Share, such Share shall be rounded
down to a whole Share.
2.2 Expiration. The Option shall expire on the Expiration Date
set forth above and must be exercised, if at all, on or before the Expiration
Date.
3. TERMINATION.
3.1 Termination for Any Reason Except Death or Disability. If
Participant is Terminated for any reason, except death or Disability, the
Option, to the extent (and only to the extent) that it would have been
exercisable by Participant on the Termination Date, may be exercised by
Participant no later than three (3) months after the Termination Date, but in
any event no later than the Expiration Date.
3.2 Termination Because of Death or Disability. If Participant
is Terminated because of death or Disability of Participant, the Option, to the
extent that it is exercisable by Participant on the Termination Date, may be
exercised by Participant (or Participant's legal representative) no later than
twelve (12) months after the Termination Date, but in any event no later than
the Expiration Date.
3.3 No Obligation to Employ. Nothing in the Plan or this
Agreement shall confer on Participant any right to continue in the employ of, or
other relationship with, the Company or any Parent, Subsidiary or Affiliate of
the Company, or limit in any way the right of the Company or any Parent,
Subsidiary or Affiliate of the Company to terminate Participant's employment or
other relationship at any time, with or without cause.
4. MANNER OF EXERCISE.
4.1 Stock Option Exercise Agreement. To exercise this Option,
Participant (or in the case of exercise after Participant's death, Participant's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement substantially in the
form attached hereto as Exhibit A, or in such other form as may be approved by
the Company from time to time (the "Exercise Agreement"), which shall set forth,
inter alia, Participant's election to exercise the Option, the number of Shares
being purchased, any restrictions imposed on the Shares and any representations,
warranties and agreements regarding Participant's investment intent and access
to information as
<PAGE> 17
may be required by the Company to comply with applicable securities laws. If
someone other than Participant exercises the Option, then such person must
submit documentation reasonably acceptable to the Company that such person has
the right to exercise the Option.
4.2 Limitations on Exercise. The Option may not be exercised
unless such exercise is in compliance with all applicable federal and state
securities laws, as they are in effect on the date of exercise. The Option may
not be exercised as to fewer than 100 Shares unless it is exercised as to all
Shares as to which the Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by full
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) at the discretion of the Committee, by surrender of
shares of the Company's Common Stock that either: (1)
have been owned by Participant for more than six (6)
months and have been paid for within the meaning of SEC
Rule 144 and, if such shares were purchased from the
Company by use of a promissory note, such note has been
fully paid with respect to such shares); or (2) were
obtained by Participant in the open public market; and
(3) are clear of all liens, claims, encumbrances or
security interests;
(c) by waiver of compensation due or accrued to Participant
for services rendered;
(d) provided that a public market for the Company's stock
exists, (1) through a "same day sale" commitment from
Participant and a broker-dealer that is a member of the
National Association of Securities Dealers (an "NASD
Dealer") whereby Participant irrevocably elects to
exercise the Option and to sell a portion of the Shares
so purchased to pay for the Exercise Price and whereby
the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the
Company, or (2) through a "margin" commitment -- from
Participant and an NASD Dealer whereby Participant
irrevocably elects to exercise the Option and to pledge
the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in
the amount of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares
to forward the Exercise Price directly to the Company;
or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares upon
exercise of the Option, Participant must pay or provide for any applicable
federal, state and local
<PAGE> 18
withholding obligations of the Company. If the Committee permits, Participant
may provide for payment of withholding taxes upon exercise of the Option by
requesting that the Company retain Shares with a Fair Market Value equal to the
minimum amount of taxes required to be withheld. In such case, the Company shall
issue the net number of Shares to the Participant by deducting the Shares
retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise Agreement and
payment are in form and substance satisfactory to counsel for the Company, the
Company shall issue the Shares registered in the name of Participant,
Participant's authorized assignee, or Participant's legal representative, and
shall deliver certificates representing the Shares with the appropriate legends
affixed thereto.
5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option is
an ISO, and if Participant sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of (1) the date two years
after the Date of Grant, and (2) the date one year after transfer of such Shares
to Participant upon exercise of the Option, Participant shall immediately notify
the Company in writing of such disposition. Participant agrees that Participant
may be subject to income tax withholding by the Company on the compensation
income recognized by Participant from the early disposition by payment in cash
or out of the current wages or other compensation payable to Participant.
6. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of the Option and
the issuance and transfer of Shares shall be subject to compliance by the
Company and Participant with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer. Participant understands that the Company is under no obligation to
register or qualify the Shares with the Securities and Exchange Commission, any
state securities commission or any stock exchange to effect such compliance.
7. NONTRANSFERABILITY OF OPTION. The Option may not be transferred in
any manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of Participant only by Participant. The terms
of the Option shall be binding upon the executors, administrators, successors
and assigns of Participant.
8. TAX CONSEQUENCES. Set forth below is a brief summary as of the Date
of Grant of some of the federal and California tax consequences of exercise of
the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE
SHARES.
8.1 Exercise of ISO. If the Option qualifies as an ISO, there
will be no regular federal or California income tax liability upon the exercise
of the Option, although the excess, if any, of the fair market value of the
Shares on the date of exercise over the Exercise Price will be treated as a tax
preference item for federal income tax purposes and may subject the Participant
to the alternative minimum tax in the year of exercise.
<PAGE> 19
8.2 Exercise of Nonqualified Stock Option. If the Option does
not qualify as an ISO, there may be a regular federal and California income tax
liability upon the exercise of the Option. Participant will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the fair market value of the Shares on the date of exercise
over the Exercise Price. The Company will be required to withhold from
Participant's compensation or collect from Participant and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
8.3 Disposition of Shares. If the Shares are held for more than
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of the Option and, in the case of an ISO, are disposed of more than two
years after the Date of Grant, any gain realized on disposition of the Shares
will be treated as long term capital gain for federal and California income tax
purposes. If Shares purchased under an ISO are disposed of within the applicable
one year or two year period, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent
of the excess, if any, of the Fair Market Value of the Shares on the date of
exercise over the Exercise Price. The Company may be required to withhold from
Participant's compensation or collect from Participant and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
9. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of the
rights of a shareholder with respect to any Shares until Participant exercises
the Option and pays the Exercise Price.
10. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Participant or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Participant.
11. ENTIRE AGREEMENT. The Plan is incorporated herein by reference. This
Agreement and the Plan constitute the entire agreement of the parties and
supersede all prior undertakings and agreements with respect to the subject
matter hereof.
12. NOTICES. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to the
Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing and
addressed to Participant at the address indicated above or to such other address
as such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon: personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by rapifax or telecopier.
13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement. This Agreement shall be binding upon and inure to the
benefit of the successors
<PAGE> 20
and assigns of the Company. Subject to the restrictions on transfer set forth
herein, this Agreement shall be binding upon Participant and Participant's
heirs, executors, administrators, legal representatives, successors and assigns.
14. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California as such laws are applied
to agreements between California residents entered into and to be performed
entirely within California.
15. ACCEPTANCE. Participant hereby acknowledges receipt of a copy of
the Plan and this Agreement. Participant has read and understands the terms and
provisions thereof, and accepts the Option subject to all the terms and
conditions of the Plan and this Agreement. Participant acknowledges that there
may be adverse tax consequences upon exercise of the Option or disposition of
the Shares and that Participant should consult a tax adviser prior to such
exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in duplicate by its duly authorized representative and Participant has
executed this Agreement in duplicate as of the Date of Grant.
BROCADE COMMUNICATIONS
SYSTEMS, INC. PARTICIPANT
By:
--------------------------------------- -----------------------------
(Signature)
- ------------------------------------------ -----------------------------
(Please print name) (Please print name)
- ------------------------------------------
(Please print title)
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC. STOCK OPTION AGREEMENT]
<PAGE> 21
EXHIBIT A
BROCADE COMMUNICATIONS SYSTEMS, INC.
1995 EQUITY INCENTIVE PLAN
STOCK OPTION EXERCISE AGREEMENT
This Exercise Agreement is made and entered into as of
______________, 19___ (the "Effective Date") by and between Brocade
Communications Systems, Inc., a California corporation (the "Company"), and the
purchaser named below (the "Purchaser"). Capitalized terms not defined herein
shall have the meaning ascribed to them in the Company's 1995 Equity Incentive
Plan (the "Plan").
<TABLE>
<S> <C>
PURCHASER:
-------------------------------------------------
SOCIAL SECURITY NUMBER:
-------------------------------------------------
ADDRESS:
-------------------------------------------------
-------------------------------------------------
TOTAL NUMBER OF SHARES:
-------------------------------------------------
PURCHASE PRICE PER SHARE:
-------------------------------------------------
TOTAL PURCHASE PRICE:
-------------------------------------------------
DATE OF GRANT:
-------------------------------------------------
TYPE OF OPTION:
[ ] INCENTIVE STOCK OPTION
[ ] NONQUALIFIED STOCK OPTION
</TABLE>
1. EXERCISE OF OPTION.
1.1 EXERCISE. Pursuant to exercise of that certain option
("Option") granted to Purchaser under the Plan and subject to the terms and
conditions of this Agreement, Purchaser hereby purchases from the Company, and
the Company hereby sells to Purchaser, the total number of shares set forth
above ("Shares") of the Company's Common Stock at the Purchase Price Per Share
set forth above for a Total Purchase Price set forth above (the "Purchase
Price"). As used in this Agreement, the term "Shares" refers to the Shares
purchased
<PAGE> 22
under this Exercise Agreement and includes all securities received (a) in
replacement of the Shares, (b) as a result of stock dividends or stock splits
with respect to the Shares, and (c) all securities received in replacement of
the Shares in a merger, recapitalization, reorganization or similar corporate
transaction.
1.2 TITLE TO SHARES. The exact spelling of the name(s) under
which Purchaser will take title to the Shares is:
Purchaser desires to take title to the Shares as follows:
[ ] Individual, as separate property
[ ] Husband and wife, as community property
[ ] Joint Tenants
[ ] Alone or with spouse as trustee(s) of the following trust
(including date):
---------------------------------------------------------------
---------------------------------------------------------------
[ ] Other; please specify:
---------------------------------------
---------------------------------------------------------------
1.3 PAYMENT. Purchaser hereby delivers payment of the Purchase
Price in the manner permitted in the Stock Option Agreement as follows (check
and complete as appropriate):
[ ] in cash in the amount of $____________, receipt of
which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to Purchaser
in the amount of $__________;
[ ] at the discretion of the Committee, by delivery of
_________ fully-paid, nonassessable and vested shares of
the Common Stock of the Company owned by Purchaser for
at least six (6) months prior to the date hereof which
have been paid for within the meaning of SEC Rule 144,
if purchased by use of a promissory note, such note has
been fully paid with respect to such vested shares), or
obtained by Purchaser in the open public market, and
owned free and clear of all liens, claims, encumbrances
or security interests, valued at the current Fair Market
Value of $___________ per share; or
[ ] by the waiver hereby of compensation due or accrued for
services rendered in the amount of $_________.
<PAGE> 23
2. DELIVERY.
2.1 DELIVERIES BY PURCHASER. Purchaser hereby delivers to the
Company (i) this Exercise Agreement, (ii) two (2) copies of a blank Stock Power
and Assignment Separate from Stock Certificate in the form of Exhibit 1 attached
hereto (the "Stock Powers"), both executed by Purchaser (and Purchaser's spouse,
if any), (iii) if Purchaser is married, a Consent of Spouse in the form of
Exhibit 2 attached hereto (the "Spouse Consent") executed by Purchaser's spouse,
and (iv) the Purchase Price.
2.2 DELIVERIES BY THE COMPANY. Upon its receipt of the Purchase
Price and all the documents to be executed and delivered by Purchaser to the
Company under Section 2.1, the Company will issue a duly executed stock
certificate evidencing the Shares in the name of Purchaser, to be placed in
escrow as provided in Section 10 until expiration or termination of the
Company's Right of First Refusal described in Section 8.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to the Company that:
3.1 AGREES TO TERMS OF THE PLAN. Purchaser has received a copy
of the Plan and the Stock Option Agreement, has read and understands the terms
of the Plan, the Stock Option Agreement and this Exercise Agreement, and agrees
to be bound by their terms and conditions. Purchaser acknowledges that there may
be adverse tax consequences upon exercise of the Option or disposition of the
Shares, and that Purchaser should consult a tax adviser prior to such exercise
or disposition.
3.2 PURCHASE FOR OWN ACCOUNT FOR INVESTMENT. Purchaser is
purchasing the Shares for Purchaser's own account for investment purposes only
and not with a view to, or for sale in connection with, a distribution of the
Shares within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"). Purchaser has no present intention of selling or otherwise
disposing of all or any portion of the Shares and no one other than Purchaser
has any beneficial ownership of any of the Shares.
3.3 ACCESS TO INFORMATION. Purchaser has had access to all
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
3.4 UNDERSTANDING OF RISKS. Purchaser is fully aware of: (i) the
highly speculative nature of the investment in the Shares; (ii) the financial
hazards involved; (iii) the lack of liquidity of the Shares and the restrictions
on transferability of the Shares (e.g., that Purchaser may not be able to sell
or dispose of the Shares or use them as collateral for loans); (iv) the
qualifications and backgrounds of the management of the Company; and (v) the tax
consequences of investment in the Shares. Purchaser is capable of evaluating the
merits and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
<PAGE> 24
3.5 NO GENERAL SOLICITATION. At no time was Purchaser presented
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
4. COMPLIANCE WITH SECURITIES LAWS.
4.1 COMPLIANCE WITH FEDERAL SECURITIES LAWS. Purchaser
understands and acknowledges that the Shares have not been registered with the
Securities and Exchange Commission ("SEC") under the Securities Act and that,
notwithstanding any other provision of the Stock Option Agreement to the
contrary, the exercise of any rights to purchase any Shares is expressly
conditioned upon compliance with the Securities Act and all applicable state
securities laws. Purchaser agrees to cooperate with the Company to ensure
compliance with such laws. The Shares are being issued under the Securities Act
pursuant to (the Company will check the applicable box):
[ ] the exemption provided by SEC Rule 701;
[ ] the exemption provided by SEC Rule 504;
[ ] Section 4(2) of the Securities Act;
[ ] other: ____________________________.
4.2 COMPLIANCE WITH CALIFORNIA SECURITIES LAWS. THE SALE OF THE
SECURITIES THAT ARE THE SUBJECT OF THIS EXERCISE AGREEMENT, IF NOT YET QUALIFIED
WITH THE CALIFORNIA COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH
QUALIFICATION, IS SUBJECT TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH
SECURITIES, AND THE RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE
PARTIES TO THIS EXERCISE AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED OR AN EXEMPTION BEING AVAILABLE.
5. RESTRICTED SECURITIES.
5.1 NO TRANSFER UNLESS REGISTERED OR EXEMPT. Purchaser understands
that Purchaser may not transfer any Shares unless such Shares are registered
under the Securities Act or qualified under applicable state securities laws or
unless, in the opinion of counsel to the Company, exemptions from such
registration and qualification requirements are available. Purchaser understands
that only the Company may file a registration statement with the SEC and that
the Company is under no obligation to do so with respect to the Shares.
Purchaser has also been advised that exemptions from registration and
qualification may not be available or may not permit Purchaser to transfer all
or any of the Shares in the amounts or at the times proposed by Purchaser.
5.2 SEC RULE 144. In addition, Purchaser has been advised that SEC
Rule 144 promulgated under the Securities Act, which permits certain limited
sales of unregistered securities, is not presently available with respect to the
Shares and, in any event, requires that the
<PAGE> 25
Shares be held for a minimum of two years, and in certain cases three years,
after they have been purchased and paid for (within the meaning of Rule 144).
Purchaser understands that Rule 144 may indefinitely restrict transfer of the
Shares so long as Purchaser remains an "affiliate" of the Company or if "current
public information" about the Company (as defined in Rule 144) is not publicly
available.
5.3 SEC RULE 701. The Shares may become freely tradeable by
non-affiliates if issued pursuant to SEC Rule 701 promulgated under the
Securities Act (under limited conditions regarding the method of sale) 90 days
after the first sale of Common Stock of the Company to the general public
pursuant to a registration statement filed with and declared effective by the
SEC, subject to the lengthier market standoff agreement contained in Section 7
of this Exercise Agreement or any other agreement entered into by Purchaser.
Affiliates must comply with the provisions (other than the holding period
requirements) of Rule 144.
5.4 STATE LAW RESTRICTIONS ON TRANSFER. Purchaser understands that
transfer of the Shares may be restricted by Section 260.141.11 of the Rules of
the California Commissioner of Corporations, a copy of which is attached hereto
as Exhibit 3, and that the certificate(s) representing the Shares may bear a
legend to that effect.
6. RESTRICTIONS ON TRANSFERS.
6.1 DISPOSITION OF SHARES. Purchaser hereby agrees that Purchaser
shall make no disposition of the Shares (other than as permitted by this
Agreement) unless and until:
(a) Purchaser shall have notified the Company of the
proposed disposition and provided a written summary of the terms and conditions
of the proposed disposition;
(b) Purchaser shall have complied with all requirements
of this Exercise Agreement applicable to the disposition of the Shares;
(c) Purchaser shall have provided the Company with
written assurances, in form and substance satisfactory to counsel for the
Company, that (i) the proposed disposition does not require registration of the
Shares under the Securities Act or (ii) all appropriate action necessary for
compliance with the registration requirements of the Securities Act or of any
exemption from registration available under the Securities Act (including Rule
144) has been taken; and
(d) Purchaser shall have provided the Company with
written assurances, in form and substance satisfactory to the Company, that the
proposed disposition will not result in the contravention of any transfer
restrictions applicable to the Shares pursuant to the provisions of the
Commissioner Rules identified in Section 4.2.
6.2 RESTRICTION ON TRANSFER. Purchaser shall not transfer, assign,
grant a lien or security interest in, pledge, hypothecate, encumber or otherwise
dispose of any of the Shares which are subject to the Company's Right of First
Refusal, except as permitted by this Agreement.
<PAGE> 26
6.3 TRANSFEREE OBLIGATIONS. Each person (other than the Company) to
whom the Shares are transferred by means of one of the permitted transfers
specified in this Agreement must, as a condition precedent to the validity of
such transfer, acknowledge in writing to the Company that such person is bound
by the provisions of this Exercise Agreement and that the transferred shares are
subject to (i) the Company's Right of First Refusal granted hereunder and (ii)
the market stand-off provisions of Section 7, to the same extent such shares
would be so subject if retained by the Purchaser.
7. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
registration of the Company's securities that, upon the request of the Company
or the underwriters managing any public offering of the Company's securities,
Purchaser will not sell or otherwise dispose of any Shares without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed 180 days) after the effective date of such
registration requested by such managing underwriters and subject to all
restrictions as the Company or the underwriters may specify.
8. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Purchaser
or any transferee of such Shares (either being sometimes referred to herein as
the "Holder") may be sold or otherwise transferred (including without limitation
a transfer by gift or operation of law), the Company and/or its assignee(s)
shall have an assignable right of first refusal to purchase the Shares to be
sold or transferred (the "Offered Shares") on the terms and conditions set forth
in this Section (the "Right of First Refusal").
8.1 NOTICE OF PROPOSED TRANSFER. The Holder of the Offered Shares
shall deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer the Offered Shares;
(ii) the name of each proposed bona fide purchaser or other transferee
("Proposed Transferee"); (iii) the number of Offered Shares to be transferred to
each Proposed Transferee; (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Offered Shares (the "Offered
Price"); and (v) that the Holder will offer to sell the Offered Shares to the
Company and/or its assignee(s) at the Offered Price as provided in this Section.
8.2 EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all of the Offered
Shares proposed to be transferred to any one or more of the Proposed Transferees
named in the Notice, at the purchase price determined as specified below.
8.3 PURCHASE PRICE. The purchase price for the Offered Shares
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the cash equivalent value of the
non-cash consideration shall conclusively be deemed to be the value of such
non-cash consideration as determined in good faith by the Company's Board of
Directors.
<PAGE> 27
8.4 PAYMENT. Payment of the purchase price for Offered Shares will
be payable, at the option of the Company and/or its assignee(s) (as applicable),
by check or by cancellation of all or a portion of any outstanding indebtedness
of the Holder to the Company (or to such assignee, in the case of a purchase of
Offered Shares by such assignee) or by any combination thereof. The purchase
price will be paid without interest within sixty (60) days after the Company's
receipt of the Notice, or, at the option of the Company and/or its assignee(s),
in the manner and at the time(s) set forth in the Notice.
8.5 HOLDER'S RIGHT TO TRANSFER. If all of the Offered Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Offered Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 120 days after the date of the
Notice, and provided further, that (i) any such sale or other transfer is
effected in compliance with all applicable securities laws and (ii) the Proposed
Transferee agrees in writing that the provisions of this Section will continue
to apply to the Offered Shares in the hands of such Proposed Transferee. If the
Offered Shares described in the Notice are not transferred to the Proposed
Transferee within such 120 day period, then a new Notice must be given to the
Company, and the Company will again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
8.6 EXEMPT TRANSFERS. Notwithstanding anything to the contrary in
this Section, the following transfers of Shares will be exempt from the Right of
First Refusal: (i) the transfer of any or all of the Shares during Purchaser's
lifetime by gift or on Purchaser's death by will or intestacy to Purchaser's
"immediate family" (as defined below) or to a trust for the benefit of Purchaser
or Purchaser's immediate family, provided that each transferee or other
recipient agrees in a writing satisfactory to the Company that the provisions of
this Section will continue to apply to the transferred Shares in the hands of
such transferee or other recipient; (ii) any transfer of Shares made pursuant to
a statutory merger or statutory consolidation of the Company with or into
another corporation or corporations (except that the Right of First Refusal will
continue to apply thereafter to such Shares, in which case the surviving
corporation of such merger or consolidation shall succeed to the rights of the
Company under this Section unless the agreement of merger or consolidation
expressly otherwise provides); or (iii) any transfer of Shares pursuant to the
winding up and dissolution of the Company. As used herein, the term "immediate
family" will mean Purchaser's spouse, the lineal descendant or antecedent,
father, mother, brother or sister, adopted child or grandchild of the Purchaser
or the Purchaser's spouse, or the spouse of any child, adopted child, grandchild
or adopted grandchild of Purchaser or the Purchaser's spouse.
8.7 TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First
Refusal will terminate as to all Shares on the effective date of the first sale
of Common Stock of the Company to the general public pursuant to a registration
statement filed with and declared effective by the SEC under the Securities Act
(other than a registration statement relating solely to the issuance of Common
Stock pursuant to a business combination or an employee incentive or benefit
plan).
<PAGE> 28
9. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
Exercise Agreement, Purchaser will have all of the rights of a shareholder of
the Company with respect to the Shares from and after the date that Purchaser
delivers payment of the Purchase Price until such time as Purchaser disposes of
the Shares or the Company and/or its assignee(s) exercise(s) the Right of First
Refusal. Upon an exercise of the Right of First Refusal, Purchaser will have no
further rights as a holder of the Shares so purchased upon such exercise, except
the right to receive payment for the Shares so purchased in accordance with the
provisions of this Exercise Agreement, and Purchaser will promptly surrender the
stock certificate(s) evidencing the Shares so purchased to the Company for
transfer or cancellation.
10. ESCROW. As security for Purchaser's faithful performance of this
Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("Escrow Holder"), who is hereby appointed to
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Agreement. Purchaser and the Company agree
that Escrow Holder will not be liable to any party to this Exercise Agreement
(or to any other party) for any actions or omissions unless Escrow Holder is
grossly negligent or intentionally fraudulent in carrying out the duties of
Escrow Holder under this Exercise Agreement. Escrow Holder may rely upon any
letter, notice or other document executed by any signature purported to be
genuine and may rely on the advice of counsel and obey any order of any court
with respect to the transactions contemplated by this Agreement. The Shares will
be released from escrow upon termination of the Right of First Refusal.
11. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
11.1 LEGENDS. Purchaser understands and agrees that the Company
will place the legends set forth below or similar legends on any stock
certificate(s) evidencing the Shares, together with any other legends that may
be required by state or federal securities laws, the Company's Articles of
Incorporation or Bylaws, any other agreement between Purchaser and the Company
or any agreement between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR
UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE
SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR
EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE
REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY
REQUIRE AN OPINION
<PAGE> 29
OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO
THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE
WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON PUBLIC RESALE, TRANSFER, AND RIGHT OF FIRST REFUSAL
OPTIONS HELD BY THE ISSUER AND/OR ITS ASSIGNEE(S) AS SET FORTH IN A
STOCK OPTION EXERCISE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL
HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER
RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES
OF THESE SHARES.
The California Commissioner of Corporations may require that the
following legend also be placed upon the share certificate(s) evidencing
ownership of the Shares:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY,
OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR,
WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE
COMMISSIONER'S RULES.
11.2 STOP-TRANSFER INSTRUCTIONS. Purchaser agrees that, to ensure
compliance with the restrictions imposed by this Agreement, the Company may
issue appropriate "stop-transfer" instructions to its transfer agent, if any,
and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
11.3 REFUSAL TO TRANSFER. The Company will not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares, or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares have been so transferred.
12. TAX CONSEQUENCES. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER'S PURCHASE OR DISPOSITION OF
THE SHARES. PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH ANY TAX
ADVISER PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION
OF THE SHARES AND THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX
ADVICE. Set forth below is a brief summary as of the date of this Exercise
Agreement of some of the federal and California tax consequences of exercise of
the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS
<PAGE> 30
AND REGULATIONS ARE SUBJECT TO CHANGE. PURCHASER SHOULD CONSULT A TAX ADVISER
BEFORE EXECUTING THIS OPTION OR DISPOSING OF THE SHARES.
12.1 EXERCISE OF INCENTIVE STOCK OPTION. If the Option qualifies as
an incentive stock option, there will be no regular federal income tax liability
or California income tax liability upon the exercise of the Option, although the
excess, if any, of the fair market value of the Shares on the date of exercise
over the Purchase Price Per Share will be treated as a tax preference item for
federal income tax purposes and may subject Purchaser to the alternative minimum
tax in the year of exercise.
12.2 EXERCISE OF NONQUALIFIED STOCK OPTION. If the Option does not
qualify as an incentive stock option, there may be a regular federal income tax
liability and a California income tax liability upon the exercise of the Option.
Purchaser will be treated as having received compensation income (taxable at
ordinary income tax rates) equal to the excess, if any, of the fair market value
of the Shares on the date of exercise over the Purchase Price Per Share. The
Company will be required to withhold from Purchaser's compensation or collect
from Purchaser and pay to the applicable taxing authorities an amount equal to a
percentage of this compensation income at the time of exercise.
12.3 DISPOSITION OF SHARES. If the Shares are held for more than
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of the Option and, in the case of an ISO, are disposed of more than two
years after the Option Date of Grant, any gain realized on disposition of the
Shares will be treated as long term capital gain for federal and California
income tax purposes. If Shares purchased under an ISO are disposed of within the
applicable one year or two year period, any gain realized on such disposition
will be treated as compensation income (taxable at ordinary income rates) to the
extent of the excess, if any, of the fair market value of the Shares on the date
of exercise over the Purchase Price Per Share. The Company may be required to
withhold from Purchaser's compensation or collect from Purchaser and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
13. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of
the Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and federal laws and regulations and with
all applicable requirements of any stock exchange or automated quotation system
on which the Company's Common Stock may be listed or quoted at the time of such
issuance or transfer.
14. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement, including its rights to repurchase Shares under the Right
of First Refusal. This Agreement shall be binding upon and inure to the benefit
of the successors and assigns of the Company. Subject to the restrictions on
transfer herein set forth, this Agreement will be binding upon Purchaser and
Purchaser's heirs, executors, administrators, legal representatives, successors
and assigns.
15. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California as
such laws are applied
<PAGE> 31
to agreements between California residents entered into and to be performed
entirely within California. If any provision of this Agreement is determined by
a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain
fully effective and enforceable.
16. NOTICES. Any notice required to be given or delivered to the Company
shall be in writing and addressed to the Corporate Secretary of the Company at
its principal corporate offices. Any notice required to be given or delivered to
Purchaser shall be in writing and addressed to Purchaser at the address
indicated above or to such other address as Purchaser may designate in writing
from time to time to the Company. All notices shall be deemed effectively given
upon personal delivery, three (3) days after deposit in the United States mail
by certified or registered mail (return receipt requested), one (1) business day
after its deposit with any return receipt express courier (prepaid), or one (1)
business day after transmission by rapifax or telecopier.
17. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
18. HEADINGS. The captions and headings of this Agreement are included
for ease of reference only and will be disregarded in interpreting or construing
this Agreement. All references herein to Sections will refer to Sections of this
Agreement.
19. ENTIRE AGREEMENT. The Plan, the Stock Option Agreement and this
Exercise Agreement, together with all its Exhibits, constitute the entire
agreement and understanding of the parties with respect to the subject matter of
this Agreement, and supersede all prior understandings and agreements, whether
oral or written, between the parties hereto with respect to the specific subject
matter hereof.
[REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]
<PAGE> 32
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in duplicate by its duly authorized representative and Purchaser has
executed this Agreement in duplicate as of the Effective Date.
BROCADE COMMUNICATIONS
SYSTEMS, INC. PURCHASER
By: -----------------------------
----------------------------- (Signature)
- -------------------------------- -----------------------------
(Please print Name) (Please print name)
- -------------------------------
(Please print title)
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC.
STOCK OPTION EXERCISE AGREEMENT]
<PAGE> 33
LIST OF EXHIBITS
Exhibit 1: Stock Power and Assignment Separate from Stock Certificate
Exhibit 2: Spouse Consent
Exhibit 3: California Commissioner Rule 260.141.11
Exhibit 4: Copy of Purchaser's Check
<PAGE> 34
EXHIBIT 1
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Stock Option
Exercise Agreement No. ___ dated as of _______________, 19___, (the
"Agreement"), the undersigned hereby sells, assigns and transfers unto
_______________________________, shares of the Common Stock of Brocade
Communications Systems, Inc., a California corporation (the "Company"), standing
in the undersigned's name on the books of the Company represented by Certificate
No(s). ______ delivered herewith, and does hereby irrevocably constitute and
appoint the Secretary of the Company as the undersigned's attorney-in-fact, with
full power of substitution, to transfer said stock on the books of the Company.
THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS
THERETO.
Dated: _______________, 19____
PURCHASER
-----------------------------
(Signature)
-----------------------------
(Please Print Name)
-----------------------------
(Spouse's Signature, if any)
-----------------------------
(Please Print Spouse's Name)
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this Stock Power and Assignment is to enable the Company to
acquire the shares upon exercise of its "Right of First Refusal" set forth in
the Agreement without requiring additional signatures on the part of the
Purchaser or Purchaser's Spouse, if any.
<PAGE> 35
EXHIBIT 2
SPOUSE CONSENT
The undersigned spouse of Purchaser has read, understands, and
hereby approves the Stock Option Exercise Agreement between Purchaser and the
Company (the "Agreement"). In consideration of the Company's granting my spouse
the right to purchase the Shares as set forth in the Agreement, the undersigned
hereby agrees to be irrevocably bound by the Agreement and further agrees that
any community property interest shall similarly be bound by the Agreement. The
undersigned hereby appoints Purchaser as my attorney-in-fact with respect to any
amendment or exercise of any rights under the Agreement.
Date:
---------------------------- -------------------------------
Signature of Purchaser's Spouse
Address:
-------------------------------
-------------------------------
<PAGE> 36
EXHIBIT 3
CALIFORNIA COMMISSIONER RULE 260.141.11
(a) The issuer of any security upon which a restriction on transfer has been
imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy
of this section to be delivered to each issuee or transferee of such security at
the time the certificate evidencing the security is delivered to the issuee or
transferee.
(b) It is unlawful for the holder of any such security to consummate a sale or
transfer of such security, or any interest therein, without the prior written
consent of the Commissioner (until this condition is removed pursuant to Section
260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of the Code or
Section 260.105.14 of these rules:
(4) to the transferor's ancestors, descendants or spouse, or any custodian or
trustee for the account of the transferor or the transferor's ancestors,
descendants, or spouse; or to a transferee by a trustee or custodian for
the account of the transferee or the transferee's ancestors, descendants or
spouse;
(5) to holders of securities of the same class of the same issuer;
(6) by way of gift or donation intervivos or on death;
(7) by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or country
who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign state,
territory or country concerned;
(8) to a broker-dealer licensed under the Code in a principal transaction, or
as an underwriter or member of an underwriting syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien given by the
purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not required;
(10) by way of a sale qualified under Section 25111, 25112, 25113, or 25121 of
the Code, of the securities to be transferred, provided that no order under
Section 25140 or subdivision (a) of Section 25143 is in effect with respect
to such qualification;
(11) by a corporation to a wholly owned subsidiary of such corporation, or by a
wholly owned subsidiary of a corporation to such corporation;
(12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the
Code, provided that no order under Section 25140 or subdivision (a) of
Section 25143 is in effect with respect to such qualification;
(13) between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or the
administrator of the unclaimed property law of another state; or
(15) by the State Controller pursuant to the Unclaimed Property Law or by the
administrator of the unclaimed property law of another state if, in either
such case, such person (i) discloses to potential purchasers at the sale
that transfer of the securities is restricted under this rule, (ii)
delivers to each purchaser a copy of this rule, and (iii) advises the
Commissioner of the name of each purchaser;
(16) by a trustee to a successor trustee when such transfer does not involve a
change in the beneficial ownership of the securities;
(17) by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirements of Section
25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any certificate
evidencing the security issued to such transferee shall contain the legend
required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any transfer
thereof, shall bear on their face a legend, prominently stamped or printed
thereon in capital letters of not less than 10-point size, reading as follows:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFORE, WITHOUT THE
PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF
CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
<PAGE> 37
EXHIBIT 4
COPY OF PURCHASER'S CHECK
<PAGE> 1
EXHIBIT 10.3
BROCADE COMMUNICATIONS SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
AS ADOPTED FEBRUARY 26, 1998
AND AS AMENDED OCTOBER 9, 1998
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options and Restricted Stock. Capitalized
terms not defined in the text are defined in Section 22 hereof. This Plan is
intended to be a written compensatory benefit plan within the meaning of Rule
701 promulgated under the Securities Act.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 17
hereof, the total number of Shares reserved and available for grant and issuance
pursuant to this Plan will be 2,400,000 Shares or such lesser number of Shares
as permitted under Section 260.140.45 of Title 10 of the California Code of
Regulations. Subject to Sections 2.2 and 17 hereof, Shares will again be
available for grant and issuance in connection with future Awards under this
Plan that: (a) are subject to issuance upon exercise of an Option but cease to
be subject to such Option for any reason other than exercise of such Option or
(b) are subject to a Restricted Stock Award that otherwise terminates without
Shares being issued. At all times the Company will reserve and keep available a
sufficient number of Shares as will be required to satisfy the requirements of
all Awards granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of
outstanding shares of the Company's Common Stock is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then (a) the number of Shares reserved for issuance under
this Plan, (b) the Exercise Prices of and number of Shares subject to
outstanding Options and (c) the Purchase Prices of and number of Shares subject
to other outstanding Awards will be proportionately adjusted, subject to any
required action by the Board or the shareholders of the Company and compliance
with applicable securities laws; provided, however, that fractions of a Share
will not be issued but will either be paid in cash at Fair Market Value of such
fraction of a Share or will be rounded down to the nearest whole Share, as
determined by the Committee.
3. ELIGIBILITY. ISOs (as defined in Section 5 hereof) may be granted
only to employees (including officers and directors who are also employees) of
the Company or of a Parent or Subsidiary of the Company. NQSOs (as defined in
Section 5 hereto) and Restricted Stock Awards may be granted to employees,
officers, directors and consultants of the Company or any Parent or Subsidiary
of the Company; provided such consultants render bona fide services not in
connection with the offer and sale of securities in a capital-raising
transaction. A person may be granted more than one Award under this Plan.
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or the Board acting as the Committee. Subject to the general purposes,
terms and conditions of this Plan, and to the direction of the Board, the
Committee will have full power to implement and carry out this Plan. Without
limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement
and any other agreement or document executed pursuant to
this Plan;
(b) prescribe, amend and rescind rules and regulations
relating to this Plan;
<PAGE> 2
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration
subject to Awards;
(f) determine whether Awards will be granted singly, in
combination with, in tandem with, in replacement of, or
as alternatives to, other Awards under this Plan or
awards under any other incentive or compensation plan of
the Company or any Parent or Subsidiary of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of
Awards;
(i) correct any defect, supply any omission, or reconcile
any inconsistency in this Plan, any Award, any Award
Agreement, any Exercise Agreement or any Restricted
Stock Purchase Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for
the administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, and subject to Section 5.9 hereof, at any later time, and such
determination will be final and binding on the Company and on all persons having
an interest in any Award under this Plan. The Committee may delegate to one or
more officers of the Company the authority to grant an Award under this Plan.
5. OPTIONS. The Committee may grant Options to eligible persons and will
determine whether such Options will be Incentive Stock Options within the
meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number
of Shares subject to the Option, the Exercise Price of the Option, the period
during which the Option may be exercised, and all other terms and conditions of
the Option, subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan
will be evidenced by an Award Agreement which will expressly identify the Option
as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and
contain such provisions (which need not be the same for each Participant) as the
Committee may from time to time approve, and which will comply with and be
subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the
date on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable immediately
(subject to repurchase pursuant to Section 11 hereof) or may be exercisable
within the times or upon the events determined by the Committee as set forth in
the Stock Option Agreement governing such Option; provided, however, that no
Option will be exercisable after the expiration of ten (10) years from the date
the Option is granted; and provided further that no ISO granted to a person who
directly or by attribution owns more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any Parent or
Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after
the expiration of five (5) years from the date the ISO is granted. The Committee
also may provide for Options to become exercisable at one time or from time to
time, periodically or otherwise, in such number of Shares or percentage of
Shares as the Committee determines. Subject to earlier termination of the Option
as provided herein, each Participant who is not an officer, director or
consultant of the
-2-
<PAGE> 3
Company or of a Parent or Subsidiary of the Company shall have the right to
exercise an Option granted hereunder at the rate of at least twenty percent
(20%) per year over five (5) years from the date such Option is granted.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant; provided that (a) the Exercise Price of an ISO will not be less than one
hundred percent (100%) of the Fair Market Value of the Shares on the date of
grant and (b) the Exercise Price of any Option granted to a Ten Percent
Shareholder will not be less than one hundred ten percent (110%) of the Fair
Market Value of the Shares on the date of grant. Payment for the Shares
purchased must be made in accordance with Section 7 hereof.
5.5 Method of Exercise. Options may be exercised only by delivery
to the Company of a written stock option exercise agreement (the "EXERCISE
AGREEMENT") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws, together
with payment in full of the Exercise Price, and any applicable taxes, for the
number of Shares being purchased.
5.6 Termination. Subject to earlier termination pursuant to
Sections 17 and 18 hereof and notwithstanding the exercise periods set forth in
the Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except
death, Disability or for Cause, then the Participant may
exercise such Participant's Options only to the extent
that such Options are exercisable upon the Termination
Date and such Options must be exercised by the
Participant, if at all, as to all or some of the Vested
Shares calculated as of the Termination Date, within
three (3) months after the Termination Date (or within
such shorter time period, not less than thirty (30)
days, or within such longer time period, not exceeding
five (5) years, after the Termination Date as may be
determined by the Committee, with any exercise beyond
three (3) months after the Termination Date deemed to be
an NQSO) but in any event, non later than the expiration
date of the Options.
(b) If the Participant is Terminated because of
Participant's death or Disability (or the Participant
dies within three (3) months after a Termination other
than for Cause), then Participant's Options may be
exercised only to the extent that such Options are
exercisable by Participant on the Termination Date and
must be exercised by Participant (or Participant's legal
representative or authorized assignee), if at all, as to
all or some of the Vested Shares calculated as of the
Termination Date, within twelve (12) months after the
Termination Date (or within such shorter time period,
not less than six (6) months, or within such longer time
period, not exceeding five (5) years, after the
Termination Date as may be determined by the Committee,
with any exercise beyond (i) three (3) months after the
Termination Date when the Termination is for any reason
other than the Participant's death or disability, within
the meaning of Section 22(e)(3) of the Code, or (ii)
twelve (12) months after the Termination Date when the
Termination is for Participant's disability, within the
meaning of Section 22(e)(3) of the Code, deemed to be an
NQSO) but in any event no later than the expiration date
of the Options.
(c) If the Participant is terminated for Cause, then
Participant's Options shall expire on such Participant's
Termination Date, or at such later time and on such
conditions as are determined by the Committee.
5.7 Limitations on Exercise. The Committee may specify a
reasonable minimum number of Shares that may be purchased on any exercise of an
Option, provided that such minimum number will not prevent Participant from
exercising the Option for the full number of Shares for which it is then
exercisable.
-3-
<PAGE> 4
5.8 Limitations on ISOs. The aggregate Fair Market Value
(determined as of the date of grant) of Shares with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year (under
this Plan or under any other incentive stock option plan of the Company or any
Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair
Market Value of Shares on the date of grant with respect to which ISOs are
exercisable for the first time by a Participant during any calendar year exceeds
$100,000, then the Options for the first $100,000 worth of Shares to become
exercisable in such calendar year will be ISOs and the Options for the amount in
excess of $100,000 that become exercisable in that calendar year will be NQSOs.
In the event that the Code or the regulations promulgated thereunder are amended
after the Effective Date (as defined in Section 18 hereof) to provide for a
different limit on the Fair Market Value of Shares permitted to be subject to
ISOs, then such different limit will be automatically incorporated herein and
will apply to any Options granted after the effective date of such amendment.
5.9 Modification, Extension or Removal. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. Any outstanding ISO that is modified, extended,
renewed or otherwise altered will be treated in accordance with Section 424(h)
of the Code. Subject to Section 5.10 hereof, the Committee may reduce the
Exercise Price of outstanding Options without the consent of Participants
affected by a written notice to them; provided, however, that the Exercise Price
may not be reduced below the minimum Exercise Price that would be permitted
under Section 5.4 hereof for Options granted on the date the action is taken to
reduce the Exercise Price.
5.10 No Disqualification. Notwithstanding any other provision in
this Plan, no term of this Plan relating to ISOs will be interpreted, amended or
altered, nor will any discretion or authority granted under this Plan be
exercised, so as to disqualify this Plan under Section 422 of the Code or,
without the consent of the Participant affected, to disqualify any ISO under
Section 422 of the Code.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company
to sell to an eligible person Shares that are subject to restrictions. The
Committee will determine to whom an offer will be made, the number of Shares the
person may purchase, the Purchase Price, the restrictions to which the Shares
will be subject, and all other terms and conditions of the Restricted Stock
Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will from
time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The Restricted Stock Award will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If such
person does not execute and deliver the Restricted Stock Purchase Agreement
along with full payment for the Shares to the Company within such thirty (30)
days , then the offer will terminate, unless otherwise determined by the
Committee.
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to
a Restricted Stock Award will be determined by the Committee and will be at
least eighty-five percent (85%) of the Fair Market Value of the Shares on the
date the Restricted Stock Award is granted or at the time the purchase is
consummated, except in the case of a sale to a Ten Percent Shareholder, in which
case the Purchase Price will be one hundred percent (100%) of the Fair Market
Value on the date the Restricted Stock Award is granted or at the time the
purchase is consummated. Payment of the Purchase Price must be made in
accordance with Section 7 hereof.
6.3 Restrictions. Restricted Stock Awards may be subject to the
restrictions set forth in Section 11 hereof or such other restrictions not
inconsistent with Section 25102(o) of the California Corporations Code.
-4-
<PAGE> 5
7. PAYMENT FOR SHARE PURCHASES.
7.1 Payment. Payment for Shares purchased pursuant to this Plan
may be made in cash (by check) or, where expressly approved for the Participant
by the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that: (i) either (A) have been
owned by Participant for more than six (6) months and
have been paid for within the meaning of SEC Rule 144
(and, if such shares were purchased from the Company by
use of a promissory note, such note has been fully paid
with respect to such shares) or (B) were obtained by
Participant in the public market and (ii) are clear of
all liens, claims, encumbrances or security interests.
(c) by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of
income under Sections 483 and 1274 of the Code;
provided, however, that Participants who are not
employees or directors of the Company will not be
entitled to purchase Shares with a promissory note
unless the note is adequately secured by collateral
other than the Shares.
(d) by waiver of compensation due or accrued to the
Participant for services rendered;
(e) with respect only to purchases upon exercise of an
Option, and provided that a public market for the
Company's stock exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member
of the National Association of Securities
Dealers (an "NASD DEALER") whereby the
Participant irrevocably elects to exercise the
Option and to sell a portion of the Shares so
purchased to pay for the Exercise Price, and
whereby the NASD Dealer irrevocably commits upon
receipt of such Shares to forward the Exercise
Price directly to the Company; or
(2) through a "margin" commitment from the
Participant and an NASD Dealer whereby the
Participant irrevocably elects to exercise the
Option and to pledge the Shares so purchased to
the NASD Dealer in a margin account as security
for a loan from the NASD Dealer in the amount of
the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares
to forward the Exercise Price directly to the
Company; or
(f) by any combination of the foregoing.
7.2 Loan Guarantees. The Committee may help the Participant pay
for Shares purchased under this Plan by authorizing a guarantee by the Company
of a third-party loan to the Participant.
8. WITHHOLDING TAXES.
8.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan, payments
in satisfaction of Awards are to be made in cash, such payment will be net of an
amount sufficient to satisfy federal, state, and local withholding tax
requirements.
8.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated to
pay the Company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be issued
that number of Shares having a Fair Market Value equal to the minimum amount
required to
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<PAGE> 6
be withheld, determined on the date that the amount of tax to be withheld is to
be determined. All elections by a Participant to have Shares withheld for this
purpose will be made in accordance with the requirements established by the
Committee for such elections and be in writing in a form acceptable to the
Committee.
9. PRIVILEGES OF STOCK OWNERSHIP.
9.1 Voting and Dividends. No Participant will have any of the
rights of a shareholder with respect to any Shares until the Shares are issued
to the Participant. After Shares are issued to the Participant, the Participant
will be a shareholder and have all the rights of a shareholder with respect to
such Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as the
Restricted Stock; provided, further, that the Participant will have no right to
retain such stock dividends or stock distributions with respect to Unvested
Shares that are repurchased pursuant to Section 11 hereof. The Company will
comply with Section 260.140.1 of Title 10 of the California Code of Regulations
with respect to the voting rights of Common Stock.
9.2 Financial Statements. The company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding, or as otherwise required under Section
260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding
the foregoing, the Company will not be required to provide such financial
statements to Participants when issuance is limited to key employees whose
services in connection with the Company assure them access to equivalent
information.
10. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by Participant, and may not be
made subject to execution, attachment or similar process, otherwise than by will
or by the laws of descent and distribution. During the lifetime of the
Participant an Award will be exercisable only by the Participant or
Participant's legal representative and any elections with respect to an Award,
may be made only by the Participant or Participant's legal representative.
11. RESTRICTIONS OF SHARES.
11.1 Right of First Refusal. At the discretion of the Committee,
the Company may reserve to itself and/or its assignee(s) in the Award Agreement
a right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, unless
otherwise not permitted by Section 25102(o) of the California Corporations Code,
provided, that such right of first refusal terminates upon the Company's initial
public offering of Common Stock pursuant to an effective registration statement
filed under the Securities Act.
11.2 Right of Repurchase. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase Unvested Shares held by a Participant for cash and/or
cancellation of purchase money indebtedness following such Participant's
Termination at any time within the later of ninety (90) days after the
Participant's Termination Date and the date the Participant purchases Shares
under the Plan at the Participant's Exercise Price or Purchase Price, as the
case may be, provided, that unless the Participant is an officer, director or
consultant of the Company or of a Parent or Subsidiary of the Company, such
right of repurchase lapses at the rate of at least twenty percent (20%) per year
over five (5) years from: (a) the date of grant of the Option or (b) in the case
of Restricted Stock, the date the Participant purchases the Shares.
12. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders, legends
and other restrictions as the Committee may deem necessary or advisable,
including restrictions under any applicable federal, state or foreign securities
law, or any rules,, regulations and other requirements of the SEC or any stock
exchange or automated quotation system upon which the Shares may be listed or
quoted.
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<PAGE> 7
13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause a
legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will be
required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligation to the
Company under the promissory note; provided, however, that the Committee may
require or accept other or additional forms of collateral to secure the payment
of such obligation and, in any event, the Company will have full recourse
against the Participant under the promissory note notwithstanding any pledge of
the Participant's Shares or other collateral. In connection with any pledge of
the Shares, Participant will be required to execute and deliver a written pledge
agreement in such form as the Committee will from time to time approve. The
Shares purchased with the promissory note may be released from the pledge on a
pro rata basis as the promissory note is paid.
14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or
from time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and cancellation
of any or all outstanding Awards. The Committee may at any time buy from a
Participant an Award previously granted with payment in cash, shares of Common
Stock of the Company (including Restricted Stock) or other consideration, based
on such terms and conditions as the Committee and the Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is
intended to comply with Section 25102(o) of the California Corporations Code.
Any provision of this Plan which is inconsistent with Section 25102(o) shall,
without further act or amendment by the Company or the Board, be reformed to
comply with the requirements of Section 25102(o). An Award will not be effective
unless such Award is in compliance with all applicable federal and state
securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance. Notwithstanding
any other provision in this Plan, the Company will have no obligation to issue
or deliver certificates for Shares under this Plan prior to (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable, and/or (b) compliance with any exemption, completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company will be under no obligation to register the
Shares with the SEC or to effect compliance with the exemption, registration,
qualification or listing requirements of any state securities laws, stock
exchange or automated quotation system, and the Company will have no liability
for any inability or failure to do so.
16. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the right
of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
Cause.
17. CORPORATE TRANSACTIONS.
17.1 Assumption or Replacement of Awards by Successor or
Acquiring Corporation. In the event of (a) a dissolution or liquidation of the
Company, (b) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders of
the Company or their relative stock holdings and the Awards granted under this
Plan are assumed, converted or replaced by the successor or acquiring
corporation, which assumption, conversion or replacement will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such merger
(other than any shareholder which merges with the
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<PAGE> 8
Company in such merger, or which owns or controls another corporation which
merges, with the Company in such merger) cease to own their shares or other
equity interests in the Company, or (d) the sale of all or substantially all of
the assets of the Company, any or all outstanding Awards may be assumed,
converted or replaced by the successor or acquiring corporation (if any), which
assumption, conversion or replacement will be binding on all Participants. In
the alternative, the successor or acquiring corporation may substitute
equivalent Awards or provide substantially similar consideration to Participants
as was provided to shareholders (after taking into account the existing
provisions of the Awards). The successor or acquiring corporation may also
issue, in place of outstanding Shares of the Company held by the Participant,
substantially similar shares or other property subject to repurchase
restrictions and other provisions no less favorable to the Participant than
those which applied to such outstanding Shares immediately prior to such
transaction described in this Section 17.1. In the event such successor or
acquiring corporation (if any) refuses to assume or substitute Awards, as
provided above, pursuant to a transaction described in this Section 17.1, then
notwithstanding any other provision in this Plan to the contrary, such Awards
will expire on such transaction at such time and on such conditions as the Board
will determine.
17.2 Other Treatment of Awards. Subject to any greater rights
granted to Participants under the foregoing provisions of this Section 17, in
the event of the occurrence of any transaction described in Section 17.1 hereof,
any outstanding Awards will be treated as provided in the applicable agreement
or plan of merger, consolidation, dissolution, liquidation or sale of assets.
17.3 Assumption of Awards by the Company. The Company, from time
to time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under this Plan in substitution of
such other company's award or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective
on the date that it is adopted by the Board (the "EFFECTIVE DATE"). This Plan
will be approved by the shareholders of the Company (excluding Shares issued
pursuant to this Plan), consistent with applicable laws, within twelve (12)
months before or after the Effective Date. Upon the Effective Date, the Board
may grant Awards pursuant to this Plan; provided, however, that: (a) no Option
may be exercised prior to initial shareholder approval of this Plan; (b) no
Option granted pursuant to an increase in the number of Shares approved by the
Board shall be exercised prior to the time such increase has been approved by
the shareholders of the Company; (c) in the event that initial shareholder
approval is not obtained within the time period provided herein, all Awards
granted hereunder shall be canceled, any Shares issued pursuant to any Award
shall be canceled and any purchase of Shares issued hereunder shall be
rescinded; and (d) Awards granted pursuant to an increase in the number of
Shares approved by the Board which increase is not timely approved by
shareholders shall be canceled, any Shares issued pursuant to any such Awards
shall be canceled, and any purchase of Shares subject to any such Award shall be
rescinded. In the event that initial shareholder approval is not obtained within
twelve (12) months before or after the date this Plan is adopted by the Board,
all Awards granted hereunder will be canceled, any Shares issued pursuant to any
Award will be canceled and any purchase of Shares hereunder will be rescinded.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
hereunder shall be governed by and construed in accordance with the laws of the
State of California excluding that body of law pertaining to conflict of laws.
20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.9 hereof, the
Board may at any time terminate or amend this Plan in any respect, including
without limitation amendment of any form of
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<PAGE> 9
Award Agreement or instrument to be executed pursuant to this Plan; provided,
however, that the Board will not, without the approval of the shareholders of
the Company, amend this Plan in any manner that requires such shareholder
approval pursuant to Section 25102(o) of the California Corporations Code or the
Code or the regulations promulgated thereunder as such provisions apply to ISO
plans.
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
Board, the submission of this Plan to the shareholders of the Company for
approval, nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and other equity awards otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
22. DEFINITIONS. As used in this Plan, the following terms will have the
following meanings:
"AWARD" means any award under this Plan, including any Option or
Restricted Stock Award.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the business
of the Company or a Parent or Subsidiary of the Company, the Participant's
conviction for, or guilty plea to, a felony or a crime involving moral
turpitude, any willful perpetration by the Participant of a common law fraud,
(ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company or any Parent or Subsidiary of the Company and the Participant regarding
the terms of the Participant's service as an employee, director or consultant to
the Company or a Parent or Subsidiary of the Company, including without
limitation, the willful and continued failure or refusal of the Participant to
perform the material duties required of such Participant as an employee,
director or consultant of the Company or a Parent or Subsidiary of the Company,
other than as a result of having a Disability, or a breach of any applicable
invention assignment and confidentiality agreement or similar agreement between
the Company and the Participant, (iv) Participant's disregard of the policies of
the Company or any Parent or Subsidiary of the Company so as to cause loss,
damage or injury to the property, reputation or employees of the Company or a
Parent or Subsidiary of the Company, or (v) any other misconduct by the
Participant which is materially injurious to the financial condition or business
reputation of, or is otherwise materially injurious to, the Company or a Parent
or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to
administer this Plan, or if no committee is appointed, the Board.
"COMPANY" means Brocade Communications Systems, Inc., or any
successor corporation.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"EXERCISE PRICE" means the price at which a holder of an Option
may purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share
of the Company's Common Stock determined as follows:
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<PAGE> 10
(a) if such Common Stock is then quoted on the Nasdaq
National Market, its closing price on the Nasdaq
National Market on the date of determination as reported
in The Wall Street Journal;
(b) if such Common Stock is publicly traded and is then
listed on a national securities exchange, its closing
price on the date of determination on the principal
national securities exchange on which the Common Stock
is listed or admitted to trading as reported in The Wall
Street Journal;
(c) if such Common Stock is publicly traded but is not
quoted on the Nasdaq National Market nor listed or
admitted to trading on a national securities exchange,
the average of the closing bid and asked prices on the
date of determination as reported by The Wall Street
Journal (or, if not so reported, as otherwise reported
by any newspaper or other source as the Board may
determine); or
(d) if none of the foregoing is applicable, by the Committee
in good faith.
"OPTION" means an award of an option to purchase Shares pursuant
to Section 5 hereof.
"PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company if each of such
corporations other than the Company owns stock possessing fifty percent (50%) or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain
"PARTICIPANT" means a person who receives an Award under this
Plan
"PLAN" means this Brocade Communications Systems, Inc. 1998
Equity Incentive Plan, as amended from time to time.
"PURCHASE PRICE" means the price at which a Participant may
purchase Restricted Stock
"RESTRICTED STOCK" means Shares purchased pursuant to a
Restricted Stock Award.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to
Section 6 hereof.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's Common Stock reserved for
issuance under this Plan, as adjusted pursuant to Sections 2 and 17 hereof, and
any successor security.
"SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan
with respect to a Participant, that the Participant has for any reason ceased to
provide services as an employee, officer, director or consultant to the Company
or a Parent or Subsidiary of the Company. A Participant will not be deemed to
have ceased to provide services in the case of (i) sick leave, (ii) military
leave, or (iii) any other leave of absence approved by the Committee, provided
that such leave is for a period of not more than ninety (90) days unless
reinstatement (or, in the case of an employee with an ISO, reemployment) upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to formal policy adopted from time to time by the
Company and issued and promulgated in writing. In the case of any Participant on
(i) sick leave, (ii) military leave or (iii) an approved leave of absence, the
Committee may make such provisions respecting suspension of vesting of the Award
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<PAGE> 11
while on leave from the Company or a Parent or Subsidiary of the Company as it
may deem appropriate, except that in no event may an Option be exercised after
the expiration of the term set forth in the Stock Option Agreement. The
Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award
Agreement.
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<PAGE> 12
BROCADE COMMUNICATIONS SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement ("AGREEMENT") is made and entered
into as of the date of grant set forth below (the "DATE OF GRANT") by and
between Brocade Communications Systems, Inc., a California corporation (the
"COMPANY"), and the participant named below ("PARTICIPANT"). Capitalized terms
not defined herein shall have the meaning ascribed to them in the Company's 1998
Equity Incentive Plan (the "PLAN").
PARTICIPANT:
-------------------------------------------------
SOCIAL SECURITY NUMBER:
-------------------------------------------------
ADDRESS:
-------------------------------------------------
-------------------------------------------------
TOTAL OPTION SHARES:
-------------------------------------------------
EXERCISE PRICE PER SHARE:
-------------------------------------------------
DATE OF GRANT:
-------------------------------------------------
FIRST VESTING DATE:
-------------------------------------------------
EXPIRATION DATE:
-------------------------------------------------
(unless earlier terminated under Section 3 below)
TYPE OF STOCK OPTION
(CHECK ONE): [ ] INCENTIVE STOCK OPTION
[ ] NONQUALIFIED STOCK OPTION
1. GRANT OF OPTION. The Company hereby grants to Participant an
option (this "OPTION") to purchase the total number of shares of Common Stock of
the Company set forth above as Total Option Shares (the "SHARES") at the
Exercise Price Per Share set forth above (the "EXERCISE PRICE"), subject to all
of the terms and conditions of this Agreement and the Plan. If designated as an
Incentive Stock Option above, the Option is intended to qualify as an "incentive
stock option" ("ISO") within the meaning of Section 422 of the Internal Revenue
Code of 1986, as amended (the "CODE").
2. EXERCISE PERIOD.
2.1 Exercise Period of Option. Provided Participant
continues to provide services to the Company or any Subsidiary or Parent of the
Company, the Option will become vested and exercisable as to portions of the
Shares as follows: (a) This Option shall not vest nor be exercisable with
respect to any of the Shares until December 7, 1999 (the "FIRST VESTING DATE");
(b) on the First Vesting Date the Option will become vested and exercisable as
to twenty-five percent (25%) of the Shares; and (c) thereafter at the end of
each full succeeding month the Option will become vested and exercisable as to
two and eight thousand three hundred thirty-three one hundred thousandths
percent (2.08333%) of the Shares. If application of the vesting percentage
causes a fractional share, such share shall be rounded down to the nearest whole
share.
<PAGE> 13
2.2 Vesting of Options. Shares that are vested pursuant to
the schedule set forth in Section 2.1 are "VESTED SHARES." Shares that are not
vested pursuant to the schedule set forth in Section 2.1 are "UNVESTED SHARES."
2.3 Expiration. The Option shall expire on the Expiration
Date set forth above or earlier as provided in Section 3 below.
3. TERMINATION.
3.1 Termination for Any Reason Except Death, Disability or
Cause. If Participant is Terminated for any reason, except death, Disability or
for Cause, the Option, to the extent (and only to the extent) that it would have
been exercisable by Participant on the Termination Date, may be exercised by
Participant no later than three (3) months after the Termination Date, but in
any event no later than the Expiration Date.
3.2 Termination Because of Death or Disability. If
Participant is Terminated because of death or Disability of Participant (or
Participant dies within three (3) months of Termination other than because of
Participant's Disability or for Cause), the Option, to the extent that it is
exercisable by Participant on the Termination Date, may be exercised by
Participant (or Participant's legal representative) no later than twelve (12)
months after the Termination Date, but in any event no later than the Expiration
Date. Any exercise beyond (a) three (3) months after the Termination Date when
the Termination is for any reason other than the Participant's death or
disability, within the meaning of Section 22(e)(3) of the Code; or (b) twelve
(12) months after the Termination Date when the termination is for Participant's
disability, within the meaning of Section 22(e)(3) of the Code, is deemed to be
an NQSO.
3.3 Termination for Cause. If Participant is Terminated for
Cause, then the Option will expire on Participant's Termination Date, or at such
later time and on such conditions as are determined by the Committee.
3.4 No Obligation to Employ. Nothing in the Plan or this
Agreement shall confer on Participant any right to continue in the employ of, or
other relationship with, the Company or any Parent or Subsidiary of the Company,
or limit in any way the right of the Company or any Parent or Subsidiary of the
Company to terminate Participant's employment or other relationship at any time,
with or without Cause.
4. MANNER OF EXERCISE.
4.1 Stock Option Exercise Agreement. To exercise this
Option, Participant (or in the case of exercise after Participant's death or
incapacity, Participant's executor, administrator, heir or legatee, as the case
may be) must deliver to the Company an executed stock option exercise agreement
in the form attached hereto as Exhibit A, or in such other form as may be
approved by the Company from time to time (the "EXERCISE AGREEMENT"), which
shall set forth, inter alia, Participant's election to exercise the Option, the
number of Shares being purchased, any restrictions imposed on the Shares and any
representations, warranties and agreements regarding Participant's investment
intent and access to information as may be required by the Company to comply
with applicable securities laws. If someone other than Participant exercises the
Option, then such person must submit documentation reasonably acceptable to the
Company that such person has the right to exercise the Option.
4.2 Limitations on Exercise. The Option may not be
exercised unless such exercise is in compliance with all applicable federal and
state securities laws, as they are in effect on the date of exercise. The Option
may not be exercised as to fewer than one hundred (100) Shares unless it is
exercised as to all Shares as to which the Option is then exercisable.
4.3 Payment. The Exercise Agreement shall be accompanied by
full payment of the Exercise Price for the shares being purchased in cash (by
check), or where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
2
<PAGE> 14
(b) at the discretion of the Committee, by surrender of
shares of the Company's Common Stock that (1) either (A)
have been owned by Participant for more than six (6)
months and have been paid for within the meaning of SEC
Rule 144 (and, if such shares were purchased from the
Company by use of a promissory note, such note has been
fully paid with respect to such shares); or (B) were
obtained by Participant in the open public market; and
(2) are clear of all liens, claims, encumbrances or
security interests;
(c) by waiver of compensation due or accrued to Participant
for services rendered;
(d) provided that a public market for the Company's stock
exists, (1) through a "same day sale" commitment from
Participant and a broker-dealer that is a member of the
National Association of Securities Dealers (an "NASD
DEALER") whereby Participant irrevocably elects to
exercise the Option and to sell a portion of the Shares
so purchased to pay for the Exercise Price and whereby
the NASD Dealer irrevocably commits upon receipt of such
Shares to forward the Exercise Price directly to the
Company, or (2) through a "margin" commitment -- from
Participant and an NASD Dealer whereby Participant
irrevocably elects to exercise the Option and to pledge
the Shares so purchased to the NASD Dealer in a margin
account as security for a loan from the NASD Dealer in
the amount of the Exercise Price, and whereby the NASD
Dealer irrevocably commits upon receipt of such Shares
to forward the Exercise Price directly to the Company;
or
(e) by any combination of the foregoing.
4.4 Tax Withholding. Prior to the issuance of the Shares
upon exercise of the Option, Participant must pay or provide for any applicable
federal, state and local withholding obligations of the Company. If the
Committee permits, Participant may provide for payment of withholding taxes upon
exercise of the Option by requesting that the Company retain Shares with a Fair
Market Value equal to the minimum amount of taxes required to be withheld. In
such case, the Company shall issue the net number of Shares to the Participant
by deducting the Shares retained from the Shares issuable upon exercise.
4.5 Issuance of Shares. Provided that the Exercise
Agreement and payment are in form and substance satisfactory to counsel for the
Company, the Company shall issue the Shares registered in the name of
Participant, Participant's authorized assignee, or Participant's legal
representative, and shall deliver certificates representing the Shares with the
appropriate legends affixed thereto.
5. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
is an ISO, and if Participant sells or otherwise disposes of any of the Shares
acquired pursuant to the ISO on or before the later of (a) the date two (2)
years after the Date of Grant, and (b) the date one (1) year after transfer of
such Shares to Participant upon exercise of the Option, Participant shall
immediately notify the Company in writing of such disposition. Participant
agrees that Participant may be subject to income tax withholding by the Company
on the compensation income recognized by Participant from the early disposition
by payment in cash or out of the current wages or other compensation payable to
Participant.
6. COMPLIANCE WITH LAWS AND REGULATIONS. The Plan and this
Agreement are intended to comply with Section 25102(o) of the California
Corporations Code. Any provision of this Agreement which is inconsistent with
Section 25102(o) shall, without further act or amendment by the Company or the
Board, be reformed to comply with the requirements of Section 25102(o). The
exercise of the Option and the issuance and transfer of Shares shall be subject
to compliance by the Company and Participant with all applicable requirements of
federal and state securities laws and with all applicable requirements of any
stock exchange on which the Company's Common Stock may be listed at the time of
such issuance or transfer. Participant understands that the Company is under no
obligation to register or qualify the Shares with the SEC, any state securities
commission or any stock exchange to effect such compliance.
3
<PAGE> 15
7. NONTRANSFERABILITY OF OPTION. The Option may not be transferred
in any manner other than by will or by the laws of descent and distribution and
may be exercised during the lifetime of Participant only by Participant or in
the event of Participant's incapacity, by Participant's legal representative.
The terms of the Option shall be binding upon the executors, administrators,
successors and assigns of Participant.
8. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Vested Shares
held by Participant or any transferee of such Vested Shares may be sold or
otherwise transferred (including without limitation a transfer by gift or
operation of law), the Company and/or its assignee(s) shall have an assignable
right of first refusal to purchase the Vested Shares to be sold or transferred
on the terms and conditions set forth in the Exercise Agreement (the "Right of
First Refusal"). The Company's Right of First Refusal will terminate when the
Company's securities become publicly traded.
9. TAX CONSEQUENCES. Set forth below is a brief summary as of the
Effective Date of the Plan of some of the federal and California tax
consequences of exercise of the Option and disposition of the Shares. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT
TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION
OR DISPOSING OF THE SHARES.
9.1 Exercise of ISO. If the Option qualifies as an ISO,
there will be no regular federal or California income tax liability upon the
exercise of the Option, although the excess, if any, of the Fair Market Value of
the Shares on the date of exercise over the Exercise Price will be treated as a
tax preference item for federal alternative minimum tax purposes and may subject
the Participant to the alternative minimum tax in the year of exercise.
9.2 Exercise of Nonqualified Stock Option. If the Option
does not qualify as an ISO, there may be a regular federal and California income
tax liability upon the exercise of the Option. Participant will be treated as
having received compensation income (taxable at ordinary income tax rates) equal
to the excess, if any, of the Fair Market Value of the Shares on the date of
exercise over the Exercise Price. If Participant is a current or former employee
of the Company, the Company may be required to withhold from Participant's
compensation or collect from Participant and pay to the applicable taxing
authorities an amount equal to a percentage of this compensation income at the
time of exercise.
9.3 Disposition of Shares. The following tax consequences
may apply upon disposition of the Shares.
(a) Incentive Stock Options. If the Shares are held
for more than twelve (12) months after the date of the transfer of the Shares
pursuant to the exercise of an ISO and are disposed of more than two (2) years
after the Date of Grant, any gain realized on disposition of the Shares will be
treated as long term capital gain for federal and California income tax
purposes. If Shares purchased under an ISO are disposed of within the applicable
one (1) year or two (2) year period, any gain realized on such disposition will
be treated as compensation income (taxable at ordinary income rates) to the
extent of the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price.
(b) Nonqualified Stock Options. If the Shares are
held for more than twelve (12) months after the date of the transfer of the
Shares pursuant to the exercise of an NQSO, any gain realized on disposition of
the Shares will be treated as long term capital gain.
(c) Withholding. The Company may be required to
withhold from the Participant's compensation or collect from the Participant and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income.
10. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of
the rights of a shareholder with respect to any Shares until the Shares are
issued to Participant.
4
<PAGE> 16
11. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Participant or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company and Participant.
12. ENTIRE AGREEMENT. The Plan is incorporated herein by reference.
This Agreement and the Plan constitute the entire agreement of the parties and
supersede all prior undertakings and agreements with respect to the subject
matter hereof.
13. NOTICES. Any notice required to be given or delivered to the
Company under the terms of this Agreement shall be in writing and addressed to
the Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing and
addressed to Participant at the address indicated above or to such other address
as such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon: personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by facsimile, rapifax or telecopier.
14. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights
under this Agreement, including its rights to repurchase Shares under the Right
of First Refusal. This Agreement shall be binding upon and inure to the benefit
of the successors and assigns of the Company. Subject to the restrictions on
transfer set forth herein, this Agreement shall be binding upon Participant and
Participant's heirs, executors, administrators, legal representatives,
successors and assigns.
15. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California as such laws are applied
to agreements between California residents entered into and to be performed
entirely within California. If any provision of this Agreement is determined by
a court of law to be illegal or unenforceable, then such provision will be
enforced to the maximum extent possible and the other provisions will remain
fully effective and enforceable.
16. ACCEPTANCE. Participant hereby acknowledges receipt of a copy of
the Plan and this Agreement. Participant has read and understands the terms and
provisions thereof, and accepts the Option subject to all the terms and
conditions of the Plan and this Agreement. Participant acknowledges that there
may be adverse tax consequences upon exercise of the Option or disposition of
the Shares and that Participant should consult a tax adviser prior to such
exercise or disposition.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in triplicate by its duly authorized representative and Participant has
executed this Agreement in triplicate as of the Date of Grant.
BROCADE COMMUNICATIONS SYSTEMS, INC. PARTICIPANT
By:
--------------------------------------- ---------------------------------
(Signature)
- ------------------------------------------ ---------------------------------
(Please print name) (Please print name)
- ------------------------------------------
(Please print title)
5
<PAGE> 17
EXHIBIT A
STOCK OPTION EXERCISE AGREEMENT
<PAGE> 18
BROCADE COMMUNICATIONS SYSTEMS, INC.
1998 EQUITY INCENTIVE PLAN
STOCK OPTION EXERCISE AGREEMENT
This Exercise Agreement is made and entered into as of __________, 19___
(the "EFFECTIVE DATE") by and between Brocade Communications Systems, Inc., a
California corporation (the "COMPANY"), and the purchaser named below (the
"PURCHASER"). Capitalized terms not defined herein shall have the meaning
ascribed to them in the Company's 1998 Equity Incentive Plan (the "Plan").
PURCHASER:
-----------------------------------------------------
-----------------------------------------------------
SOCIAL SECURITY NUMBER:
-----------------------------------------------------
ADDRESS:
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
TOTAL OPTION SHARES:
-----------------------------------------------------
EXERCISE PRICE PER SHARE:
-----------------------------------------------------
DATE OF GRANT:
-----------------------------------------------------
FIRST VESTING DATE:
-----------------------------------------------------
EXPIRATION DATE:
-----------------------------------------------------
(unless earlier terminated under Section 3 of Option
Agreement)
TYPE OF STOCK OPTION
(CHECK ONE): [ ] INCENTIVE STOCK OPTION
[ ] NONQUALIFIED STOCK OPTION
1. EXERCISE OF OPTION.
1.1 Exercise. Pursuant to exercise of that certain option
("OPTION") granted to Purchaser under the Plan and subject to the terms and
conditions of this Exercise Agreement, Purchaser hereby purchases from the
Company, and the Company hereby sells to Purchaser, the Total Number of Shares
set forth above ("SHARES") of the Company's Common Stock at the Exercise Price
Per Share set forth above ("EXERCISE PRICE"). As used in this Exercise
Agreement, the term "SHARES" refers to the Shares purchased under this Exercise
Agreement and includes all securities received (a) in replacement of the Shares,
(b) as a result of stock dividends or stock splits with respect to the Shares,
and (c) all securities received in replacement of the Shares in a merger,
recapitalization, reorganization or similar corporate transaction.
<PAGE> 19
1.2 Title to Shares. The exact spelling of the name(s) under
which Purchaser will take title to the Shares is:
-----------------------------------------------------
-----------------------------------------------------
Purchaser desires to take title to the Shares as follows:
[ ] Individual, as separate property
[ ] Husband and wife, as community property
[ ] Joint Tenants
[ ] Alone or with spouse as trustee(s) of the following
trust (including date):
-----------------------------------------------------
-----------------------------------------------------
[ ] Other; please specify:
-------------------------------
1.3 Payment. Purchaser hereby delivers payment of the Exercise
Price in the manner permitted in the Stock Option Agreement as follows (check
and complete as appropriate):
[ ] in cash (by check) in the amount of $____________,
receipt of which is acknowledged by the Company;
[ ] by cancellation of indebtedness of the Company to
Purchaser in the amount of $_______________;
[ ] at the discretion of the Committee, by delivery of
_________ fully-paid, nonassessable and vested shares
of the Common Stock of the Company owned by Purchaser
for at least six (6) months prior to the date hereof
which have been paid for within the meaning of SEC
Rule 144, (if purchased by use of a promissory note,
such note has been fully paid with respect to such
vested shares), or obtained by Purchaser in the open
public market, and owned free and clear of all liens,
claims, encumbrances or security interests, valued at
the current Fair Market Value of $___________ per
share;
[ ] at the discretion of the Committee, by tender of a
Full Recourse Promissory Note in the principal amount
of $__________, having such terms as may be approved
by the Committee and bearing interest at a rate
sufficient to avoid imputation of income under
Sections 483 and 1274 of the Code and secured by a
Pledge Agreement herewith; provided, however, that
Participants who are not employees or directors of the
Company shall not be entitled to purchase Shares with
a promissory note unless the note is adequately
secured by collateral other than the Shares; or
[ ] by the waiver hereby of compensation due or accrued
for services rendered in the amount of $_________.
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<PAGE> 20
2. DELIVERY.
2.1 Deliveries by Purchaser. Purchaser hereby delivers to the
Company (i) this Exercise Agreement, (ii) two (2) copies of a blank Stock Power
and Assignment Separate from Stock Certificate in the form of Exhibit 1 attached
hereto (the "STOCK POWERS"), both executed by Purchaser (and Purchaser's spouse,
if any), (iii) if Purchaser is married, a Consent of Spouse in the form of
Exhibit 2 attached hereto (the "SPOUSE CONSENT") executed by Purchaser's spouse,
(iv) the Exercise Price and payment or other provision for any applicable tax
obligations and if the Exercise Price is paid for with a full recourse
promissory note, by delivery of a Secured Full Recourse Promissory Note in the
form of Exhibit 3, and (v) a Stock Pledge Agreement in the form of Exhibit 4
executed by Purchaser (the "PLEDGE AGREEMENT").
2.2 Deliveries by the Company. Upon its receipt of the Exercise
Price, payment or other provision for any applicable tax obligations and all the
documents to be executed and delivered by Purchaser to the Company under Section
2.1, the Company will issue a duly executed stock certificate evidencing the
Shares in the name of Purchaser, to be placed in escrow as provided in Section
11 until expiration or termination of the Company's Repurchase Option and Right
of First Refusal described in Sections 8 and 9.
3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to the Company that:
3.1 Agrees to Terms of the Plan. Purchaser has received a copy of
the Plan and the Stock Option Agreement, has read and understands the terms of
the Plan, the Stock Option Agreement and this Exercise Agreement, and agrees to
be bound by their terms and conditions. Purchaser acknowledges that there may be
adverse tax consequences upon exercise of the Option or disposition of the
Shares, and that Purchaser should consult a tax adviser prior to such exercise
or disposition.
3.2 Purchase for Own Account for Investment. Purchaser is
purchasing the Shares for Purchaser's own account for investment purposes only
and not with a view to, or for sale in connection with, a distribution of the
Shares within the meaning of the Securities Act. Purchaser has no present
intention of selling or otherwise disposing of all or any portion of the Shares
and no one other than Purchaser has any beneficial ownership of any of the
Shares.
3.3 Access to Information. Purchaser has had access to all
information regarding the Company and its present and prospective business,
assets, liabilities and financial condition that Purchaser reasonably considers
important in making the decision to purchase the Shares, and Purchaser has had
ample opportunity to ask questions of the Company's representatives concerning
such matters and this investment.
3.4 Understanding of Risks. Purchaser is fully aware of: (i) the
highly speculative nature of the investment in the Shares; (ii) the financial
hazards involved; (iii) the lack of liquidity of the Shares and the restrictions
on transferability of the Shares (e.g., that Purchaser may not be able to sell
or dispose of the Shares or use them as collateral for loans); (iv) the
qualifications and backgrounds of the management of the Company; and (v) the tax
consequences of investment in the Shares. Purchaser is capable of evaluating the
merits and risks of this investment, has the ability to protect Purchaser's own
interests in this transaction and is financially capable of bearing a total loss
of this investment.
3.5 No General Solicitation. At no time was Purchaser presented
with or solicited by any publicly issued or circulated newspaper, mail, radio,
television or other form of general advertising or solicitation in connection
with the offer, sale and purchase of the Shares.
4. COMPLIANCE WITH SECURITIES LAWS.
4.1 Compliance with U.S. Federal Securities Laws. Purchaser
understands and acknowledges that the Shares have not been registered with the
SEC under the Securities Act and that, notwithstanding any other provision of
the Stock Option Agreement to the contrary, the exercise of any rights to
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<PAGE> 21
purchase any Shares is expressly conditioned upon compliance with the Securities
Act and all applicable state securities laws. Purchaser agrees to cooperate with
the Company to ensure compliance with such laws. The Shares are being issued
under the Securities Act pursuant to the exemption provided by SEC Rule 701.
4.2 Compliance with California Securities Laws. The Plan, The
stock option agreement, and this Exercise Agreement are intended to comply with
Section 25102(o) of the California Corporations Code. Any provision of this
Exercise Agreement which is inconsistent with Section 25102(o) shall, without
further act or amendment by the Company or the Board, be reformed to comply with
the requirements of Section 25102(o). THE SALE OF THE SECURITIES THAT ARE THE
SUBJECT OF THIS EXERCISE AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA
COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT
TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF
ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL
UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS EXERCISE AGREEMENT
ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION
BEING AVAILABLE.
5. RESTRICTED SECURITIES.
5.1 No Transfer Unless Registered or Exempt. Purchaser
understands that Purchaser may not transfer any Shares unless such Shares are
registered under the Securities Act or qualified under applicable state
securities laws or unless, in the opinion of counsel to the Company, exemptions
from such registration and qualification requirements are available. Purchaser
understands that only the Company may file a registration statement with the SEC
and that the Company is under no obligation to do so with respect to the Shares.
Purchaser has also been advised that exemptions from registration and
qualification may not be available or may not permit Purchaser to transfer all
or any of the Shares in the amounts or at the times proposed by Purchaser.
5.2 SEC Rule 144. In addition, Purchaser has been advised that
SEC Rule 144 promulgated under the Securities Act, which permits certain limited
sales of unregistered securities, is not presently available with respect to the
Shares and, in any event, requires that the Shares be held for a minimum of one
(1) year, and in certain cases two (2) years, after they have been purchased and
paid for (within the meaning of Rule 144). Purchaser understands that Shares
paid for with a Note may not be deemed to be fully "paid for" within the meaning
of Rule 144 unless certain conditions are met and that, accordingly, the Rule
144 holding period of such Shares may not begin to run until such Shares are
fully paid for within the meaning of Rule 144. Purchaser understands that Rule
144 may indefinitely restrict transfer of the Shares so long as Purchaser
remains an "affiliate" of the Company or if "current public information" about
the Company (as defined in Rule 144) is not publicly available.
5.3 SEC Rule 701. The Shares are issued pursuant to SEC Rule 701
promulgated under the Securities Act and may become freely tradeable by
non-affiliates (under limited conditions regarding the method of sale) ninety
(90) days after the first sale of Common Stock of the Company to the general
public pursuant to a registration statement filed with and declared effective by
the SEC, subject to the lengthier market standoff agreement contained in Section
7 of this Exercise Agreement or any other agreement entered into by Purchaser.
Affiliates must comply with the provisions (other than the holding period
requirements) of Rule 144.
6. RESTRICTIONS ON TRANSFERS.
6.1 Disposition of Shares. Purchaser hereby agrees that Purchaser
shall make no disposition of the Shares (other than as permitted by this
Exercise Agreement) unless and until:
(a) Purchaser shall have notified the Company of the
proposed disposition and provided a written summary of the terms and conditions
of the proposed disposition;
-4-
<PAGE> 22
(b) Purchaser shall have complied with all requirements of
this Exercise Agreement applicable to the disposition of the Shares;
(c) Purchaser shall have provided the Company with written
assurances, in form and substance satisfactory to counsel for the Company, that
(i) the proposed disposition does not require registration of the Shares under
the Securities Act or (ii) all appropriate action necessary for compliance with
the registration requirements of the Securities Act or of any exemption from
registration available under the Securities Act (including Rule 144) has been
taken; and
(d) Purchaser shall have provided the Company with written
assurances, in form and substance satisfactory to the Company, that the proposed
disposition will not result in the contravention of any transfer restrictions
applicable to the Shares pursuant to the provisions of the Commissioner Rules
identified in Section 4.2.
6.2 Restriction on Transfer. Purchaser shall not transfer,
assign, grant a lien or security interest in, pledge, hypothecate, encumber or
otherwise dispose of any of the Shares which are subject to the Company's
Repurchase Option or the Company's Right of First Refusal, except as permitted
by this Exercise Agreement.
6.3 Transferee Obligations. Each person (other than the Company)
to whom the Shares are transferred by means of one of the permitted transfers
specified in this Exercise Agreement must, as a condition precedent to the
validity of such transfer, acknowledge in writing to the Company that such
person is bound by the provisions of this Exercise Agreement and that the
transferred Shares are subject to (i) both the Company's Repurchase Option and
the Company's Right of First Refusal granted hereunder and (ii) the market
stand-off provisions of Section 7, to the same extent such Shares would be so
subject if retained by the Purchaser.
7. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any
registration of the Company's securities that, upon the request of the Company
or the underwriters managing any public offering of the Company's securities,
Purchaser will not sell or otherwise dispose of any Shares without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed 180 days) after the effective date of such
registration requested by such managing underwriters and subject to all
restrictions as the Company or the underwriters may specify.
8. COMPANY'S REPURCHASE OPTION FOR UNVESTED SHARES. The Company, or its
assignee, shall have the option to repurchase Purchaser's Unvested Shares (as
defined in Section 2.2 of the Stock Option Agreement) on the terms and
conditions set forth in this Section (the "REPURCHASE OPTION FOR UNVESTED
SHARES") if Purchaser is Terminated (as defined in the Plan) for any reason, or
no reason, including without limitation Purchaser's death, Disability (as
defined in the Plan), voluntary resignation or termination by the Company with
or without Cause. Notwithstanding the foregoing, the Company shall retain the
Repurchase Option for Unvested Shares only as to that number of Unvested Shares
(whether or not exercised) that exceeds the number of shares which remain
exercisable.
8.1 Termination and Termination Date. In case of any dispute as
to whether Purchaser is Terminated, the Committee shall have discretion to
determine whether Purchaser has been Terminated and the effective date of such
Termination (the "TERMINATION DATE").
8.2 Exercise of Repurchase Option for Unvested Shares. At any
time within ninety (90) days after the Purchaser's Termination Date, the
Company, or its assignee, may elect to repurchase the Purchaser's Unvested
Shares by giving Purchaser written notice of exercise of the Repurchase Option
for Unvested Shares.
8.3 Calculation of Repurchase Price for Unvested Shares. The
Company or its assignee shall have the option to repurchase from Purchaser (or
from Purchaser's personal representative as the case may be) the Unvested Shares
at the Purchaser's Exercise Price, proportionately adjusted for any stock split
or similar change in the capital structure of the Company as set forth in
Section 2.2 of the Plan.
-5-
<PAGE> 23
8.4 Payment of Repurchase Price. The repurchase price shall be
payable, at the option of the Company or its assignee, by check or by
cancellation of all or a portion of any outstanding indebtedness of Purchaser to
the Company or such assignee, or by any combination thereof. The repurchase
price shall be paid without interest within sixty (60) days after exercise of
the Repurchase Option for Unvested Shares.
8.5 Right of Termination Unaffected. Nothing in this Exercise
Agreement shall be construed to limit or otherwise affect in any manner
whatsoever the right or power of the Company (or any Parent or Subsidiary of the
Company) to terminate Purchaser's employment or other relationship with Company
(or the Parent or Subsidiary of the Company) at any time, for any reason or no
reason, with our without Cause.
9. COMPANY'S RIGHT OF FIRST REFUSAL. Unvested Shares may not be sold or
otherwise transferred by Purchaser without the Company's prior written consent.
Before any Vested Shares held by Purchaser or any transferee of such Vested
Shares (either being sometimes referred to herein as the "Holder") may be sold
or otherwise transferred (including without limitation a transfer by gift or
operation of law), the Company and/or its assignee(s) shall have an assignable
right of first refusal to purchase the Vested Shares to be sold or transferred
(the "OFFERED SHARES") on the terms and conditions set forth in this Section
(the "RIGHT OF FIRST REFUSAL").
9.1 Notice of Proposed Transfer. The Holder of the Offered Shares
shall deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer the Offered Shares;
(ii) the name of each proposed bona fide purchaser or other transferee
("PROPOSED TRANSFEREE"); (iii) the number of Offered Shares to be transferred to
each Proposed Transferee; (iv) the bona fide cash price or other consideration
for which the Holder proposes to transfer the Offered Shares (the "OFFERED
PRICE"); and (v) that the Holder will offer to sell the Offered Shares to the
Company and/or its assignee(s) at the Offered Price as provided in this Section.
9.2 Exercise of Right of First Refusal. At any time within thirty
(30) days after the date of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all (or, with the
consent of the Holder, less than all) the Offered Shares proposed to be
transferred to any one or more of the Proposed Transferees named in the Notice,
at the purchase price determined as specified below.
9.3 Purchase Price. The purchase price for the Offered Shares
purchased under this Section will be the Offered Price. If the Offered Price
includes consideration other than cash, then the cash equivalent value of the
non-cash consideration shall conclusively be deemed to be the value of such
non-cash consideration as determined in good faith by the Board.
9.4 Payment. Payment of the Offered Price will be payable, at the
option of the Company and/or its assignee(s) (as applicable), by check or by
cancellation of all or a portion of any outstanding indebtedness of the Holder
to the Company (or to such assignee, in the case of a purchase of Offered Shares
by such assignee) or by any combination thereof. The Offered Price will be paid
without interest within sixty (60) days after the Company's receipt of the
Notice, or, at the option of the Company and/or its assignee(s), in the manner
and at the time(s) set forth in the Notice.
9.5 Holder's Right to Transfer. If all of the Offered Shares
proposed in the Notice to be transferred to a given Proposed Transferee are not
purchased by the Company and/or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Offered Shares to that
Proposed Transferee at the Offered Price or at a higher price, provided that
such sale or other transfer is consummated within 120 days after the date of the
Notice, and provided further, that (i) any such sale or other transfer is
effected in compliance with all applicable securities laws and (ii) the Proposed
Transferee agrees in writing that the provisions of this Section will continue
to apply to the Offered Shares in the hands of such Proposed Transferee. If the
Offered Shares described in the Notice are not transferred to the Proposed
Transferee within such 120 day period, then a new Notice must be given to the
Company, and the Company will again be offered the Right of First Refusal before
any Shares held by the Holder may be sold or otherwise transferred.
-6-
<PAGE> 24
9.6 Exempt Transfers. Notwithstanding anything to the contrary in
this Section, the following transfers of Vested Shares will be exempt from the
Right of First Refusal: (i) the transfer of any or all of the Vested Shares
during Purchaser's lifetime by gift or on Purchaser's death by will or intestacy
to Purchaser's "immediate family" (as defined below) or to a trust for the
benefit of Purchaser or Purchaser's immediate family, provided that each
transferee or other recipient agrees in a writing satisfactory to the Company
that the provisions of this Section will continue to apply to the transferred
Vested Shares in the hands of such transferee or other recipient; (ii) any
transfer of Vested Shares made pursuant to a statutory merger or statutory
consolidation of the Company with or into another corporation or corporations
(except that the Right of First Refusal and Repurchase Option will continue to
apply thereafter to such Vested Shares, in which case the surviving corporation
of such merger or consolidation shall succeed to the rights of the Company under
this Section unless the Agreement of merger or consolidation expressly otherwise
provides); or (iii) any transfer of Vested Shares pursuant to the winding up and
dissolution of the Company. As used herein, the term "IMMEDIATE FAMILY" will
mean Purchaser's spouse, the lineal descendant or antecedent, father, mother,
brother or sister, child, adopted child, grandchild or adopted grandchild of the
Purchaser or the Purchaser's spouse, or the spouse of any child, adopted child,
grandchild or adopted grandchild of Purchaser or the Purchaser's spouse.
9.7 Termination of Right of First Refusal. The Company's Right of
First Refusal will terminate when the Company's securities become publicly
traded.
10. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this
Exercise Agreement, Purchaser will have all of the rights of a shareholder of
the Company with respect to the Shares from and after the date that Shares are
issued to Purchaser until such time as Purchaser disposes of the Shares or the
Company and/or its assignee(s) exercise(s) the Right of First Refusal. Upon an
exercise of the Right of First Refusal, Purchaser will have no further rights as
a holder of the Shares so purchased upon such exercise, except the right to
receive payment for the Shares so purchased in accordance with the provisions of
this Exercise Agreement, and Purchaser will promptly surrender the stock
certificate(s) evidencing the Shares so purchased to the Company for transfer or
cancellation.
11. ESCROW. As security for Purchaser's faithful performance of this
Exercise Agreement, Purchaser agrees, immediately upon receipt of the stock
certificate(s) evidencing the Shares, to deliver such certificate(s), together
with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any
(with the date and number of Shares left blank), to the Secretary of the Company
or other designee of the Company ("ESCROW HOLDER"), who is hereby appointed to
hold such certificate(s) and Stock Powers in escrow and to take all such actions
and to effectuate all such transfers and/or releases of such Shares as are in
accordance with the terms of this Exercise Agreement. Purchaser and the Company
agree that Escrow Holder will not be liable to any party to this Exercise
Agreement (or to any other party) for any actions or omissions unless Escrow
Holder is grossly negligent or intentionally fraudulent in carrying out the
duties of Escrow Holder under this Exercise Agreement. Escrow Holder may rely
upon any letter, notice or other document executed by any signature purported to
be genuine and may rely on the advice of counsel and obey any order of any court
with respect to the transactions contemplated by this Exercise Agreement. The
Shares will be released from escrow upon termination of the Right of First
Refusal; provided, however, in case any Shares are pledged, the Shares will be
retained in escrow so long as they are subject to the Pledge Agreement.
12. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS.
12.1 Legends. Purchaser understands and agrees that the Company
will place the legends set forth below or similar legends on any stock
certificate(s) evidencing the Shares, together with any other legends that may
be required by state or U.S. Federal securities laws, the Company's Articles of
Incorporation or Bylaws, any other agreement between Purchaser and the Company
or any agreement between Purchaser and any third party:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF
CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
-7-
<PAGE> 25
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE
SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS,
PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO
BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN
INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE
SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT
ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH
THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO CERTAIN RESTRICTIONS ON PUBLIC RESALE AND TRANSFER,
AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER
AND/OR ITS ASSIGNEE(S) AS SET FORTH IN A STOCK OPTION
EXERCISE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL
HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED
AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE
AND TRANSFER RESTRICTIONS AND THE RIGHT OF FIRST REFUSAL
ARE BINDING ON TRANSFEREES OF THESE SHARES.
The California Commissioner of Corporations may require that the
following legend also be placed upon the share certificate(s) evidencing
ownership of the Shares:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN
CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE
OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S
RULES.
12.2 Stop-Transfer Instructions. Purchaser agrees that, to ensure
compliance with the restrictions imposed by this Exercise Agreement, the Company
may issue appropriate "stop-transfer" instructions to its transfer agent, if
any, and if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
12.3 Refusal to Transfer. The Company will not be required (i) to
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Exercise Agreement or (ii) to treat
as owner of such Shares, or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares have been so transferred.
13. TAX CONSEQUENCES. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER
ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER'S PURCHASE OR DISPOSITION OF
THE SHARES. PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH ANY TAX
ADVISER PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION
OF THE SHARES AND THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX
ADVICE. Set forth below is a brief summary as of the date the Plan was adopted
by the Board of some of the U.S. Federal and California tax consequences of
exercise of the Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
PURCHASER SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR
DISPOSING OF THE SHARES.
-8-
<PAGE> 26
13.1 Exercise of Incentive Stock Option. If the Option qualifies
as an ISO, there will be no regular U.S. Federal income tax liability or
California income tax liability upon the exercise of the Option, although the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price will be treated as a tax preference item for U.S.
Federal alternative minimum tax purposes and may subject Purchaser to the
alternative minimum tax in the year of exercise.
13.2 Exercise of Nonqualified Stock Option. If the Option does
not qualify as an ISO, there may be a regular U.S. Federal income tax liability
and a California income tax liability upon the exercise of the Option. Purchaser
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market Value of the
Shares on the date of exercise over the Exercise Price. If Purchaser is or was
an employee of the Company, the Company may be required to withhold from
Purchaser's compensation or collect from Purchaser and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income
at the time of exercise.
13.3 Disposition of Shares. The following tax consequences may
apply upon disposition of the Shares:
a. Incentive Stock Options. If the Shares are held for more
than twelve (12) months after the date of the transfer of the Shares pursuant to
the exercise of an ISO and are disposed of more than two (2) years after the
Date of Grant, any gain realized on disposition of the Shares will be treated as
long term capital gain for federal and California income tax purposes. If Shares
purchased under an ISO are disposed of within the applicable one (1) year or two
(2) year period, any gain realized on such disposition will be treated as
compensation income (taxable at ordinary income rates) to the extent of the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price.
b. Nonqualified Stock Options. If the Shares are held for
more than twelve (12) months after the date of the transfer of the Shares
pursuant to the exercise of an NQSO, any gain realized on disposition of the
Shares will be treated as long term capital gain.
c. Withholding. The Company may be required to withhold
from the Participant and pay to the applicable taxing authorities an amount
equal to a percentage of this compensation income.
13.4 SECTION 83(b) ELECTION FOR UNVESTED SHARES. With respect to
Unvested Shares, which are subject to the Repurchase Option, Purchaser hereby
acknowledges that Purchaser has been informed that, unless an election is filed
by the Purchaser with the Internal Revenue Service (and, if necessary, the
proper state taxing authorities), within 30 days of the purchase of the Unvested
Shares, electing pursuant to Section 83(b) of the Internal Revenue Code (and
similar state tax provisions, if applicable) to be taxed currently on any
difference between the Purchase Price of the Unvested Shares and their Fair
Market Value on the date of purchase, there may be a recognition of taxable
income (including, where applicable, alternative minimum tax) to the Purchaser,
measured by the excess, if any, of the Fair Market Value of the Unvested Shares,
at the time they cease to be Unvested Shares, over the Purchase Price of such
Shares. Purchaser represents that Purchaser has consulted any tax advisers
Purchaser deems advisable in connection with Purchaser's purchase of the
Unvested Shares and the filing of the election under Section 83(b) and similar
tax provisions. A form of Election under Section 83(b) is attached hereto as
Exhibit 5 for reference. PURCHASER HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING
SUCH ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR FROM FAILURE
TO FILE THE ELECTION AND PAYING TAXES RESULTING FROM THE LAPSE OF THE REPURCHASE
RESTRICTIONS ON THE UNVESTED SHARES.
14. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the
Shares will be subject to and conditioned upon compliance by the Company and
Purchaser with all applicable state and U.S. Federal laws and regulations and
with all applicable requirements of any stock exchange or automated quotation
system on which the Company's Common Stock may be listed or quoted at the time
of such issuance or transfer.
-9-
<PAGE> 27
15. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Exercise Agreement, including its rights to repurchase Shares under the
Right of First Refusal. This Exercise Agreement shall be binding upon and inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Exercise Agreement will be
binding upon Purchaser and Purchaser's heirs, executors, administrators, legal
representatives, successors and assigns.
16. GOVERNING LAW; SEVERABILITY. This Exercise Agreement shall be governed
by and construed in accordance with the internal laws of the State of California
as such laws are applied to agreements between California residents entered into
and to be performed entirely within California. If any provision of this
Exercise Agreement is determined by a court of law to be illegal or
unenforceable, then such provision will be enforced to the maximum extent
possible and the other provisions will remain fully effective and enforceable.
17. NOTICES. Any notice required to be given or delivered to the Company
shall be in writing and addressed to the Corporate Secretary of the Company at
its principal corporate offices. Any notice required to be given or delivered to
Purchaser shall be in writing and addressed to Purchaser at the address
indicated above or to such other address as Purchaser may designate in writing
from time to time to the Company. All notices shall be deemed effectively given
upon personal delivery, three (3) days after deposit in the United States mail
by certified or registered mail (return receipt requested), one (1) business day
after its deposit with any return receipt express courier (prepaid), or one (1)
business day after transmission by rapifax or telecopier.
18. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Exercise Agreement.
19. HEADINGS. The captions and headings of this Exercise Agreement are
included for ease of reference only and will be disregarded in interpreting or
construing this Exercise Agreement. All references herein to Sections will refer
to Sections of this Exercise Agreement.
20. ENTIRE AGREEMENT. The Plan, the Stock Option Agreement and this
Exercise Agreement, together with all its Exhibits, constitute the entire
agreement and understanding of the parties with respect to the subject matter of
this Exercise Agreement, and supersede all prior understandings and agreements,
whether oral or written, between the parties hereto with respect to the specific
subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Exercise Agreement to be
executed in triplicate by its duly authorized representative and Purchaser has
executed this Exercise Agreement in triplicate as of the Effective Date.
BROCADE COMMUNICATIONS SYSTEMS, INC. PURCHASER
By:
--------------------------------- -----------------------------------
(Signature)
- ------------------------------------ -----------------------------------
(Please print name) (Please print name)
- ------------------------------------
(Please print title)
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC. STOCK OPTION
EXERCISE AGREEMENT]
-10-
<PAGE> 28
LIST OF EXHIBITS
Exhibit 1: Stock Power and Assignment Separate from Stock Certificate
Exhibit 2: Spouse Consent
Exhibit 3: Copy of Purchaser's Check (and/or Secured Full Recourse
Promissory Note, if applicable)
Exhibit 4: Stock Pledge Agreement (if applicable)
Exhibit 5: Section 83(b) Election
<PAGE> 29
EXHIBIT 1
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
<PAGE> 30
STOCK POWER AND ASSIGNMENT
SEPARATE FROM STOCK CERTIFICATE
FOR VALUE RECEIVED and pursuant to that certain Stock Option Exercise
Agreement No. ________ dated as of _______________, 19___, (the "AGREEMENT"),
the undersigned hereby sells, assigns and transfers unto _____________________,
shares of the Common Stock of Brocade Communications Systems, Inc., a California
corporation (the "COMPANY"), standing in the undersigned's name on the books of
the Company represented by Certificate No(s). ______ delivered herewith, and
does hereby irrevocably constitute and appoint the Secretary of the Company as
the undersigned's attorney-in-fact, with full power of substitution, to transfer
said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS
AUTHORIZED BY THIS EXERCISE AGREEMENT AND ANY EXHIBITS THERETO.
PURCHASER
-----------------------------------------
(Signature)
-----------------------------------------
(Please Print Name)
__________ Please check if no spouse
-----------------------------------------
(Spouse's Signature, if any)
-----------------------------------------
(Please Print Spouse's Name)
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this Stock Power and Assignment is to enable the Company to
acquire the shares upon a default under Purchaser's Note, if such Note exists,
and to exercise its "Repurchase Option" and/or "Right of First Refusal" set
forth in this Exercise Agreement without requiring additional signatures on the
part of the Purchaser or Purchaser's Spouse, if any.
<PAGE> 31
EXHIBIT 2
SPOUSE CONSENT
<PAGE> 32
SPOUSE CONSENT
The undersigned spouse of Purchaser has read, understands, and hereby
approves the Stock Option Exercise Agreement between Purchaser and the Company
(the "AGREEMENT"). In consideration of the Company's granting my spouse the
right to purchase the Shares as set forth in this Exercise Agreement, the
undersigned hereby agrees to be irrevocably bound by this Exercise Agreement and
further agrees that any community property interest shall similarly be bound by
this Exercise Agreement. The undersigned hereby appoints Purchaser as my
attorney-in-fact with respect to any amendment or exercise of any rights under
this Exercise Agreement.
Date:____________________
--------------------------------------
Name of Purchaser - Please Print
__________ Please check if no spouse
--------------------------------------
Signature of Purchaser's Spouse
Address:
--------------------------------------
<PAGE> 33
EXHIBIT 3
COPY OF PURCHASER'S CHECK AND/OR SECURED FULL RECOURSE PROMISSORY NOTE
<PAGE> 34
SECURED FULL RECOURSE PROMISSORY NOTE
______________, California
$__________________ __________________, 19___
1. OBLIGATION. In exchange for the issuance to the undersigned
("PURCHASER") of ___________ shares (the "SHARES") of the Common Stock of
Brocade Communications Systems, Inc., a California corporation (the "COMPANY"),
receipt of which is hereby acknowledged, Purchaser hereby promises to pay to the
order of the Company on or before _________, 19___, at the Company's principal
place of business at _________________________________ California __________, or
at such other place as the Company may direct, the principal sum of
_______________________________________ Dollars ($__________) together with
interest compounded semi-annually on the unpaid principal at the rate of
_________ percent (___%), which rate is not less than the minimum rate
established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as
amended, on the earliest date on which there was a binding contract in writing
for the purchase of the Shares; provided, however, that the rate at which
interest will accrue on unpaid principal under this Note will not exceed the
highest rate permitted by applicable law.
2. SECURITY. Payment of this Note is secured by a security interest in
the Shares granted to the Company by Purchaser under a Stock Pledge Agreement
dated of even date herewith between the Company and Purchaser (the "PLEDGE
AGREEMENT"). This Note is being tendered by Purchaser to the Company as [PART
OF] the Exercise Price of the Shares pursuant to that certain Stock Option
Exercise Agreement between Purchaser and the Company dated of even date with
this Note (the "PURCHASE AGREEMENT").
3. DEFAULT; ACCELERATION OF OBLIGATION. Purchaser will be deemed to be
in default under this Note and the principal sum of this Note, together with all
interest accrued thereon, will immediately become due and payable in full: (a)
upon Purchaser's failure to make any payment when due under this Note; (b) in
the event Purchaser is Terminated (as defined in the Company's 1998 Equity
Incentive Plan) for any reason; (c) upon the filing by or against Purchaser of
any voluntary or involuntary petition in bankruptcy or any petition for relief
under the U.S. Federal bankruptcy code or any other state or U.S. Federal law
for the relief of debtors; or (d) upon the execution by Purchaser of an
assignment for the benefit of creditors or the appointment of a receiver,
custodian, trustee or similar party to take possession of Purchaser's assets or
property.
4. REMEDIES ON DEFAULT. Upon any default of Purchaser under this Note,
the Company will have, in addition to its rights and remedies under this Note
and the Pledge Agreement, full recourse against any real, personal, tangible or
intangible assets of Purchaser, and may pursue any legal or equitable remedies
that are available to it.
5. PREPAYMENT. Prepayment of principal and/or interest due under this
Note may be made at any time without penalty. Unless otherwise agreed in writing
by the Company, all payments will be made in lawful tender of the United States
and will be applied first to the payment of accrued interest, and the remaining
balance of such payment, if any, will then be applied to the payment of
principal. If Purchaser prepays all or a portion of the principal amount of this
Note, the Shares paid for by the portion of principal so paid will continue to
be held in pledge under the Pledge Agreement to serve as independent collateral
for the outstanding portion of this Note for the purpose of commencing the
holding period under Rule 144(d) of the Securities and Exchange Commission with
respect to other Shares purchased with this Note unless Purchaser notifies the
Company in writing otherwise and the Company consents to release of the Shares
from the Pledge Agreement.
<PAGE> 35
6. GOVERNING LAW; WAIVER. The validity, construction and performance of
this Note will be governed by the internal laws of the State of California,
excluding that body of law pertaining to conflicts of law. Purchaser hereby
waives presentment, notice of non-payment, notice of dishonor, protest, demand
and diligence.
7. ATTORNEYS' FEES. If suit is brought for collection of this Note,
Purchaser agrees to pay all reasonable expenses, including attorneys' fees,
incurred by the holder in connection therewith whether or not such suit is
prosecuted to judgment.
8. RULE 144 HOLDING PERIOD. PURCHASER UNDERSTANDS THAT THE HOLDING
PERIOD SPECIFIED UNDER RULE 144(d) OF THE SECURITIES AND EXCHANGE COMMISSION
WILL NOT BEGIN TO RUN WITH RESPECT TO SHARES PURCHASED WITH THIS NOTE UNTIL
EITHER (A) THE EXERCISE PRICE OF SUCH SHARES IS PAID IN FULL IN CASH OR BY OTHER
PROPERTY ACCEPTED BY THE COMPANY, OR (B) THIS NOTE IS SECURED BY COLLATERAL,
OTHER THAN THE SHARES THAT HAVE NOT BEEN FULLY PAID FOR, HAVING A FAIR MARKET
VALUE AT LEAST EQUAL TO THE AMOUNT OF PURCHASER'S THEN OUTSTANDING OBLIGATION
UNDER THIS NOTE (INCLUDING ACCRUED INTEREST).
IN WITNESS WHEREOF, Purchaser has executed this Note as of the date and
year first above written.
- --------------------------------- -----------------------------------
Purchaser's Name [type or print] Purchaser's Signature
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC.
SECURED FULL RECOURSE PROMISSORY NOTE]
-2-
<PAGE> 36
EXHIBIT 4
STOCK PLEDGE AGREEMENT
<PAGE> 37
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement is made and entered into as of
_______________, 19___ between Brocade Communications Systems, Inc., a
California corporation (the "COMPANY"), and __________________ ("Pledgor").
R E C I T A L S
A. In exchange for Pledgor's Secured Full Recourse Promissory Note to
the Company of even date herewith (the "NOTE"), the Company has issued and sold
to Pledgor _______________ shares of its Common Stock (the "SHARES") pursuant to
the terms and conditions of that Stock Option Exercise Agreement between the
Company and Pledgor of even date herewith (the "PURCHASE AGREEMENT").
B. Pledgor has agreed that repayment of the Note will be secured by the
pledge of the Shares pursuant to this Stock Pledge Agreement.
NOW, THEREFORE, the parties agree as follows:
1. CREATION OF SECURITY INTEREST. Pursuant to the provisions of
the California Commercial Code, Pledgor hereby grants to the Company, and the
Company hereby accepts, a first and present security interest in the Shares as
collateral to secure the payment of Pledgor's obligation to the Company under
the Note. Pledgor herewith delivers to the Company Common Stock certificate(s)
No(s). _________, representing all the Shares, together with one stock power for
each certificate in the form attached as an Exhibit to the Purchase Agreement,
duly executed (with the date and number of shares left blank) by Pledgor and
Pledgor's spouse, if any. For purposes of this Stock Pledge Agreement, the
Shares pledged to the Company hereby, together with any additional collateral
pledged pursuant to Sections 5 and 6 hereof, will hereinafter be collectively
referred to as the "COLLATERAL." Pledgor agrees that the Collateral pledged to
the Company will be deposited with and held by the Escrow Holder (as defined in
the Purchase Agreement) and that, notwithstanding anything to the contrary in
the Purchase Agreement, for purposes of carrying out the provisions of this
Stock Pledge Agreement, Escrow Holder will act solely for the Company as its
agent.
2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and
warrants to the Company that Pledgor has good title (both record and beneficial)
to the Collateral, free and clear of all claims, pledges, security interests,
liens or encumbrances of every nature whatsoever, and that Pledgor has the right
to pledge and grant the Company the security interest in the Collateral granted
under this Stock Pledge Agreement. Pledgor further agrees that, until the entire
principal sum and all accrued interest due under the Note has been paid in full,
Purchaser will not, without the Company's prior written consent, (i) sell,
assign or transfer, or attempt to sell, assign or transfer, any of the
Collateral, or (ii) grant or create, or attempt to grant or create, any security
interest, lien, pledge, claim or other encumbrance with respect to any of the
Collateral.
3. RIGHTS ON DEFAULT. In the event of default (as defined in the
Note) by Pledgor under the Note, the Company will have full power to sell,
assign and deliver the whole or any part of the Collateral at any broker's
exchange or elsewhere, at public or private sale, at the option of the Company,
in order to satisfy any part of the obligations of Pledgor now existing or
hereinafter arising under the Note. On any such sale, the Company or its assigns
may purchase all or any part of the Collateral. In addition, at its sole option,
the Company may elect to retain all the Collateral in full satisfaction of
Pledgor's obligation under the Note, in accordance with the provisions and
procedures set forth in the California Commercial Code.
4. ADDITIONAL REMEDIES. The rights and remedies granted to the
Company herein upon default under the Note will be in addition to all the
rights, powers and remedies of the Company under the California Commercial Code
and applicable law and such rights, powers and remedies will be exercisable by
the Company with respect to all of the Collateral. Pledgor agrees that the
Company's reasonable expenses of holding
<PAGE> 38
the Collateral, preparing it for resale or other disposition, and selling or
otherwise disposing of the Collateral, including attorneys' fees and other legal
expenses, will be deducted from the proceeds of any sale or other disposition
and will be included in the amounts Pledgor must tender to redeem the
Collateral. All rights, powers and remedies of the Company will be cumulative
and not alternative. Any forbearance or failure or delay by the Company in
exercising any right, power or remedy hereunder will not be deemed to be a
waiver of any such right, power or remedy and any single or partial exercise of
any such right, power or remedy hereunder will not preclude the further exercise
thereof.
5. DIVIDENDS; VOTING. All dividends hereinafter declared on or
payable with respect to the Collateral during the term of this pledge (excluding
only ordinary cash dividends, which will be payable to Pledgor so long as
Pledgor is not in default under the Note) will be immediately delivered to the
Company to be held in pledge under this Stock Pledge Agreement. Notwithstanding
this Stock Pledge Agreement, so long as Pledgor owns the Shares and is not in
default under the Note, Pledgor will be entitled to vote any shares comprising
the Collateral, subject to any proxies granted by Pledgor.
6. ADJUSTMENTS. In the event that during the term of this pledge,
any stock dividend, reclassification, readjustment, stock split or other change
is declared or made with respect to the Collateral, or if warrants or any other
rights, options or securities are issued in respect of the Collateral, then all
new, substituted and/or additional shares or other securities issued by reason
of such change or by reason of the exercise of such warrants, rights, options or
securities, will be immediately pledged to the Company to be held under the
terms of this Stock Pledge Agreement in the same manner as the Collateral is
held hereunder.
7. RIGHTS UNDER PURCHASE AGREEMENT. Pledgor understands and
agrees that the Company's rights to repurchase the Collateral under the Purchase
Agreement, if any, will continue for the periods and on the terms and conditions
specified in the Purchase Agreement, whether or not the Note has been paid
during such period of time, and that to the extent that the Note is not paid
during such period of time, the repurchase by the Company of the Collateral may
be made by way of cancellation of all or any part of Pledgor's indebtedness
under the Note.
8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire
principal sum and all accrued interest due under the Note, and subject to the
terms and conditions of the Purchase Agreement, the Company will immediately
redeliver the Collateral to Pledgor and this Stock Pledge Agreement will
terminate; provided, however, that all rights of the Company to retain
possession of the Shares pursuant to the Purchase Agreement will survive
termination of this Stock Pledge Agreement.
9. SUCCESSORS AND ASSIGNS. This Stock Pledge Agreement will inure
to the benefit of the respective heirs, personal representatives, successors and
assigns of the parties hereto.
10. GOVERNING LAW; SEVERABILITY. This Stock Pledge Agreement will
be governed by and construed in accordance with the internal laws of the State
of California, excluding that body of law relating to conflicts of law. Should
one or more of the provisions of this Stock Pledge Agreement be determined by a
court of law to be illegal or unenforceable, the other provisions nevertheless
will remain effective and will be enforceable.
11. MODIFICATION; ENTIRE AGREEMENT. This Stock Pledge Agreement
will not be amended without the written consent of both parties hereto. This
Stock Pledge Agreement constitutes the entire agreement of the parties hereto
with respect to the subject matter hereof and supersedes all prior agreements
and understandings related to such subject matter.
-2-
<PAGE> 39
IN WITNESS WHEREOF, the parties hereto have executed this Stock Pledge
Agreement as of the date and year first above written.
BROCADE COMMUNICATIONS SYSTEMS, INC. PLEDGOR
By:
----------------------------------- -----------------------------------
(Signature)
- -------------------------------------- -----------------------------------
(Please print name) (Please print name)
- --------------------------------------
(Please print title)
[SIGNATURE PAGE TO BROCADE COMMUNICATIONS SYSTEMS, INC. STOCK PLEDGE AGREEMENT]
-3-
<PAGE> 40
EXHIBIT 5
SECTION 83(b) ELECTION
<PAGE> 41
ELECTION UNDER SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the
Internal Revenue Code of 1986, as amended, to include the excess, if any, of the
fair market value of the property described below at the time of transfer over
the amount paid for such property, as compensation for services in the
calculation of: (1) regular gross income; (2) alternative minimum taxable income
or (3) disqualifying disposition gross income, as the case may be.
1. TAXPAYER'S NAME:
--------------------------------------------------
TAXPAYER'S ADDRESS:
--------------------------------------------------
--------------------------------------------------
SOCIAL SECURITY NUMBER:
--------------------------------------------------
2. The property with respect to which the election is made is described as
follows: _______ shares of Common Stock of Brocade Communications Systems,
Inc., a California corporation, which were transferred upon exercise of an
option (the "Company"), which is Taxpayer's employer or the corporation
for whom the Taxpayer performs services.
3. The date on which the shares were transferred pursuant to the exercise of
the option was ________, 199__ and this election is made for calendar year
199__.
4. The shares received upon exercise of the option are subject to the
following restrictions: The Company may repurchase all or a portion of the
shares at the Taxpayer's original purchase price under certain conditions
at the time of Taxpayer's termination of employment or services.
5. The fair market value of the shares (without regard to restrictions other
than restrictions which by their terms will never lapse) was $___ per
share at the time of exercise of the option.
6. The amount paid for such shares upon exercise of the option was $___ per
share.
7. The Taxpayer has submitted a copy of this statement to the Company.
THIS ELECTION MUST BE FILED WITH THE INTERNAL REVENUE SERVICE ("IRS"), AT THE
OFFICE WHERE THE TAXPAYER FILES ANNUAL INCOME TAX RETURNS, WITHIN 30 DAYS AFTER
THE DATE OF TRANSFER OF THE SHARES, AND MUST ALSO BE FILED WITH THE TAXPAYER'S
INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED WITHOUT
THE CONSENT OF THE IRS.
Dated:
-------------------------- ------------------------------
Taxpayer's Signature
<PAGE> 1
EXHIBIT 10.4
BROCADE COMMUNICATIONS SYSTEMS, INC.
1998 EXECUTIVE EQUITY INCENTIVE PLAN
AS ADOPTED OCTOBER 9, 1998
1. PURPOSE. The purpose of this Plan is to provide incentives to
attract, retain and motivate eligible persons whose present and potential
contributions are important to the success of the Company, its Parent and
Subsidiaries, by offering them an opportunity to participate in the Company's
future performance through awards of Options and Restricted Stock. Capitalized
terms not defined in the text are defined in Section 22 hereof.
2. SHARES SUBJECT TO THE PLAN.
2.1 Number of Shares Available. Subject to Sections 2.2 and 17
hereof, the total number of Shares reserved and available for grant and
issuance pursuant to this Plan will be 300,000 Shares. Subject to Sections 2.2
and 17 hereof, Shares will again be available for grant and issuance in
connection with future Awards under this Plan to the extent such Shares: (a)
cease to be subject to issuance upon exercise of an Option, other than due to
exercise of such Option; or (b) are subject to an Award granted hereunder but
the Shares subject to such Award are forfeited or repurchased by the Company at
the original issue price; or (c) are subject to a Restricted Stock Award that
otherwise terminates without Shares being issued. At all times the Company will
reserve and keep available a sufficient number of Shares as will be required to
satisfy the requirements of all Award granted under this Plan.
2.2 Adjustment of Shares. In the event that the number of outstanding
shares of the Company's Common Stock is changed by a stock dividend,
recapitalization, stock split, reverse stock split, subdivision, combination,
reclassification or similar change in the capital structure of the Company
without consideration, then (a) the number of Shares reserved for issuance
under this Plan, (b) the Exercise Prices of and number of Shares subject to
outstanding Options and (c) the Purchase Prices of and number of Shares subject
to other outstanding Awards will be proportionately adjusted, subject to any
required action by the Board or the shareholders of the Company and compliance
with applicable securities laws, provided, however, that fractions of a Share
will not be issued but will either be paid in cash at Fair Market Value of such
fraction of a Share or will be rounded down to the nearest whole Share, as
determined by the Committee.
3. ELIGIBILITY. Awards may be granted only to officers, directors and
consultants of the Company. A person may be granted more than one Award under
this Plan.
4. ADMINISTRATION.
4.1 Committee Authority. This Plan will be administered by the
Committee or the Board acting at the Committee. Subject to the general
purposes, terms and conditions of this Plan, and to the direction of the Board,
the Committee will have full power to implement and carry out this Plan.
Without limitation, the Committee will have the authority to:
(a) construe and interpret this Plan, any Award Agreement and any
other agreement or document executed pursuant to this Plan;
(b) prescribe, amend and rescind rules and regulations relating to
this Plan;
(c) select persons to receive Awards;
(d) determine the form and terms of Awards;
(e) determine the number of Shares or other consideration subject to
Awards;
<PAGE> 2
(f) determine whether Awards will be granted singly, in combination
with, in tandem with, in replacement of, or as alternatives to,
other Awards under this Plan or awards under any other incentive
or compensation plan of the Company or any Parent or Subsidiary
of the Company;
(g) grant waivers of Plan or Award conditions;
(h) determine the vesting, exercisability and payment of Awards;
(i) correct any defect, supply any omission, or reconcile any
inconsistency in this Plan, any Award, any Award Agreement, any
Exercise Agreement or any Restricted Stock Purchase Agreement;
(j) determine whether an Award has been earned; and
(k) make all other determinations necessary or advisable for the
administration of this Plan.
4.2 Committee Discretion. Any determination made by the Committee
with respect to any Award will be made in its sole discretion at the time of
grant of the Award or, unless in contravention of any express term of this Plan
or Award, and subject to Section 5.8 hereof, at any later time, and such
determination will be final and binding on the Company and on all persons having
an interest in any Award under this Plan. The Committee may delegate to one or
more officers of the Company the authority to grant an Award under this Plan.
5. OPTIONS. The Committee may grant Nonqualified Stock Options
("NQSOS") to eligible persons and will determine the number of Shares subject
to the Option, the Exercise Price of the Option, the period during which the
Option may be exercised, and all other terms and conditions of the Option,
subject to the following:
5.1 Form of Option Grant. Each Option granted under this Plan will
be evidenced by an Award Agreement ("STOCK OPTION AGREEMENT"), which will be
in such form and contain such provisions (which need not be the same for each
Participant) as the Committee may from time to time approve, and which will
comply with and be subject to the terms and conditions of this Plan.
5.2 Date of Grant. The date of grant of an Option will be the date
on which the Committee makes the determination to grant such Option, unless
otherwise specified by the Committee. The Stock Option Agreement and a copy of
this Plan will be delivered to the Participant within a reasonable time after
the granting of the Option.
5.3 Exercise Period. Options may be exercisable immediately (subject
to repurchase pursuant to Section 11 hereof) or may be exercisable within the
times or upon the events determined by the Committee as set forth in the Stock
Option Agreement governing such Option; provided, however, that no Option will
be exercisable after the expiration of ten (10) years from the date the Option
is granted. The Committee also may provide for Options to become exercisable at
one time or from time to time, periodically or otherwise, in such number of
Shares or percentage of Shares as the Committee determines.
5.4 Exercise Price. The Exercise Price of an Option will be
determined by the Committee when the Option is granted and may not be less than
eighty-five percent (85%) of the Fair Market Value of the Shares on the date of
grant. Payment for the shares purchased must be made in accordance with Section
7 hereof.
5.5 Method of Exercise. Options may be exercised only by delivery to
the Company of a written stock option exercise agreement (the "EXERCISE
AGREEMENT") in a form approved by the Committee (which need not be the same for
each Participant), stating the number of Shares being purchased, the
restrictions imposed on the Shares purchased under such Exercise Agreement, if
any, and such representations and agreements regarding Participant's investment
intent and access to information and other matters, if any, as may be required
or desirable by the Company to comply with applicable securities laws,
together with payment in full of the Exercise Price, and any applicable taxes,
for the number of Shares being purchased.
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<PAGE> 3
5.6 Termination. Subject to earlier termination pursuant to Sections
17 and 18 hereof and notwithstanding the exercise periods set forth in the
Stock Option Agreement, exercise of an Option will always be subject to the
following:
(a) If the Participant is Terminated for any reason except death,
Disability or for Cause, then the Participant may exercise such
Participant's Options only to the extent that such Options are
exercisable upon the Termination Date and such Options must be
exercised by the Participant, if at all, as to all or some of
the Vested Shares calculated as of the Termination Date, within
three (3) months after the Termination Date (or within such
shorter time period, not less than thirty (30) days, or within
such longer time period, not exceeding five (5) years, after the
Termination Date as may be determined by the Committee, but in
any event, no later than the expiration date of the Options.
(b) If the Participant is Terminated because of Participant's death
or Disability (or the Participant dies within three (3) months
after a Termination other than for Cause), then Participant's
Options may be exercised only to the extent that such Options
are exercisable by Participant on the Termination Date and must
be exercised by Participant (or Participant's legal
representative or authorized assignee), if at all, as to all or
some of the Vested Shares calculated as of the Termination Date,
within twelve (12) months after the Termination Date (or within
such shorter time period, not less than six (6) months, or
within such longer time period, not exceeding five (5) years,
after the Termination Date as may be determined by the
Committee, but in any event no later than the expiration date of
the Options.
(c) If the Participant is terminated for Cause, then Participant's
Options shall expire on such Participant's Termination Date, or
at such later time and on such conditions as are determined by
the Committee.
5.7 Limitations on Exercise. The Committee may specify a reasonable
minimum number of Shares that may be purchased on any exercise of an Option,
provided that such minimum number will not prevent Participant from exercising
the Option for the full number of Shares for which it is then exercisable.
5.8 Modification, Extension or Removal. The Committee may modify,
extend or renew outstanding Options and authorize the grant of new Options in
substitution therefor, provided that any such action may not, without the
written consent of a Participant, impair any of such Participant's rights under
any Option previously granted. The Committee may reduce the Exercise Price of
outstanding Options without the consent of Participants affected by a written
notice to them; provided, however, that the Exercise Price may not be reduced
below the minimum Exercise Price that would be permitted under Section 5.4
hereof for Options granted on the date the action is taken to reduce the
Exercise Price.
6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the
Company to sell to an eligible person Shares that are subject to restrictions.
The Committee will determine to whom an offer will be made, the number of Shares
the person may purchase, the Purchase Price, the restrictions to which the
Shares will be subject, and all other terms and conditions of the Restricted
Stock Award, subject to the following:
6.1 Form of Restricted Stock Award. All purchases under a
Restricted Stock Award made pursuant to this Plan will be evidenced by an Award
Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form
(which need not be the same for each Participant) as the Committee will
from time to time approve, and will comply with and be subject to the terms and
conditions of this Plan. The Restricted Stock Award will be accepted by the
Participant's execution and delivery of the Restricted Stock Purchase Agreement
and full payment for the Shares to the Company within thirty (30) days from the
date the Restricted Stock Purchase Agreement is delivered to the person. If
such person does not execute and deliver the Restricted Stock Purchase
Agreement along with full payment for the Shares to the Company within such
thirty (30) days, then the offer will terminate, unless otherwise determined by
the Committee.
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<PAGE> 4
6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a
Restricted Stock Award will be determined by the Committee and will be at least
eighty-five percent (85%) of the Fair Market Value of the Shares on the date
the Restricted Stock Award is granted or at the time the purchase is
consummated. Payment of the Purchase Price must be made in accordance with
Section 7 hereof.
6.3 Restrictions. Restricted Stock Awards may be subject to the
restrictions set forth in Section 11 hereof.
7. PAYMENT FOR SHARE PURCHASES.
7.1 Payment. Payment for Shares purchased pursuant to this Plan may
be made in cash (by check) or, where expressly approved for the Participant by
the Committee and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of shares that: (i) either (A) have been owned
by Participant for more than six (6) months and have been
paid for within the meaning of SEC Rule 144 (and, if such
shares were purchased from the Company by use of a
promissory note, such note has been fully paid with respect
to such shares) or (B) were obtained by Participant in the
public market and (ii) are clear of all liens, claims,
encumbrances or security interests.
(c) by tender of a full recourse promissory note having such
terms as may be approved by the Committee and bearing
interest at a rate sufficient to avoid imputation of income
under Sections 483 and 1274 of the Code; provided, however,
that Participants who are not employees or directors of the
Company will not be entitled to purchase Shares with a
promissory note unless the note is adequately secured by
collateral other than the Shares.
(d) by waiver of compensation due or accrued to the Participant
for services rendered;
(e) with respect only to purchases upon exercise of an Option,
and provided that a public market for the Company's stock
exists:
(1) through a "same day sale" commitment from the
Participant and a broker-dealer that is a member of the
National Association of Securities Dealers (an "NASD
DEALER") whereby the Participant irrevocably elects to
exercise the Option and to sell a portion of the Shares
so purchased to pay for the Exercise Price, and whereby
the NASD Dealer irrevocably commits upon receipt of
such Shares to forward the Exercise Price directly to
the Company; or
(2) through a "margin" commitment from the Participant and
an NASD Dealer whereby the Participant irrevocably
elects to exercise the Option and to pledge the Shares
so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer in the amount
of the Exercise Price, and whereby the NASD Dealer
irrevocably commits upon receipt of such Shares to
forward the Exercise Price directly to the Company; or
(f) by any combination of the foregoing.
7.2 Loan Guarantees. The Committee may help the Participant pay for
Shares purchased under this Plan by authorizing a guarantee by the Company of a
third-party loan to the Participant.
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<PAGE> 5
8. WITHHOLDING TAXES.
8.1 Withholding Generally. Whenever Shares are to be issued in
satisfaction of Awards granted under this Plan, the Company may require the
Participant to remit to the Company an amount sufficient to satisfy federal,
state and local withholding tax requirements prior to the delivery of any
certificate or certificates for such Shares. Whenever, under this Plan,
payments in satisfaction of Awards are to be made in cash, such payment will be
net of an amount sufficient to satisfy federal, state, and local withholding
tax requirements.
8.2 Stock Withholding. When, under applicable tax laws, a
Participant incurs tax liability in connection with the exercise or vesting of
any Award that is subject to tax withholding and the Participant is obligated
to pay the company the amount required to be withheld, the Committee may in its
sole discretion allow the Participant to satisfy the minimum withholding tax
obligation by electing to have the Company withhold from the Shares to be
issued that number of Shares having a Fair Market Value equal to the minimum
amount required to be withheld, determined on the date that the amount of tax
to be withheld is to be determined. All elections by a Participant to have
Shares withheld for this purpose will be made in accordance with the
requirements established by the Committee for such elections and be in writing
in a form acceptable to the Committee.
9. PRIVILEGES OF STOCK OWNERSHIP.
9.1 Voting and Dividends. No Participant will have any of the rights
of a shareholder with respect to any Shares until the Shares are issued to the
Participant. After Shares are issued to the Participant, the Participant will
be a shareholder and have all the rights of a shareholder with respect to such
Shares, including the right to vote and receive all dividends or other
distributions made or paid with respect to such Shares; provided, that if such
Shares are Restricted Stock, then any new, additional or different securities
the Participant may become entitled to receive with respect to such Shares by
virtue of a stock dividend, stock split or any other change in the corporate or
capital structure of the Company will be subject to the same restrictions as
the Restricted Stock; provided, further, that the Participant will have no
right to retain such stock dividends or stock distributions with respect to
Unvested Shares that are repurchased pursuant to Section 11 hereof. The Company
will comply with Section 260.140.1 of Title 10 of the California Code of
Regulations with respect to the voting rights of Common Stock.
9.2 Financial Statements. The company will provide financial
statements to each Participant prior to such Participant's purchase of Shares
under this Plan, and to each Participant annually during the period such
Participant has Awards outstanding, or as otherwise required under Section
260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding
the foregoing, the Company will not be required to provide such financial
statements to Participants when issuance is limited to key employees whose
services in connection with the Company assure them access to equivalent
information.
10. TRANSFERABILITY. Awards granted under this Plan, and any interest
therein, will not be transferable or assignable by participant, and may not be
made subject to execution, attachment or similar process, otherwise than by
will or by the laws of descent and distribution. During the lifetime of the
Participant an Award will be exercisable only by the Participant or
Participant's legal representative and any elections with respect to an Award,
may be made only by the Participant or Participant's legal representative.
11. RESTRICTIONS OF SHARES.
11.1 Right of First Refusal. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right of first refusal to purchase all Shares that a Participant (or a
subsequent transferee) may propose to transfer to a third party, provided, that
such right of first refusal terminates upon the company's initial public
offering of Common Stock pursuant to an effective registration statement filed
under the Securities Act.
11.2 Right of Repurchase. At the discretion of the Committee, the
Company may reserve to itself and/or its assignee(s) in the Award Agreement a
right to repurchase Unvested Shares held by a Participant for
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<PAGE> 6
cash and/or cancellation of purchase money indebtedness following such
Participant's Termination at any time within the later of ninety (90) days
after the Participant's Termination Date and the date the Participant purchases
Shares under the Plan at the Participant's Exercise Price or Purchase Price, as
the case may be.
12. CERTIFICATES. All certificates for Shares or other securities
delivered under this Plan will be subject to such stock transfer orders,
legends and other restrictions as the Committee may deem necessary or
advisable, including restrictions under any applicable, federal, state or
foreign securities law, or any rules, regulations and other requirements of the
SEC or any stock exchange or automated quotation system upon which the Shares
may be listed or quoted.
13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a
Participant's Shares, the Committee may require the Participant to deposit all
certificates representing Shares, together with stock powers or other
instruments of transfer approved by the Committee, appropriately endorsed in
blank, with the Company or an agent designated by the Company to hold in escrow
until such restrictions have lapsed or terminated, and the Committee may cause
a legend or legends referencing such restrictions to be placed on the
certificates. Any Participant who is permitted to execute a promissory note as
partial or full consideration for the purchase of Shares under this Plan will
be required to pledge and deposit with the Company all or part of the Shares so
purchased as collateral to secure the payment of Participant's obligations to
the Company under the promissory note; provided, however, that the Committee
may require or accept other or additional forms of collateral to secure the
payment of such obligation and, in any event, the Company will have full
recourse against the Participant under the promissory note notwithstanding any
pledge of the Participant's Shares or other collateral. In connection with any
pledge of the Shares, Participant will be required to execute and deliver a
written pledge agreement in such form as the Committee will from time to time
approve. The Shares purchased with the promissory note may be released from the
pledge on a pro rata basis as the promissory note is paid.
14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from
time to time, authorize the Company, with the consent of the respective
Participants, to issue new Awards in exchange for the surrender and
cancellation of any or all outstanding Awards. The Committee may at any time
buy from a Participant an Award previously granted with payment in cash, shares
of Common Stock of the Company (including Restricted Stock) or other
consideration, based on such terms and conditions as the Committee and the
Participant may agree.
15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award will not be
effective unless such Award is in compliance with all applicable federal and
state securities laws, rules and regulations of any governmental body, and the
requirements of any stock exchange or automated quotation system upon which the
Shares may then be listed or quoted, as they are in effect on the date of grant
of the Award and also on the date of exercise or other issuance. Notwithstanding
any other provision in this Plan, the Company will have no obligation to issue
or deliver certificates for Shares under this Plan prior to (a) obtaining any
approvals from governmental agencies that the Company determines are necessary
or advisable, and/or (b) compliance with any exemption, completion of any
registration or other qualification of such Shares under any state or federal
law or ruling of any governmental body that the Company determines to be
necessary or advisable. The Company will be under no obligation to register the
Shares with the SEC or to effect compliance with the exemption, registration,
qualification or listing requirements of any state securities laws, stock
exchange or automated quotation system, and the Company will have no liability
for any inability or failure to do so.
16. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted
under this Plan will confer or be deemed to confer on any Participant any right
to continue in the employ of, or to continue any other relationship with, the
Company or any Parent or Subsidiary of the Company or limit in any way the
right of the Company or any Parent or Subsidiary of the Company to terminate
Participant's employment or other relationship at any time, with or without
Cause.
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<PAGE> 7
17. CORPORATE TRANSACTIONS.
17.1 Assumption or Replacement of Awards by Successor or Acquiring
Corporation. In the event of (a) a dissolution or liquidation of the Company,
(b) a merger or consolidation in which the Company is not the surviving
corporation (other than a merger or consolidation with a wholly-owned
subsidiary, a reincorporation of the Company in a different jurisdiction, or
other transaction in which there is no substantial change in the shareholders
of the Company or their relative stock holdings and the Awards granted under
this Plan are assumed, converted or replaced by the successor or acquiring
corporation, which assumption, conversion or replacement will be binding on all
Participants), (c) a merger in which the Company is the surviving corporation
but after which the shareholders of the Company immediately prior to such
merger (other than any shareholder which merges with the Company in such
merger, or which owns or controls another corporation which merges, with the
Company in such merger) cease to own their shares or other equity interests in
the Company, or (d) the sale of all or substantially all of the assets of the
Company, any or all outstanding Awards may be assumed, converted or replaced by
the successor or acquiring corporation (if any), which assumption, conversion
or replacement will be binding on all Participants. In the alternative, the
successor or acquiring corporation may substitute equivalent Awards or provide
substantially similar consideration to Participants as was provided to
shareholders (after taking into account the existing provisions of the Awards).
The successor or acquiring corporation may also issue, in place of outstanding
Shares of the Company held by the Participant, substantially similar shares or
other property subject to repurchase restrictions and other provisions no less
favorable to the Participant than those which applied to such outstanding
Shares immediately prior to such transaction described in this Section 17.1. In
the event such successor or acquiring corporation (if any) refuses to assume or
substitute Awards, as provided above, pursuant to a transaction described in
this Section 17.1, then notwithstanding any other provision in this Plan to the
contrary, such Awards will expire on such transaction at such time and on such
conditions as the Board will determine.
17.2 Other Treatment of Awards. Subject to any greater rights granted
to Participants under the foregoing provisions of this Section 17, in the event
of the occurrence of any transaction described in Section 17.1 hereof, any
outstanding Awards will be treated as provided in the applicable agreement or
plan of merger, consolidation, dissolution, liquidation or sale of assets.
17.3 Assumption of Awards by the Company. The Company, from time to
time, also may substitute or assume outstanding awards granted by another
company, whether in connection with an acquisition of such other company or
otherwise, by either (a) granting an Award under this Plan in substitution of
such other company's award or (b) assuming such award as if it had been granted
under this Plan if the terms of such assumed award could be applied to an Award
granted under this Plan. Such substitution or assumption will be permissible if
the holder of the substituted or assumed award would have been eligible to be
granted an Award under this Plan if the other company had applied the rules of
this Plan to such grant. In the event the Company assumes an award granted by
another company, the terms and conditions of such award will remain unchanged
(except that the exercise price and the number and nature of shares issuable
upon exercise of any such option will be adjusted appropriately pursuant to
Section 424(a) of the Code). In the event the Company elects to grant a new
Option rather than assuming an existing option, such new Option may be granted
with a similarly adjusted Exercise Price.
18. ADOPTION OF PLAN. This Plan will become effective on the date that it
is adopted by the Board (the "EFFECTIVE DATE"). No shareholder approval will be
required for this Plan to become effective.
19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided
herein, this Plan will terminate ten (10) years from the Effective Date or, if
earlier, the date of shareholder approval. This Plan and all agreements
hereunder shall be governed by and construed in accordance with the laws of the
State of California excluding that body of law pertaining to conflict of laws.
20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.8 hereof, the
Board may at any time terminate or amend this Plan in any respect, including
without limitation amendment of any form of Award Agreement or instrument to be
executed pursuant to this Plan.
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<PAGE> 8
21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the
Board nor any provision of this Plan will be construed as creating any
limitations on the power of the Board to adopt such additional compensation
arrangements as it may deem desirable, including, without limitation, the
granting of stock options and other equity awards otherwise than under this
Plan, and such arrangements may be either generally applicable or applicable
only in specific cases.
22. DEFINITIONS. As used in this Plan, the following terms will have the
following meanings:
"AWARD" means any award under this Plan, including any Option or
Restricted Stock Award.
"AWARD AGREEMENT" means, with respect to each Award, the signed
written agreement between the Company and the Participant setting forth the
terms and conditions of the Award.
"BOARD" means the Board of Directors of the Company.
"CAUSE" means Termination because of (i) any willful material
violation by the Participant of any law or regulation applicable to the
business of the Company or a Parent or Subsidiary of the Company, the
Participant's conviction for, or guilty plea to, a felony or a crime involving
moral turpitude, any willful perpetration by the Participant of a common law
fraud, (ii) the Participant's commission of an act of personal dishonesty which
involves personal profit in connection with the Company or any other entity
having a business relationship with the Company, (iii) any material breach by
the Participant of any provision of any agreement or understanding between the
Company or any Parent or Subsidiary of the Company and the Participant
regarding the terms of the Participant's service as an employee, director or
consultant to the Company or a Parent or Subsidiary of the Company, including,
without limitation, the willful and continued failure or refusal of the
Participant to perform the material duties required of such Participant as an
employee, director or consultant of the Company or a Parent or Subsidiary of
the Company, other than as a result of having a Disability, or a breach of any
applicable invention assignment and confidentiality agreement or similar
agreement between the Company and the Participant, (iv) Participant's disregard
of the policies of the Company or any Parent or Subsidiary of the Company so as
to cause loss, damage or injury to the property, reputation or employees of the
Company or a Parent or Subsidiary of the Company, or (v) any other misconduct
by the Participant which is materially injurious to the financial condition or
business reputation of, or is otherwise materially injurious to, the Company or
a Parent or Subsidiary of the Company.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee appointed by the Board to administer
this Plan, or if no committee is appointed, the Board.
"DISABILITY" means a disability, whether temporary or permanent,
partial or total, as determined by the Committee.
"EXERCISE PRICE" means the price at which a holder of an Option may
purchase the Shares issuable upon exercise of the Option.
"FAIR MARKET VALUE" means, as of any date, the value of a share of
the Company's Common Stock determined as follows:
(a) if such Common Stock is then quoted on the Nasdaq National
Market, its closing price on the Nasdaq National Market on
the date of determination as reported in The Wall Street
Journal;
(b) if such Common Stock is publicly traded and is then listed
on a national securities exchange, its closing price on the
date of determination on the principal national
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<PAGE> 9
securities exchange on which the Common Stock is listed or admitted to
trading as reported in The Wall Street Journal;
(c) if such Common Stock is publicly traded but is not quoted on the
Nasdaq National Market nor listed or admitted to trading on a national
securities exchange, the average of the closing bid and asked prices
on the date of determination as reported by The Wall Street Journal
(or, if not so reported, as otherwise reported by any newspaper or
other source as the Board may determine); or
(d) if none of the foregoing is applicable, by the Committee in good
faith.
"OPTION" means an award of an option to purchase Shares pursuant to
Section 5 hereof.
"PARENT" means any corporation (other than the company) in an unbroken
chain of corporations ending with the Company if each of such corporations
other than the company owns stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
"PARTICIPANT" means a person who receives an Award under this Plan.
"PLAN" means this Brocade Communications Systems, Inc. 1998 Executive
Officers' Equity Incentive Plan, as amended from time to time.
"PURCHASE PRICE" means the price at which a Participant may purchase
Restricted Stock.
"RESTRICTED STOCK" means Shares purchased pursuant to a Restricted Stock
Award.
"RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6
hereof.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" means shares of the Company's common Stock reserved for issuance
under this Plan, as adjusted pursuant to Sections 2 and 17 hereof, and any
successor security.
"SUBSIDIARY" means any corporation (other than the Company) in an unbroken
chain of corporations beginning with the Company if each of the corporations
other than the last corporation in the unbroken chain owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes
of stock in one of the other corporations in such chain.
"TERMINATION" or "TERMINATED" means, for purposes of this Plan with
respect to a Participant, that the Participant has for any reason ceased to
provide substantial services as (i) an employee, officer, director, consultant
or independent contractor to the Company or a Parent or Subsidiary or affiliate
of the Company, or (ii) as a consultant, independent contractor or advisor to
the Board of Directors of the Company. A Participant will not be deemed to have
ceased to provide services in the case of (i) sick leave, (ii) military leave,
or (iii) any other leave of absence approved by the Committee, provided that
such leave is for a period of not more than ninety (90) days unless
reinstatement (or, in the case of an employee with an ISO, reemployment) upon
the expiration of such leave is guaranteed by contract or statute, or unless
provided otherwise pursuant to formal policy adopted from time to time by the
Company and issued and promulgated in writing. In the case of any Participant
on (i) sick leave, (ii) military leave or (iii) an approved leave of absence,
the Committee may make such provisions respecting suspension of vesting of the
Award while on leave from the Company or a Parent or Subsidiary of the Company
as it may deem appropriate, except that in no event may an Option be exercised
after the expiration of the term set forth in the Stock Option Agreement. The
Committee will have sole discretion to determine whether a Participant has
ceased to provide services and the effective date on which the Participant
ceased to provide services (the "TERMINATION DATE").
-9-
<PAGE> 10
"UNVESTED SHARES" means "Unvested Shares" as defined in the Award
Agreement.
"VESTED SHARES" means "Vested Shares" as defined in the Award Agreement.
-10-
<PAGE> 1
EXHIBIT 10.5
BROCADE COMMUNICATIONS SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Brocade Communications Systems, Inc., a
Delaware corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
<PAGE> 2
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Period" shall mean a period of approximately six
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after June 1 and terminating on the
last Trading Day in the period ending the following November 30, or commencing
on the first Trading Day on or after December 1 and terminating on the last
Trading Day in the period ending the following May 31; provided, however, that
the first Offering Period under the Plan shall commence with the first Trading
Day on or after the date on which the Securities and Exchange Commission
declares the Company's Registration Statement effective and ending on the last
Trading Day on or before November 30, 1999. The duration of Offering Periods may
be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(o) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after June 1 and December 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before November 30, 1999. The
Board shall have the power to change the duration of Offering Periods (including
the commencement dates thereof) with respect to future offerings without
stockholder approval if such change is announced at least five (5) days prior to
the scheduled beginning of the first Offering Period to be affected thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
3
<PAGE> 4
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than 3000
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in
4
<PAGE> 5
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, the shares purchased upon exercise of his or
her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
5
<PAGE> 6
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 200,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2000 equal to the lesser of (i) 2,500,000
shares, (ii) 2.5% of the outstanding shares on such date or (iii) a lesser
amount determined by the Board. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more
6
<PAGE> 7
dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the
7
<PAGE> 8
New Exercise Date and that the participant's option shall be exercised
automatically on the New Exercise Date, unless prior to such date the
participant has withdrawn from the Offering Period as provided in Section 10
hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and Section 20 hereof, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
8
<PAGE> 9
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval
or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
9
<PAGE> 10
EXHIBIT A
BROCADE COMMUNICATIONS SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: _______
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the Brocade Communications Systems, Inc. 1999 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the
amount of ____% of my Compensation on each payday (from 1 to 15%) during the
Offering Period in accordance with the Employee Stock Purchase Plan. (Please
note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for
the purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I understand
that if I do not withdraw from an Offering Period, any accumulated payroll
deductions will be used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan.
I understand that my participation in the Employee Stock Purchase Plan is in all
respects subject to the terms of the Plan. I understand that my ability to
exercise the option under this Subscription Agreement is subject to stockholder
approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated for
federal income tax purposes as having received ordinary income at the
<PAGE> 11
time of such disposition in an amount equal to the excess of the fair market
value of the shares at the time such shares were purchased by me over the price
which I paid for the shares. I hereby agree to notify the Company in writing
within 30 days after the date of any disposition of shares and I will make
adequate provision for Federal, state or other tax withholding obligations, if
any, which arise upon the disposition of the Common Stock. The Company may, but
will not be obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding necessary
to make available to the Company any tax deductions or benefits attributable to
sale or early disposition of Common Stock by me. If I dispose of such shares at
any time after the expiration of the 2-year holding period, I understand that I
will be treated for federal income tax purposes as having received income only
at the time of such disposition, and that such income will be taxed as ordinary
income only to the extent of an amount equal to the lesser of (1) the excess of
the fair market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market value
of the shares on the first day of the Offering Period. The remainder of the
gain, if any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock
Purchase Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan
NAME: (Please print)
---------------------------------------------------------
(First) (Middle) (Last)
- --------------------------------------------------
Relationship
- --------------------------------------------------
(Address)
Employee's Social Security Number:
-------------------------------
Employee's Address:
-------------------------------------------------
-------------------------------------------------
-----------------------------------------------
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<PAGE> 12
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT
THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
------------------------ ----------------------------------
Signature of Employee
----------------------------------
Spouse's Signature
(If beneficiary other than spouse)
<PAGE> 13
EXHIBIT B
BROCADE COMMUNICATIONS SYSTEMS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Brocade
Communications Systems, Inc. 1999 Employee Stock Purchase Plan which began on
___________, ______ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
- ------------------------------------
- ------------------------------------
- ------------------------------------
Signature:
- ------------------------------------
Date:
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<PAGE> 1
EXHIBIT 10.8
SUBLEASE
This Sublease ("Sublease") is entered into on this 6 day of May, 1997 by and
between SYMMETRICOM, INC., a California corporation ("Sublandlord") and BROCADE
COMMUNICATIONS SYSTEMS, INC., a California corporation ("Subtenant") as a
Sublease under that certain lease (the "Master Lease") dated June 10, 1996 by
and between Sublandlord, as "tenant", and Nexus Equity, Inc., a California
corporation ("Master Landlord"), as "landlord".
1. RECITALS. This Sublease is made with reference to the following
facts and with the following intentions:
1.1 Pursuant to the Master Lease, Master Landlord has agreed to
construct and lease to Sublandlord a certain approximately one hundred seventeen
thousand seven hundred thirty-nine (117,739) square foot building located at
1901 Guadalupe Parkway and 2300 Orchard Parkway, San Jose, California, together
with all immediately adjacent outside areas and appurtenances related thereto
and shown on the site plan (the "Site Plan") attached hereto as Exhibit A
(collectively, the "Master Premises"). A true, complete and correct copy of the
Master Lease, which includes all exhibits, addenda, and amendments thereto, is
attached hereto as Exhibit B.
1.2 Sublandlord now desires to sublease a portion of the Master
Premises to Subtenant and Subtenant desires to sublease a portion of the Master
Premises from Sublandlord, on the terms and conditions set forth in this
Sublease.
2. SUBLEASED PREMISES.
2.1 Sublandlord hereby subleases to Subtenant and Subtenant
hereby subleases from Sublandlord for the term at the rental, and upon all of
the conditions set forth herein, a portion of the Master Premises consisting of
approximately thirty-five thousand three hundred seventy (35,370) square feet of
Rentable Area in the location and configuration shown on Exhibit A-1 attached
hereto (the "Subleased Premises").
2.2 Sublandlord also hereby grants Subtenant the non-exclusive
right to use for their intended purposes the outside areas designated on the
Site Plan as common area not intended for the exclusive use of any occupant of
the Master Premises. Subtenant shall not have the right to use any areas with
the building not specifically designated as common area including, without
limitation, the elevator and any interior corridors, stairways, doorways and
restrooms not so designated. Notwithstanding the foregoing, Subtenant shall have
the right, during normal business hours, upon prior reasonable notice to
Sublandlord, to use the elevator solely for the purpose of (i) moving
Subtenant's equipment in and out of the building, and (ii) provided handicapped
access to those whose are unable to use the stairwell to access the second floor
of the Master Premises or to the extent required by the Americans With
Disabilities Act. Subtenant shall have the right to use one
<PAGE> 2
hundred thirty (130) parking spaces in the location shown on the Site Plan.
Subtenant shall not at any time use more parking spaces than the number so
allocated to Subtenant or park its vehicles in any portion of the Master
Premises not designated for the use of Subtenant.
2.3 On the Commencement Date, Sublandlord shall deliver to
Subtenant the Subleased Premises substantially in accordance with that certain
space plan dated April 11, 1997 approved by Sublandlord and Subtenant and
attached hereto as Exhibit C. Subtenant shall accept the Subleased Premises in
their then existing condition, "as is" and shall waive any right or claim
Subtenant may have against Sublandlord arising out of the condition of the
Subleased Premises. Subtenant shall promptly notify Sublandlord in writing of
any deficiencies or defects that Subtenant discovers in the Subleased Premises.
Sublandlord shall use reasonable efforts to enforce the warranties, covenants
and representations made by Master Landlord pursuant to Sections 14.4, 14.5 and
39 of the Master Lease, the obligation of Master Landlord to complete
"punch-list" items pursuant to the terms of the Work Letter attached to the
Master Lease, and any other obligation of Master Landlord set forth in the
Master Lease with respect to the construction of the Master Premises. Except for
Sublandlord's obligations stated in the immediately preceding sentence,
Sublandlord shall not be obligated to repair any defects or deficiencies in the
work required to be constructed by Master Landlord pursuant to the terms of the
Master Lease and Sublandlord shall not be liable for any failure by Master
Landlord to perform its obligations in this regard under the Master Lease.
Sublandlord shall use reasonable efforts to enforce any warranties contained in
the owner-contractor agreement between Sublandlord and Devcon Construction, Inc.
for the benefit of Subtenant.
3. TERM.
3.1 The term of this Sublease (the "Sublease Term") shall
commence on that date (the "Commencement Date") which is the later to occur of
(i) June 1, 1997 or (ii) the date that Tenant's Improvements (as that term is
defined in the Work Letter) are substantially complete (as that term is defined
in Section 4.2 of the Master Lease) and shall expire on the date which is
forty-two (42) months following the Commencement Date, unless this Sublease is
sooner terminated pursuant to its terms or the Master Lease is sooner terminated
pursuant to its terms. Accordingly, if the Commencement Date occurs on June 1,
1997, the Sublease Term shall expire on November 30, 2000. Notwithstanding the
foregoing to the contrary, if Subtenant enters upon and uses the Subleased
Premises for the purpose of conducting its business therein (as opposed to
installing its trade fixtures and equipment as permitted in Section 3.3 hereof),
then the Commencement Date shall become that date on which Subtenant uses the
Subleased Premises for such purpose.
3.2 If Sublandlord is unable to deliver possession of the
Subleased Premises to Subtenant for any reason whatsoever on or before June 1,
1997, then this Sublease shall not be void or voidable, nor shall Sublandlord be
liable to Subtenant for any loss or damage; however, in such event, Base Monthly
Rent and Additional Rent shall be abated until such date (the "Delivery Date")
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<PAGE> 3
as Sublandlord delivers possession of the Premises to Subtenant substantially
complete, in which event the Delivery Date shall be deemed to be the
Commencement Date.
3.3 On the Effective Date, Subtenant shall have the right to
enter upon the Subleased Premises solely for the purpose of installing its trade
fixtures and equipment in the Subleased Premises so long as such entry does not
interfere with any work then being conducted by Sublandlord's contractor and
subcontractors. Such entry shall be subject to all of the terms of this Sublease
(including, without limitation, the obligations regarding indemnity and
insurance) except those regarding the obligation to pay Rent.
4. RENT.
4.1 Commencing on the Commencement Date and thereafter on the
first day of each calendar month occurring thereafter during the remainder of
the Sublease Term, Subtenant shall pay to Sublandlord the following sums as base
monthly rent ("Base Monthly Rent"):
(a) Fifty-Nine Thousand Four Hundred Twenty-One Dollars and
Sixty Cents ($59,421.60) for the period commencing on the Commencement Date and
continuing until the first anniversary of the Commencement Date;
(b) Sixty-One Thousand One Hundred Ninety Dollars and Ten
Cents ($61,190.10) for the period commencing on the first anniversary of the
Commencement Date and continuing until the second anniversary of the
Commencement Date;
(c) Sixty-Two Thousand Nine Hundred Fifty-Eight Dollars and
Sixty Cents ($62,958.60) for the period commencing on the second anniversary of
the Commencement Date and continuing until the third anniversary of the
Commencement Date; and
(d) Sixty-Four Thousand Seven Hundred Twenty-Seven Dollars
and Ten Cents ($64,727.10) for the period commencing on the third anniversary of
the Commencement Date and continuing until the expiration of the Sublease Term.
4.2 Sublandlord and Subtenant agree as follows with regard to
Subtenant's obligation to pay additional rent:
(a) As additional rent, commencing on the Commencement Date
and continuing throughout the Sublease term, Subtenant shall pay to, or
reimburse Sublandlord for, the following costs and expenses (collectively,
"Operating Costs") (i) all Additional Rent (as that term is defined in the
Master Lease) payable by Sublandlord to Master Landlord under the Master Lease
to the extent fairly allocable to the Subleased Premises (including, without
limitation the portion of the Management Fee described in Section 7.1 of the
Master Lease that is fairly allocable to the Subleased Premises); (ii) all costs
and expenses for which Sublandlord is responsible pursuant to
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<PAGE> 4
Section 7.2 of the Master Lease and all costs and expenses incurred by
Sublandlord in discharging its obligations pursuant to Section 7.2 of the Master
Lease to the extent such costs and expenses are fairly allocable to the
Subleased Premises; (iii) any other costs or expenses incurred by Sublandlord in
repairing, maintaining, replacing, restoring and insuring (including the cost of
both casualty and liability insurance carried by Sublandlord and/or, to the
extent reimbursable by Sublandlord under the Master Lease, Master Landlord) the
Master Premises to the extent fairly allocable to the Subleased Premises; (iv)
all costs, charges and expenses incurred by Sublandlord for utilities
(including, without limitation, the cost of the operation of the heating,
ventilating and air conditioning system, and charges for electricity, water and
sewer, as more particularly set forth in Section 4.3 hereof) to the extent
fairly allocable to the Subleased Premises; (v) all costs and expenses incurred
by Sublandlord in providing any other services to the Subleased Premises
(including, without limitation, janitorial service and any costs incurred by
Sublandlord for third-party property management services) to the extent fairly
allocable to the Subleased Premises; and (vi) all taxes, assessments and other
levies and charges required to be paid by Sublandlord pursuant to Section 13 of
the Master Lease to the extent fairly allocable to the Subleased Premises.
Notwithstanding the foregoing to the contrary, Subtenant shall not be required
to pay any additional rent that is payable as a result of a default by
Sublandlord of any of its obligations under the Master Lease.
(b) Subtenant shall be entitled to the benefit of all rebates
on account of taxes, rates, levies, charges and assessments received by
Sublandlord pursuant to Section 13.4 of the Master Lease to the extent fairly
allocable to the Subleased Premises and the Sublease Term.
(c) Except as otherwise provided below in this subsection,
Subtenant shall pay all Operating Costs in advance in estimated monthly
installments, in accordance with the following: (i) Sublandlord shall deliver to
subtenant Sublandlord's reasonable estimate of Operating Costs it anticipates
will be paid or incurred for the ensuing twelve (12) - month period; (ii) during
the first year of the Sublease Term, Sublandlord shall have the right to adjust
it estimate of Operating Costs on a quarterly basis and to adjust the monthly
installment payable by Subtenant to reflect such revised estimate, (iii) during
such twelve (12) - month period Subtenant shall pay to Sublandlord Operating
Costs in advance in monthly installments as required by Sublandlord due with
monthly installments of Base Monthly Rent; and (iv) within ninety (90) days
after the end of each such twelve (12) - month period, Sublandlord shall furnish
to Subtenant a statement in reasonable detail of the actual amount of Operating
Costs paid or incurred by Sublandlord during the just ended twelve (12) -month
period and thereupon there shall be an adjustment between Sublandlord and
Subtenant, with payment to Landlord or credit by Landlord against the next
installment of Base Monthly Rent, as the case may require, within ten (10) days
after delivery by Sublandlord to Subtenant of said. In addition to the
foregoing, Sublandlord shall have the right to bill Subtenant for any
non-recurring or extraordinary Operating Cost on a case-by-case basis, in which
event Subtenant pay to Sublandlord its share of such Operating Cost within
fifteen (15) days after Subtenant shall have received written demand for such
payment together with substantiating documentation therefor.
(d) All amounts in addition to Base Monthly Rent required to
be paid by Subtenant under this sublease shall be deemed to be rent ("Rent").
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<PAGE> 5
(e) The parties hereto acknowledge paragraphs 7.2 and
portions of Section 13 of the Master Lease are not incorporated into this
Sublease by reference and that the terms of this Section 4.2 govern the
obligations of Subtenant to pay the amounts set forth in said Sections 7.2 and
13.
4.3 Subtenant acknowledges that only a portion of the Subleased
Premises shall be separately metered for utilities. Accordingly, the parties
agree as follows:
(a) The cost of electricity to the area of the Subleased
Premises which is separately metered shall be charged to Subtenant at the rate
charged by PG&E to Sublandlord therefor; and
(b) The cost of electricity to the area of the Subleased
Premises which is not separately metered also shall be charged to Subtenant at
the rate charged by PG&E to Sublandlord therefor and Subtenant shall reimburse
Sublandlord, as additional rent, the cost of such electricity which is fairly
allocable to the Subleased Premises as reasonably determined by Sublandlord.
4.4 Subtenant shall pay Base Monthly Rent to Sublandlord in
advance of the first day of each month of the term hereof. Rent for any period
during the term hereof which is for less than one month shall be a pro rata
portion of the monthly installment. Rent shall be payable without deduction or
offset to Sublandlord at the address stated herein. If the Subleased Premises
shall be delivered to Subtenant on a day other than the first day of a calendar
month, then Subtenant shall pay, upon Subtenant's possession of the Subleased
Premises, a pro rata portion of Base Monthly Rent and additional rent, prorated
on a per diem basis, with respect to the portion of the first fractional
calendar month of Subtenant's possession of the Subleased Premises.
4.5 In a variety of places throughout this Sublease, the parties
have provided that certain costs will be paid by Sublandlord or Subtenant based
upon the extent to which such amounts are "fairly allocable" to the Subleased
Premises. This concept shall generally mean that an expense shall be allocated
to the Subleased Premises based upon the ratio that the Rentable Area of the
Subleased Premises bears to the Rentable Area of the Master Premises. For
example, real property taxes which are "fairly allocable" to the Subleased
Premises would be determined by multiplying the fraction 35,370/117,739 by the
total amount of real property taxes due under the Master Lease for the Master
Premises. However, if an item of expense relates only to the Subleased Premises,
and does not affect the remainder of the Master Premises (e.g., a repair of a
portion of the Subleased Premises), then the amount which is "fairly allocable"
to the Subleased Premises would be one hundred percent (100%) of the cost of the
repair, and if an item of expense relates only to the portions of the Master
Premises other than the Subleased Premises, and does not affect the Subleased
Premises, then the amount which is "fairly allocable" to the Subleased Premises
would be zero.
4.6 Upon execution hereof, Subtenant shall pay to Sublandlord the
sum of Seventy-Five Thousand Dollars ($75,000) to reimburse Sublandlord for a
portion of certain costs
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<PAGE> 6
incurred by Sublandlord in constructing tenant improvements in the Subleased
Premises for Subtenant.
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<PAGE> 7
5. USE.
5.1 The Subleased Premises shall be used solely for office,
research and development, assembly and testing of computer modules and systems,
and warehousing and may not be used for any other purpose without the prior
written consent of Sublandlord, which consent may be withheld in Sublandlord's
sole and absolute discretion. Notwithstanding anything to the contrary in this
Sublease or Section 39 of the Master Lease as incorporated into this Sublease,
in no event shall Subtenant or its agents, employees, contractors, invitees,
subtenants or assignees use, store, dispose of, release, manufacture, recycle,
treat, discard, transport or otherwise bring upon, keep or use any Hazardous
Material in, on, to, or about the Subleased Premises (other than customary
quantities and types of Hazardous Materials used solely for office and
janitorial purposes). Notwithstanding the foregoing to the contrary: (i)
Subtenant may use Hazardous Materials of the type and in the quantities
described in Exhibit E attached hereto to the extent such Hazardous Materials
are required for the continued operation of Subtenant's business in the
Subleased Premises for the uses permitted under this Section 5.1 (the "Permitted
Hazardous Materials"); (ii) if Subtenant desires to use any Hazardous Materials
which are not Permitted Hazardous Materials or Permitted Hazardous Materials of
a quantity in excess of those set forth in Exhibit E, Subtenant shall first
obtain Sublandlord's prior written consent to such use and/or quantity, which
consent shall not be unreasonably withheld; (iii) the Permitted Hazardous
Materials shall be used strictly in compliance with all applicable laws, rules,
regulations, ordinances, fire underwriters' requirements, codes, the provisions
of the Master Lease, and in accordance with the storage procedures described in
Exhibit E; and (iv) prior to bringing any Permitted Hazardous Materials onto the
Leased Premises, Subtenant shall present to Sublandlord for its consent, a
hazardous materials management plan prepared by Subtenant and acceptable to the
City of San Jose Fire Department (provided however, that Sublandlord shall
assume no responsibility for the adequacy or completeness of such plan by reason
of such consent) . Notwithstanding the foregoing to the contrary, the limited
right of Subtenant to use Hazardous Materials pursuant to this Section 5.1 is
personal to Brocade Communications Systems, Inc., and accordingly, no subtenant,
assignee of the Sublease or other occupant of the Subleased Premises shall use,
store, dispose of, release, manufacture, recycle, treat, discard, transport or
otherwise bring upon, keep or use any Hazardous Material in, on, to, or about
the Subleased Premises (other than customary quantities and types of Hazardous
Materials used solely for office and janitorial purposes).
5.2 Subtenant acknowledges that an "antenna farm" will be located
on the roof of the building and agrees that at no time shall Subtenant or any of
its employees, agents, contractors, invitees, subtenant or assignees enter upon
the roof for any reason whatsoever; provided however, if Subtenant has installed
an antenna on the roof pursuant to this Section 5.2, Subtenant may enter upon
the roof with the prior written consent of Sublandlord and, at Sublandlord's
election, accompanied by Sublandlord, for the sole purpose of repairing,
maintaining or otherwise attending to such antenna . Sublandlord reserves the
exclusive right to use the roof and Subtenant shall have no right to use the
roof for any reason except to the extent expressly provided in the immediately
preceding sentence. Subtenant further acknowledges that a portion of the antenna
farm is located directly above the portion of the Subleased Premises located on
the second floor of the building and
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the preferred access from the building thereto is through an electrical closet
located within the Subleased Premises. Sublandlord and Sublandlord's employees,
agents and contractors shall have the right to enter the Subleased Premises at
all reasonable times, upon reasonable notice, and during business hours to
access the antenna farm through such electrical closet. Subtenant shall have the
right to accompany Sublandlord at all times. Sublandlord shall use reasonable
efforts to minimize any interference with Subtenant's business that may be
caused by such entry. Subtenant shall have the right to install an antenna dish
on the roof of the building in accordance with the following: (i) if the
diameter of the dish in thirty-six (36) inches or less, the dish may be
installed on Sublandlord's antenna deck located on the east wing of the
building; and (ii) if the diameter of the dish exceeds thirty-six (36) inches,
the dish shall be located within the area enclosed by the roof screen in a
location approved by Sublandlord. The roof "hatches" within the Subleased
Premises and the Master Premises shall remain unlocked at all times, but may be
monitored by a security system.
5.3 Subtenant acknowledges that neither Sublandlord nor
Sublandlord's agents has made any representation or warranty to Subtenant with
regard to the Premises including, without limitation, the suitability of the
Premises for the conduct of Subtenant's business, the physical, environmental
and economic condition and the compliance of the Premises with applicable legal
requirements except as otherwise expressly provided herein.
5.4 Subtenant acknowledges that Subtenant is entering into this
Sublease and accepts the Premises on the basis of Subtenant's independent
evaluation and investigation of the Premises including, without limitation, the
matters referred to in Paragraph 5.3 above.
6. MASTER LEASE.
6.1 This Sublease is subject and subordinate to the Master Lease.
Upon any termination of the Master Lease, this Sublease shall also terminate.
Subtenant shall not commit or permit to be committed any act or omission which
shall violate any term or conditions of the Master Lease or this Sublease.
Subtenant expressly assumes and agrees to perform for the term of this Sublease,
and any extension or renewal hereof, all of the obligations on the part of the
"Tenant" to be performed under the Master Lease to the extent fairly allocable
to the Subleased Premises except as otherwise expressly provided herein;
provided however, that Subtenant shall not be required to perform any obligation
under the Master Lease that is required as a result of a default by Sublandlord
of any of its obligations under the Master Lease.
6.2 All of the terms and conditions contained in the Master Lease
that are set forth in subparagraph 6.2(g) below are incorporated into this
Sublease as if fully set forth herein subject to the following and any
additional exceptions set forth in said subparagraph 6.2(g):
(a) all references in such incorporated provisions to
"Landlord", "Tenant", "Premises", "Lease" and "Basic Annual Rent" for the
purposes of this Sublease shall be deemed to
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<PAGE> 9
refer respectively to "Sublandlord", "Subtenant", the "Subleased Premises" this
"Sublease" and "Base Monthly Rent" as such terms are defined in this Sublease.
(b) in any case where under the incorporated provisions of
the Master Lease the "Landlord" reserves or is granted the right to manage,
supervise, control, repair, alter, regulate the use of, enter or use the
Premises or any areas beneath, above or adjacent thereto, such reservation or
grant of right of entry shall be deemed to be for the benefit of both Master
Landlord and Sublandlord.
(c) in any case where under the incorporated provisions of
the Master Lease the "Landlord's" consent or approval is required, the consent
or approval of both Landlord and Sublandlord shall be required and, if a
provision of the Master Lease (as incorporated into this Sublease) or this
Sublease requires Sublandlord not to unreasonably withhold its consent,
Sublandlord shall not be in default of this Sublease or otherwise liable to
Subtenant for withholding its consent if Master Landlord fails to consent to the
matter in question.
(d) in any case where under the incorporated provisions of
the Master Lease "Tenant" is to indemnify or to waive or release any claims
against "Landlord", such indemnity and/or waiver shall be deemed to run from
Subtenant to both Master Landlord and Sublandlord.
(e) in any case where under the incorporated provisions of
the Master Lease "Tenant" is to execute and deliver certain documents or
notices, or to provide any documents or information, to "Landlord", such
obligation shall be deemed to run from Subtenant to both Master Landlord and
Sublandlord.
(f) the time limits provided for in the Master Lease for the
giving of notice, making of demands, performance of any act, condition or
covenant, or the exercise of any right, remedy or option, are amended for the
purposes of this Sublease by lengthening or shortening the time limits in each
instance by five (5) days, as appropriate, so that notices may be given, demands
made or any act, condition or covenant performed, or any right, remedy or option
hereunder exercised, by Sublandlord or Subtenant, as the case may be, within the
time limit relating thereto contained in the Master Lease; provided, if the
Master Lease allows only five (5) days or less for Sublandlord to perform any
act, or to undertake to perform any act, or to correct any failure relating to
the Premises or this Sublease, then Subtenant shall nevertheless be allowed the
lesser of the time permitted in the Master Lease or two (2) business days to
perform the act, undertake the act and/or correct the failure relating to the
Premises or this Sublease.
(g) The following provisions of the Master Lease are
incorporated into this Sublease: 2.2 (except that the reference to the Work
Letter shall mean the Work Letter attached to the Master Lease); 5.2; 9.2; 9.3;
the first sentence of 10.1 (provided however, that Subtenant may only use the
Subleased Premises for the uses specified in Section 5.1 of this Sublease);
10.2; 10.3; 10.4 (except that the references to "Landlord" in the first sentence
shall mean Sublandlord); 10.5
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(provided however, that Subtenant only may install signage on the exterior of
the building in the locations specified in Section 17 of the Master Lease);
10.6; 10.7; 11.2; 11.3; 12.1 (provided however, that during any holdover period,
Basic Monthly Rent shall be increased to one hundred twenty-five percent (125%)
of Basic Monthly Rent payable by Subtenant during the last month of the Sublease
Term (as the same may have been extended); 12.3; 12.4; 13.5 (but deleting the
language beginning with the word "including" appearing in the third line); 14.1;
15.2; 16.1 (provided, however, that this section shall not apply with respect to
any utilities or services furnished by Sublandlord the cost of which is
reimbursed by Subtenant); 16.2; 17.1 through 17.5 (subject to Section 16 of this
Sublease); 18.1 (provided however, that Master Landlord shall perform the
obligations of "Landlord" and Sublandlord shall use reasonable efforts to
enforce the obligations of Master Landlord);18.3; 18.4; 19 (provided however,
that the obligations of Subtenant in Section 19.3 shall run to the benefit of
Sublandlord and Master Landlord); 20.1; 20.2 (provided however, that clause (ii)
shall be deleted therefrom); 20.3; 20.4; 20.5; 21.1 (provided however, that
Subtenant shall cause Master Landlord and the lenders of Master Landlord (if
required by such lenders) to be added as additional insureds on all policies
obtained by Subtenant); 21.3; 21.4 (provided however, that the requirement set
forth in this section shall apply to all insurance policies required to be
obtained by Subtenant pursuant to the terms of this Sublease); 21.5; 21.6; 21.7;
21.8; 24 (provided however, that the insolvency of Subtenant or Subtenant's
failure to pay debts as they become due also shall constitute a "Default" under
this Sublease); 25 (provided however, that (i) with respect to Section 25.2,
Sublandlord only will consent to the transfers described therein if the net
worth of the transferee equals or exceeds the greater of (a) the net worth of
Subtenant immediately prior to the transfer in question, or (b) the net worth of
Subtenant as of the Effective Date of this Sublease, and (ii) the last sentence
of Section 25.9 is deleted); 26.1 (provided however, that the fourth sentence is
deleted); 27.1; 28.1; 29.1; 31.2; 31.3; 33.1; 34.1; 35.1 through 35.3 (provided
however, that (i) this Sublease shall be subject and subordinate to the lien of
any mortgage of deed of trust now or hereafter in force against the Premises or
any portion thereof as more specifically provided in Section 35.1 without the
necessity of a Non-Disturbance Agreement in favor of Subtenant, (ii) Subtenant
shall execute such instruments reasonably required by Sublandlord or Master
Landlord to subordinate this Sublease without the necessity of obtaining a
Non-Disturbance Agreement in favor of Subtenant, and (iii) Sublandlord shall use
reasonable efforts to obtain a Non-Disturbance Agreement from any lender for
Subtenant); 36; 37.1; 38.1; 39.1 (provided however, notwithstanding anything to
the contrary in this Sublease or Section 39 of the Master Lease as incorporated
into this Sublease, in no event shall Subtenant or its agents, employees,
contractors, invitees, subtenants or assignees cause or permit any Hazardous
Material to be brought upon, kept or used in, on or about the Subleased
Premises); 39.2 (provided however, that both Sublandlord and Master Landlord
shall benefit from the obligations of Subtenant contained in said section); 39.3
(provided however, that the last sentence shall be deleted and Sublandlord shall
indemnify, protect, defend and hold harmless Subtenant from all liability,
damages, injuries, cause of action, claims, judgments, costs, penalties, funds,
losses and expenses which arise from Sublandlord's receiving, handling, use,
storage, accumulation, transportation, generation, spillage, discharge, release
or disposal of Hazardous Material in, upon or about the Master Premises); 39.4;
39.9 (provided however, that the obligations of Subtenant shall benefit both
Sublandlord and Master Landlord); 39.11; 39.12; and 42 (except that Section 42.8
shall be deleted).
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6.3 Subtenant acknowledges that with respect to any work, services,
repairs, restoration, insurance obligations or the performance of any other
obligation of Master Landlord under the Master Lease, that Sublandlord shall be
under no obligation to provide any such services or work or satisfy any such
obligations or covenants; provided, however, Sublandlord, upon written notice to
Subtenant, shall use reasonable efforts to attempt to enforce the obligations of
Master Landlord under the Master Lease. Subtenant shall reimburse Sublandlord
for all amounts incurred by Sublandlord in enforcing the obligations of Master
Landlord to the extent fairly allocable to the Subleased Premises.
7. CONDITIONS PRECEDENT. The obligations of the parties hereunder and
the effectiveness of this Sublease are expressly conditioned upon Sublandlord's
and Subtenant's receipt of Master Landlord's written consent to this Sublease in
form reasonably acceptable to Sublandlord and Subtenant within ten (10) business
days of the Effective Date.
8. REPAIRS AND MAINTENANCE. Sublandlord shall be responsible for
performing any repairs, maintenance and replacements to or of the Subleased
Premises to the extent required by Section 18.2 of the Master Lease and
Subtenant shall reimburse Sublandlord for all costs and expenses incurred by
Sublandlord in performing such obligations to the extent fairly allocable to the
Subleased Premises as more specifically set forth in Section 4.2 of this
Sublease; provided however, and notwithstanding anything to the contrary in this
Sublease or the Master Lease ( but subject to the terms of Section 21.6 of the
Master Lease as incorporated into this Sublease), Subtenant shall be entirely
responsible for the cost of all repairs, maintenance and/or replacements to the
extent resulting from the negligence or willful misconduct of Subtenant or its
employees, agents, contractors, subtenant or assigns.
9. DEPOSITS. Upon execution hereof, Subtenant shall deposit with
Sublandlord the sum of Fifty-Nine Thousand Four Hundred Twenty-One Dollars and
Sixty Cents ($59,421.60) which amount shall be applied against the Base Monthly
Rent due under this Sublease for the first month of the Sublease Term. Upon the
execution hereof, Subtenant shall deposit with Sublandlord a security deposit
(the "Security Deposit") in the amount of Sixty-Four Thousand Seven Hundred
Twenty-Seven Dollars ($64,727). Sublandlord may use and commingle the Security
Deposit with other funds of Sublandlord. If Subtenant fails to pay rent or other
charges due hereunder or otherwise fails to perform any other obligations of
Subtenant under this Sublease, then Sublandlord may draw upon, use, apply or
retain all or any portion of the Security Deposit for the payment of any rent or
other charge in default, for the payment of any other sum which Sublandlord has
become obligated to pay by reason of Subtenant's default, or to compensate
Sublandlord for any loss or damage which Sublandlord has suffered thereby. If
Sublandlord so uses or applies all or any portion of the Security Deposit, then
Subtenant shall, within ten (10) days after demand therefor, deposit cash with
Sublandlord in the amount required to restore the Security Deposit to the full
amount stated above
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<PAGE> 12
and Subtenant's failure to so restore shall constitute a Default (as that term
is defined in Section 24.2 the Master Lease as incorporated into this Sublease)
by Subtenant under this Sublease. Upon the expiration of this Sublease and
Subtenant's vacation of the Subleased Premises, Sublandlord shall return to
Subtenant that portion of the Security Deposit which has not been applied by
Sublandlord pursuant to this paragraph, or which is not otherwise required to
cure Subtenant's defaults.
10. BROKERS.
10.1 Sublandlord and Subtenant warrant and represent that they
have dealt with no real estate brokers in connection with this Sublease other
than CPS and Industrial Property Associates (hereinafter "Brokers"), and that no
other broker is entitled to any commission on account of this Sublease.
Subtenant shall indemnify, defend, protect and hold Sublandlord harmless from
and against any loss, cost or expense, including, but not limited to, reasonable
attorneys' fees and court costs, resulting from any claim for any fee,
commission or other compensation made by any other agent, broker, salesman or
finder as a consequence of Subtenant's actions or dealings with such agent,
broker, salesman or finder.
10.2 Sublandlord shall pay a real estate brokerage commission in
accordance with Sublandlord's separate agreement with CPS for the subleasing of
the Master Premises.
11. [Intentionally omitted.]
12. NOTICES. All notices or demands of any kind required or desired to
be given by Sublandlord or Subtenant hereunder shall be in writing at the
addresses set forth below and shall be deemed delivered upon actual receipt or
refusal of delivery and if Subtenant shall have vacated or abandoned the
Premises, then upon attempted delivery at the Premises:
Sublandlord
Symmetricom, Inc.
2300 Orchard Parkway
San Jose, CA 95131
Attn: Chief Financial Officer/Scott Kamsler
Subtenant
Brocade Communications Systems, Inc.
1901 Guadalupe Parkway
San Jose, CA 95131
Attn: Chief Financial Officer/Carl Lee
-12-
<PAGE> 13
13. [Intentionally omitted.]
14. DAMAGE AND RELATED TERMINATION RIGHTS. The parties hereto
acknowledge that Section 22 of the Master Lease entitled "Damage or Destruction"
governs the rights of Master Landlord and Sublandlord concerning damage to the
Master Premises by fire or other peril and Sublandlord and Subtenant agree as
follows with respect thereto:
14.1 Sublandlord shall use reasonable efforts to enforce the
obligations of Master Landlord pursuant to Section 22 (including its obligations
to restore damage to the extent required by Section 22). Except to the extent of
its obligations stated in the immediately preceding sentence, its obligation to
contribute to costs to restore Tenant's Improvements (as that term is defined in
the Master Lease) and the Master Premises, and its obligation to restore certain
improvements in certain circumstances, all as more particularly set forth in
Section 22 and Section 21.9 of the Master Lease, Sublandlord shall not be
obligated to restore damage to the Master Premises caused by fire or other
peril, and shall not be liable for any failure by Master Landlord to perform its
obligations under the Master Lease.
14.2. The parties acknowledge that Master Landlord has the right
to terminate the Master Lease in certain circumstances pursuant to Sections 21.9
and 22.2 of the Master Lease. In the event Master Landlord exercises any such
right of termination, this Sublease shall terminate on the date the Master Lease
terminates.
14.3. The parties hereto acknowledge that Sublandlord has the
right to terminate the Master Lease in certain circumstances pursuant to
Sections 21.9 and 22.3 of the Master Lease. If Sublandlord becomes entitled to
terminate the Master Lease pursuant to said paragraph 11.3, then it may do so in
its sole and absolute discretion and this Sublease shall terminate on the date
the Master Lease terminates.
14.4. If, in the opinion of an independent architect selected by
Sublandlord and Master Landlord, damage or destruction to the Subleased Premises
(or the Master Premises if such damage or the repair thereof would interfere
with Subtenant's use of the Subleased Premises) is so substantial that it cannot
be corrected within six (6) months of the date of damage or, if such damage or
destruction occurs during the last six (6) months of the Sublease Term,
Subtenant may elect to terminate this Sublease by delivering to Sublandlord
written notice of its election to terminate within fifteen (15) days after the
damage or destruction.
14.5 Subtenant acknowledges that, pursuant to Section 21.9 of the
Master Lease, in the event of a casualty, Sublandlord, in certain circumstances,
is obligated to pay for a certain percentage of the cost of the loss or
insurance deductible equal to one-seventeenth (1/17th) of fifty percent (50%) of
the loss or deductible for each year remaining in the initial term and first
extension term of the Master Lease (the "Uninsured Loss Amount"). If Sublandlord
is required or elects to pay the Uninsured Loss Amount, Subtenant shall pay to
Sublandlord as additional rent one-seventeenth
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<PAGE> 14
(1/17th) of fifty percent (50%) of such loss or deductible for each year
remaining in the Sublease Term to the extent such amount is fairly allocable to
the Subleased Premises.
14.6 In the event of damage, destruction and/or restoration as
herein provided, there shall be no abatement or Rent and Subtenant shall not be
entitled to any compensation or damages occasioned by any such damage,
destruction or restoration. Subtenant hereby waives the provisions of California
Civil Code Sections 1932(2) and 1933(4) or any similar statue now existing or
hereafter adopted governing destruction of the Premises, so that the parties'
rights and obligations in the event of damage or destruction shall be governed
by the provisions of the Sublease.
14.7 The provisions of Section 17 of the Master Lease (as
incorporated into this Sublease) shall apply to any restoration work under this
Section as if the restoration was an alteration, addition or improvement
thereunder.
15. CONDEMNATION. The parties acknowledge that Section 23 of the Master
Lease entitled "Eminent Domain" governs the rights of Master Landlord and
Sublandlord with respect to condemnation of the Master Premises and Sublandlord
and Subtenant agree as follows with respect this subject:
15.1 Sublandlord shall use reasonable efforts to enforce the
obligations of Master Landlord pursuant to Section 23.3 of the Master Lease.
Except to the extent of its obligations stated in the immediately proceeding
sentence and its obligation to contribute to the cost of restoration in certain
circumstances (as more specifically provided in Section 23.3 of the Master
Lease), Sublandlord shall not be obligated to restore the Master Premises and
shall not be liable for any failure by Master Landlord to perform its
obligations under the Master Lease.
15.2 The parties acknowledge that Master Landlord has the right
to terminate the Master Lease in certain circumstances pursuant to Section 23.1
of the Master Lease. In the event Master Landlord exercises any such right of
termination, this Sublease shall terminate on the date the Master Lease
terminates.
15.3 The parties acknowledge that Sublandlord has the right to
terminate the Master Lease in certain circumstances pursuant to Section 23.1 and
23.2 of the Master Lease. If Sublandlord becomes entitled to terminate the
Master Lease pursuant to said Section 23.1 or 23.2, then it may do so in its
sole and absolute discretion and if Sublandlord elects to so terminate the
Master Lease, then this Sublease shall terminate on the date the Master Lease
terminates.
15.4 In the event of a partial taking of the Subleased Premises
for any public or quasi-public purpose by any lawful power or authority by
exercise of right of appropriation, condemnation, or eminent domain, or sold to
prevent such taking, then Subtenant may elect to terminate this Sublease if such
taking is of material detriment to, and substantially interferes with,
Subtenant's use and occupancy of, and conduct of its business from, the
Subleased Premises, including but not limited to materially affecting
Subtenant's parking or Subtenant's ingress and
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<PAGE> 15
egress from the Subleased Premises, unless Sublandlord provides reasonable
alternatives thereto acceptable to Subtenant. In no event shall this Lease be
terminated when such a partial taking does not have a material adverse effect
upon Subtenant. Termination pursuant to this section shall be effective as of
the date possession is required to be surrendered to said authority. In the
event of a partial taking and whether or not Subtenant terminates this Sublease,
Subtenant, Sublandlord and Master Landlord shall be entitled to those
condemnation proceeds attributable to those items for which they are entitled to
compensation pursuant to Section 15.7 hereof (excluding moving expenses).
15.5 If upon any taking of the Subleased Premises this Sublease
continues in effect, Base Monthly Rent shall be abated proportionately on the
basis of the rental value of the Subleased Premises, including improvements and
fixtures, as restored after such taking compared to the rental value of the
Subleased Premises prior to such taking.
15.7 Any award made as a result of any condemnation of the
Subleased Premises shall belong to and be paid to Sublandlord and Master
Landlord, and Subtenant hereby assigns to Sublandlord and Master Landlord all of
its right, title and interest in any such award; provided, however, that
Subtenant shall be entitled to receive any condemnation award that is made
directly to Subtenant for the following so long as the award made to Master
Landlord or Sublandlord is not thereby reduced: (a) for the taking of personal
property or trade fixtures belonging to Subtenant, (b) the interruption of
Subtenant's business or its moving costs, or (c) loss of Subtenant's goodwill.
The rights of Sublandlord and Subtenant regarding condemnation shall be
determined as provided in this paragraph, and each party thereby waives the
provisions of California Code of Civil Procedure Section 1265.130 and the
provisions of any similar law hereinafter enacted allowing either party to
petition the Superior Court to terminate this Sublease in the event of a partial
taking of the Premises.
16. ALTERATIONS.
16.1 All improvements (as that term is defined in Section 17.1 of
the Master Lease as incorporated into this Sublease) shall be made strictly in
compliance with the terms and conditions of Section 17 of the Master Lease as
incorporated into this Sublease; provided however, that, notwithstanding the
terms of Section 17.1 of the Master Lease, Subtenant may construct no
improvements in the Subleased Premises (including those the cost of which do not
exceed Fifty Thousand Dollars ($50,000)) without the prior written consent of
both Sublandlord and Master Landlord, which consent shall not be unreasonably
withheld or delayed. Notwithstanding the foregoing, Sublandlord may withhold its
consent in its sole and absolute discretion to any proposed improvements which
would affect the structural elements of the Master Premises including, without
limitation, any improvements involving a penetration of the roof membrane or
structural roof.
16.2 At the expiration or sooner termination of the Sublease
Term, all improvements installed by Subtenant shall be surrendered to
Sublandlord as part of the realty and shall then become Sublandlord's property,
and Sublandlord shall have no obligation to reimburse
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<PAGE> 16
Tenant for all or any portion of the value or cost thereof. Subtenant, at any
time, shall have the right to remove any movable cubicles installed in the
Subleased Premises by Subtenant at its cost. Subtenant shall have the right to
request Sublandlord to specify in Sublandlord's consent to any improvements (if
consent is, in fact, given) whether Landlord will require Subtenant to remove
Subtenant's improvements from the Subleased Premises upon the expiration or
sooner termination of this Sublease. If Sublandlord reserves such right or, if
Master Landlord requires such removal, Subtenant shall remove any improvements
installed by Subtenant prior to the expiration or sooner termination of the
Sublease Term and restore the Subleased Premises to the condition in which it
existed prior to the installation of such improvements. If Subtenant shall fail
to remove any of its trade fixtures or personal property upon the expiration or
sooner termination of the Sublease Term, Sublandlord may dispose of the property
pursuant to the provisions of Section 1980 et seq. of the California Civil Code,
as such provisions may be modified from time to time, or under any other
applicable provisions of California law.
16.3 Notwithstanding anything to the contrary in this Section 16
or the Master Lease, (i) Subtenant may make no improvements to the area
designated on Exhibit A-1 as "Office, Administrative, Storage/Kitchen Area"
without Sublandlord's consent, which consent may be withheld in Sublandlord's
sole and absolute discretion; and (ii) in no event shall Subtenant remove,
relocate or otherwise alter the cabling and electrical system that Sublandlord
has installed in the second floor of the Subleased Premises which includes
individual tel/data connection points consisting of 2-CAT 5 jacks, 1-CAT 3 RJ45
for ISDN and 1-CAT 3 RJ11 for voice. However, Subtenant may use such cabling and
systems if it so desires.
16.4 Subject to Master Landlord prior written approval thereof
and Sublandlord's approval of the design thereof, which consent shall not be
unreasonably withheld, Subtenant, at Subtenant's sole cost and expense, may
construct a separate trash enclosure within the outside areas of the Master
Premises; provided however, that such enclosure may only be located within the
area designated for Subtenant's parking spaces and the number of parking spaces
allocated for Subtenant's use hereunder shall be reduced by the number of
parking spaces rendered unusable as a result of such enclosure.
17. SIGNAGE. Subject to any restrictions contained in the Master Lease,
the Covenants, Conditions and Restrictions affecting the Master Premises, any
applicable laws, rules, regulations, codes and ordinances, and any other matters
of public record, Subtenant, at its sole cost and expense, shall have the right
to place signs displaying its name and logo in the following locations, but in
no others: (i) on the monument sign located on the Master Premises off of
Guadalupe Expressway, (ii) on the parapet over the lobby entry within the
Subleased Premises, and (iii) a small sign on the glass adjacent to the front
door of the main lobby and the exit door at the stock room of the Subleased
Premises. Subtenant shall obtain the prior written consent of Subtenant and
Master Landlord to the design and content of such signage, which consent shall
not be unreasonably withheld. Subtenant, at its sole cost and expense, shall
maintain such signage in good condition and repair.
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<PAGE> 17
18. INSURANCE. Sublandlord and Subtenant agree as follows with respect
to the obligation of the parties to obtain insurance: (i) throughout the
Sublease Term Sublandlord shall carry the "all risk" insurance covering the
Premises and all improvements and fixtures therein as more particularly
described in Section 21.2 of the Master Lease, whether or not such improvements
and/or fixtures were constructed by Sublandlord or Subtenant; (ii) Subtenant
shall reimburse Sublandlord for the cost of such insurance to the extent fairly
allocable to the Subleased Premises as more particularly set forth in Section
4.2 of this Sublease; (iii) Sublandlord shall be entitled to all proceeds from
all insurance carried by Sublandlord, and (iv) throughout the Sublease Term,
Subtenant, at Subtenant's expenses, shall maintain "all risk" insurance,
including, but not limited to, coverage against loss or damage by fire, flood,
vandalism and malicious mischief covering Subtenant's trade fixtures and
personal property located in the Subleased Premises.
19. STOCK WARRANTS: In consideration of their mutual execution of this
Lease, concurrently with the execution of this Sublease, Sublandlord and
Subtenant shall execute a Warrant Purchase Agreement in the form attached hereto
as Exhibit D pursuant to which Subtenant shall issue to Sublandlord warrants for
the purchase of an aggregate of twenty thousand (20,000) shares of Series C
Preferred stock of Subtenant at an exercise price of Three Dollars ($3.00) per
share, as more particularly set forth in said Exhibit D.
20. ASSIGNMENT AND SUBLETTING: The following additional provisions
shall apply to any sublease, assignment or other transfer of this Sublease
(each, a "Transfer"):
20.1 In the event that Subtenant seeks to make any Transfer,
Sublandlord shall have the right to terminate this Sublease or, in the case of a
sublease of less than all of the Subleased Premises, terminate this Sublease as
to that part of the Subleased Premises proposed to be so sublet, either (i) on
the condition that the proposed transferee immediately enter into a direct
sublease of the Subleased Premises with Sublandlord (or, in the case of a
partial sublease, a sublease for the portion proposed to be sublet) on the same
terms and conditions contained in the Assignment Notice (as that term is defined
in Section 25.3 of the Master Lease, as incorporated into this Sublease), or
(ii) so that Sublandlord is thereafter free to lease the Subleased Premises (or,
in the case of a partial sublease, a sublease for the portion proposed to be
sublet) to whomever it pleases on whatever terms are acceptable to Sublandlord.
In the event that Sublandlord elects to so terminate this Sublease, then (a) if
such termination is conditioned upon the execution of a sublease between
Sublandlord and the proposed transferee, Subtenant's obligations under this
Sublease shall not be terminated until such transferee executes a new sublease
with Sublandlord, enters into possession and commences the payment of rent, and
(b) if Sublandlord elects simply to terminate this Sublease (or, in the case of
a partial sublease, a sublease for the portion proposed to be sublet), this
Sublease shall so terminate in its entirety (or as to the space to be so sublet)
fifteen (15) days after Sublandlord has notified Subtenant in writing of such
election. Upon such termination, Subtenant shall be released from any further
obligation under this Sublease if it is terminated in its entirety, or shall be
released from any further obligation under this Sublease with respect to the
space proposed to be sublet in the case of a proposed partial sublease. In the
case of a partial termination of this Sublease, Base Monthly Rent shall be
reduced to an amount which bears the same relationship to the original amount
thereof as the
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<PAGE> 18
area of that part of the Subleased Premises which remains subject to the
Sublease bears to the original area of the Subleased Premises. Sublandlord and
Subtenant shall execute a cancellation and release with respect to the Sublease
to effect such termination.
20.2 If Sublandlord consents to a Transfer proposed by Subtenant,
the following shall apply:
(a) If Subtenant assigns its interest in this Sublease, then
Subtenant shall pay to Sublandlord fifty percent (50%) of all Subrent
(hereinafter defined) received by Subtenant over and above (i) the assignee's
agreement to assume the obligations of Subtenant under this Sublease, and (ii)
all Permitted Transfer Costs (hereinafter defined) related to such assignment.
In the case of an assignment, the amount of Subrent owed to Sublandlord shall be
paid to Sublandlord on the same basis, whether periodic or in lump sum, that
such Subrent is paid to Subtenant by the assignee.
(b) If Subtenant sublets all or any part of the Subleased
Premises then with respect to the space so sub-subleased, Subtenant shall pay to
Sublandlord fifty percent (50%) of the positive difference, if any, between (i)
all Subrent paid by the sub-subtenant to Subtenant less (ii) the sum of all Base
Monthly Rent and Operating Costs fairly allocable to the space sublet and all
Permitted Transfer Costs related to such sub-sublease. Such amount shall be paid
to Sublandlord on the same basis, whether periodic or in lump sum, that such
Subrent is paid to Subtenant by its sub-subtenant.
(c) The term "Subrent" shall mean any consideration of any
kind received, or to be received, by Subtenant as a result of the Transfer, if
such sums are related to Subtenant's interest in the Sublease or in the
Subleased Premises. The term "Permitted Transfer Costs" shall mean (i) all
reasonable leasing commissions paid to third parties not affiliated with
Subtenant in order to obtain the Transfer in question, (ii) all reasonable costs
incurred by Subtenant to construct improvements in the Subleased Premises (or
portion thereof) for the transferee in question, and Vacancy Costs (hereinafter
defined). The term Vacancy Costs shall mean, during any period of time that the
Subleased Premises is vacant and Subtenant is paying rent for the lease of space
in substitution of the Subleased Premises, the lesser of (a) Base Monthly Rent
and additional rent payable under this Sublease and (b) base monthly rent and
additional rent payable under a lease for the substitute space.
(e) Subtenant's obligations under this Section 21 shall
survive any Transfer.
20.3 Notwithstanding anything to the contrary in this Sublease or
the Master Lease, at no time may the Subleased Premises be used or occupied by
(i) more than two (2) subtenants or occupants if Subtenant is still occupying a
portion of the Subleased Premises, or (ii) more than one (1) subtenant or
occupant if Subtenant is not occupying a portion of the Subleased Premises.
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<PAGE> 19
21. SUBLANDLORD'S RIGHT TO ENTER: Sublandlord, Master Landlord and
their agents and contractors may enter the Subleased Premises at any reasonable
time after giving at least 24 hours' prior notice to Subtenant (and immediately
in the case of emergency) for the purpose of: (i) inspecting the same; (ii)
posting notices of nonresponsibility; (iii) supplying any service to be provided
by Sublandlord to Subtenant; (iv) showing the Subleased Premises to prospective
purchasers, mortgagees or, during the last six (6) months of the Sublease Term,
tenants; (v) making necessary alterations, additions or repairs; (vi) performing
Subtenant's obligations when Subtenant has failed to do so after written notice
from Sublandlord; and (vii) responding to an emergency. Sublandlord shall have
the right to use any and all means Sublandlord may deem necessary and proper to
enter the Premises in an emergency. Any entry into the Premises obtained by
Sublandlord is accordance with this Section 21 shall not be a forcible or
unlawful entry into, or a detainer of, the Subleased Premises, or an eviction,
actual or constructive, of Subtenant from the Subleased Premises.
IN WITNESS WHEREOF, Sublandlord and Subtenant have signed this Sublease
to evidence their acceptance of and intent to be bound by the terms hereof as of
the Effective Date.
SUBLANDLORD: SUBTENANT:
SYMMETRICOM, INC. BROCADE COMMUNICATIONS
a California corporation SYSTEMS, INC.,
a California corporation
By: /s/ J. Scott Kamsler By: /s/ B. Carl Lee
-------------------------------- -------------------------------
Title: VP & CFO Title: VP & CFO
----------------------------- ----------------------------
Address: 85 West Tasman Drive Address: 2231 Calle De Luna
San Jose, CA 95134-1703 Santa Clara, CA
Telephone: 408-428-7803 Telephone: 408-588-4155
------------------------- ------------------------
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<PAGE> 20
EXHIBIT A
SITE PLAN
[TO FOLLOW.]
-20-
<PAGE> 21
EXHIBIT A-1
DIAGRAM OF SUBLEASED PREMISES
[TO FOLLOW.]
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<PAGE> 22
EXHIBIT B
MASTER LEASE
[TO FOLLOW.]
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<PAGE> 23
EXHIBIT C
SPACE PLAN
[TO FOLLOW.]
-23-
<PAGE> 24
EXHIBIT D
WARRANT PURCHASE AGREEMENT
[TO FOLLOW.]
-24-
<PAGE> 25
EXHIBIT E
HAZARDOUS MATERIALS
<TABLE>
<CAPTION>
TYPE QUANTITY METHOD OF STORAGE
- ---- -------- -----------------
<S> <C> <C>
Tetraflouroethane 5 gal. Aerosol cans
Rosin Flux 2 gal. Plastic container in
secured metal cabinet
</TABLE>
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<PAGE> 26
LEASE
NEXUS EQUITY, INC.
"LANDLORD"
AND
SYMMETRICOM, INC.
"TENANT"
SAN JOSE, CALIFORNIA
<PAGE> 27
LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Lease Premises 1
2. Basic Lease Provisions 1
3. Term 2
4. Construction, Possession and Commencement Date 3
5. Rent 6
6. Rental Adjustments 7
7. Additional Rent and Expenses 7
8. Rentable Area 11
9. Security Deposit 11
10. Use 12
11. Brokers 14
12. Holding Over 14
13. Taxes and Assessments 15
14. Condition of Premises 16
15. Parking Facilities 18
16. Utilities and Services 18
17. Alterations 19
18. Repairs and Maintenance 19
19. Liens 21
20. Indemnification and Exculpation 21
21. Insurance -Waiver of Subrogation 23
22. Damage or Destruction 27
23. Eminent Domain 28
24. Defaults and Remedies 29
25. Assignment or Subletting 33
26. Arbitration - Attorney's Fees 35
27. Bankruptcy 36
28. Definition of Landlord 36
29. Estoppel Certificate 37
30. Removal of Property 37
31. Limitation of Landlord's Liability 38
32. [Intentionally Left Blank] 39
33. Quiet Enjoyment 39
34. Quitclaim Deed 39
35. Subordination and Attornment 40
36. Surrender 41
37. Waiver and Modification 41
38. Waiver of Jury Trial and Counterclaims 41
39. Hazardous Materials 41
40. Option to Extend 45
41. Right of First Refusal to Purchase 48
42. Miscellaneous 50
42.1 Terms and Headings 50
42.2 Examination of Lease 51
42.3 Time 51
42.4 Covenants and Conditions 51
42.5 Consents 51
</TABLE>
<PAGE> 28
<TABLE>
<S> <C>
42.6 Entire Agreement 51
42.7 Severability 51
42.8 Recording 51
42.9 Impartial Construction 51
42.10 Inurement 51
42.11 Force Majeure 51
42.12 Notices 51
42.13 Authority to Execute Lease 51
</TABLE>
EXHIBIT "A" -- Work Letter
EXHIBIT "B" -- Form of Acknowledgement of Term Commencement Date
EXHIBIT "C" -- Memorandum of Lease
ii
<PAGE> 29
LEASE
THIS LEASE ("Lease") is made as of June 10, 1996, by and between NEXUS
EQUITY, INC., a California corporation ("Landlord"), and SYMMETRICOM, INC., a
California corporation ("Tenant").
1. LEASE PREMISES.
1.1 Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord those certain premises ("Premises") located on Orchard Parkway in San
Jose, California, consisting of (i) that certain real property ("Real Property")
legally described as Parcel 2 of Parcel Map filed with the Santa Clara County
Recorder on December 6, 1995, in Book 671 of Maps, Pages 40 and 41, (ii) the
entirety of the building (the "Building") to be constructed on the Real
Property, and (iii) all landscaping, drainage, irrigation, lighting, parking
facilities, walkways, driveways and other improvements and appurtenances related
thereto.
2. BASIC LEASE PROVISIONS.
2.1 For convenience of the parties, certain basic provisions of this
Lease are set forth herein. The provisions set forth herein are subject to the
remaining terms and conditions of this Lease and are to be interpreted in light
of such remaining terms and conditions.
2.1.1 Rentable Area of Premises:
118,000 square feet, subject to adjustment
as provided in Section 8.2
2.1.2 Initial Basic Annual Rent:
$1,458,480 ($12.36 per square foot of
Rentable Area per year), subject to
adjustment as provided in Sections 6.1
and 8.2
2.1.3 Monthly Installment of Basic Annual Rent:
$121,540 ($1.03 per square foot of
Rentable Area per month), subject to
adjustment as provided in Sections 6.1
and 8.2
2.1.4 (a) Estimated Term Commencement Date:
April 15, 1997, subject to adjustment as
provided in Section 4.6
(b) Term Expiration Date: Twelve (12)
years from
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Term Commencement Date
2.1.5 Permitted Use: Uses permitted in Section 10.1
2.1.6 Security Deposit: $121,540
2.1.7 Address for Rent Payment and Notices to Landlord:
Nexus Equity, Inc.
1740 Technology Drive, Suite 315
San Jose, California 95110
Address for Notices to Tenant
Before Term Commencement Date:
SymmetriCom, Inc.
85 West Tasman Drive
San Jose, California 95110
After Term Commencement Date: Premises
2.2 Capitalized terms not otherwise defined in this Lease shall
have the meaning set forth in the Work Letter attached hereto as Exhibit "A"
("Work Letter").
3. TERM.
3.1 This Lease shall take effect upon the date of execution hereof by
each of the parties hereto, and each of the provisions hereof shall be binding
upon and inure to the benefit of Landlord and Tenant from the date of execution
hereof by each of the parties hereto; provided, however, the effectiveness of
this Lease is conditioned upon Tenant's approval (in its sole discretion) on or
before June 6, 1996, of (i) CC&Rs prepared by Atmel Corporation which will
encumber the Real Property, and (ii) approval by Atmel Corporation in a form
satisfactory to Tenant of elevations and schematic plans of the Building
(described on Attachment A-2) and the placement of Tenant's antennas on the roof
of the Building.
3.2 The term of this Lease will be that period from the Term
Commencement Date described in Sections 2.1.4(a) and 4.6 through the Term
Expiration Date as set forth in Section 2.1.4(b), subject to earlier termination
of this Lease or extension of the term of this Lease as provided herein.
3.3 Notwithstanding anything in this Lease to the contrary, Tenant
shall have the right to terminate this Lease due to nonperformance by Landlord
if:
(i) Landlord has not on or before June 30, 1996, secured a
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construction loan and/or other funding, from sources reasonably satisfactory to
Tenant as to financial ability to perform, in an amount reasonably necessary to
complete the work required of Landlord under the Work Letter; provided however,
that such date shall be extended to that date which is the earlier of (i) August
15, 1996 and (ii) the date to which close of escrow for the acquisition of the
Real Property is extended by the written agreement of Atmel Corporation, the
seller of the Real Property;
(ii) Landlord has not on or before September 1, 1996, received
architectural site approval from the City of San Jose;
(iii) Landlord has not on or before September 15, 1996,
substantially commenced Landlord's Work, defined to mean grading has been
substantially completed and work on footings and foundations has commenced and
is substantially underway; or
(iv) Landlord fails at any time thereafter to diligently pursue
construction of Landlord's Work to completion, defined to mean (for the purposes
of this subsection 3.3(iv) only) substantial cessation of work for more than
thirty (30) consecutive days.
The time for Landlord to perform its obligations under
subsections (i) and (ii) above will be extended on account of Tenant-Caused
Delays, but not Landlord-Caused Delays or Force-Majeure Delays. The time for
Landlord to perform its obligations under subsection (iii) will be extended on
account of Tenant-Caused Delays and no more than thirty (30) days of Force
Majeure Delays, but not Landlord-Caused delays. The time for Landlord to perform
its obligations under subsection (iv) will be extended on account of
Tenant-Caused Delays and Force Majeure Delays, but not Landlord-Caused delays.
In the event Tenant terminates this Lease pursuant to this Section 3.3, neither
Landlord nor Tenant shall have any further duties, obligations or liability to
the other, except that Landlord shall promptly return to Tenant the first
month's Basic Annual Rent deposited under Section 5.1, and the security deposit
deposited under Section 9.1.
4. CONSTRUCTION, POSSESSION AND COMMENCEMENT DATE.
4.1 Landlord shall make available to Tenant the Building Shell within
the time period set forth in the Construction Schedule with Landlord's Work
sufficiently complete to allow Tenant to commence construction of Tenant's
Improvements. Landlord shall Substantially Complete Landlord's work (as that
term is defined in the Work Letter attached hereto as Exhibit "A") within the
time period set forth in the Project Schedule. Landlord shall use diligent good
faith efforts to continuously prosecute the construction of Landlord's Work to
completion. Tenant shall Substantially Complete Tenant's Improvements within the
time period set forth in the Project Schedule. Landlord and Tenant shall allow
each other reasonable access to the Premises for the completion of work required
hereunder, and shall conduct such work in a commercially reasonable manner. All
time periods set forth in the Project Schedule for the construction of
Landlord's Work and Tenant's Improvements shall be extended by Landlord-Caused
Delays, Tenant-Caused Delays and/or Force-Majeure Delays in the manner and to
the
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extent set forth in the Work Letter, subject to the limitations on Landlord with
respect to Force-Majeure Delays set forth in the last paragraph of Section 3.3
above.
4.2 As used in Section 4.1 above and elsewhere in this Lease and the
Work Letter, the terms "Substantially Complete", "Substantially Completed", and
"Substantial Completion" shall mean (i) with respect to Landlord's Work, the
date by which all of the following shall have occurred: (a) construction of
Landlord's Work is completed substantially in accordance with the plans and
specifications therefor and all applicable governmental laws, ordinances,
regulations and requirements ("Laws"), (b) the Project Architect has certified
in writing that Landlord's Work is substantially complete, (c) there exist no
incomplete or deficient items identified by or on behalf of Tenant on its
"punch-list" that could materially interfere with Tenant's use of the Premises
for its intended purpose, and (d) Landlord shall have substantially completed
Landlord's Work to such a point to enable Tenant to obtain all permits and
approvals for Tenant's legal occupancy of the Premises, assuming that Tenant's
Improvements are Substantially Completed, and (ii) with respect to Tenant's
Improvements, the date by which all of the following shall have occurred: (a)
construction of Tenant's Improvements is completed substantially in accordance
with the plans and specifications therefor and all applicable Laws, (b) Tenant's
Architect has certified in writing that Tenant's Improvements are substantially
complete, (c) no incomplete or deficient items exist that would materially
interfere with Tenant's use of the Premises for its intended purpose, and (d)
Tenant shall have substantially completed Tenant's Improvements and shall have
obtained all permits and approvals for Tenant's legal occupancy of the Premises.
4.3 Tenant agrees that in the event Landlord fails to tender
possession of the Premises with the Building Shell and Land Improvements
Substantially Completed on or before the date set forth in the Project Schedule
for the Substantial Completion of Landlord's Work, this Lease shall not be void
or voidable and Landlord shall not be liable to Tenant for any loss or damage
resulting therefrom except as otherwise set forth in Sections 3.3 and 4.4. In
such event, however, Tenant's obligation to pay Rent and any other amounts under
this Lease shall not commence until the actual Term Commencement Date.
4.4 Notwithstanding Section 4.3, in the event Landlord fails to
tender possession of the Premises with the Building Shell and Land Improvements
Substantially Completed on or before April 15, 1997 (as such date is extended by
Tenant-Caused Delays, and Tenant is unable to occupy the Premises on or before
July 15, 1997 on account thereof, Landlord shall pay to Tenant liquidated
damages equal to any holdover or penalty rent or other sums in excess of the
normal rental paid by Tenant to the landlord of its present premises at 85 West
Tasman Drive, San Jose, California, on account of Tenant's extension or holding
over of its tenancy at such location, for a number of days equal to the number
of days between April 15, 1997 and the date the Premises are tendered to Tenant
with the Building Shell and Land Improvements Substantially Completed (but for
no longer period than Tenant actually holds over at its present location). In
the event that the landlord of Tenant's present premises does not consent to
Tenant's holding over, Landlord shall indemnify Tenant from any and all claims,
damages, losses, costs and liabilities incurred by Tenant as a result of
Landlord's failure to
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deliver the Building Shell and Land Improvements to Tenant Substantially
Completed on or before April 15, 1997.
4.5 The actual Term Commencement Date shall be the date set forth in
the Project Schedule as the date by which Tenant's Improvements and Landlord's
Work is to be Substantially Complete; provided, however, that (i) such date
shall be extended by the number of days that Tenant is prevented from commencing
construction of Tenant's Improvements on the date for commencement thereof as
set forth in the Project Schedule as a result of Force Majeure Delays and
Landlord-Caused Delays (as more particularly described in the Work Letter), (ii)
such date shall be extended by the number of days that Tenant is prevented from
continuously prosecuting to completion and Substantially Completing Tenant's
Improvements as a result of Force-Majeure Delays and/or Landlord-Caused Delays,
and (iii) in no event shall the Term Commencement Date occur prior to the date
by which all of the following shall have occurred; (a) Landlord shall have
Substantially Completed Landlord's Work, (b) the Land Improvements are
Substantially Completed to a point where ingress and egress to the Building is
not unreasonably impeded, the parking lot is completed and the landscaping is to
a point where any incomplete or deficient landscaping can be completed or
corrected within thirty (30) days or which consists of trees, shrubs or other
landscaping which have not been installed for reasons relating to the then
climatic season, and (c) no "punch-list" items remain uncompleted that would
materially interfere with Tenant's use of the Premises for its intended
purposes. Landlord and Tenant shall execute a written acknowledgment of the Term
Commencement Date and the Term Expiration Date when such is established in
substantially the form attached hereto as Exhibit "B" and attach it to this
Lease as Exhibit "B-1"; however, failure to execute and deliver such
acknowledgement shall not affect Tenant's liability hereunder.
4.6 Prior to entry by Tenant onto the Premises for the purposes of
constructing Tenant's Improvements or installation of personal property within
the Premises which are not part of the work required of Landlord under the Work
Letter, Tenant shall furnish to Landlord evidence satisfactory to Landlord that
insurance coverage required of Tenant under the provisions of Article 21 and the
Work Letter are in effect. Entry by Tenant onto the Premises prior to the Term
Commencement Date for such purposes shall be subject to all of the terms and
conditions of this Lease other than the payment of Rent, and shall not interfere
with the performance by Landlord or the Project Contractor with the work
required of Landlord under the Work Letter. Tenant agrees to indemnify, protect,
defend and hold Landlord harmless from any and all loss or damage to property,
completed work, fixtures, equipment, or materials, or from liability for death
of or injury to any person, during any such entry prior to the Term Commencement
Date to the extent caused by the negligence or willful acts of Tenant or its
agents and/or contractors (and their agents, contractors and subcontractors),
and subject to Tenant's right to seek contribution or indemnity from Landlord or
other responsible party. Landlord agrees to indemnify, protect, defend and hold
Tenant harmless from any and all loss or damage to property, completed work,
fixtures, equipment, or materials, or from liability for death of or injury to
any person, during any such entry prior to the Term Commencement Date to the
extent caused by the negligence or willful acts of Landlord or its agents and/or
contractors (and their agents, contractors and subcontractors), and subject to
Landlord's right to seek contribution or indemnity from Tenant or other
responsible party.
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4.7 Tenant shall be responsible for construction of Tenant's
Improvements in the Premises pursuant to the Work Letter at the sole cost of
Tenant, without any contribution or reimbursement by Landlord (except to the
extent of Landlord's indemnity obligations under Section 4.6), at a cost not to
be less than Twenty Five Dollars ($25.00) per square foot of Rentable Area.
However, with regard to any space that Tenant does not intend to initially
occupy (up to a maximum of 20,000 square feet of Rentable Area), Tenant shall
not be required to construct improvements at a cost per square foot greater than
that required to finish interior surfaces of interior walls to the extent they
are ready for paint, the floor is carpeted or tiled, HVAC and other utility
systems and bathrooms are in place. If and to the extent required by Landlord's
construction lender, Tenant shall provide assurances reasonably satisfactory to
such lender of Tenant's ability to fund the construction of Tenant's
Improvements in accordance with the terms of this Lease and the Work Letter.
5. RENT.
5.1 Tenant agrees to pay Landlord as Basic Annual Rent for the
Premises the sum set forth in Section 2.1.2, subject to the rental adjustments
provided in Sections 6.1 and 8.2. Basic Annual Rent shall be paid in the equal
monthly installments set forth in Section 2.1.3, subject to the rental
adjustments provided in Sections 6.1 and 8.2, each in advance on the first day
of each and every calendar month during the term of this Lease, except that the
first month's Basic Annual Rent shall be paid upon the execution hereof in
addition to the Security Deposit in the amount set forth in Section 2.1.3. On
the Term Commencement Date, the first month's Basic Annual Rent deposit shall be
credited to the Basic Annual Rent due for the calendar month in which rental
commences and any balance will be a credit against the next rental to become
due. Prior to the Term Commencement Date, the deposit of the first month's Basic
Annual Rent shall constitute additional security for Tenant's obligations
hereunder and be treated in like manner as the Security Deposit.
5.2 In addition to Basic Annual Rent, Tenant agrees to pay to
Landlord as additional rent ("Additional Rent"), at the times hereinafter
specified in this Lease, the costs of management and administrative services as
provided in Article 7.1, and all other amounts that Tenant agrees to pay under
the provisions of this Lease, including without limitation (i) any and all other
sums that may become due by reason of any default of Tenant or failure on
Tenant's part to comply with the agreements, terms, covenants and conditions of
this Lease to be performed by Tenant, and (ii) expenses of Landlord's
performance of any obligations of Tenant under this Lease.
5.3 Basic Annual Rent and Additional Rent shall together be
denominated "Rent". Rent shall be paid to Landlord in lawful money of the United
States of America, at the office of Landlord as set forth in Section 2.1.7 or to
such other person or at such other place as Landlord may from time to time
designate in writing, without notice, demand, abatement, suspension, deduction,
setoff, counterclaim, or defense.
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5.4 In the event the term of this Lease commences or ends on a day
other than the first day of a calendar month, then the Rent for such fraction of
a month shall be prorated for such period on the basis of a thirty (30) day
month and shall be paid at the then current rate for such fractional month prior
to the commencement of the partial month.
6. RENTAL ADJUSTMENTS.
6.1 Basic Annual Rent then in effect (as increased by previous
adjustments under this Section 6.1) shall be increased four percent (4%) on each
annual anniversary of the Term Commencement Date.
7. ADDITIONAL RENT AND EXPENSES.
7.1 As Additional Rent, Tenant shall pay or reimburse Landlord for
costs of management and administrative services in an amount equal to two
percent (2%) of the Basic Annual Rent due from Tenant ("Management Fee"),
whether or not Landlord incurs fees payable to any third party to provide such
services and without regard to the actual costs incurred by Landlord for such
services.
7.2 Tenant shall pay, at its own cost and expense and without any
cost or expense to Landlord, or reimbursement or contribution by Landlord,
directly to the provider of the services, all costs of any kind incurred in
connection with the operation, maintenance, repairs, replacements and management
of the Premises, including, except as otherwise set forth in Sections 7.5, 18.1,
and 20.1, and Articles 22 and 23, or elsewhere in this Lease, (i) reasonable
costs directly related to maintenance and repairs to improvements, fixtures and
personal property within the Premises, including the roof membranes (but not the
roof structure itself), as appropriate to maintain the Premises in commercially
reasonable condition (allowing wear and tear consistent with commercially
reasonable maintenance and repair standards applicable to comparable buildings),
but shall exclude any costs related to defects in design, materials or
construction to Landlord's Work to the extent of Landlord's warranties in
Article 14; (ii) costs of new improvements and fixtures added to the Premises by
Tenant; (iii) costs of utilities furnished to the Premises; (iv) sewer use fees;
(v) costs of cable TV when applicable; (vi) costs of trash collection; (vii)
costs of cleaning; (viii) costs of maintenance, repairs and replacements of
heating, ventilation, air conditioning, plumbing, electrical and other systems
(but excluding costs related to defects in design, materials or construction of
such systems to the extent they were included within Landlord's Work to the
extent of Landlord's warranties in Article 14); (ix) costs of security services
and devices; (x) costs of building supplies; (xi) insurance premiums pursuant to
Section 21.2 and portions of insured losses deductible by reason of insurance
policy terms subject to the limitations contained in Section 21.8; (xii) costs
of service contracts and services of independent contractors retained to do work
of a nature before referenced; (xiii) taxes and assessments pursuant to Sections
13.1 and 13.2; and (xv) costs of compliance with applicable Laws (except costs
of modifications to Landlord's Work required by something other than a change in
Tenant's use or occupancy of the Premises). Notwithstanding anything to the
contrary in this Lease, costs incurred by Tenant for replacement of major HVAC
components, the parking lot,
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and the roof (including structural elements and roof membranes) and, except to
the extent required as a result of a change in Tenant's use or occupancy of the
Premises, costs to construct alterations, additions and/or improvements required
by applicable Laws, with a useful life in excess of the balance of the initial
term shall be reimbursed to Tenant by Landlord at the time the replacement or
improvement is made in the proportion that the remaining useful life during any
period of time following the expiration of the initial term bears to the entire
useful life of the item; in the event Tenant exercises its option to extend the
term, Tenant shall at such time reimburse Landlord for the pro rata portion paid
by Landlord for the extension term. By way of example only, if in the tenth
(10th) year of the Lease Term, Tenant is required to replace an HVAC compressor
with a useful life of fifteen (15) years and at a cost of Sixty Thousand Dollars
($60,000), then Tenant would be responsible for paying for the replacement and,
at the time that Tenant makes such payment, Landlord would be obligated to pay
to Tenant in cash Fifty-Two Thousand Dollars ($52,000) (($60,000) x (13/15)).
If, in such example, Tenant exercises its option to extend the Lease Term for
five (5) years, then at the commencement of the option term, Tenant would be
obligated to pay Landlord Twenty Thousand Dollars ($20,000) (($60,000/15) x
(5)).
7.3 Notwithstanding anything herein to the contrary, Landlord shall
pay, at its own cost and expense and without any cost or expense to Tenant, or
reimbursement or contribution by Tenant, the costs described in Section 18.1 and
any other cost described herein for which Tenant is not responsible.
7.4 Notwithstanding anything in this Lease to the contrary, Tenant
shall not be responsible, and Landlord shall be responsible, for the payment of
the following costs and expenses:
(a) costs incurred for the construction, repair, maintenance or
replacement of the Premises or any portion or component thereof, to the extent
of (i) proceeds of insurance which Tenant is required to maintain under the
Lease or maintains on the Premises (but Tenant shall be responsible for payment
of any deductibles and uninsured losses as set forth in Article 21), and (ii)
any reimbursement which Landlord receives therefor under any warranties or from
any third party;
(b) costs incurred for the construction, repair, maintenance or
replacement of the Premises or any portion or component thereof resulting from
the active or passive negligence or willful misconduct of Landlord, or its
agents, employees, contractors, or invitees, except to the extent of proceeds of
insurance which Tenant is required to maintain under this Lease which covers
such conduct;
(c) costs incurred for the repair, maintenance or replacement of
the foundations, structural walls, floors, including the second floor deck, and
roof of the Premises to the extent set forth in Section 18.1;
(d) costs of construction of the Landlord's Work;
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(e) costs incurred to correct any patent or latent defects in the
design, materials or construction of Landlord's Work to the extent of Landlord's
warranties under Article 14;
(f) costs, expenses and penalties (including without limitation
attorneys fees) incurred as a result of the use, storage, removal or remediation
of any toxic or hazardous substances or other environmental contamination not
caused by Tenant;
(g) rentals and other payments by Landlord under any ground lease
or other lease underlying the Lease, and interest, principal, points and other
fees on debt or amortization of any debt secured in whole or part by all or any
portion of the Premises;
(h) costs incurred in connection with the financing, sale or
acquisition of the Premises or any portion thereof;
(i) costs, expenses, and penalties (including without limitation
attorneys' fees) incurred due to the violation by Landlord of any underlying
deed of trust, mortgage or ground lease affecting the Premises or any portion
thereof;
(j) depreciation on the Premises or any portion thereof, or any
equipment or machinery owned by Landlord;
(k) any costs incurred as a result of Landlord's violation of any
statute, ordinance or other source of applicable law, or breach of contract or
tort liability to any other party, including without limitation, any unrelated
third party, or Landlord's employee(s), contractor(s), subcontractor(s),
agent(s) or representative(s);
(l) leasing commissions, attorneys' fees and other costs and
expenses incurred in connection with the leasing of the Premises;
(m) advertising, marketing, media and promotional expenditures
regarding the Premises and costs of signs in or on the Building identifying the
owner, lender or any contractor thereof;
(n) costs incurred to comply with the Americans with Disabilities
Act except to the extent otherwise expressly provided herein;
(o) costs incurred to comply with Title 24 of the California Code
of Regulations except to the extent otherwise expressly provided herein;
(p) costs incurred to comply with any other existing laws, rules,
regulations, codes or permits except to the extent otherwise expressly provided
herein;
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(q) any fees or salaries of the principals of Landlord;
(r) any costs and expenses arising from or related to breach of
Landlord's warranties in Sections 14.4 and 14.5 hereof; and
(s) any costs and expense incurred as a result of conditions
existing as of or prior to the Term Commencement Date to the extent of required
modifications to Landlord's Work, unless caused by a change in use or occupancy
of the Premises by Tenant;.
7.5 Tenant shall not be responsible for Rent or any other expenses
under this Lease attributable to the time period prior to the Term Commencement
Date.
7.6 The Management Fee for the calendar year in which Tenant's
obligation to pay them commences and in the calendar year in which such
obligation ceases shall be prorated. Expenses such as taxes and assessments and
insurance which are incurred for an extended time period shall be prorated based
upon time periods to which they are applicable so that the amounts attributed to
the Premises relate in a reasonable manner to the time period wherein Tenant has
an obligation to pay Rent.
7.7 In fulfilling its obligations set forth in Section 7.2 and
Article 18, Tenant shall maintain the HVAC system, elevator and other systems in
accordance with no less than the minimum standards established by the
manufacturer and the minimum standards necessary to maintain any warranties in
effect, and Tenant may enter into such maintenance contracts as Tenant
determines is reasonably necessary in order to do so. Landlord shall have the
right, upon reasonable notice, to inspect and copy any such maintenance
contracts, as well as records of maintenance conducted by Tenant or any such
service provider.
7.8 Landlord shall have the right, upon reasonable notice, to inspect
and copy documents showing in reasonable detail the actual expenses paid by
Tenant pursuant to Section 7.2 and Article 16 (Utilities and Services) of this
Lease. Tenant shall maintain such documents as are reasonably necessary for such
purpose for a period of not less than three (3) years.
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8. RENTABLE AREA.
8.1 The Rentable Area of the Premises as set forth in Section 2.1.1
and as referenced within the Work Letter and as may otherwise be referenced
within this Lease, is determined by making separate calculations of the Rentable
Area of each floor within the Building and totalling the Rentable Area of all
floors within the Building (excluding any parking areas). The Rentable Area of a
floor is calculated by measuring to the outside finished surface of each
permanent outer Building wall where it intersects the floor. The full area
calculated as set forth above is included as Rentable Area of the Premises
without deduction for (i) columns or projections, (ii) vertical penetrations
such as stairs, elevator shafts, flues, pipe shafts, vertical ducts, and the
like, and their enclosing walls, (iii) corridors, equipment rooms, rest rooms,
entrance ways, elevator lobbies, and the like, and their enclosing walls, or
(iv) any other unusable area of any nature.
8.2 The Rentable Area as set forth in Section 2.1.1 is an estimate of
the area which will upon completion of development of the Building constitute
the Rentable Area of the Premises, which shall be adjusted upon Substantial
Completion of the Building in accordance with a certification of the Rentable
Area from the Project Architect. If either party disputes the certification of
the Project Architect, upon Substantial Completion of the Building Shell, the
Rentable Area shall be field measured and confirmed by a mutually agreeable
architect or civil engineer, which measurement shall be conclusive and binding
on Landlord and Tenant. If the Rentable Area as determined hereunder is greater
or less than the Rentable Area set forth in Section 2.1.1, Basic Annual Rent and
monthly installments of Basic Annual Rent shall be adjusted upward or downward,
as the case may be, based on the actual Rentable Area of the Premises.
9. SECURITY DEPOSIT
9.1 Promptly upon execution of this Lease, Tenant shall deposit with
Landlord the sum set forth in Section 2.1.6, which sum shall be held by Landlord
as security for the faithful performance by Tenant of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the term and any extension term hereof. If Tenant defaults with respect
to any provision of this Lease, including but not limited to any provision
relating to the payment of Rent, and subject to any notice requirements and cure
periods for Tenant's benefit set forth in Article 24, Landlord may (but shall
not be required to) use, apply or retain all or any part of such security
deposit for the payment of any Rent or any other sum in default, or to
compensate Landlord for any other loss or damage which Landlord may suffer by
reason of Tenant's default. If any portion of said deposit is so used or
applied, Tenant shall, upon demand therefor, deposit cash with Landlord in an
amount sufficient to restore the security deposit to its original amount and
Tenant's failure to do so shall be a material default of this Lease. Landlord
shall not be required to keep this security deposit separate from its general
fund, and Tenant shall not be entitled to interest on such deposit.
9.2 In the event of bankruptcy or other debtor-creditor proceeding
against
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Tenant, such security deposit shall be deemed to be applied first to the payment
of Rent and other charges due Landlord for all periods prior to the filing of
such proceedings.
9.3 Landlord may deliver the funds deposited hereunder by Tenant to
any purchaser of Landlord's interest in the Premises and thereupon Landlord
shall be discharged from any further liability with respect thereto. This
provisions shall also apply to any subsequent transfers.
9.4 So long as Tenant is not in material default as of the Term
Commencement Date, the security deposit, or any balance thereof, shall be
returned to Tenant upon the Term Commencement Date.
10. USE.
10.1 Tenant may use the Premises for any of those purposes, and only
those purposes, allowed by (i) City of San Jose zoning ordinances in effect from
time to time and as applicable to the Premises, (ii) any other applicable laws,
regulations, ordinances, permits and approvals applicable to the Premises, and
(iii) all covenants, conditions and restrictions recorded against the Real
Property, and shall not use the Premises, or permit or suffer the Premises to be
used, for any other purpose without the prior written consent of Landlord.
Landlord warrants that, as of the Term Commencement Date, Tenant's intended use
of the Premises for manufacture, assembly, distribution and sales of Tenant's
products, and for office and other activities related thereto, are permitted
uses under applicable zoning ordinances, and, to the best of Landlord's
knowledge, under other applicable laws, regulations, ordinances, permits and
approvals applicable to the Premises. Landlord represents and warrants that
there are no covenants, conditions and restrictions on the Real Property which
will interfere with Tenant's intended use of the Premises. Landlord acknowledges
that Tenant intends to install numerous antennas on the roof of the Building.
10.2 Tenant shall use the Premises in compliance with all federal,
state, and local laws, regulations, ordinances, requirements, permits and
approvals applicable to the Premises. Tenant shall not use or occupy the
Premises in violation of any law or regulation, or the certificate of occupancy
issued for the Building, and shall, upon five (5) days' written notice from
Landlord, discontinue any use of the Premises which is declared by any
governmental authority having jurisdiction to be a violation of law or the
certificate of occupancy.
10.3 Tenant shall comply with any direction of any governmental
authority having jurisdiction which shall, by reason of the nature of Tenant's
use or occupancy of the Premises, impose any duty upon Tenant or Landlord with
respect to the Premises or with respect to the use or occupation thereof,
including any duty to make structural or capital improvements, alterations,
repairs
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and replacements to the Premises. However, Landlord shall have the obligation to
make any such improvements to the Land Improvements or the Building Shell unless
required by a government authority because of a change in Tenant's use or
occupancy of the Premises. Tenant's obligation to make structural or capital
improvements, alterations, repairs and replacements to any portion of the
Premises other than the Land Improvements and Building Shell shall not exceed
the amortized amount described in the last three sentences of Section 7.2. Both
Landlord and Tenant shall have the right to contest any such direction of a
governmental authority.
10.4 Landlord warrants that the work required of Landlord under the
Work Letter shall be in compliance with the Americans with Disabilities Act of
1990 ("ADA") at the time possession is tendered to Tenant. Tenant shall comply
with the ADA, and the regulations promulgated thereunder, as amended from time
to time. All responsibility for compliance with the ADA relating to the Premises
and the activities conducted by Tenant within the Premises shall be exclusively
that of Tenant and not of Landlord, including any duty to make structural or
capital improvements, alterations, repairs and replacements to the Premises
(subject to the limitation set forth in the last three sentences of Section
7.2); however, Landlord shall have the duty to make such structural or capital
improvements, alterations, repairs and replacements to the Land Improvements and
the Building Shell if the duty to do so under ADA is triggered by something
other than a change in Tenant's use or occupancy of the Premises. Any
alterations to the Premises made by Tenant for the purpose of complying with the
ADA or which otherwise require compliance with the ADA shall be done in
accordance with Article 17 of this Lease; provided, that Landlord's consent to
such alterations shall not constitute either Landlord's assumption, in whole or
in part, of Tenant's responsibility for compliance with the ADA, or
representation or confirmation by Landlord that such alterations comply with the
provisions of the ADA.
Nothing in this Lease shall be construed to require either
Landlord or Tenant to make structural or capital improvements, alterations,
repairs or replacements to comply with ADA unless and until required to do so by
order of any government entity or court of law exercising proper jurisdiction
with regard thereto, subject to any right to appeal or otherwise contest any
such order.
10.5 Tenant may install signage on the Building to the extent
permitted by, and in conformity with, applicable provisions of any City of San
Jose sign ordinance, any other applicable governmental sign regulation, and any
covenants, conditions and restrictions recorded against the Real Property.
Tenant acknowledges it is not relying on any representations or warranty of
Landlord regarding the number, size or location of any signage. No other sign,
advertisement, or notice shall be exhibited, painted or affixed by Tenant on any
part of the Premises which is visible from outside the Building, or any part of
the exterior of the Building or elsewhere in the Premises, without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
The expense of design, permits, purchase and installation of any signs shall be
the responsibility of Tenant and the cost thereof shall be borne by Tenant. At
the termination of the Lease, all signs shall be the property of Tenant and may
be removed from the Premises by Tenant, subject to the provisions of Article 30.
10.6 No equipment shall be placed at a location within the Building
other than a location designed to carry the load of the equipment. Equipment
weighing in excess of
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floor loading capacity shall not be placed in the Building.
10.7 Tenant shall not use or allow the Premises to be used for any
unlawful purpose.
11. BROKERS.
11.1 Landlord and Tenant represent and warrant one to the other that
there have been no dealings with any real estate broker or agent in connection
with the negotiation of this Lease other than The Commercial Property Services
Company, the fees of which shall be paid by Landlord, and that to the best of
their knowledge, no other real estate broker or agent is or might be entitled to
a commission in connection with this Lease. Each shall indemnify, defend,
protect, and hold harmless the other from any claim of any other broker as a
result of any act or agreement of the indemnitor.
11.2 Landlord and Tenant each represent and warrant to the other that
no broker or agent has made any representation or warranty relied upon by such
party in its decision to enter into this Lease other than as contained in this
Lease.
11.3 The employment of brokers by Landlord is for the purpose of
solicitation of offers of lease from prospective tenants and no authority is
granted to any broker to furnish any representation (written or oral) or
warranty from Landlord unless placed within this Lease. Landlord and Tenant in
executing this Lease do so in reliance upon the other's representations and
warranties contained within Sections 11.1 and 11.2.
12. HOLDING OVER.
12.1 If, with Landlord's consent, Tenant holds possession of all or
any part of the Premises after the expiration or earlier termination of this
Lease, Tenant shall become a tenant from month to month upon the date of such
expiration or earlier termination, and in such case Tenant shall continue to pay
in accordance with Article 5 the Basic Annual Rent as adjusted from the Term
Commencement Date, together with the Management Fee in accordance with Article 7
and other Additional Rent as may be payable by Tenant, and such month-to-month
tenancy shall be subject to every other term, covenant and condition contained
herein.
12.2 If Tenant remains in possession of all or any portion of the
Premises after the expiration or earlier termination of the term hereof without
the express written consent of Landlord, Tenant shall become a tenant at
sufferance upon the terms of this Lease except that monthly rental shall be
equal to one hundred fifteen percent (115%) of the Basic Annual Rent in effect
during the last twelve (12) months of the Lease term.
12.3 Acceptance by Landlord of Rent after such expiration or earlier
termination shall not result in a renewal or reinstatement of this Lease.
12.4 The foregoing provisions of this Article 12 are in addition to
and do not
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affect Landlord's right to re-entry or any other rights of Landlord under
Article 24 or elsewhere in this Lease or as otherwise provided by law.
13. TAXES AND ASSESSMENTS.
13.1 Tenant shall pay and discharge as they become due, promptly and
before delinquency, all taxes, assessment, rates, charges, license fees,
municipal liens, levies, excises or imposts, whether general or special, or
ordinary or extraordinary, of every name, nature, and kind whatsoever, including
all governmental charges of whatsoever name, nature, or kind, which may be
levied, assessed, charged, or imposed, or may become a lien or charge on the
Premises, or any part thereof, or any improvements now or hereafter thereon, or
on Landlord by reason of its ownership of the Premises or any part thereof,
during the entire term hereof, saving and excepting only those taxes hereinafter
in this Lease specifically excepted. Notwithstanding the foregoing, Tenant shall
not be in Default for failure to pay any such tax or other payment until ten
(10) days after receipt of a written bill or statement therefore from Landlord.
13.2 Specifically and without in any way limiting the generality of
the foregoing, Tenant shall pay any and all special assessments or levies or
charges made by any municipal or political subdivision for local improvements,
and shall pay the same in cash as they shall fall due and before they shall
become delinquent and as required by the act and proceedings under which any
such assessments or levies or charges are made by any municipal or political
subdivision. If the right is given to pay either in one sum or in installments,
Tenant may elect either mode of payment subject to Landlord's approval. If by
making an election to pay in installments, any of the installments shall be
payable after the termination of this Lease or any extended term thereof, the
unpaid installments shall be prorated as of the date of termination, and amounts
payable after said date shall be paid by Landlord without reimbursement from
Tenant. All other taxes and charges payable under this Article 13 shall be
prorated as of and payable at the commencement and expiration of the term of
this Lease, as the case may be. Landlord shall not during the term of this Lease
undertake any action to place any special assessments, levies or charges on the
Premises without first obtaining the prior written approval of Tenant, other
than those due to Landlord's acquisition of the Real Property and construction
of the Premises pursuant to the Work Letter, and other than those imposed by the
City of San Jose or other government entity over which Landlord has no control.
If Landlord does undertake such action without Tenant's approval, Tenant shall
not be required to pay or reimburse Landlord for such special assessments,
levies or charges sought by such action.
13.3 Anything in this Article 13 to the contrary notwithstanding,
Tenant shall not be required to pay or reimburse Landlord for any estate, gift,
inheritance, succession, franchise, income, excess profits, sales or payroll
taxes, or any tax in the nature of a transfer tax arising from the conveyance of
the Premises or the recording of a deed of trust or mortgage encumbering the
Premises, that may be payable by Landlord or Landlord's legal representative,
successors, or assigns.
13.4 Any and all rebates on account of taxes, rates, levies, charges
or
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assessments paid or reimbursed by Tenant under the provisions of this Lease
shall belong to Tenant, and Landlord will, on the request of Tenant, execute any
receipts, assignments, or other acquittances that may be necessary in order to
secure the recovery of the rebates, and will pay over to Tenant any rebates that
may be received by Landlord.
13.5 Tenant shall pay before delinquency, without reimbursement or
contribution from Landlord, taxes levied against any fixtures, equipment and
personal property in or about the Premises, including any and all personal
property installed as part of the work required of Landlord under the Work
Letter.
13.6 If Tenant shall in good faith desire to contest the validity or
amount of any tax, assessment, levy, or other governmental charge herein agreed
to be paid or reimbursed by Tenant, Tenant shall be permitted to do so, and to
defer the payment of said tax or charge, the validity or amount of which Tenant
is so contesting, until final determination of the contest, by giving to
Landlord written notice thereof prior to the commencement of any contest, which
shall be at least fifteen (15) days prior to delinquency, and, if requested by
Landlord during the last three years of the term, by protecting Landlord on
demand by a good and sufficient surety bond against any tax, levy, assessment,
rate or governmental charge, and from any costs, penalties, interest, liability,
or damage arising out of a contest. Landlord shall not be required to join in
any proceeding or contest brought by Tenant unless the provisions of any law
require that the proceeding or contest be brought by or in the name of Landlord.
In that case, Landlord shall join in the contest or permit it to be brought in
Landlord's name so long as Landlord is not required to bear any costs. Tenant,
on final determination of the contest, shall immediately pay or discharge any
decision or judgment rendered, together with all costs, charges, interest and
penalties incidental to the decision or judgment.
13.7 If Tenant shall from time to time desire to seek a reassessment
of the Premises for real property tax purposes, Tenant shall be permitted to do
so. Landlord shall not be required to join in any such proceeding unless the
provisions of any law require that the proceeding to be brought by or in the
name of Landlord. In that case, Landlord shall join in the proceeding and permit
it to be brought in Landlord's name so long as Landlord is not required to bear
any costs.
13.8 To the extent Tenant fails to make any payment required by this
Article 13 and Landlord does so on Tenant's behalf, Tenant shall reimburse
Landlord for the cost thereof pursuant to the provisions of Sections 7.1 and
24.3 of this Lease.
14. CONDITION OF PREMISES.
14.1 Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty, express or implied, with
respect to the condition of the
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Premises, or to the work required of Landlord under the Work Letter, except as
set forth herein, or with respect to their suitability for the conduct of
Tenant's business.
14.2 Upon Substantial Completion of the Premises, Tenant shall accept
the Premises in the condition in which they then exist, and shall waive any
right or claim Tenant may have against Landlord for any cause directly or
indirectly arising out of the condition or delay in delivery of possession of
the Premises, appurtenances thereto, the improvements thereon and the equipment
thereof, except for (i) damages in the event of completion delays to the extent
of Section 4.4 hereof, (ii) the warranties made by Landlord under Sections 14.4
and 14.5 to the extent thereof, (iii) covenants and representations made by
Landlord in Article 39, (iv) the obligation to deliver the Premises lien-free
pursuant to Section 35.4, (v) the completion of punch list items relating to the
Building Shell and Land Improvements pursuant to the provisions of the Work
Letter, and (vi) any other duties or obligations of Landlord arising under the
provisions of this Lease and applicable law. Tenant shall thereafter indemnify,
defend, protect and hold Landlord harmless from liability, as provided in
Article 20 of the Lease.
14.3 Tenant's taking possession of the Premises and acceptance of the
Premises shall not constitute a waiver of any claims based upon warranty or
defect in regard to design, materials, or construction of Landlord's Work under
the Work Letter against the design professional, contractor, materialman,
manufacturer, or other responsible party (other than Landlord, whose liability
is described in Section 14.4 and 14.5 below), nor for failure of any such party
(other than Landlord) to comply with all applicable building code requirements,
regulations, laws, rules, orders, ordinances, directions, permits, approvals,
and requirements of all governmental agencies, offices, departments, bureaus and
boards having jurisdiction, nor for failure to comply with the rules, orders,
directions, regulations, and requirements of any applicable fire rating bureau.
Landlord hereby assigns to Tenant, and Tenant shall have the benefit of, on a
non-exclusive basis, any and all warranties with respect to the design,
materials and construction of the work required of Landlord under the Work
Letter which are assignable to Tenant, together with all other rights and claims
it may have against any design professional, contractor, materialman,
manufacturer, or other responsible party, or from applicable insurance policies.
Landlord and Tenant agree to cooperate with regard to the enforcement of all
such warranties, rights and claims. Tenant shall comply with whatever
maintenance and similar standards are required to maintain any applicable
warranties in affect.
14.4 Landlord warrants to Tenant that Landlord's Work will be on
Substantial Completion built in a good and workmanlike manner and in compliance
with the plans and specifications approved under the Work Letter and all
applicable building code requirements, laws, rules, orders, ordinances,
directions, regulations, permits, approvals, and requirements of all
governmental agencies, offices, departments, bureaus and boards having
jurisdiction, and with the rules, orders, directions, regulations, and
requirements of any applicable fire rating bureau.
14.5 Landlord warrants to Tenant that Landlord's Work will be on
Substantial Completion free of patent and latent defects in design, materials
and construction.
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The warranty given by Landlord in this Section 14.5 shall terminate one (1) year
after the recording of the notice of completion of the Premises, except for any
breach claimed by Tenant as long as Tenant has notified Landlord in writing of
such claim of breach (identifying the breach in reasonable detail) within such
one (1) year period. The warranty given by Landlord shall be extended to the
extent of any warranty given by a design professional, contractor, materialman,
manufacturer, or other responsible party which exceeds one (1) year after the
recording of the notice of completion. Notwithstanding the foregoing, (i)
Landlord's warranty with regard to latent defects in the design, materials and
construction of the parking areas shall not terminate after one (1) year and
shall continue for the entire Lease Term and any extensions hereof, and (ii)
Landlord's warranty with regard to defects in the design, materials and
construction of the roof membranes shall not terminate after one (1) year, but
shall terminate ten (10) years after the recording of the notice of completion
of the Premises, except for any breach claimed by Tenant as long as Tenant has
notified Landlord in writing of such claim of breach (identifying the breach in
reasonable detail) within such ten (10) year period.
14.6 Nothing in this Article 14 shall restrict Tenant's right to
pursue remedies against any responsible party other than Landlord. Landlord and
Tenant shall cooperate with regard to the repair and replacement of any
improvements for which they are responsible from recoveries from any applicable
warranty or insurance policy. Any and all warranties set forth in this Article
14 shall survive the expiration or earlier termination of the Lease.
15. PARKING FACILITIES.
15.1 Tenant acknowledges that any exterior areas used for Tenant's
equipment, equipment enclosures, trash enclosures, mechanical systems, and the
like will reduce available parking.
15.2 Tenant shall not place any equipment, storage containers or any
other property on the surface parking area except in accordance with the plans
and specification approved pursuant to the Work Letter or as otherwise approved
by Landlord, which approval shall not be unreasonably withheld.
16. UTILITIES AND SERVICES.
16.1 Tenant shall pay directly to the provider, prior to delinquency,
for all water, gas, electricity, telephone, sewer, and other utilities which may
be furnished to the Premises during the term of this Lease, together with any
taxes thereon. The cost of installing all utility meters shall be paid by
Tenant.
16.2 Landlord shall not be liable for, nor shall any eviction of
Tenant result from, any failure of any such utility or service, provided such
failure is not due to the gross negligence or willful misconduct of Landlord,
and in the event of such failure Tenant shall not be entitled to any abatement
or reduction of Rent, nor be relieved from the operation of any
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covenant or agreement of this Lease, and Tenant waives any right to terminate
this Lease on account thereof.
17. ALTERATIONS.
17.1 Tenant shall make no alterations, additions or improvements
(hereinafter in this article, "improvements") in or to the Premises, other than
interior non-structural improvements the cost of which does not exceed $50,000,
without Landlord's prior written consent, which shall not be unreasonably
withheld. Tenant shall deliver to Landlord final plans and specifications and
working drawings for the improvements to Landlord, and Landlord shall have
fifteen (15) days thereafter to grant or withhold its consent. If Landlord does
not notify Tenant of its decision within the fifteen (15) days, Landlord shall
be deemed to have given its approval.
17.2 If a permit is required to construct the improvements, Tenant
shall deliver a completed, signed-off inspection card to Landlord within ten
(10) days of completion of the improvements, and shall promptly thereafter
obtain and record a notice of completion and deliver a copy thereof to Landlord.
17.3 The improvements shall be constructed only by licensed
contractors approved by Landlord, which approval shall not be unreasonably
withheld. Any such contractor must have in force a general liability insurance
policy with commercially reasonable limits, which policy of insurance shall name
Landlord as an additional insured. Tenant shall provide Landlord with a copy of
the contract with the contractor prior to the commencement of construction.
17.4 Tenant agrees that any work by Tenant shall be accomplished in
such a manner as to permit any fire sprinkler system and fire water supply lines
to remain fully operable at all times except when minimally necessary for
building reconfiguration work.
17.5 Tenant covenants and agrees that all work done by Tenant shall
be performed in compliance with all laws, rules, orders, ordinances, directions,
regulations, permits, approvals, and requirements of all governmental agencies,
offices, departments, bureaus and boards having jurisdiction, and in full
compliance with the rules, orders, directions, regulations, and requirements of
any applicable fire rating bureau. Tenant shall provide Landlord with "as-built"
plans showing any change in the Premises within thirty (30) days after
completion.
17.6 Landlord shall make no improvements in or to the Premises
without Tenant's prior written consent, and the provisions of this article shall
apply to improvements undertaken by Landlord to the same extent as they apply to
improvements undertaken by Tenant.
18. REPAIRS AND MAINTENANCE.
18.1 Landlord shall, throughout the term of this Lease, at its own
cost and
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expense, and without any cost or expense to Tenant, keep and maintain in good
condition and repair the structural components, but not the surface finishes or
cosmetic improvements, of (i) the foundations, (ii) structural walls (including
responsibility for the watertight integrity of the exterior glazing and framing
system), (ii) floors, including the second floor deck, and (iii) structural roof
(but excluding the roof membranes) of the Premises (subject to wear and tear
consistent with commercially reasonable maintenance and repair standards
applicable to comparable buildings). However, Tenant shall take all reasonable
precautions to insure that, in accordance with Section 10.6, the second floor
deck is not over-loaded with improvements, fixtures or equipment. In addition,
Landlord shall, at its own cost and expense, and without any cost or expense to
Tenant, promptly repair any patent or latent defects in the design, materials or
construction of the work required of Landlord under the Work Letter to the
extent of Landlord's warranties in Section 14.4 and 14.5 hereof.
18.2 Except as otherwise set forth in Sections 18.1 and elsewhere in
this Lease, including without limitation Articles 7, 21, 22 and 23, throughout
the term of this Lease, at its own cost and expense, and without any cost or
expense to Landlord, Tenant shall keep and maintain in good, sanitary and neat
order, condition, and repair, the Premises and every part thereof (subject to
wear and tear consistent with commercially reasonable maintenance and repair
standards applicable to comparable buildings), including all improvements,
fixtures, equipment and personal property, and all appurtenances thereto,
including but not limited to water, gas and electrical distribution systems and
facilities, all signs, both illuminated and non-illuminated that are now or
hereafter on the Premises, and exterior sidewalks, parking areas, curbs,
internal roads, driveways, lighting standards, landscaping, sewers, and drainage
facilities.
18.3 If Landlord fails to make any repairs required of Landlord under
this Article 18, and such failure unreasonably interferes with Tenant's use or
occupancy of the Premises and continues for more than fifteen (15) days after
written notice from Tenant to Landlord demanding performance by Landlord, Tenant
may, without waiving or releasing Landlord from any obligation therefore, make
such repairs on behalf of Landlord. However, Tenant may not deduct the cost
thereof from, or set off the cost against, Basic Annual Rent except in
accordance with the provisions of Article 26. Tenant waives Civil Code Sections
1941 and 1942 relating to a landlord's duty to maintain the Premises in a
tenantable condition, and under said sections or under any law, statute or
ordinance now or hereafter in effect to make repairs at Landlord's expense, so
that the parties' rights and obligations regarding repairs and maintenance shall
be governed by this Article 18, Article 26, and other applicable provisions of
this Lease.
18.4 There shall be no abatement of Rent and no liability of Landlord
by reason of any injury to or interference with Tenant's business arising from
the making of any repairs, alterations or improvements in or to any portion of
the Premises, or in or to improvements, fixtures, equipment and personal
property therein, provided that Landlord makes commercially reasonable efforts
to comply with its repair and replacement obligations under this Article 18 at
such times and in such manner as do not unreasonably interfere with Tenant's use
or occupancy of the Premises. If repairs or replacements become necessary which
by the terms of
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this Lease are the responsibility of Tenant and Tenant fails to make the repairs
or replacements, Landlord may do so pursuant to the provisions of Section 24.3
of this Lease.
19. LIENS.
19.1 Tenant shall keep the Premises and every part thereof free from
any liens arising out of work performed, materials furnished or obligations
incurred by Tenant. Tenant further covenants and agrees that any mechanic's lien
filed against the Premises for work claimed to have been done directly for, or
materials claimed to have been furnished to, Tenant, will be discharged by
Tenant, by bond or otherwise, within thirty (30) days after the filing thereof
(or within ten (10) days after the filing thereof if requested by Landlord as
necessary to facilitate a pending sale or refinancing), at the cost and expense
of Tenant.
19.2 Should Tenant fail to discharge any lien of the nature described
in Section 19.1, Landlord may at Landlord's election pay such claim or post a
bond or otherwise provide security to eliminate the lien as a claim against
title and the cost thereof shall be immediately due from Tenant as Additional
Rent.
19.3 In the event Tenant shall lease or finance the acquisition of
office equipment, furnishings, or other personal property utilized by Tenant in
the operation of Tenant's business, should any holder of a security agreement
executed by Tenant record or place of record a financing statement which appears
to constitute a lien against any interest of Landlord, Tenant shall upon request
of Landlord (i) cause copies of the security agreement or other documents to
which the financing statement pertains to be furnished to Landlord to facilitate
Landlord's being in a position to show such lien is not applicable to any
interest of Landlord, and (ii) cause the holder of the security interest to
amend documents of record so as to clarify that such lien is not applicable to
any interest of Landlord in the Premises. Nothing herein shall be deemed to
imply any security interest in favor of Landlord in any fixtures or personal
property owned by Tenant, or that Tenant may not grant security interests in its
property to others. Upon request of Tenant, Landlord shall execute documents in
a form reasonably acceptable to Tenant to evidence Landlord's waiver of any
right, title, lien or interest in any fixtures or personal property owned by
Tenant which Tenant has the right to remove.
20. INDEMNIFICATION AND EXCULPATION.
20.1 Except to the extent of Landlord's indemnity obligations set
forth in Sections 20.2 and 21.6 and other applicable provisions of the Lease,
Tenant agrees to indemnify Landlord, and its partners and affiliates, and their
respective shareholders, directors, officers, agents, contractors (and their
subcontractors) and employees (collectively, "Landlord's Agents") against, and
to protect, defend, and save them harmless from, all demands, claims, causes of
action, liabilities, losses and judgments, and all reasonable expenses incurred
in investigating or resisting the same (including reasonable attorneys' fees),
for death of or injury to person or
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damage to property arising out of (i) any occurrence in, upon or about the
Premises during the term of this Lease to the extent of proceeds of insurance
required to be maintained by Tenant under this Lease and applicable deductibles,
(ii) Tenant's use, occupancy, repairs, maintenance, and improvements of the
Premises and all improvements, fixtures, equipment and personal property
thereon, and (iii) any act or omission of Tenant, its shareholders, directors,
officers, agents, employees, servants, contractors (and their subcontractors),
invitees and subtenants. Tenant's obligation under this Section 20.1 shall
survive the expiration or earlier termination of the term of this Lease.
20.2 Landlord agrees to indemnify Tenant, and its partners and
affiliates, and their respective shareholders, directors, officers, agents,
contractors (and their subcontractors) and employees (collectively, "Tenant's
Agents") against, and to protect, defend, and save them harmless from, all
demands, claims, causes of action, liabilities, losses and judgments, and all
reasonable expenses incurred in investigating or resisting the same (including
reasonable attorneys' fees), for death of or injury to person or damage to
property by Landlord and arising out of (i) any occurrence in, upon or about the
Premises during the term of this Lease to the extent caused by the willful
misconduct or gross negligence of Landlord or Landlord's Agents, (ii) Landlord's
repairs, maintenance, and improvements of the Premises, and (iii) any act or
omission of Landlord or Landlord's Agents (including servants, contractors and
their subcontractors and invitees). Landlord's obligation under this Section
20.2 shall survive the expiration or earlier termination of the term of this
Lease.
20.3 Notwithstanding any provision of Sections 20.1 and 20.2 to the
contrary, Landlord shall not be liable to Tenant and Tenant assumes all risk of
damage to any fixtures, goods, inventory, merchandise, equipment, records,
research, experiments, computer hardware and software, leasehold improvements,
and other personal property of any nature whatsoever (including any personal
property installed as part of the work required of Landlord under the Work
Letter), and Landlord shall not be liable for injury to Tenant's business or any
loss of income therefrom relative to such damage, unless caused by Landlord's or
Landlord's Agents' willful misconduct or gross negligence.
20.4 The indemnity obligations of both Landlord and Tenant under this
Section 20 shall be satisfied to the extent of proceeds of applicable insurance
maintained by Tenant to the extent thereof, and thereafter to proceeds of any
applicable insurance maintained by Landlord; Landlord and Tenant shall be
required to satisfy any such obligation only to the extent it is not satisfied
by proceeds of applicable insurance as set forth above.
20.5 Security devices and services, if any, while intended to deter
crime may not in given instances prevent theft or other criminal acts and it is
agreed that Landlord shall not be liable for injuries or losses caused by
criminal acts of third parties and the risk that any security device or service
may malfunction or otherwise be circumvented by a criminal is assumed by Tenant.
Tenant shall at Tenant's cost obtain insurance coverage to the extent Tenant
desires protection against such criminal acts.
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21. INSURANCE - WAIVER OF SUBROGATION.
21.1 Commencing prior to Tenant's first entry onto the Premises for
purposes of constructing Tenant's Improvements, and continuing at all times
during the term of this Lease, Tenant shall maintain, at Tenant's expense and
without any cost or expense to Landlord, or any reimbursement or contribution by
Landlord, commercial general liability insurance, on an occurrence basis (or on
a claims made basis as long as Tenant makes adequate arrangements for claims
made after the expiration of the term or earlier termination of the Lease for
occurrences during the term of the Lease), insuring Tenant and Tenant's agents,
employees and independent contractors against all bodily injury, property
damage, personal injury and other covered loss arising out of the use,
occupancy, improvement and maintenance of the Premises and the business operated
by Tenant, or any other occupant, on the Premises. Such insurance shall have a
minimum combined single limit of liability per occurrence of not less than
$3,000,000.00 and a general aggregate limit of $3,000,000.00. Such insurance
shall: (i) name Landlord, and Landlord's lenders if required by such lenders,
and any management company retained to manage the Premises if requested by
Landlord, as additional insureds; (ii) include a broad form contractual
liability endorsement insuring Tenant's indemnity obligations under Section
20.1; (iii) include boiler and machinery liability endorsement, and a products
completed operations coverage endorsement; (iv) provide that it is primary
coverage and noncontributing with any insurance maintained by Landlord or
Landlord's lenders, which shall be excess insurance with respect only to losses
arising out of Tenant's negligence; and (v) provide for severability of
interests or include a cross-liability endorsement, such that an act or omission
of an insured shall not reduce or avoid coverage of other insureds.
21.2 At all times during the term of this Lease, Tenant shall also
maintain "all risk" insurance, including, but not limited to, coverage against
loss or damage by fire, flood, vandalism, and malicious mischief covering the
Premises and all improvements and fixtures therein, whether owned by Landlord or
Tenant, and all other improvements and fixtures that may be constructed or
installed on the Premises, in an amount equal to one hundred percent (100%) of
the full replacement value thereof, subject to commercially reasonable premiums
and deductibles. The parties acknowledge that Landlord's investment in the
Premises is limited to the Real Property, Land Improvements and Building Shell
only and that Tenant, with its own funds, will construct Tenant's Improvements
and all other improvements in the Building other than the Building Shell.
Landlord and Tenant desire that neither Landlord, any lender of Landlord, nor
any other person or entity have any interest in any insurance proceeds
attributable to Tenant's Improvements and/or any other improvements constructed
by Tenant at its sole cost and that Tenant have exclusive control over any such
proceeds (subject to any obligation of Tenant to use proceeds for repairs and
reconstruction as set forth herein). To this end, Tenant shall have the right to
satisfy its obligations under this section 21.2 by insuring the Land
Improvements and Building Shell and all other building improvement under one
policy of insurance or separately under one or more policies and such policy or
policies shall provide that neither Landlord, any Lender of Landlord, nor any
other person or entity shall have any interest in, or have the right to exercise
any control over, any insurance proceeds attributable to any improvements other
than the Land Improvements and the Building Shell and any other
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improvements constructed by Landlord at its sole cost (subject to any obligation
of Tenant to use proceeds for repairs and reconstruction as set forth herein).
In addition, Tenant shall maintain, to the extent it is reasonably available,
earthquake insurance, covering such losses and subject to premiums and
deductibles as are commercially reasonable and comparable to such insurance
covering similar buildings in the San Jose area. If any boilers or other
pressure vessels or systems are installed on the Premises, Tenant shall maintain
boiler and machinery insurance in an amount equal to one hundred percent (100%)
of the full replacement value thereof, subject to commercially reasonable
deductibles. The insurance described in this Section 21.2 shall: (i) with regard
to the policy insuring the Land Improvements and Building Shell only (or, if
only one policy insures the Land Improvements, Building Shell and all other
elements of the Building, including, without limitation, Tenant's Improvements,
then with regard to the portion of the policy insuring the Land Improvements and
Building Shell or any proceeds payable on account thereof), name Landlord and
Landlord's lenders as additional insureds; (ii) with regard to the policy
insuring the Land Improvements and Building Shell only (or, if only one policy
insures the Land Improvements, Building Shell and all other elements of the
Building, including, without limitation, Tenant's Improvements, then with regard
to the portion of the policy insuring the Land Improvements and Building Shell
or any proceeds payable on account thereof), contain a Lender's Loss Payable
Form (Form 438 BFU or equivalent) in favor of Landlord's lenders and name
Landlord, or Landlord's lender if required by such lender, as the loss payee
(subject to the obligation to use proceeds for repairs and reconstruction as set
forth herein); (iii) provide for severability of interests or include a
cross-liability endorsement, such that an act or omission of an insured shall
not reduce or avoid coverage of other insureds; (iv) include a building
ordinance endorsement, an agreed amount endorsement and an inflation
endorsement; and (v) provide that it is noncontributing with any insurance
maintained by Landlord, and shall be excess insurance to that maintained by
Landlord. The full replacement value of the Building, improvements and fixtures
insured thereunder shall be determined by the company issuing the insurance
policy and shall be redetermined by said company within twelve (12) months after
completion of any material alterations or improvements to the Premises and
otherwise at intervals of not more than three (3) years. Tenant shall increase
the amount of the insurance carried pursuant to this Section 21.2 to the amount
so redetermined. The proceeds of the insurance described in this Section shall
be used for the repair, replacement and restoration of the Premises and other
improvements and fixtures insured thereunder, as further provided in Article 22;
provided, however, if this Lease is terminated after damage or destruction, all
proceeds of the insurance policy or policies related to such damage or
destruction, and the right to collect such proceeds, shall be allocated as
follows: (i) Landlord shall be entitled to all proceeds allocable to the
Building Shell and Land Improvements, and (ii) (a) if Landlord terminates the
Lease, Tenant shall be entitled to all proceeds attributable to Tenant's
Improvements and any alterations, additions, and/or improvements subsequently
made by Tenant, and (b) if Tenant terminates the Lease, Tenant shall be entitled
to the proceeds attributable to Tenant's Improvements and any alterations,
additions, and/or improvements subsequently made by Tenant to the extent of the
unamortized value of Tenant's Improvements, alterations, additions and/or
improvements based upon the cost to construct the same and an amortization
period equal to the initial Lease Term. Any deed of trust affecting the Premises
and all loan documentation relating thereto shall provide that all insurance
proceeds shall be used for the repair and reconstruction of the Premises
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pursuant to the terms hereof, and shall not conflict with the provisions of this
Lease concerning the disposition of insurance proceeds.
21.3 At all times during the term of this Lease, Tenant shall
maintain workers' compensation insurance in accordance with California law and
employers' liability insurance with a limit of not less than that required by
California law.
21.4 All of the policies of insurance referred to in this Article 21
shall be written by companies authorized to do business in California and rated
A+VII or better in Best's Insurance Guide, except as otherwise reasonably
approved by Landlord. Each insurer referred to in this Article 21 shall agree,
by endorsement on the applicable policy or by independent instrument furnished
to Landlord, that it will give Landlord, and Landlord's lenders if required by
such lenders, at least ten (10) days' prior written notice by registered mail
before the applicable policy shall be cancelled for non-payment of premium, and
thirty (30) days' prior written notice by registered mail before the applicable
policy shall be cancelled or altered in coverage, scope, amount or other
material term for any other reason (although any failure of an insurer to give
notice as provided herein shall not be a breach of this Lease by Tenant). Except
as otherwise provided in this Lease, Tenant shall pay all of the premiums for
such insurance and all deductible amounts provided for thereunder. No policy
shall provide for a deductible amount in excess of that which is commercially
reasonable, unless approved in advance in writing by Landlord, which approval
shall not be unreasonably withheld. Tenant shall deliver to Landlord, and to
Landlord's lenders if required by such lenders, copies of the insurance
policies, certified by the insurer, or certificates evidencing such insurance
policies, issued by the insurer, together with evidence of payment of the
required premiums, prior to the required date for commencement of such coverage.
At least thirty (30) days prior to expiration of any such policy, Tenant shall
deliver to Landlord, and Landlord's lenders if required by such lenders, a
certificate evidencing renewal, or a certified copy of a new policy or
certificate evidencing the same, together with evidence of payment of the
required premiums. If Tenant fails to provide to Landlord any such policy or
certificate by the required date for commencement of coverage, or within fifteen
(15) days prior to expiration of any policy, or to pay the premiums therefor
when required, Landlord shall have the right, but not the obligation, to procure
said insurance and pay the premiums therefor. Any premiums paid by Landlord
shall be repaid by Tenant to Landlord with the next due installment of rent, and
failure to repay the same shall have the same consequences as failure to pay any
installment of Rent.
21.5 Tenant may provide the property insurance only required under
this Article 21 pursuant to a so-called blanket policy or policies of property
insurance maintained by Tenant; provided, however, that the amount and type of
coverage afforded to the Landlord shall not be reduced or adversely affected
from that which would exist under a separate policy or policies meeting all of
the requirements of this Lease by reason of the use of a blanket policy of
property insurance, and provided further that the requirements of this Article
21 are otherwise satisfied.
21.6 Landlord and Tenant each hereby waive any and all rights of
recovery
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against the other or against the officers, directors, partners, employees,
agents, subtenants, contractors and representatives of the other, on account of
loss or damage to property occasioned to such waiving party or its property or
the property of others under its control, to the extent that such loss or damage
is caused by or results from risks insured against under any insurance policy
which insures such waiving party at the time of such loss or damage (or which
would have been insured against under a policy of insurance required to be
carried by such waiving party under this Lease had such waiving party carried
such insurance), which waiver shall continue in effect as long as the parties'
respective insurers permit such waiver under the terms of their respective
insurance policies or otherwise in writing. Any termination of such waiver shall
be by written notice as hereinafter set forth. Prior to obtaining policies of
insurance required or permitted under this Lease, Tenant shall give notice to
the insurers that the foregoing mutual waiver is contained in this Lease, and
each party shall use its best efforts to cause such insurer to approve such
waiver in writing and to cause each insurance policy obtained by it to provide
that the insurer waives all right of recovery by way of subrogation against the
other party. If such written approval of such waiver of subrogation cannot be
obtained from any insurer or is obtainable only upon payment of an additional
premium which the party seeking to obtain the policy reasonably determines to be
commercially unreasonable, the party seeking to obtain such policy shall notify
the other thereof, and the latter shall have twenty (20) days thereafter to
either: (i) identify other insurance companies reasonably satisfactory to the
other party that will provide the written approval and waiver of subrogation; or
(ii) agree to pay such additional premium. If neither (i) nor (ii) are done, the
mutual waiver set forth above shall not be operative, and the party seeking to
obtain the policy shall be relieved of the obligation to obtain the insurer's
written approval and waiver of subrogation with respect to such policy during
such time as such policy is not obtainable or is obtainable only upon payment of
a commercially unreasonable additional premium as described above. If such
policies shall at any subsequent time be obtainable or obtainable upon payment
of a commercially reasonable additional premium, neither party shall be
subsequently liable for failure to obtain such insurance until a reasonable time
after notification thereof by the other party. If the release of either Landlord
or Tenant, as set forth in the first sentence of this Section 21.9, shall
contravene any law with respect to exculpatory agreements, the liability of the
party in question shall be deemed not released but shall be secondary to the
other's insurer.
21.7 Any property management firm retained by Landlord to manage the
Premises shall be required to maintain commercial general liability insurance
with such limits of liability as are commercially reasonable naming Tenant as an
additional insured.
21.8 It is understood and agreed that insurance policies required
under this Article 21 may be blanket policies covering other locations operated
by Landlord or Tenant, or by their affiliates or subsidiaries, subject to the
reasonable approval of the other party.
21.9 Notwithstanding anything in this Section 21 or 22 to the
contrary, in the event damages attributable to uninsured losses and deductibles
relating to earthquake and flood losses exceed twenty percent (20%) of the
replacement cost of the Premises, either Landlord or Tenant may terminate this
Lease in the manner and within the time periods set forth in Article
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22. In the event damages attributable to uninsured losses and deductibles
relating to earthquake and flood losses do not exceed twenty percent (20%) of
the value of the Premises, or if they do and neither party elects to terminate
this Lease, Tenant shall pay for one-seventeenth (1/17th) of fifty percent (50%)
of the loss or deductible for each year remaining in the initial term and first
extension period, and Landlord shall pay the balance. Tenant shall not be
required to pay any deductible amount under any policy of insurance if either
Landlord or Tenant terminate this Lease in accordance with its terms.
22. DAMAGE OR DESTRUCTION.
22.1 In the event of damage to or destruction of all or any portion
of the Premises or the improvements and fixtures thereon (collectively in this
Article 22, "improvements") arising from a risk covered by the insurance
described in Section 21.2, Landlord shall, with the use of the insurance
proceeds and any deductibles payable by Tenant, and within a reasonable time,
commence and proceed diligently to repair, reconstruct and restore (collectively
in this Article 22, "restore" or "restoration") such improvements to
substantially the same condition as they were in immediately prior to the
casualty, whether or not the insurance proceeds and deductibles are sufficient
to cover the actual cost of restoration, and this Lease shall continue in full
force and effect notwithstanding such damage or destruction. Subject to the
limitations and rights set forth in Section 21.8 hereof, Landlord shall
contribute any amounts necessary to restore the Land Improvements and Building
Shell in excess of the proceeds of insurance attributable thereto and applicable
deductibles, and Tenant shall contribute any amounts necessary to restore
Tenant's Improvements in excess of the proceeds of insurance attributable
thereto together with any applicable deductibles.
22.2 In the event of damage to or destruction of all or any portion
of the improvements arising from a risk which is not covered by the insurance
described in Section 21.2, Landlord may elect to restore the improvements, and
this Lease shall continue in full force and effect. Landlord shall give Tenant
written notice of its election to restore the improvements within sixty (60)
days after the damage or destruction occurs, and shall, at its expense and
within a reasonable period of time thereafter, commence and proceed diligently
to restore the improvements to substantially the same condition as they were in
immediately prior to the casualty. If Landlord does not elect to restore the
improvements within such 60-day period, then this Lease shall terminate unless
Tenant delivers to Landlord written notice of its election to continue this
Lease within thirty (30) days thereafter. If Tenant elects to continue this
Lease, Tenant shall, at its expense and within a reasonable period of time,
commence and proceed diligently to restore the improvements to substantially the
same condition as they were in immediately prior to the casualty, and this Lease
shall continue in full force and effect notwithstanding such damage or
destruction. Notwithstanding anything to the contrary in this Section 22.2, the
rights and obligations of Landlord and Tenant under this Section 22.2 shall be
subject to the terms and conditions of Section 21.8.
22.3 Notwithstanding anything in Section 22.1 or 22.2 to the
contrary, if, in the opinion of an independent architect selected by Landlord
and Tenant, the damage or
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destruction is so substantial that it cannot be corrected within eight (8)
months of the date of damage, Tenant may elect to terminate this Lease by
delivering to Landlord written notice of its election to terminate within thirty
(30) days after the damage or destruction.
22.4 In the event the Lease is terminated in accordance with the
forgoing provisions, (i) Tenant shall surrender possession of the Premises
within a reasonable period of time, (ii) this Lease shall terminate as of the
date possession of the Premises is surrendered, (iii) insurance proceeds shall
be distributed in accordance with the provisions of Section 21.2, and (iv) the
parties shall be released from all obligations arising under this Lease after
such termination date.
22.5 In satisfying any restoration obligations under this Article
22, neither party shall be required to restore improvements with improvements
identical to those which were damaged or destroyed; rather, with the consent of
the other party, which consent will not be unreasonably withheld, the restoring
party may restore the damage or destruction with improvements reasonably
equivalent to those damaged or destroyed. In no event shall Tenant be required
to restore its own trade fixtures or equipment.
22.6 In the event of damage, destruction and/or restoration as
herein provided, there shall be no abatement of Rent, and Tenant shall not be
entitled to any compensation or damages occasioned by any such damage,
destruction or restoration.
22.7 Notwithstanding anything to the contrary contained in this
Lease, if the damage or destruction occurs during the last year of the term or
any extended term of this Lease, Tenant shall not be required to repair the
damage or destruction so long as it tenders to Landlord the insurance proceeds
and applicable deductibles for restoration which would otherwise been required
under this Article 22.
22.8 The provisions of Article 17 shall apply to any restoration
work under this Article as if the restoration was an alteration, addition or
improvement thereunder.
22.9 Tenant waives the provisions of Civil Code Section 1932(2) and
1933(4) or any similar statute now existing or hereafter adopted governing
destruction of the Premises, so that the parties' rights and obligations in the
event of damage or destruction shall be governed by the provisions of this
Lease.
23. EMINENT DOMAIN.
23.1 In the event the whole of the Premises shall be taken for any
public or quasi-public purpose by any lawful power or authority by exercise of
the right of appropriation, condemnation or eminent domain, or sold to prevent
such taking, Tenant or Landlord may terminate this Lease effective as of the
date possession is required to be surrendered to said authority. The
condemnation proceeds shall be reasonably allocated to Tenant to the extent of
its trade fixtures, the value of any improvements (as that term is referred to
in Article 17, including,
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without limitation, Tenant's Improvements constructed by Tenant pursuant to the
Work Letter) which Tenant has the right to remove from the Premises, the
unamortized value allocable to the remainder of the term of this Lease of any
improvements (as that term is referred to in Article 17 hereof, including,
without limitation, Tenant's Improvements constructed by Tenant pursuant to the
Work Letter) installed at Tenant's expense which are not removable, good will,
and moving expenses, and Landlord shall be entitled to any condemnation proceed
attributable to the Real Property, the Land Improvements, the Building Shell,
the value of any improvements not allocated to Tenant above, and any severance
damages.
23.2 In the event of a partial taking of the Premises for any public
or quasi-public purpose by any lawful power or authority by exercise of right of
appropriation, condemnation, or eminent domain, or sold to prevent such taking,
then Tenant may elect to terminate this Lease if such taking is of material
detriment to, and substantially interferes with, Tenant's use and occupancy of,
and conduct of its business from, the Premises, including but not limited to
materially affecting Tenant's parking or Tenant's ingress and egress from the
Premises, unless Landlord provides reasonable alternatives thereto acceptable to
Tenant. In no event shall this Lease be terminated when such a partial taking
does not have a material adverse effect upon Landlord or Tenant or both.
Termination pursuant to this section shall be effective as of the date
possession is required to be surrendered to said authority. In the event of a
partial taking and whether or not Tenant terminates this Lease, Tenant and
Landlord shall be entitled to those condemnation proceeds attributable to those
items for which they are entitled to compensation pursuant to Section 23.1
(excluding moving expenses).
23.3 If upon any taking of the nature described in this Article 23
this Lease continues in effect, then Landlord shall promptly proceed to restore
the remaining portion of the Premises, and all improvements and fixtures located
thereon, to substantially their same condition prior to such partial taking.
Landlord shall contribute any amount necessary for restoration of Landlord's
Work described in the Work Letter in excess of the condemnation proceeds awarded
for such purpose, and Tenant shall contribute any amount necessary for
restoration of Tenant's Improvement Work described in the Work Letter in excess
of the condemnation proceeds awarded for such purposes. Basic Annual Rent shall
be abated proportionately on the basis of the rental value of the Premises,
including improvements and fixtures, as restored after such taking compared to
the rental value of the Premises prior to such taking.
23.4 The provisions of Article 17 shall apply to any restoration
work under this Article as if the restoration was an alteration, addition or
improvement thereunder.
24. DEFAULTS AND REMEDIES.
24.1 Late payment by Tenant to Landlord of Rent and other sums due
will cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult and impracticable to ascertain. Such
costs include, but are not limited to, processing and accounting charges and
late charges which may be imposed on Landlord by the terms of any mortgage or
trust deed covering the Premises. Therefore, if any installment of Rent
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due from Tenant is not received by Landlord within fifteen (15) days of the date
such payment is due, Tenant shall pay to Landlord an additional sum of five
percent (5%) of the overdue rent as a late charge. The parties agree that this
late charge represents a fair and reasonable estimate of the costs that Landlord
will incur by reason of late payment by Tenant. In addition to the late charge,
Rent not paid within thirty (30) days of the date such payment is due shall bear
interest from thirty (30) days after the date due until paid at the lesser of
(i) ten percent (10%) per annum or (ii) the maximum rate permitted by law.
24.2 No payment by Tenant or receipt by Landlord of a lesser amount
than the rent payment herein stipulated shall be deemed to be other than on
account of the rent, nor shall any endorsement or statement on any check or any
letter accompanying any check or payment as rent be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such rent or pursue any other remedy
provided. If at any time a dispute shall arise as to any amount or sum of money
to be paid by Tenant to Landlord, Tenant shall have the right to make payment
"under protest" and such payment shall not be regarded as a voluntary payment,
and there shall survive the right on the part of Tenant to institute suit for
recovery of the payment paid under protest.
24.3 If Tenant fails to pay any sum of money (other than Basic
Annual Rent) required to be paid by it hereunder, or shall fail to perform any
other act on its part to be performed hereunder, Landlord may, without waiving
or releasing Tenant from any obligations of Tenant, but shall not be obligated
to, make such payment or perform such act; provided, that such failure by Tenant
continued for fifteen (15) days after written notice from Landlord demanding
performance by Tenant was delivered to Tenant, or that such failure by Tenant
unreasonably interfered with the use or efficient operation of the Premises, or
resulted or could have resulted in a violation of law or the cancellation of an
insurance policy maintained by Landlord. All sums so paid or incurred by
Landlord, together with interest thereon, from the date such sums were paid or
incurred, at the annual rate equal to ten percent (10%) per annum or highest
rate permitted by law, whichever is less, shall be payable to Landlord on demand
as Additional Rent.
24.4 The occurrence of any one or more of the following events shall
constitute a "Default" hereunder by Tenant:
(a) The failure by Tenant to make any payment of Rent, as and
when due, where such failure shall continue for a period of fifteen (15) days
after written notice thereof from Landlord to Tenant. Such notice shall be in
lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161;
(b) The failure by Tenant to observe or perform any material
obligation other than described in Section 24.4(a) to be performed by Tenant,
where such failure shall continue for a period of thirty (30) days after written
notice thereof from Landlord to Tenant; provided, however, that if the nature of
Tenant's default is such that more than thirty (30) days are reasonably required
to cure the default, then Tenant shall not be deemed to be in default
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if Tenant shall commence such cure within said thirty (30) day period and
thereafter diligently prosecute the same to completion. Such notice shall be in
lieu of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161;
(c) Tenant makes an assignment for the benefit of creditors;
(d) A receiver, trustee or custodian is appointed to, or does,
take title, possession or control of all, or substantially all, of Tenant's
assets;
(e) An order for relief is entered against Tenant pursuant to a
voluntary or involuntary proceeding commenced under any chapter of the
Bankruptcy Code;
(f) Any involuntary petition is filed against the Tenant under
any chapter of the Bankruptcy Code and is not dismissed within ninety (90) days;
or
(g) Tenant's interest in this Lease is attached, executed upon,
or otherwise judicially seized and such action is not released within ninety
(90) days of the action.
Notices given under this Section shall specify the alleged
default and shall demand that Tenant perform the provisions of this Lease or pay
the Rent that is in arrears, as the case may be, within the applicable period of
time, or quit the Premises. No such notice shall be deemed a forfeiture or a
termination of this Lease unless Landlord elects otherwise in such notice, and
in no event shall a forfeiture or termination occur without such written notice.
24.5 In the event of a Default by Tenant, and at any time thereafter
while such Default is continuing, and without limiting Landlord in the exercise
of any right or remedy which Landlord may have, Landlord shall be entitled to
terminate Tenant's right to possession of the Premises by any lawful means, in
which case this Lease shall terminate and Tenant shall immediately surrender
possession of the Premises to Landlord. In such event Landlord shall have the
immediate right to re-enter and remove all persons and property by any lawful
means, and such property may be removed and stored in a public warehouse or
elsewhere at the cost of, and for the account of Tenant, all without service of
notice and without being deemed guilty of trespass, or becoming liable for any
loss or damage which may be occasioned thereby, subject to the rights of
personal property lessors or secured parties with validly granted and duly
perfected ownership or security interests in any such property. In the event
that Landlord shall elect to so terminate this Lease, then Landlord shall be
entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including:
(a) The worth at the time of award of any unpaid Rent which had
been earned at the time of such termination; plus
(b) The worth at the time of award of the amount by which the
unpaid Rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss which Tenant proves could have been
reasonably avoided; plus
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(c) The worth at the time of award of the amount by which the
unpaid Rent for the balance of the term after the time of award exceeds the
amount of such rental loss which Tenant proves could have been reasonably
avoided; plus
(d) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligation
under this Lease or which in the ordinary course of things would be likely to
result therefrom; plus
(e) At Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted from time to time by applicable
law.
As used in Subsections (a), (b) and (c), the "time of award"
shall mean the date upon which the judgment in any action brought by Landlord
against Tenant by reason of such default is entered or such earlier date as the
court may determined. As used in Subsections (a) and (b), the "worth at the time
of award" shall be computed by allowing interest at the rate specified in
Section 24.1. As used in Subsection (c) above, the "worth at the time of award"
shall be computed by taking the present value of such amount using the discount
rate of the Federal Reserve Bank of San Francisco at the time of award plus one
percentage point.
Nothing in this Section 24.4 is intended to increase or enlarge
the damages recoverable by Landlord under Section 1951.2 of the Civil Code, as
same may be amended from time to time.
24.6 If Landlord does not elect to terminate this Lease as provided
in Section 24.5 or otherwise terminate Tenant's right to possession of the
Premises, Landlord shall have the remedy described in Section 1951.4 of the
Civil Code. Landlord may continue the lease in effect for so long as Landlord
does not terminate Tenant's right to possession of the Premises, and may enforce
all of its rights and remedies under the Lease, including the right from time to
time to recover Rent as it becomes due under the Lease. At any time thereafter,
Landlord may elect to terminate this Lease and to recover damages to which
Landlord is entitled.
24.7 Notwithstanding anything herein to the contrary, Landlord's
reentry to perform acts of maintenance or preservation of, or in connection with
efforts to relet, the Premises, or any portion thereof, or the appointment of a
receiver upon Landlord's initiative to protect Landlord's interest under this
Lease, shall not terminate Tenant's right to possession of the Premises or any
portion thereof and, until Landlord does elect to terminate this Lease or
terminates Tenant's right to possession of the Premises, this Lease shall
continue in full force and Landlord may pursue all its remedies hereunder,
including, without limitation, the right to recover from Tenant as they become
due hereunder all Rent and other charges required to be paid by Tenant under the
terms of this Lease.
24.8 All rights, options, and remedies of Landlord contained in this
Lease shall be construed and held to be nonexclusive and cumulative. Landlord
shall have the right to
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pursue any one or all of such remedies or any other remedy or relief which may
be provided by law, whether or not stated in this Lease. No waiver of any
default of Tenant hereunder shall be implied from any acceptance by Landlord of
any rent or other payments due hereunder or by any omission by Landlord to take
any action on account of such default if such default persists or is repeated,
and no express waiver shall affect defaults other than as specified in said
waiver.
24.9 Termination of this Lease or Tenant's right to possession by
Landlord shall not relieve Tenant from any liability to Landlord which has
theretofore accrued or shall arise based upon events which occurred prior to the
last to occur of (i) the date of Lease termination or (ii) the date possession
of Premises is surrendered or taken by Landlord.
24.10 Landlord shall not be in default unless Landlord fails to
perform obligations required of Landlord within a reasonable time, but in no
event later than thirty (30) days after written notice by Tenant specifying
wherein Landlord has failed to perform such obligation; provided, however, that
if the nature of Landlord's obligation is such that more than thirty (30) days
are required for performance, then Landlord shall not be in default if Landlord
commences performance within such thirty (30) day period and thereafter
diligently prosecutes the same to completion.
24.11 In the event of any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed of
trust or mortgagee of a mortgage covering the Premises whose address shall have
been furnished and shall offer such beneficiary and/or mortgagee a reasonable
opportunity to cure the default.
25. ASSIGNMENT OR SUBLETTING.
25.1 Except as hereinafter provided, Tenant shall not, either
voluntarily or by operation of law, sell, hypothecate or transfer this Lease, or
sublet the Premises or any part thereof, or permit or suffer the Premises or any
part thereof to be used or occupied as work space, storage space, concession or
otherwise by anyone other than Tenant or Tenant's employees, without the prior
written consent of Landlord in each instance, which consent shall not be
unreasonably withheld or delayed.
25.2 If Tenant desires to sublet all or any part of the Premises, or
to assign this Lease, to any entity into which Tenant is merged, with which
Tenant is consolidated, or which acquires all or substantially all of the assets
of Tenant, or to a parent, subsidiary, or other affiliate of Tenant, provided
that the subtenant or assignee first executes, acknowledges and delivers to
Landlord an agreement whereby the subtenant or assignee agrees to be bound by
all of the covenants and agreements in this Lease to the extent relating to the
unexpired term of the Lease and, in the event of a sublease, the portion of the
Premises so sublet, then Landlord upon receipt thereof will consent to the
sublease or assignment.
25.3 In the event Tenant desires to assign, sublease, hypothecate or
otherwise transfer this Lease or sublet the Premises to an assignee other than
one set forth in
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Section 25.2, then at least fifteen (15) days, but not more than ninety (90)
days, prior to the date when Tenant desires the assignment or sublease to be
effective (the "Assignment Date"), Tenant shall give Landlord a notice (the
"Assignment Notice") which shall set forth the name, address and business of the
proposed assignee or sublessee, information (including references and financial
statements) concerning the reputation and financial ability of the proposed
assignee or sublessee, the Assignment Date, any ownership or commercial
relationship between Tenant and the proposed assignee or sublessee, and the
consideration and all other material terms and conditions of the proposed
assignment or sublease, all in such detail as Landlord shall reasonably require.
25.4 Landlord in making its determination as to whether consent
should be given to a proposed assignment or sublease, may give consideration to
the reputation of a proposed successor, the financial strength of such successor
(notwithstanding the assignor remaining liable for Tenant's performance), and
any use which such successor proposes to make of the Premises. If Landlord fails
to deliver written notice of its determination to Tenant within fifteen (15)
days following receipt of the Assignment Notice and the information required
under Section 25.3, Landlord shall be deemed to have approved the request. In no
event shall Landlord be deemed to be unreasonable for declining to consent to a
transfer to a successor of poor reputation, lacking financial qualification,
seeking a change in use which would involve the generation, storage, use,
treatment or disposal of Hazardous Materials in any manner for a purpose
prohibited by any applicable Law, so long as Landlord is reasonable in making
its determination based on such factors. As a condition to any assignment or
sublease to which Landlord has given consent, any such assignee or sublessee
must execute, acknowledge and deliver to Landlord an agreement whereby the
assignee or sublessee agrees to be bound by all of the covenants and agreements
in this Lease to the extent relating to the unexpired term of the Lease and, in
the event of a sublease, the portion of the Premises so sublet.
25.5 Any sale, assignment, hypothecation or transfer of this Lease
or subletting of Premises that is not in compliance with the provisions of this
Article 25 shall be void.
25.6 The consent by Landlord to an assignment or subletting shall
not relieve Tenant or any assignee of this Lease or sublessee of the Premises
from obtaining the consent of Landlord to any further assignment or subletting
or as releasing Tenant or any assignee or sublessee of Tenant from full and
primary liability.
25.7 If Tenant shall sublet the Premises or any part thereof Tenant
hereby immediately and irrevocably assigns to Landlord, as security for Tenant's
obligations under this Lease, all rent from any subletting of all or a part of
the Premises and Landlord as assignee, or a receiver for Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this Lease; except that, until the occurrence of a Default in
the payment of Basic Annual Rent by Tenant, Tenant shall have the right to
collect such rent.
25.8 Notwithstanding any subletting or assignment Tenant shall
remain
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fully and primarily liable for the payment of all Rent and other sums due, or to
become due hereunder, and for the full performance of all other terms,
conditions, and covenants to be kept and performed by Tenant. The acceptance of
rent or any other sum due hereunder, or the acceptance of performance of any
other term, covenant, or condition hereof, from any other person or entity shall
not be deemed to be a waiver of any of the provisions of this Lease or a consent
to any subletting or assignment of the Premises. Landlord shall not unreasonably
withhold consent to an assignment back to the original Tenant hereunder from a
subsequent assignee.
25.9 Any sublease of the Premises shall be subject and subordinate
to the provisions of this Lease, shall not extend beyond the term of this Lease,
and shall provide that the sublessee shall attorn to Landlord, at Landlord's
sole option, in the event of the termination of this Lease. Landlord and any
lender shall upon Tenant's request provide any subtenant of the entirety of the
Premises with a recognition and nondisturbance agreement in the form set forth
in Article 35 hereof on the condition that the sublessee agrees to attorn to
Landlord on exactly the same terms and conditions as this Lease.
26. ARBITRATION - ATTORNEY'S FEES.
26.1 In the event Tenant claims a breach of this Lease by Landlord,
Tenant may demand arbitration of the claim before a panel of three arbitrators,
one appointed by Tenant, one appointed by Landlord, and the third selected by
the two arbitrators so appointed. In the event arbitration is demanded by
Tenant, Landlord may, but shall not be required to, include in the arbitration
any other claims or disputes arising from or related to this Lease. The
arbitrators shall be instructed to conclude the arbitration within ninety (90)
days of the time the claim is submitted to arbitration. Notwithstanding the
provisions of Section 5.3, Tenant may deduct from or set off against Rent the
amount of any final award of the arbitrators in favor of Tenant, even if the
award is appealed by Landlord (but subject to Landlord's right to collect the
amount deducted or set off in the event the appeal is successful). The remedy
described in this Section 26.1 is optional only and nothing contained herein
shall be construed as a waiver of any other remedy that Tenant may have at law
or equity.
26.2 If either party commences an arbitration, action or proceeding
against the other party arising out of or in connection with this Lease, the
prevailing party shall be entitled to have and recover from the other party
reasonable attorneys' fees, expert witness fees and costs of suit or
arbitration.
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27. BANKRUPTCY.
27.1 In the event a debtor or trustee under the Bankruptcy Code, or
other person with similar rights, duties and powers under any other law,
proposes to cure any default under this Lease or to assume or assign this Lease,
and is obliged to provide adequate assurance to Landlord that (i) a default will
be cured, (ii) Landlord will be compensated for its damages arising from any
breach of this Lease, or (iii) future performance under this Lease will occur,
then adequate assurance shall include any or all of the following, as determined
by the Bankruptcy Court:
(a) Those acts specified in the Bankruptcy Code or other law as
included within the meaning of adequate assurance;
(b) A cash payment to compensate Landlord for any monetary
defaults or damages arising from a breach of this Lease;
(c) The credit worthiness and desirability, as a tenant, of the
person assuming this Lease or receiving an assignment of this Lease, at least
equal to Landlord's customary and usual credit worthiness requirements and
desirability standards in effect at the time of the assumption or assignment, as
determined by the Bankruptcy Court; and
(d) The assumption or assignment of all of Tenant's interest
and obligations under this Lease.
28. DEFINITION OF LANDLORD.
28.1 The term "Landlord" as used in this Lease, so far as covenants
or obligations on the part of Landlord are concerned, shall be limited to mean
and include only Landlord or the successor-in-interest of Landlord under this
Lease at the time in question. In the event of any transfer, assignment or
conveyance of Landlord's title or leasehold, the Landlord herein named (and in
case of any subsequent transfers or conveyances, the then grantor and any prior
grantors) shall be automatically freed and relieved from and after the date of
such transfer, assignment or conveyance of all liability for the performance of
any covenants or obligations contained in this Lease thereafter to be performed
by Landlord and, without further agreement, the transferee of such title or
leasehold shall be deemed to have assumed and agreed to observe and perform any
and all obligations of Landlord hereunder, during its ownership of the Premises.
Landlord may transfer its interest in the Premises or this Lease without the
consent of Tenant and such transfer or subsequent transfer shall not be deemed a
violation on the part of Landlord or the then grantor of any of the terms or
conditions of this Lease.
28.2 Notwithstanding the foregoing, the term "Landlord" shall
include the Landlord herein named with regard to (i) construction of the work
required by Landlord under the Work Letter pursuant to Sections 4.1 hereof, (ii)
damages in the event of completion delays to the extent of Section 4.4 hereof,
(iii) the warranties made by Landlord under Sections 14.4 and
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14.5 to the extent thereof, (iv) covenants and representations made by Landlord
in Article 39, (v) the obligation to deliver the Premises lien-free pursuant to
Section 35.4, (vi) the completion of punch list items relating to the Building
Shell and Land Improvements pursuant to the provisions of the Work Letter, and
(vii) any other duties or obligations of Landlord arising under the provisions
of this Lease and applicable Law.
29. ESTOPPEL CERTIFICATE.
29.1 Each party shall, within fifteen (15) days of written notice
from the other party, execute, acknowledge and deliver to the other party a
statement in writing on a form reasonably requested by a proposed lender,
purchaser, assignee or subtenant (i) certifying that this Lease is unmodified
and in full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease as so modified is in full force and
effect) and the dates to which the rental and other charges are paid in advance,
if any, (ii) acknowledging that there are not, to each party's knowledge, any
uncured defaults on the part of Landlord or Tenant hereunder (or specifying such
defaults if any are claimed) and (iii) setting forth such further information
with respect to this Lease or the Premises as may be reasonably requested
thereon.
30. REMOVAL OF PROPERTY.
30.1 Except as provided below, all fixtures and personal property
owned by Tenant (but excluding any property specifically described in Section
30.2 even if it would otherwise be defined as a fixture) shall be and remain the
property of Tenant, and may be removed by Tenant at the expiration of the term
of this Lease, or at such earlier time as Tenant is not in default hereunder.
30.2 All fixtures and improvements provided by Landlord under the
Work Letter, and all other improvements, additions, alterations, and decorations
constructed or installed by Tenant that are of general utility to the operation
of the Building (but excluding trade fixtures and personal property owned by
Tenant unless specifically described below) attached to or built into the
Premises shall be deemed real property and shall become the property of Landlord
upon the expiration or earlier termination of this Lease, and shall remain upon
and be surrendered with the Premises as a part thereof, including, without
limiting the generality of the foregoing, walls, partitions and related
coverings; flooring and floor coverings; ceilings; insulation; doors, frames and
related hardware; built-in cabinet work and paneling; lighting fixtures;
built-in security systems; fire sprinkler system; lobbies; rest rooms;
mechanical (HVAC) system, including central plant and controls, and including
equipment, screens and enclosures; environmental control and monitoring systems;
telephone, electrical and other wires and cabling; elevator and related
components; plumbing system and fixtures; and electrical and other utility
systems and components thereof and appurtenances thereto. Tenant shall have the
right to remove any improvement, addition, alteration, decoration and/or trade
fixture that is not of general utility to the operation of the Building and/or
that is used in the operation of Tenant's business so long as any damage caused
by such removal is repaired, including, without limitation, the following: (1)
antenna farm; (ii) environmental chambers in manufacturing areas; (iii) special
audio-visual cabinets; (iv) up-graded interior office doors (provided, Tenant
replaces
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such doors with standard doors); (v) fencing in stock room area or other areas;
(vi) hoist; (vii) power equipment that extends from the tray to the
manufacturing floor; (viii) air compressor; and (ix) special sound equipment in
exercise room. Tenant shall not be required to remove any of such property from
the Premises or restore the Premises except as set forth in Section 30.3.
30.3 Notwithstanding Sections 30.1 hereof, Tenant may not remove any
property if such removal would cause material damage to the Premises, unless
such damages can be and is repaired by Tenant. Furthermore, Tenant shall repair
any damage to the Premises caused by Tenant's removal of any such property, and
shall, prior to the expiration or earlier termination of this Lease, restore and
return the Premises to the condition they were in when first occupied by Tenant
(or after they were altered as allowed by Article 17, and excepting Tenant's
Improvements and subject to the provisions of Articles 22 and 23), reasonable
wear and tear excepted. At a minimum, Tenant shall leave in place and repair any
damage to the interior floors, walls and ceilings of the Premises. The
provisions of Article 17 shall apply to any restoration work under this Article
as if the restoration was an alteration, addition or improvement thereunder.
Should Tenant require any period beyond the expiration or earlier termination of
the Lease to complete such restoration, Tenant shall be a tenant at sufferance
subject to the provisions of Section 12.2 hereof.
30.4 If Tenant shall fail to remove any fixtures or personal
property which it is entitled to remove under this Article 30 from the Premises
prior to termination of this Lease, then Landlord may dispose of the property
under the provisions of Section 1980 et seq. of the California Civil Code, as
such provisions may be modified from time to time, or under any other applicable
provisions of California law.
31. LIMITATION OF LANDLORD'S LIABILITY.
31.1 Except as set forth in Section 31.4, if Landlord is in default
of this Lease, and as a consequence, Tenant recovers a money judgment against
Landlord, the judgment shall be satisfied only out of the proceeds of sale
received on execution of the judgment and levy against the right, title, and
interest of Landlord in the Premises, and out of insurance proceeds, rent or
other income from the Premises receivable by Landlord or out of the
consideration received by Landlord from the sale or other disposition of all or
any part of Landlord's right, title, and interest in the Premises.
31.2 Neither Landlord nor Landlord's Agents shall be personally
liable for any deficiency except to the extent liability is based upon willful
and intentional misconduct. If Landlord is a partnership or joint venture, the
partners of such partnership shall not be personally liable and no partner of
Landlord shall be sued or named as a party in any suit or action, or service of
process be made against any partner of Landlord, except as may be necessary to
secure jurisdiction of the partnership or joint venture or to the extent
liability is caused by willful and intentional misconduct. If Landlord is a
corporation, the shareholders, directors, officers, employees, and/or agents of
such corporation shall not be personally liable and no shareholder, director,
officer, employee, or agent of Landlord shall be sued or named as a party in any
suit or
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action, or service of process be made against any shareholder, director,
officer, employee, or agent of Landlord, except as may be necessary to secure
jurisdiction of the corporation. No partner, shareholder, director, employee, or
agent of Landlord shall be required to answer or otherwise plead to any service
of process and no judgment will be taken or writ of execution levied against any
partner, shareholder, director, employee, or agent of Landlord.
31.3 Each of the covenants and agreements of this Article 31 shall
be applicable to any covenant or agreement either expressly contained in this
Lease or imposed by statute or by common law.
31.4 Notwithstanding the foregoing, the Landlord herein named shall
remain liable or responsible for (i) construction of the work required by
Landlord under the Work Letter pursuant to Sections 4.1 hereof, (ii) damages in
the event of completion delays to the extent of Section 4.4 hereof, (iii) the
warranties made by Landlord under Sections 14.4 and 14.5 to the extent thereof,
(iv) covenants and representations made by Landlord in Article 39, (v) the
obligation to deliver the Premises lien-free pursuant to Section 35.4, (vi) the
completion of punch list items relating to the Building Shell and Land
Improvements pursuant to the provisions of the Work Letter, and (vii) any other
duties or obligations of Landlord arising under the provisions of this Lease and
applicable law.
32. [INTENTIONALLY LEFT BLANK].
33. QUIET ENJOYMENT.
33.1 So long as Tenant is not in Default, Tenant may peaceably and
quietly have, hold, use, occupy and enjoy the Premises during the term and any
extended term of this Lease.
34. QUITCLAIM DEED.
34.1 Tenant shall execute and deliver to Landlord on the expiration
or termination of this Lease, immediately on Landlord's request, a quitclaim
deed to the Premises or other document in recordable form suitable to evidence
of record termination of this Lease and the right of first refusal and option
contained herein.
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35. SUBORDINATION AND ATTORNMENT.
35.1 Unless the mortgagee or beneficiary elects otherwise at any
time prior to or following a default by Tenant, this Lease shall be subject to
and subordinate to the lien of any mortgage or deed of trust now or hereafter in
force against the Premises or any portion thereof, and to all advances made or
hereafter to be made upon the security thereof without the necessity of the
execution and delivery of any further instruments on the part of Tenant to
effectuate such subordination, provided that the lienholder, beneficiary, or
mortgagee executes and delivers to Tenant a non-disturbance, attornment, and
subordination agreement ("Non-Disturbance Agreement") in recordable form, in the
form as the lienholder, beneficiary, or mortgagee may reasonably request and is
approved by Tenant, which approval will not be unreasonably withheld, setting
forth that so long as Tenant is not in Default hereunder, Landlord's and
Tenant's rights and obligations hereunder (including the use of insurance
proceeds as set forth herein) shall remain in force and Tenant's right to
possession shall be upheld. Each Non-Disturbance Agreement shall provide for use
of insurance proceeds as set forth in Article 21 of this Lease.
35.2 Notwithstanding the foregoing, Tenant shall upon request of
Landlord promptly execute and deliver such further instrument or instruments
reasonably required by Landlord and reasonably acceptable to Tenant evidencing
such subordination of this Lease to the lien of any such mortgage or deed of
trust as may be required by Landlord, provided that the lienholder, beneficiary,
or mortgagee has previously executed and delivered to Tenant a Non-Disturbance
Agreement in recordable form. However, if any such mortgagee or beneficiary so
elects at any time prior to or following a default by Tenant, this Lease shall
be deemed prior in lien to any such mortgage or deed of trust regardless of date
and Tenant will execute a statement in writing to such effect at Landlord's
request.
35.3 In the event any proceedings are brought for foreclosure, or in
the event of the exercise of the power of sale under any mortgage or deed of
trust made by the Landlord covering the Premises, the Tenant shall at the
election of the purchaser at such foreclosure or sale attorn to the purchaser
upon any such foreclosure or sale and recognize such purchaser as the Landlord
under this Lease in accordance with the terms of the Non-Disturbance Agreement.
35.4 Landlord represents that there are no mortgages or deeds of
trust encumbering the Premises, nor will there be any mortgages or deeds of
trust encumbering the Premises, with interests which will be superior to
Tenant's leasehold, on the date a memorandum of the Lease is duly recorded in
the Official Records of Santa Clara County, other than those interests for which
Tenant has been provided a Non-Disturbance Agreement. Notwithstanding the
foregoing, Landlord shall use commercially reasonable efforts to insure that the
Premises are free of material and mechanics' liens on account of the work
required of Landlord under the Work Letter as soon as is reasonably practical
after Tenant occupies the Premises. At the request of Tenant, Landlord shall
provide such documentation as may be reasonably requested by a title company for
the purpose of allowing the leasehold policy to be issued without listing any
such liens as exceptions, so long as Landlord incurs no expense therefor. In any
event, however,
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Landlord shall insure such a policy without exceptions for such liens may be
issued no later than six (6) months from the Substantial Completion of the
Premises.
36. SURRENDER.
36.1 No surrender of possession of any part of the Premises shall
release Tenant from any of its obligations hereunder unless accepted by
Landlord.
36.2 The voluntary or other surrender of this Lease by Tenant shall
not work a merger, unless Landlord consents, and shall, at the option of
Landlord, operate as an assignment to it of any or all subleases or
subtenancies.
37. WAIVER AND MODIFICATION.
37.1 No provision of this Lease may be waived, modified, amended or
added to except by an agreement in writing. The waiver by either party hereto of
any breach of any term, covenant or condition herein contained shall not be
deemed to be a waiver of any subsequent breach of the same or any other term,
covenant or condition herein contained.
38. WAIVER OF JURY TRIAL AND COUNTERCLAIMS.
38.1 The parties hereto shall and they hereby do waive trial by jury
in any action, proceeding or counterclaim brought by either of the parties
hereto against the other on any matters whatsoever arising out of or in any way
connected with this Lease, the relationship of Landlord and Tenant, Tenant's use
or occupancy of the Premises, and/or any claim of injury or damage.
39. HAZARDOUS MATERIAL.
39.1 Tenant, at its sole cost, shall comply with all federal, state
and local laws, statutes, ordinances, codes, regulations and orders relating to
Tenant's receiving, handling, use, storage, accumulation, transportation,
generation, spillage, migration, discharge, release and disposal of Hazardous
Material (as hereinafter defined in Section 39.12 hereof) in or about the
Premises. Tenant shall not cause or permit any Hazardous Material to be brought
upon, kept or used in or about the Premises by Tenant, its agents, employees,
contractors, invitees or subtenants, in a manner or for a purpose prohibited by
any federal, state or local agency or authority. The accumulation of Hazardous
Material shall be in approved containers and removed from the Premises by duly
licensed carriers.
39.2 Tenant shall promptly provide Landlord with telephonic notice,
which shall promptly be confirmed by written notice, of any and all spillage,
discharge, release and
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disposal of Hazardous Material onto or within the Premises, including the soils
and subsurface waters thereof, which by law must be reported to any federal,
state or local agency, and any injuries or damages resulting directly or
indirectly therefrom. Further, Tenant shall deliver to Landlord each and every
notice or order, when said order or notice identifies a violation which may have
the potential to adversely impact the Premises, received from any federal, state
or local agency concerning Hazardous Material and the possession, use and/or
accumulation thereof promptly upon receipt of each such notice or order by
Tenant. Landlord shall have the right, upon reasonable notice, to inspect and
copy each and every notice or order received from any federal, state or local
agency concerning Hazardous Material and the possession, use and/or accumulation
thereof.
39.3 Tenant shall be responsible for and shall indemnify, protect,
defend and hold harmless Landlord and Landlord's Agents from any and all
liability, damages, injuries, causes of action, claims, judgments, costs,
penalties, fines, losses, and expenses which arise during or after the term of
this Lease and which result from Tenant's (or from Tenant's Agents, assignees,
subtenants, employees, agents, contractors, licensees, or invitees) receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
discharge, release, disposal of Hazardous Material in, upon or about the
Premises, including without limitation (i) damages for the loss or restriction
on use of any portion or amenity of the Premises, (ii) damages arising from any
adverse impact on marketing of space in the Building, and (iii) reasonable
consultant fees, expert fees, and attorneys' fees. Landlord shall be responsible
for and shall indemnify, protect, defend and hold harmless Tenant on the same
basis as above for all other claims which arise from receiving, handling, use,
storage, accumulation, transportation, generation, spillage, migration,
discharge, release or disposal of Hazardous Material in, upon or about the
Premises (subject to applicable insurance, if any, required to be maintained by
Tenant under this Lease).
39.4 The indemnification pursuant to the preceding Section 39.3
includes, without limiting the generality of Section 39.3, reasonable costs
incurred in connection with any investigation of site conditions or any cleanup,
remedial, removal or restoration work required by any federal, state or local
governmental agency or political subdivision because of Hazardous Material
present in the soil, subsoil, ground water, or elsewhere on, under or about the
Premises. Without limiting the foregoing, if the presence of any Hazardous
Material on the Premises results in any contamination of the Premises, or
underlying soil or groundwater, the party responsible therefore under Section
39.3 shall promptly take all actions at its sole expense as are necessary to
return the Premises to the condition existing prior to the introduction of any
such Hazardous Material, provided that the other party's approval of such action
shall first be obtained, which approval shall not be unreasonably withheld so
long as such actions would not potentially have any material adverse long-term
or short-term effect on the Premises, except that the responsible party shall
not be required to obtain the other party's prior approval of any action of an
emergency nature reasonably required or any action mandated by a governmental
authority.
39.5 Landlord acknowledges that it is not the intent of this Article
39 to prohibit Tenant from operating its business as described in Article 10 or
to unreasonably interfere with the operation of Tenant's business. Tenant may
operate its business according to the custom
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of the industry so long as the use or presence of Hazardous Material is strictly
and properly monitored according to all applicable governmental requirements. As
a material inducement to Landlord to allow Tenant to use Hazardous Material in
connection with its business, Tenant agrees to deliver to Landlord prior to the
Term Commencement Date a list identifying each type of Hazardous Material to be
present in or upon the Premises and setting forth any and all governmental
approvals or permits required in connection with the presence of Hazardous
Material on the Premises ("Hazardous Material Summary") and a copy of the
Hazardous Material business plan prepared pursuant to Health and Safety Code
Section 25500 et seq. At Landlord's request, and at reasonable times, Tenant
shall make available to Landlord the latest available Hazardous Materials
Summary and true and correct copies of the following documents (hereinafter
referred to as the "Hazardous Material Documents") relating to the handling,
storage, disposal and emission of Hazardous Material: permits; approvals;
reports and correspondence; storage and management plans; notice of violations
of any laws; plans relating to the installation of any storage tanks to be
installed in or under the Premises (provided said installation of tanks shall be
permitted only after Landlord has given Tenant its written consent to do so,
which consent may not be unreasonably withheld); and all closure plans or any
other documents required by any and all federal, state and local governmental
agencies and authorities for any storage tanks installed in, on or about the
Premises for the closure of any such tanks. Tenant shall not be required,
however, to provide Landlord with that portion of any document which contains
information of a proprietary nature and which, in and of itself, does not
contain a reference to any Hazardous Material which are not otherwise identified
to Landlord in such documentation, unless any such Hazardous Material Document
names Landlord as an "owner" or "operator" of the facility in which Tenant is
conducting its business. It is not the intent of this subsection to provide
Landlord with information which could be detrimental to Tenant's business should
such information become possessed by Tenant's competitors. Landlord shall treat
all information furnished by Tenant to Landlord pursuant to this Section 39.5 as
confidential and shall not disclose such information to any person or entity
without Tenant's prior written consent, which consent shall not be unreasonably
withheld or delayed, except as required by law.
39.6 Notwithstanding other provisions of this Article 39, it shall
be a default under this Lease, and Landlord shall have the right to terminate
the Lease and/or pursue its other remedies under Article 24, in the event that
(i) Tenant's use of the Premises for the generation, storage, use, treatment or
disposal of Hazardous Material is in a manner or for a purpose prohibited by
applicable law unless Tenant is diligently pursuing compliance with such law,
(ii) Tenant has been required by any governmental authority to take remedial
action in connection with Hazardous Material contaminating the Premises if the
contamination resulted from Tenant's action or use of the Premises, unless
Tenant is diligently pursuing compliance with such requirement, or (iii) Tenant
is subject to an enforcement order issued by any governmental authority in
connection with the use, disposal or storage of a Hazardous Material on the
Premises, unless Tenant is diligently seeking compliance with such enforcement
order.
39.7 Notwithstanding the provisions of Article 25, if any
anticipated use of the Premises by a proposed assignee or subtenant involves the
generation or storage, use, treatment or disposal of Hazardous Material in any
manner or for a purpose prohibited by any
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applicable law, it shall not be unreasonable for Landlord to withhold its
consent to an assignment or subletting to such proposed assignee or sublessee.
39.8 Landlord represents that, to the best of its knowledge, as of
the date of this Lease and as of the Term Commencement Date, there is no
Hazardous Material on the Premises, and will deliver to Tenant a certification
to that effect promptly upon the Term Commencement Date. Landlord shall at its
expense provide Tenant with a Phase I Environmental Site Assessment as of the
Term Commencement Date. In addition, Landlord may at its expense also provide
Tenant with a Phase II Environmental Site Assessment as of the Term Commencement
Date. Should either assessment disclose the presence of Hazardous Material,
Landlord shall remedy the problems to Tenant's reasonable satisfaction, and
shall cause a further update of the Phase I and any Phase II Environmental Site
Assessment to be issued reflecting the remedy therein. The Phase I and any Phase
II Environmental Site Assessments and all updates thereto are hereinafter
referred to as the "Base Line Report."
39.9 At any time prior to the expiration or earlier termination of
the term of the Lease, Landlord shall have the right to enter upon the Premises
at all reasonable times and at reasonable intervals in order to conduct
appropriate tests regarding the presence, use and storage of Hazardous Material,
and to inspect Tenant's records with regard thereto. Tenant will pay the
reasonable costs of any such test which demonstrates that contamination in
excess of permissible levels has occurred and such contamination is the
responsibility of Tenant under Section 39.3. Tenant shall correct any
deficiencies identified in any such tests in accordance with its obligations
under this Article 39.
39.10 Tenant shall at its own expense cause a Phase I environmental
site assessment of the Premises to be conducted and a report thereof delivered
to Landlord upon the expiration or earlier termination of the Lease, such report
to be as complete and broad in scope as the Base Line Report as is necessary to
identify any impact on the Premises Tenant's operations might have had. Should
the assessment disclose the presence of Hazardous Material, Tenant shall, prior
to the expiration of this Lease, remedy the problems for which it is responsible
under Section 39.3 to the extent required by applicable law, and shall cause a
further update of the environmental site assessment to be issued reflecting the
remedy therein. The assessment and all updates thereto are hereinafter referred
to as the "Exit Report." This Article 39 is the exclusive provision in this
Lease regarding clean-up, repairs or maintenance arising from receiving,
handling, use, storage, accumulation, transportation, generation, spillage,
migration, discharge, release or disposal of Hazardous Material in, upon or
about the Premises, and the provisions of Article 18 (Repairs and Maintenance)
shall not apply thereto.
39.11 Landlord's and Tenant's obligations under this Article 39
shall survive the termination of the Lease.
39.12 As used herein, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of California or the United States
Government. The term "Hazardous
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Material" includes, without limitation, any material or substance which is (i)
defined as a "hazardous waste," "extremely hazardous waste" or "restricted
hazardous waste" under Sections 25515, 25117 or 25122.7, or listed pursuant to
Section 25140, of the California Health and Safety Code, Division 20, Chapter
6.5 (Hazardous Waste Control Law), (ii) defined as a "hazardous substance" under
Section 25316 of the California Health and Safety Code, Division 2, Chapter 6.8
(Carpenter-Presly-Tanner Hazardous Substance Account Act), (iii) defined as a
"hazardous material," hazardous substance" or "hazardous waste" under Section
25501 of the California Health and Safety Code, Division 20, Chapter 6.95
(Hazardous Substances), (v) petroleum, (vi) asbestos, (vii) listed under Article
9 and defined as hazardous or extremely hazardous pursuant to Article 11 of
Title 22 of the California Administrative Code, Division 4, Chapter 20, (viii)
designated as a "hazardous substance" pursuant to Section 311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (ix) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901, et. seq. (42 U.S.C. Section 6903), or
(x) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response Compensation and Liability Act, 42 U.S.C.
Section 9601 et. seq. (42 U.S.C. Section 9601).
40. OPTIONS TO EXTEND.
40.1 Landlord grants to Tenant two (2) options to extend the term of
this Lease for (5) years each under the same terms and conditions existing in
the original Lease except as set forth in this Article 40. Basic Annual Rent
shall be adjusted on the first day of the first extension term to an amount
equal to the fair market rental value of the Premises as if in shell condition
only (as more particularly described in Section 40.4) as of the commencement of
the first extension term, but in no event less than the average Basic Annual
Rent payable during the initial term. Basic Annual Rent shall be adjusted on the
first day of the second extension term to an amount equal to the fair market
rental value of the Premises as if in shell condition only (as more particularly
described in Section 40.4) as of the commencement of the second extension term,
but in no event less than the average Basic Annual Rent payable during the first
extension term. Tenant shall exercise such right to extend the term of this
Lease by written notice to Landlord no later than eight (8) months prior to the
end of the original term or the first extension term, as the case may be. The
second extension option shall lapse and have no further force or effect if the
first extension option is not exercised.
40.2 Landlord shall obtain at its expense and deliver to Tenant an
independent appraisal of the fair market rental value of the Premises as if in
shell condition only as of the commencement of each extension term. Following
its receipt of Landlord's appraisal, Tenant may elect to obtain at its expense
and deliver to Landlord a second independent appraisal of the fair market rental
value of the Premises as if in shell condition only as of the commencement of
the extension term. If Tenant elects not to obtain a second appraisal,
Landlord's appraisal shall be conclusive. If Tenant's appraisal is no more than
five percent (5%) less than Landlord's appraisal, the fair market rental value
of the Premises as if in shell condition only shall be the arithmetic average of
the two appraisals. If Tenant's appraisal is more than five percent (5%) less
than Landlord's appraisal, the two appraisers shall appoint a third appraiser to
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appraise the fair market rental value of the Premises as if in shell condition
only as of the commencement of the extension term, and the fair market rental
value of the Premises as if in shell condition only shall be the arithmetic
average of the two appraisals closest in their determination of fair market
rental value. Landlord and Tenant shall bear equally the expense of the third
appraiser.
40.3 All appraisers appointed hereunder shall have at least ten (10)
years' experience in the appraisal of commercial/industrial real property in the
San Jose area and shall be members of professional organizations such as the
American Appraisal Institute with a designation of MAI or equivalent.
40.4 The parties acknowledge that Landlord will construct at its
expense the Building Shell and Land Improvements only (as described in the Work
Letter and Exhibits "A-1" and "A-2" attached thereto) and that Tenant, at its
sole cost and expense, will construct Tenant's Improvements (as described in the
Work Letter) which consist of all mechanical equipment, interior partitions,
floor and wall coverings, lighting fixtures, and all other improvements in the
Premises other than the Building Shell and Land Improvements. The initial Basic
Annual Rent payable as of the initial Term Commencement Date was based only upon
Landlord's investment in the Building Shell and Land Improvements (and the Land
itself), and did not, nor was it intended, to provide Landlord with a return
based upon the cost or value added by Tenant's Improvements. It is the intention
of the parties that Basic Annual Rent for the extended terms shall be based only
upon Landlord's investment in the Building Shell and Land Improvements (and the
Land itself), and shall not reflect a return for or investment in Tenant's
Improvements. Accordingly, as used herein, the term "fair market rental value of
the Premises as if in shell condition only" shall mean the price that a ready
and willing tenant would pay, as of the commencement of the extension term in
question, as Basic Annual Rent, to a ready and willing landlord, for the
Building Shell and Land Improvements only, assuming that Tenant's Improvements
did not exist in the Premises, that the landlord would provide no tenant
improvement allowance for the improvement of the Building Shell, and that the
tenant would be solely responsible for constructing at its cost all mechanical
equipment, interior partitions, and other tenant improvements necessary to
operate the Premises for the uses being conducted by Tenant as of the
commencement of the extension term in question. In addition, such fair market
rental value shall be based upon the assumption that the term of the extension
is for five (5) years and shall be on all other terms set forth in the Lease
(other than the amount of Basic Annual Rent and annual rental adjustments),
determined as if such property were exposed for lease on the open market for a
reasonable period of time and taking into account all of the purposes for which
such property is then being used.
40.5 Any increase or decrease in Basic Annual Rent under this
Article 40 which is not determined until after the effective date of the
increase shall nevertheless be retroactive to the effective date; Tenant shall
pay any such retroactive increase with the installment of Rent next due, and
Landlord shall promptly reimburse Tenant an amount equal to any such retroactive
decrease. The parties hereto understand that any increase or decrease in Basic
Annual Rent shall necessarily increase or decrease the management fee payable
under
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Section 7.1(ii) which is calculated as a percentage of Basic Annual Rent.
40.6 Basic Annual Rent as of the commencement of each extension term
as determined under this Article 40 shall be increased on each annual
anniversary of the first day of the extension term in question (each an
"Adjustment Date") as follows:
(a) With regard to each extension term, the "Base Month" for
purposes of each adjustment of Basic Annual Rent shall be that month immediately
preceding the month during which the first day of the extension term in question
occurs, and the "Comparison Month" shall be that month immediately preceding the
month in which the Adjustment Date in question occurs. By way of example only,
with regard to the first extension term, assuming the first extension term
commences on April 15, 2009, the Base Month would be March 2009.
(b) As used in this subsection, the term "Consumer Price Index"
means the All Urban Consumers (All Items) for the San Francisco-Oakland-San Jose
Metropolitan Area (1982-1984 = 100) as published by the United States Department
of Labor, Bureau of Labor Statistics. If the 1982-84 base of the Consumer Price
Index is hereafter changed, then the new base will be converted to the 1982-84
base and the base as so converted shall be used. In the event that the Bureau
ceases to publish the Consumer Price Index once every month, then the successor
or most nearly comparable index thereto selected by Landlord subject to Tenant's
reasonable approval shall be used.
(c) In the event that the Consumer Price Index for the
Comparison Month exceeds the Consumer Price Index for the Base Month, the Basic
Annual Rent payable on the first day of the extension term in question shall be
multiplied by a fraction, the numerator of which is the Consumer Price Index
figure for the Comparison Month, and the denominator of which is the Consumer
Price Index figure for the Base Month. Such amount as calculated shall be the
Basic Annual Rent to be paid until the next Adjustment Date. Any of the
foregoing notwithstanding, in no event shall the Basic Annual Rent as previously
adjusted increase less than two percent (2%) or more than six percent (6%) each
year.
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(d) Prior to each Adjustment Date, or as soon as reasonably
practical thereafter, Landlord will calculate and give Tenant notice of any
increase in Basic Annual Rent under this Article 40. Delivery of such notice
after the effective date of any such increase shall not waive Landlord's right
to collect such increase, and Tenant shall pay to Landlord, upon receipt of such
notice, any such increase due from the last anniversary of the Term Commencement
Date.
40.7 Tenant shall not have the right to exercise either option to
extend the term, notwithstanding anything set forth above to the contrary, (a)
during the time commencing from the date Landlord gives to Tenant a written
notice that Tenant is in Default under any provision of this Lease and
continuing until the default alleged in said notice is cured, or (b) after the
expiration or earlier termination of the initial or first extension term, as the
case may be. The period of time within which either option to extend may be
exercised shall not be extended or enlarged by reason of the Tenant's inability
to exercise the option because of the foregoing provisions. At the election of
Landlord, all rights of Tenant under the provisions of this Article 40 shall
terminate and be of no further force or effect even after Tenant's due and
timely exercise of an option to extend if, after such exercise, but prior to the
commencement of the extension term, (1) Tenant fails to cure a monetary Default
for a period of thirty (30) days after the date Landlord gives notice to Tenant
of such default, or (2) Tenant fails to commence to cure any other default
within thirty (30) days after the date Landlord gives notice to Tenant of such
default.
41. RIGHT OF FIRST REFUSAL TO PURCHASE. Tenant shall have the right of
first refusal to purchase the Premises ("Right of First Refusal") upon the
following terms and conditions:
41.1 If at any time during the initial or any extended term of this
Lease Landlord determines to sell the Premises, Landlord shall give written
notice to Tenant ("Right of First Refusal Notice") of the economic terms and
conditions on which Landlord would be willing to sell the Premises. If Tenant,
within thirty (30) days after receipt of Landlord's Right of First Refusal
Notice, agrees in writing to purchase the Premises on the terms and conditions
stated in the notice, Landlord shall sell and convey the Premises to Tenant on
the economic terms and conditions stated in the notice.
41.2 If Tenant does not agree in writing to purchase the Premises
within thirty (30) days after receipt of Landlord's Right of First Refusal
Notice, or if Landlord and Tenant have not entered into a purchase and sale
agreement within thirty (30) days thereafter, Landlord shall have the right to
sell and convey the Premises to a third party on economic terms and conditions
no more favorable than the economic terms and conditions stated in the Right of
First Refusal Notice, except that the purchase price may be two and one half
percent (2.5%) less than that stated in the Right of First Refusal Notice, and,
upon any such sale, the Right of First Refusal shall terminate. If Landlord does
not sell and convey the Premises within one hundred eighty (180) days after the
Right of First Refusal Notice, any sale transaction thereafter shall be
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deemed a new determination by Landlord to sell and convey the Premises and the
provisions of this Section shall again be applicable.
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41.3 If Tenant purchases the Premises pursuant to the Right of First
Refusal, this Lease shall terminate on the date title vests in Tenant, and
Landlord shall remit to Tenant any security deposit and all prepaid and unearned
Rent. Notwithstanding the foregoing, if Tenant, at its option, should determine
to take title to the Premises in the name of an affiliate of Tenant, this Lease
shall not terminate on the date title vests in any such affiliate of Tenant
unless Tenant and such affiliate agree otherwise.
41.4 The Right of First Refusal herein granted to Tenant is not
assignable separate and apart from this Lease, and shall expire upon the
expiration or earlier termination of the term.
41.5 Tenant shall not have the right to exercise the Right of First
Refusal, notwithstanding anything set forth above to the contrary, (a) during
the time commencing from the date Landlord gives to Tenant a written notice that
Tenant is in Default under any provision of this Lease and continuing until the
default alleged in said notice is cured, or (b) after the expiration or earlier
termination of this Lease. The period of time within which the Right of First
Refusal may be exercised shall not be extended or enlarged by reason of the
Tenant's inability to exercise the Right of First Refusal because of the
foregoing provisions. At the election of Landlord, all rights of Tenant under
the provisions of this Article 41 shall terminate and be of no further force or
effect even after Tenant's due and timely exercise of the Right of First
Refusal, if, after such exercise, but prior to the transfer of title, (1) Tenant
fails to cure a monetary Default for a period of thirty (30) days after the date
Landlord gives notice to Tenant of such default, or (2) Tenant fails to commence
to cure any other default within thirty (30) days after the date Landlord gives
notice to Tenant of such default.
41.6 Notwithstanding the foregoing, the Right of First Refusal shall
not be applicable to a sale or other transfer of the Premises to an affiliate of
which more than fifty percent (50%) is owned or controlled by Landlord or the
partners or members of Landlord, so long as such sale or other transfer to such
affiliate of Landlord is not primarily intended as a means of ultimately
transferring substantially all of the ownership of the Premises to an entity or
entities not more than fifty percent (50%) owned or controlled by Landlord or
its partners or members without first complying with this Right of First
Refusal.
42. MISCELLANEOUS.
42.1 TERMS AND HEADINGS. Where applicable in this Lease, the
singular includes the plural and the masculine or neuter includes the masculine,
feminine and neuter. The section headings of this Lease are not a part of this
Lease and shall have no effect upon the construction or interpretation of any
part hereof.
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42.2 EXAMINATION OF LEASE. Submission of this instrument for
examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant. 42.3 TIME . Time is of
the essence with respect to the performance of every provision of this Lease in
which time of performance is a factor.
42.4 COVENANTS AND CONDITIONS. Each provision of this Lease
performable by Landlord, and each provision of this Lease performable by Tenant,
shall be deemed both a covenant and a condition.
42.5 CONSENTS. Whenever consent or approval of either party is
required, that party shall not unreasonably withhold or delay such consent or
approval, except as may be expressly set forth to the contrary.
42.6 ENTIRE AGREEMENT. The terms of this Lease and the Work Letter
attached hereto are intended by the parties as a final expression of their
agreement with respect to the terms as are included herein, and may not be
contradicted by evidence of any prior or contemporaneous agreement.
42.7 SEVERABILITY. Any provision of this Lease which shall prove to
be invalid, void, or illegal in no way affects, impairs or invalidates any other
provision hereof, and such other provisions shall remain in full force and
effect.
42.8 RECORDING. Within thirty (30) days from the execution of this
Lease, Landlord and Tenant shall record a short form memorandum hereof in the
form attached hereto as Exhibit "D", subject to the requirement to execute and
deliver a quitclaim deed pursuant to the provisions of Section 34.1 hereof.
42.9 IMPARTIAL CONSTRUCTION. The language in all parts of this
Lease shall be in all cases construed as a whole according to its fair meaning
and not strictly for or against either Landlord or Tenant.
42.10 INUREMENT. Each of the covenants, conditions, and agreements
herein contained shall inure to the benefit of and shall apply to and be binding
upon the parties hereto and their respective heirs, legatees, devisees,
executors, administrators, successors, assigns, sublessees, or any person who
may come into possession of said Premises or any part thereof in any manner
whatsoever. Nothing in this section shall in any way alter the provisions
against assignment or subletting in this Lease provided.
42.11 FORCE MAJEURE. The definition of Force-Majeure Delay in
Section 1.6 of the Work Letter is incorporated herein by this reference.
42.12 NOTICES. Any notice, consent, demand, bill, statement, or
other
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communication required or permitted to be given hereunder must be in writing and
may be given by personal delivery or by mail, and if given by personal delivery
shall be deemed given on the date of delivery, and if given by mail shall be
deemed given on the date of delivery or refusal of delivery, to Landlord or
Tenant at the addresses shown in Section 2.1.7 hereof, or to such other address
as either party may specify by notice to the other given pursuant to this
Section.
42.13 AUTHORITY TO EXECUTE LEASE. Landlord and Tenant each
acknowledge that it has all necessary right, title and authority to enter into
and perform its obligations under this Lease, that this Lease is a binding
obligation of such party and has been authorized by all requisite action under
the party's governing instruments, that the individuals executing this Lease on
behalf of such party are duly authorized and designated to do so, and that no
other signatories are required to bind such party.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the date first above written.
LANDLORD:
NEXUS EQUITY, INC.
A California corporation
By: /s/ [Signature]
--------------------------------
Authorized Officer
TENANT:
SymmetriCom, Inc.
A California corporation
By: /s/ [Signature]
--------------------------------
Authorized Officer
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EXHIBIT 10.9
5-C
SECURITY AND LOAN AGREEMENT
THIS SECURITY AND LOAN AGREEMENT is entered into as of June 19, 1997
(this "Loan Agreement") between BROCADE COMMUNICATIONS SYSTEMS, INC., a
California corporation (herein called "Borrower") and IMPERIAL BANK (herein
called "Bank").
1. FACILITY-A COMMITMENT. Subject to all the terms and conditions of
this Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Facility-A
Loan") to Borrower, from time to time in such amounts as may be determined by
Bank up to, but not exceeding, an aggregate unpaid principal balance of
$4,000,000.00 (the "Facility-A Commitment"). If at any time or for any reason,
the outstanding principal amount of the Facility-A Loan Account (as hereinafter
defined) is greater than the Facility-A Commitment, Borrower shall immediately
pay to Bank, in cash, the amount of such excess. Any commitment of Bank,
pursuant to the terms of this Loan Agreement, to make Facility-A Loans shall
expire on the Facility-A Maturity Date (as hereinafter defined), subject to
Bank's right to renew said commitment in its sole and absolute discretion at
Borrower's request. Any such renewal of said commitment shall not be binding
upon Bank unless it is in writing and signed by an officer of Bank. Provided
that no Event of Default (as hereinafter defined) has occurred and is
continuing, all or any portion of the Facility-A Loans advanced by Bank which
are repaid by Borrower shall be available for reborrowing in accordance with the
terms hereof. Borrower promises to pay to Bank the entire outstanding unpaid
principal balance (and all accrued unpaid interest thereon) of the Facility-A
Loans on June 18, 1998 ("Facility-A Maturity Date"). The outstanding principal
balance due under the Facility-A Loan Account may be repaid, in whole or in
part, without penalty at any time or from time to time prior to the Facility-A
Maturity Date.
A. FACILITY-A LOANS. At any time from the date hereof and prior to
the Facility-A Maturity Date, Borrower may from time to time request advances
from Bank up to an aggregate principal amount outstanding under the Facility-A
Commitment equal to the sum of: (1) eighty percent (80.0%) of Eligible Accounts
plus (2) the lesser of $500,000 or 40% of Finished Goods Inventory plus (3)
until November 30, 1997,$500,000.00 (the "Non-Formula Availability") (such sum
being hereinafter referred to as the "Facility-A Borrowing Base"). When Borrower
desires to obtain a Facility-A Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be irrevocable) in
accordance with Section 3 hereof, to be received no later than 3:00 p.m. Pacific
time one (1) business day before the day on which the Facility-A Loan is to be
made. Facility-A Loans may only be used for short term working capital
requirements, the issuance of letters of credit and hedging of foreign currency
exposures. The amount of each Facility-A Loan shall be debited to the loan
ledger account of Borrower maintained by Bank with respect to Facility-A Loans
(the "Facility-A Loan Account") and Bank shall credit the Facility-A Loan
Account with all loan repayments in respect thereof made by Borrower. If at any
time or for any reason (including, without limitation, at the expiration of the
Non-Formula Availability and because of the expiration of the Non-Formula
Availability), the outstanding principal amount of the Facility-A Loan Account
is greater than the Facility-A Borrowing Base, Borrower shall immediately pay to
Bank, in cash, the amount of such excess.
<PAGE> 2
(i) INTEREST PAYMENTS ON FACILITY-A LOANS. Borrower
promises to pay to Bank from the date of the advance of the initial Facility-A
Loan through the Facility-A Maturity Date, on or before the tenth (10th) day of
each month, interest on the average daily unpaid balance of the Facility-A Loan
Account during the immediately preceding month at a rate of interest per annum,
equal to the rate of interest which Bank has announced as its prime lending rate
(the "Prime Rate"), which shall vary concurrently with any change in the Prime
Rate. Interest shall be computed at the above rate on the basis of the actual
number of days during which the principal balance of the Facility-A Loan Account
is outstanding divided by 360, which shall for interest computation purposes be
considered one (1) year.
(ii) LETTER OF CREDIT USAGE AND SUBLIMIT. Subject to the
availability of the Facility-A Commitment and in reliance on the representations
and warranties of Borrower set forth herein, at any time and from time to time
from the date hereof through the business day immediately prior to the
Facility-A Maturity Date, Bank shall issue for the account of Borrower such
standby and commercial letters of credit ("Letters of Credit") as Borrower may
request, which request shall be made by delivering to Bank a duty executed
letter of credit application on Bank's standard form; provided, however, that
the outstanding and undrawn amounts under all such Letters of Credit (a) shall
not at any time exceed $500,000, and (b) shall be deemed to constitute
Facility-A Loans for the purpose of calculating availability under the Facility
A Commitment. Unless Borrower shall have deposited with Bank cash collateral in
an amount sufficient to cover all undrawn amounts under each such Letter of
Credit and Bank shall have agreed in writing, no Letter of Credit shall have an
expiration date that is later than the Facility-A Maturity Date. All Letters of
Credit shall be in form and substance acceptable to Bank in its sole discretion
and shall be subject to the terms and conditions of Bank's form application and
letter of credit agreement. Borrower will pay any standard issuance and other
fees that Bank notifies Borrower will be charged for issuing and processing
Letters of Credit for Borrower.
(iii) FOREIGN EXCHANGE USAGE AND SUBLIMIT. Subject to the
availability of the Facility-A Commitment and in reliance on the representations
and warranties of Borrower set forth herein, at any time and from time to time
from the date hereof through the business day immediately prior to the
Facility-A Maturity Date, Bank shall arrange the purchase by Borrower of foreign
exchange futures contracts ("Exchange Contracts") as Borrower may request, which
request shall be made by delivering to Bank a duly executed exchange contract
application on Bank's standard form; provided, however, that the maximum
aggregate notional contract amount under all such Exchange Contracts shall not
at any time exceed $1,000,000, provided, further, that 10% of the maximum
aggregate notional contract amount under all such Exchange Contracts shall be
deemed to constitute outstanding Facility-A Loans for the purpose of calculating
availability under the Facility-A Commitment. Unless Borrower shall have
deposited with Bank cash collateral in an amount sufficient to cover all undrawn
amounts under each such Exchange Contract and Bank shall have agreed in writing,
no Exchange Contract shall have a due date that is later than the Facility-A
Maturity Date. All Exchange Contracts shall be in form and substance acceptable
to Bank in its sole discretion and shall be subject to the terms and conditions
of Bank's form exchange contract application. Borrower will pay any standard
issuance and other fees that Bank notifies Borrower will be charged for issuing
and processing Exchange Contracts for Borrower. After and during the continuance
of an Event of Default, Bank may, in its sole and absolute discretion, terminate
any or
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all of the Exchange Contracts. Borrower agrees to indemnify and hold harmless
Bank from and against all loss, costs and expense associated with any such
termination of any Exchange Contract.
2. FACILITY-B COMMITMENT. Subject to all the terms and conditions of
this Loan Agreement and prior to the termination of its commitment as
hereinafter provided, Bank hereby agrees to make loans (each a "Facility-B
Loan") to Borrower in such amounts as Borrower shall request pursuant to this
Section 2 at any time prior to June 18, 1998 (the "Facility-B Availability End
Date"), in an aggregate principal amount not to exceed to exceed $1,500,000.00
(the "Facility-B Commitment"). If at any time or for any reason, the outstanding
principal amount of the Facility-B Loan Account (as hereinafter defined) is
greater than the Facility-B Commitment, Borrower shall immediately pay to Bank,
in cash, the amount of such excess. Any commitment of Bank, pursuant to the
terms of this Loan Agreement, to make Facility-B Loans shall expire on the
Facility-B Availability End Date, subject to Bank's right to renew said
commitment in its sole and absolute discretion at Borrower's request. Any such
renewal of said commitment shall not be binding upon Bank unless it is in
writing and signed by an officer of Bank. Facility-B Loans which are repaid by
Borrower may not be reborrowed. Borrower promises to pay to Bank the outstanding
unpaid principal balance (and all accrued unpaid interest thereon) of the
Facility-B Loan Account on the dates set forth below, the final such date being
that date forty-eight months from the date hereof ("Facility-B Maturity Date").
A. FACILITY-B LOANS. The amount of each Facility-B Loan made by
Bank to Borrower hereunder shall be debited to the loan ledger account of
Borrower maintained by Bank for the Facility-B Commitment (herein called the
"Facility-B Loan Account") and Bank shall credit the Facility-B Loan Account
with all loan repayments in respect thereof made by Borrower. When Borrower
desires to obtain a Facility-B Loan, Borrower shall notify Bank (which notice
shall be signed by an officer of Borrower and shall be irrevocable) in
accordance with Section 3 hereof, to be received no later than 3:00 p.m. Pacific
time one (1) business day before the day on which the Facility-B Loan is to be
made. The notice shall be signed by an officer of Borrower and contain a
detailed schedule of the items being financed, including copies of paid invoices
and serial numbers for the original equipment, furniture or software to be
financed. Facility-B Loans may only be used to finance equipment, furniture or
software purchased by the Borrower after February 29, 1997 and will be limited
to (1) one hundred percent (100%) of the original equipment invoice amount for
such equipment less any taxes, shipping and freight charges or discounts,
warranty charges, installation expenses and other soft costs, (2) one hundred
percent (100%) of the original furniture invoice amount for such furniture less
any taxes, shipping and freight charges or discounts, warranty charges,
installation expenses and other soft costs and (3) eighty-five percent (85%) of
the original software invoice amount for such software less any taxes, shipping
and freight charges or discounts, warranty charges, installation expenses and
other soft costs. Notwithstanding the foregoing, Facility-B Loans made for the
purpose of financing (a) furniture shall be limited to a maximum aggregate total
amount of $100,000.00 and (b) software shall be limited to a maximum aggregate
total amount of $300,000-00.
(i) INTEREST PAYMENTS. Borrower promises to pay to Bank from
the date of the advance of the initial Facility-B Loan through the Facility-B
Maturity Date, on or before the tenth (10th) day of each month through the
Facility-B Maturity Date, interest on the average daily unpaid and unamortized
principal balance of the Facility-B Loan Account during the immediately
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preceding month at a rate of interest equal to one percent (1.0%) per annum in
excess of the Prime Rate, which shall vary concurrently with any change in the
Prime Rate. Interest shall be computed at the above rate on the basis of the
actual number of days during which the principal balance of the Facility-B Loan
Account is outstanding divided by 360, which shall for interest computation
purposes be considered one (1) year.
(ii) QUARTERLY TERM OUT AND PRINCIPAL PAYMENTS.
(a) FIRST QUARTER TERM OUT. Borrower promises to pay
to Bank (1) the principal balance of the Facility-B Loan Account outstanding on
the date which is three months following the date hereof (the "First Quarter
Term Out Date") in thirty-six (36) equal monthly installments of principal,
beginning on that date four (4) months after the date hereof, plus (2) interest
computed in accordance with SECTION 2A(i) hereof.
(b) SECOND QUARTER TERM OUT. Borrower promises to pay
to Bank (1) the principal balance of the Facility-B Loans made after the First
Quarter Term Out Date through the date three months thereafter (the "2nd Quarter
Term Out Date") in thirty-six (36) equal monthly installments of principal,
beginning on that date seven (7) months after the date hereof, plus (2) interest
computed in accordance with SECTION 2A(i) hereof.
(c) THIRD QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B Loans made after the 2nd
Quarter Term Out Date through the date three months thereafter (the "3rd Quarter
Term Out Date") in thirty-six (36) equal monthly installments of principal,
beginning on that date ten (10) months after the date hereof, plus (2) interest
computed in accordance with SECTION 2A(i) hereof.
(d) FOURTH QUARTER TERM OUT. Borrower promises to pay
to Bank (1) the principal balance of the Facility-B, Loans made after the 3rd
Quarter Term Out Date through the date three months thereafter (the "4th Quarter
Term Out Date") in thirty-six (36) equal monthly installments of principal,
beginning on that date thirteen (13) months after the date hereof, plus (2)
interest computed in accordance with SECTION 2A(i) hereof.
3. LOAN REQUESTS. Requests for Loans hereunder shall be in writing duly
executed by Borrower in a form satisfactory to Bank and shall contain a
certification setting forth the matters referred to in SECTIONS 1 or 2 hereof,
which shall disclose that Borrower is entitled to the amount and type of Loan
being requested. Bank is hereby authorized to charge Borrower's deposit
account(s) with Bank for all sums due Bank under this Loan Agreement.
4. DELIVERY OF PAYMENTS. Payment to Bank of all amounts due hereunder
shall be made at its Santa Clara Valley Regional offices, or at such other place
as may be designated in writing by Bank from time to time. If any payment due
date falls on a day that is not a day that Bank is open for the transaction of
business ("Banking Day"), the payment due date shall be extended to the next
Banking Day.
5. LATE CHARGES. If any interest payment, principal payment or principal
balance payment required hereunder is not received by Bank on or before ten (10)
days from the date in
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which such payment becomes due, Borrower shall pay to Bank, a late charge equal
to the lesser of (a) one and one-half percent (1.50%) of the amount of such
unpaid payment, in addition to said unpaid payment or (b) the maximum amount
permitted to be charged by applicable law, until remitted to Bank; provided,
however, nothing contained in this Section 5, shall be construed as any
obligation on the part of Bank to accept payment of any past due payment or less
than the total unpaid principal balance of the Loan Accounts (as hereinafter
defined) following their respective Maturity Dates. All payments shall be:
applied first to any late charges due hereunder, next to accrued interest then
payable and the remainder, if any, to reduce any unpaid principal due under the
Loan Accounts, as applicable.
6. DEFAULT INTEREST. From and after the Facility-A Maturity Date and/or
the Facility-B Maturity Date, as applicable, or such earlier date as all sums
owing under the respective Loan Accounts become due and payable by acceleration
or otherwise, or upon the occurrence and continuance of an Event of Default, at
the option of Bank and upon fifteen (15) days prior notice to Borrower, all sums
owing under the applicable Loan Account shall bear interest until paid in full
at a rate equal to the lesser of (a) five percent (5.0%) per annum in excess of
the then applicable interest rate provided for in SECTIONS 1A(i) OR 2A(i)
hereof, respectively, or (b) the maximum amount permitted to be charged by
applicable law, until all obligations hereunder are repaid in full or the Event
of Default is cured to the satisfaction of Bank, as applicable.
7. DEFINITIONS. As used in this Loan Agreement and unless otherwise
defined herein, all initially capitalized terms shall have the meanings set
forth on EXHIBIT A attached hereto and incorporated herein by this reference.
8. ASSIGNMENT OF ACCOUNTS. Borrower hereby assigns to Bank all of
Borrower's present and future Accounts, including all proceeds due thereunder,
all guaranties and security therefor, and hereby grants to Bank a continuing
security interest in all moneys collected as contemplated under Section 9 hereof
as security for any and all obligations of Borrower to Bank, whether now owing
or hereafter incurred and whether direct, indirect, absolute or contingent. So
long as Borrower is indebted to Bank or Bank is committed to extend credit to
Borrower and there shall exist and be continuing an Event of Default, Borrower
will execute and deliver to Bank such assignments, including Bank's standard
forms of Specific or General Assignment covering individual Accounts, notices,
financing statements, and other documents and papers as Bank may require in
order to affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors obligated
on the Accounts, notice of Bank's interest in the Collateral. Notwithstanding
the foregoing, so long as no Event of Default has occurred and is continuing,
Borrower shall be entitled to use the proceeds of such Accounts in the ordinary
course of its business.
9. COLLECTION OF ACCOUNTS. Until Bank exercises its rights to collect
the Accounts pursuant to SECTION 18 hereof, Borrower will collect with diligence
all Borrower's Accounts. Any collection of Accounts by Borrower, whether in the
form of cash, checks, notes, or other instruments for the payment of money
(properly endorsed or assigned where required to enable Bank to collect same),
shall be in trust for Bank. If an Event of Default has occurred, Borrower shall
keep all such collections separate and apart from all other funds and property
so as to be capable of identification as the property of Bank and deliver said
collections daily to Bank in the identical form received. The
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proceeds of such collections when received by Bank may be applied by Bank
directly to the payment of the Loan Accounts or to any other obligation secured
hereby. Any credit given by Bank upon receipt of said proceeds shall be
conditional credit subject to collection. Returned items at Bank's option may be
charged to Borrower's deposit account with Bank. All collections of the Accounts
shall be set forth on an itemized schedule, showing the name of the account
debtor, the amount of each payment and such other information as Bank may
request.
10. RETURNS AND ADJUSTMENTS. Until Bank exercises its rights to collect
the Accounts pursuant to SECTION 18 hereof, Borrower may continue its present
policies with respect to returned merchandise and adjustments. However, Borrower
shall immediately notify Bank of all cases involving repossessions, and material
loss or damage of or to merchandise represented by the Accounts.
11. REPRESENTATIONS AND WARRANTIES. Borrower represents and wan-ants to
Bank: (a) That Borrower is a corporation, duly organized and existing in the
State of its incorporation and the execution, delivery and performance of each
of the Loan Documents are within Borrower's corporate powers, have been duly
authorized and are not in conflict with law or the terms of any charter, by-law
or other incorporation papers, or of any indenture, agreement or undertaking to
which Borrower is a party or by which Borrower is bound or affected; (b)
Borrower is, and at the time the Collateral becomes subject to Bank's security
interest will be, the true and lawful owner of and has, and at the time the
Collateral becomes subject to Bank's security interest will have, good and clear
title to the Collateral, subject only to Bank's rights therein and to Permitted
Liens; (c) Each Account is, and at the time the Account comes into existence
will be, a true and correct statement of a bona fide indebtedness incurred by
the debtor named therein in the amount of the Account for either merchandise
sold or delivered (or being held subject to Borrower's delivery instructions)
to, or services rendered, performed and accepted by, the account debtor; (d)
That there are and will be no defenses, counterclaims, or setoffs which may be
asserted against the Accounts from time to time represented by Borrower to be
Eligible Accounts, except as permitted in the definition thereof; (e) Any and
all financial information, including information relating to the Collateral,
submitted by Borrower to Bank, whether previously or in the future, is and will
be true and correct; (f) There is no litigation or other proceeding pending or
threatened against or affecting Borrower, and Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or other
governmental or regulatory authority; (g)(i) The consolidated and consolidating
balance sheets of Borrower dated as of April 30, 1997 and the related
consolidated and consolidating profit and loss statements for the fiscal year
ending December 31, 1996, copies of which have heretofore been delivered to Bank
by Borrower, and all other statements and data submitted in writing by Borrower
to Bank in connection With Borrower's request for credit are true and correct,
and said balance sheet and profit and loss statement accurately present the
financial condition of Borrower as of the date thereof and the results of the
operations of Borrower for the period covered thereby, and have been prepared in
accordance with GAAP, (ii) since such date, there have been no material adverse
changes in the financial condition of Borrower, and (iii) Borrower has no
knowledge of any liabilities, contingent or otherwise, at such date not
reflected in said balance sheet, and Borrower has not entered into any special
commitments or substantial contracts which are not reflected in said balance
sheet, other than in the ordinary and normal course of its business, which may
have a Materially Adverse Effect upon its financial condition, operations or
business as now conducted; (h) Borrower has no liability for any delinquent
local, state or federal taxes, and, if Borrower has
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contracted with any government agency, it has no liability for renegotiation of
profits; and (i) Borrower, as of the date hereof, possesses all necessary
trademarks, trade names, copyrights, patents, patent rights, and licenses to
conduct its business as now operated, without any known conflict with valid
trademarks, trade names, copyrights, patents, patent rights and license rights
of others.
12. NEGATIVE COVENANTS. Borrower agrees that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank or the
commitment of Bank hereunder is in effect, neither Borrower, nor any of its
subsidiaries will, without the prior written consent of Bank:
A. Make any substantial change in the character of its
business as now conducted.
B. Create, incur, assume or permit to exist any Indebtedness other
than loans from Bank except obligations now existing as shown in the financial
statements referred to in SECTION 11(g)(i) hereof, excluding those being
refinanced by Bank, Subordinated Debt and Permitted Indebtedness; or sell or
transfer, either with or without recourse, any accounts or notes receivable or
any monies due or to become due.
C. Create, incur, assume or permit to exist any mortgage, pledge,
encumbrance, lien or charge of any kind (including the charge upon property at
any time purchased or acquired under conditional sale or other tide retention
agreement) upon any asset now owned or hereafter acquired by it, other than
Permitted Liens and liens in favor of Bank.
D. Sell, dispose of or grant a security interest in any of the
Collateral other than to Bank (other than the disposing of such Collateral in
the ordinary and normal course of its business as now conducted or other assets
which are obsolete or otherwise considered surplus), or execute any financing
statements covering the Collateral in favor of any secured party or Person other
than Bank.
E. Make any loans or advances to any Person or other entity other
than in the ordinary and normal course of its business as now conducted
(provided that such loans or advances are not made to any Person or entity which
is controlled by or under common control with Borrower) or make any investment
in the securities of any Person or other entity except as set forth in
Borrower's Investment Policy, a copy of which is attached hereto as Exhibit B
and is incorporated herein by this reference.
F. Purchase or otherwise acquire all or substantially all of the
assets or business of any Person or other entity; or liquidate, dissolve, merge
or consolidate, or commence any proceedings therefore; or, except in the
ordinary and normal course of its business as now conducted, sell (including,
without limitation, the selling of any property or other asset accompanied by
the leasing back of the same) any assets including any fixed assets, any
property, or other assets necessary for the continuance of its business as now
conducted, provided that Bank's consent shall not be unreasonably withheld.
G. Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued or purchase, redeem
or retire any of such stock other than in dividends or distributions payable in
Borrower's or any such subsidiary's capital stock,
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except pursuant to bona fide employee stock option plans approved by the board
of directors of Borrower.
13. AFFIRMATIVE COVENANTS. Borrower affirmatively covenants that so long
as any loans, obligations or liabilities remain outstanding or unpaid to Bank or
the commitment of Bank hereunder is in effect, it will:
A. Furnish Bank from time to time such financial statements and
information as Bank may reasonably request and inform Bank immediately upon the
occurrence of a material adverse change therein;
B. Upon reasonable notice to Borrower, permit representatives of
Bank to inspect Borrower's books and records relating to the Collateral and make
extracts therefrom, with results satisfactory to Bank, provided that Bank shall
use its best efforts to not interfere with the conduct of Borrower's business,
and to arrange for the verification and audit of the Accounts on an annual basis
by Bank's Asset Based Department, under reasonable procedures, acceptable to
Bank, directly with the account debtors or otherwise, all at Borrower's sole
expense; provided, however, the cost for each such audit of the Accounts shall
not exceed $1,500.00.
C. Promptly notify Bank of any attachment or other legal process
levied against any of the Collateral and any information received by Borrower
relative to the Collateral, including the Accounts, the account debtors or other
Persons obligated in connection therewith, which may in any way affect the value
of the Collateral or the rights and remedies of Bank in respect thereto;
D. Reimburse Bank upon demand for any and all legal costs,
including reasonable attorneys' fees, and other expense incurred in collecting
any sums payable by Borrower under the Loan Accounts or any other obligation
secured hereby, enforcing any term or provision of this Loan Agreement or
collection of the Collateral and the preparation and enforcement of any
agreement relating thereto;
E. Notify Bank of each location and of each office of Borrower at
which records of Borrower relating to the Accounts are kept;
F. Provide, maintain and deliver to Bank policies insuring the
Collateral against loss or damage by such risks and in such amounts, forms and
companies as Bank may require (to the extent customarily maintained by
businesses similar to Borrower) and with loss payable to Bank, and, in the event
Bank takes possession of the Collateral, the insurance policy or policies and
any unearned or returned premium thereon shall at the option of Bank become the
sole property of Bank, such policies and the proceeds of any other insurance
covering or in any way relating to the Collateral, whether now in existence or
hereafter obtained, being hereby assigned to Bank;
G. In the event the unpaid balance of any of the Loan Accounts
shall exceed the maximum amount of outstanding loans to which Borrower is
entitled under Sections 1 and 2 hereof, as applicable, Borrower shall
immediately pay to Bank for credit to such Loan Account the amount of such
excess;
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H. Maintain and preserve all rights, franchises and other
authority adequate and necessary for the conduct of its business and maintain
and preserve its existence in the State of its incorporation and any other
state(s) in which Borrower conducts its business, except with respect to such
other state(s), as the failure to do so would not have a Material Adverse
Effect;
I. Maintain public liability, property damage and workers
compensation insurance and insurance on all its insurable property against fire
and other hazard with responsible insurance carriers to the extent usually
maintained by similar businesses. Borrower shall provide evidence of property
insurance in amounts and types acceptable to Bank, and certificates naming Bank
as a loss payee;
J. Pay and discharge, before the same becomes delinquent and
before penalties accrue thereon, all taxes, assessments and governmental charges
upon or against it or any of its properties, and any of its other liabilities at
any time existing, except to the extent and so long as: (i) the same are being
contested in good faith and by appropriate proceedings in such manner as not to
cause any Materially Adverse Effect or the loss of any right or redemption from
any sale thereunder; and (ii) it shall have set aside on its books reserves
(segregated to the extent required by GAAP);
K. Maintain a standard and modern system of accounting in
accordance with GAAP on a basis consistently maintained; permit Bank's
representatives to have access to, and to examine its properties, books and
records at all reasonable times; provided that Bank shall use its best efforts
to not interfere with the conduct of Borrower's business;
L. Maintain its properties, equipment and facilities in good order
and repair; and
M. Prior to allowing any of Borrower's raw materials, work in
process, finished goods inventory and property, plant and equipment to be
transported to or be held at any contract manufacturer, warehouse or other
location (other than with bonafide distributors and retail accounts), Borrower
shall provide notice to Bank and Borrower shall have complied with such filing
and notice requirements as shall, in Bank's opinion, assure Borrower's and
Bank's priority in such property over creditors of such contract manufacturer,
warehouseman or operator of such other location, including, without limitation,
making filings under California Commercial Code 2326, providing notice under
California Commercial Code 9114 and making filings and publications as required
under California Civil Code 3440.1 and 3440.5 All such filings, notices and
publications shall be in form and substance satisfactory to Bank.
14. FINANCIAL COVENANTS AND INFORMATION. All financial covenants and
financial information referenced herein shall be interpreted and prepared in
accordance with GAAP as used in the United States of America applied on a basis
consistent with previous years. Compliance with financial covenants shall be
calculated and monitored on a monthly basis, except as shall be expressly stated
to the contrary. Borrower affirmatively covenants that so long as any loans,
obligations or liabilities remain outstanding or unpaid to Bank, it will, on a
consolidated basis:
A. Maintain a minimum quick ratio (meaning all cash plus Accounts
divided by current liabilities) of 1.00 to one (1.00:1.00).
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<PAGE> 10
B. Maintain a minimum tangible net worth (meaning all assets,
excluding any value for goodwill, trademarks, patents, copyrights, organization
expense and other similar intangible items), less all liabilities, plus
Subordinated Debt) of not less than $2,250,000.00.
C. Measured only for the fiscal quarter ending September 30, 1997,
have a minimum net product sales of not less than $2,300,000.00.
D. Beginning with the quarter ending June 30, 1998 and every
quarter thereafter, maintain a minimum cash flow coverage ratio (meaning for
such quarter net income plus depreciation plus amortization divided by the next
fiscal quarter's current portion of long term debt (including the next fiscal
quarter's portion of capital leases due within ninety (90) days) of not less
than 1.25 to one (1.25:1.00).
E. As soon as it is available, but not later than ninety (90) days
after the end of Borrower's fiscal year, deliver to Bank unqualified copies of
Borrower's consolidated financial statements together with changes in financial
position.
F. As soon as it is available, but not later than twenty-five (25)
days after and as of the end of the month, deliver to Bank internally prepared
financial statements prepared in accordance with GAAP consisting of a balance
sheet and profit and loss statement in form satisfactory to Bank, and a
Compliance Certificate in the form of EXHIBIT C attached hereto and incorporated
herein by this reference, certified by an officer of Borrower.
G. As soon as it is available, but not later than ten (10) days
after and as of the end of each month, deliver to Bank, in such form and detail
as Bank may require, statements showing aging and reconciliation of the Accounts
and collections thereon and Borrower's accounts payable and a Borrowing Base
Certificate in the form of EXHIBIT D attached hereto and incorporated herein by
this reference, certified by an officer of Borrower.
H. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial exhibits and
information in form and substance satisfactory to Bank.
I. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or reasonably
likely to result in, damages against Borrower in an amount in excess of
$50,000-00.
15. LOAN FEE. Borrower has paid, and Bank hereby acknowledges receipt
of, (a) in respect of the Facility-A Commitment, a loan fee in the amount of Ten
Thousand Dollars ($10,000.00) and (b) in respect of the Facility-B Commitment, a
loan fee in the amount of Five Thousand Six Hundred Twenty-Five Dollars
($5,625.00).
16. BANKING RELATIONSHIP. Borrower will maintain its primary operating
and depository accounts with Bank.
17. DEFAULT AND REMEDIES. The occurrence of any one or more of the
following shall constitute an "Event of De fault": (a) Default be made in the
payment of any obligation by Borrower
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under any Loan Document; (b) Except for any failure to pay as described in
clause (a) above, breach be made in any warranty, statement, promise, term or
condition, contained herein or in any other Loan Document and the same shall not
have been cured to the satisfaction of Bank within fifteen (15) days after
Borrower shall have become aware thereof, whether by written notice from Bank,
or otherwise, (except that no cure period shall exist for breaches in respect of
Borrower's obligations under SECTION 12, SUBSECTIONS 13A, B C, F, G, H and I,
SUBSECTIONS 14A, B, C, D, E, F and G of this Loan Agreement, and Sections 1 and
2 of the General Security Agreement); (c) Any statement, warranty or
representation made by Borrower at any time proves false; (d) Borrower defaults
in the repayment of any principal of or the payment of any interest on any
indebtedness exceeding in the aggregate principal amount $250,000.00 or breaches
or violates any term or provision of any promissory note, loan agreement,
mortgage, indenture or other evidence of such indebtedness pursuant to which
amounts outstanding in the aggregate exceed 50,000.00 if the effect of such
breach is to permit the acceleration of such indebtedness, whether or not waived
by the note holder or obligee, and such failure shall not have been cured to
Bank's satisfaction within fifteen (15) calendar days after Borrower shall
become aware thereof, whether by written notice from Bank or otherwise, or there
has in fact been an acceleration of such indebtedness; (e) Borrower becomes
insolvent or makes an assignment for the benefit of creditors; (f) Any
proceeding be commenced by Borrower under any bankruptcy, reorganization,
arrangement, readjustment of debt or moratorium law or statute or, any such a
proceeding is commenced against Borrower and is not dismissed or stayed within
thirty (30) days (provided that no Loans will be made prior to the dismissal of
such proceeding); (g) Any money judgment, writ of attachment, garnishment,
execution or other legal process be entered against Borrower or issued against
any material property of Borrower which is not fully covered by insurance
(subject to reasonable deductibles) and remain unvacated, unbonded, unstayed or
unpaid or undischarged for more than fifteen (15) days (whether or not
consecutive) or in any event later than five (5) days prior to the date of any
proposed sale thereunder, or if any assessment for taxes against Borrower other
than real property, is made by the Federal or State government or any department
thereof-, or (h) Any change in Borrower's financial condition, prospects or
operations which has a Material Adverse Effect. Upon the occurrence and during
the continuance of an Event of Default, Bank may, at its option and without
demand first made and without notice to Borrower, do any one or more of the
following: (i) Terminate its obligation to make loans to Borrower as provided in
SECTIONS 1 AND 2 hereof; (ii) Declare all sums secured hereby immediately due
and payable; (iii) immediately take possession of the Collateral wherever it may
be found, using all necessary force so to do, or require Borrower to assemble
the Collateral and make it available to Bank at a place designated by Bank which
is reasonably convenient to Borrower and Bank, and Borrower waives all claims
for damages due to or arising from or connected with any such taking; (iv)
Proceed in the foreclosure of Bank's security interest and sale of the
Collateral in any manner permitted by law, or provided for herein; (v) Sell,
lease or otherwise dispose of the Collateral at public or private sale, with or
without having the Collateral at the place of sale, and upon terms and in such
manner as Bank may determine, and Bank may purchase same at any such sale; (vi)
Retain the Collateral in full satisfaction of the obligations secured thereby as
permitted under the Uniform Commercial Code; or (vii) Exercise any remedies of a
secured party under the Uniform Commercial Code. Prior to any such disposition,
Bank may, at its option, cause any of the Collateral to be repaired or
reconditioned in such manner and to such extent as Bank may deem advisable, and
any sums expanded therefor by Bank shall be repaid by Borrower and secured
hereby. Bank shall have the right to enforce one or more remedies hereunder
successively or concurrently,
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and any such action shall not estop or prevent Bank from pursuing any further
remedy which it may have hereunder or by law. If a sufficient sum is not
realized from any such disposition of the Collateral to pay all obligations
secured by this Loan Agreement, Borrower hereby promises and agrees to pay Bank
any deficiency.
18. COLLECTION OF ACCOUNTS BY BANK. After and during the continuance of
an Event of Default Bank may, without prior notice to Borrower, collect the
Accounts and may give notice of assignment to any and all account debtors, and
Borrower does hereby make, constitute and appoint Bank its irrevocable, true and
lawful attorney with power (a) to receive, open and dispose of all mail
addressed to Borrower, (b) to endorse the name of Borrower upon any checks or
other evidences of payment that may come into the possession of Bank upon the
Accounts, (c) to endorse the name of Borrower upon any document or instrument
relating to the Collateral, in its name or otherwise, (d) to demand, sue for,
collect and give acquittances for any and all moneys due or to become due upon
the Accounts, (e) to compromise, prosecute or defend any action, claim or
proceeding with respect thereto and (f) to do any and all things necessary and
proper to carry out the purpose herein contemplated.
19. RECORDS RETENTION. Borrower authorizes Bank to destroy all invoices,
delivery receipts, reports and other types of documents and records submitted to
Bank in connection with the transactions contemplated herein at any time
subsequent to four (4) months from the time such items are delivered to Bank.
20. ATTORNEYS FEES. Borrower agrees to reimburse Bank for its reasonable
attorneys' fees and expenses incurred in connection with the negotiation,
preparation, execution and delivery of the Loan Documents, which fees and
expenses shall not exceed $7,500.00.
21. GOVERNING LAW; JUDICIAL REFERENCE
A. GOVERNING LAW. This Agreement shall be deemed to have been made
in the State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
B. JUDICIAL REFERENCE.
(i) Other than (i) nonjudicial foreclosure and all matters
in connection therewith regarding security interests in real or personal
property; or (ii) the appointment of a receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this Loan Agreement, which controversy, dispute or claim
is not settled in writing within thirty (30) days after the "Claim Date")
(defined as the date on which a party subject to this Loan Agreement gives
written notice to all other parties that a controversy, dispute or claim
exists), will be settled by a reference proceeding in California in accordance
with the provisions of Section 638 et seq. of the California Code of Civil
Procedure, or their successor section ("CCP"), which shall constitute the
exclusive remedy for the settlement of any controversy, dispute or claim
concerning this Loan Agreement, including whether such controversy, dispute or
claim is subject to the
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<PAGE> 13
reference proceeding and except as set forth above, the parties waive their
rights to initiate any legal proceedings against each other in any court or
jurisdiction other than the Superior Court in the County where the real
property, if any, is located or Los Angeles County, if none (the "Court"). The
referee shall be a retired Judge of the Court selected by mutual agreement of
the parties, and if they cannot so agree within forty-five (45) days after the
Claim Date, the referee shall be promptly selected by the Presiding Judge of the
Court (or his/her representative.) The referee shall be appointed to sit as a
temporary judge, with ail of the powers for a temporary judge, as authorized by
law, and upon selection should take and subscribe to the oath of office as
provided for in Rule 244 of the California Rules of Court (or any subsequently
enacted Rule). Each party shall have one peremptory challenge pursuant to CCP
170.6. The referee shall (a) be requested to set the matter for hearing within
sixty (60) days after the date of selection of the referee and (b) try any and
all issues of law or fact and report a statement of decision upon them, if
possible, within ninety (90) days of the Claim Date. Any decision rendered by
the referee will be final, binding and conclusive and judgement shall be entered
pursuant to CCP 6" in any court in the State of California having jurisdiction.
Any party may apply for a reference proceeding at any time after thirty (30)
days following notice to any other party of the nature of the controversy,
dispute or claim, by filing a petition for a hearing and/or trial. All discovery
permitted by this Loan Agreement shall be completed no later than fifteen (15)
days before the first hearing date established by the referee. The referee may
extend such period in the event of a party's refusal to provide requested
discovery for any reason whatsoever, including, without limitation, legal
objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
an/or provisional remedies, as appropriate.
(ii) Except as expressly set forth in this Loan Agreement,
the referee shall determine the manner in which the reference proceeding is
conducted including the time and place of all hearings, the order of
presentation of evidence, and all other questions that arise with respect to the
course of the reference proceeding. All proceedings and hearings conducted
before the referee, except for trial, shall be conducted without a court
reporter except that when any party so requests, a court reporter will be used
at any hearing conducted before the referee. The party making such a request
shall have the obligation to arrange for and pay for the court reporter. The
costs of the court reporter at the trial shall be borne equally by the parties.
(iii) The referee shall be required to determine all issues
in accordance with existing case law and the statutory laws of the State of
California. The rules of evidence applicable to proceedings at law in the State
of California will be applicable to the reference proceeding. The referee shall
be empowered to enter equitable as well as legal relief, to provide all
temporary and/or provisional remedies and to enter equitable orders that will be
binding upon the parties. The referee shall issue a single judgment at the close
of the reference proceeding which shall dispose of all of the claims of the
parties that are the subject of the reference. The parties hereto expressly
reserve the right to contest or appeal from the final judgment or any appealable
order or appealable judgment entered by the referee. The parties hereto
expressly reserve the right to findings of fact, conclusions
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<PAGE> 14
of laws, a written statement of decision, and the right to move for a new trial
or a different judgment, which new trial, if granted, is also to be a reference
proceeding under this provision.
(iv) In the event that the enabling legislation which
provides for appointment of a referee is repealed (and no successor statute is
enacted), any dispute between the parties that would otherwise be determined by
the reference procedure herein described will be resolved and determined by
arbitration. The arbitration will be conducted by a retired judge of the Court,
in accordance with the California Arbitration Act, 1280 through 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
22. MISCELLANEOUS PROVISIONS.
A. Nothing herein shall in any way limit the effect of the
conditions set forth in any other security or other agreement executed by
Borrower, but each and every condition hereof shall be in addition thereto.
B. No failure or delay on the part of Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise thereof.
C. All rights and remedies existing under this Agreement or any
other Loan Document are cumulative to, and not exclusive of, any rights or
remedies otherwise available.
D. All headings and captions in this Loan Agreement and any
related documents are for convenience only and shall not have any substantive
effect.
E. This Loan Agreement may be executed in any number of
counterparts, each of which when so delivered shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument. Each
such agreement shall become effective upon the execution of a counterpart hereof
or thereof by each of the parties hereto and telephonic notification that such
executed counterparts has been received by Borrower and Bank.
BANK: BORROWER:
IMPERIAL BANK BROCADE COMMUNICATIONS SYSTEMS, INC.
a California corporation
By: /s/ James B. Rutter By: /s/ Carl Lee
--------------------------------- ---------------------------------
Name: James B. Rutter B. Carl Lee
------------------------------- Vice President and CFO
Title: Senior Vice President
------------------------------
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<PAGE> 1
EXHIBIT 10.10
AMENDMENT TO LOAN DOCUMENTS
THIS AMENDMENT TO LOAN DOCUMENTS ("Amendment") is made and entered into
as of January 30, 1998 -by and among BROCADE COMMUNICATIONS SYSTEMS, INC.
("Borrower") and IMPERIAL BANK ("Bank").
RECITALS
A. Bank agreed to make loans to Borrower in the maximum principal amount
of $5,500,000.00 ("Commitment"), pursuant to the terms of that certain Security
and Loan Agreement dated June 19, 1997 ("Loan Agreement"), entered into between
Borrower and Bank.
B. Borrower and Bank desire to amend certain provisions of the Loan
Agreement to increase the Facility-B Commitment (as defined in the Loan
Agreement), to modify certain financial covenants and to modify certain other
provisions of the Loan Agreement, all in accordance with the terms of this
Amendment.
C. The Loan Agreement and that certain General Security Agreement dated
as of June 19, 1997, each as executed by Borrower in favor of Bank, together
with all other documents entered into or delivered pursuant to any of the
foregoing, in each case as originally executed or as the same may from time to
time be supplemented, modified or amended are hereinafter collectively referred
to as the "Loan Documents".
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants herein set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and intending to
be legally bound, Borrower and Bank hereby agree to amend the Loan Documents as
follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms defined in
the Loan Agreement have the same meaning when used herein.
2. AMENDMENTS TO LOAN AGREEMENT. The terms of the Loan Agreement are
hereby amended and restated as follows:
a. Section 2 of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"2. FACILITY-B COMMITMENT. Subject to all the terms and
conditions of this Loan Agreement and prior to the termination of its
commitment as hereinafter provided, Bank hereby agrees to make loans
(each a "Facility-B Loan") to Borrower in such amounts as Borrower shall
request pursuant to this Section 2 at any time prior to December 31,
1998 (the "Facility-B Availability End Date"), in an aggregate,
principal amount not to exceed $3,000,000-00 (the "Facility-B
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<PAGE> 2
Commitment"). If at any time or for any reason, the outstanding
principal amount of the Facility-B Loan Account (as hereinafter defined)
is greater than the Facility-B Commitment, Borrower shall immediately
pay to Bank, in cash, the amount of such excess. Any commitment of Bank,
pursuant to the terms of this Loan Agreement, to make Facility-B Loans
shall expire on the Facility-B Availability End Date, subject to Bank's
right to renew said commitment in its sole and absolute discretion at
Borrower's request. Any such renewal of said commitment shall not be
binding upon Bank unless it is in writing and signed by an officer of
Bank. Facility-B Loans which are repaid by Borrower may not be
reborrowed. Borrower promises to pay to Bank the outstanding unpaid
principal balance (and C accrued unpaid interest thereon) of the
Facility-B Loan Account on the dates set forth below, the final such
date being December 31, 2001 ("Facility-B Maturity Date").
A. FACILITY-B LOANS. The amount of each Facility-B Loan made by Bank to
Borrower hereunder shall be debited to the loan ledger account of Borrower
maintained by Bank for the Facility-B Commitment (herein called the "Facility-B
Loan Account") and Bank shall credit the Facility-B Loan Account with all loan
repayments in respect thereof made by Borrower. When Borrower desires to obtain
a Facility-B Loan, Borrower shall notify Bank (which notice shall be signed by
an officer of Borrower and shall be irrevocable) in accordance with Section 3
hereof, to be received no later than 3:00 p.m. Pacific time one (1) business day
before the day on which the Facility-B Loan is to be made. The notice shall be
signed by an officer of Borrower and contain a detailed schedule of the items
being financed, including copies of paid invoices and serial numbers for the
original equipment, furniture or software to be financed. Facility-B Loans may
only be used to finance equipment, furniture or software purchased by the
Borrower within ninety (90) days of the invoice date for said items and will be
limited to (1) one hundred percent (100%) of the original equipment invoice
amount for such equipment less any taxes, shipping and freight charges or
discounts, warranty charges, installation expenses and other soft costs, (2) one
hundred percent (100%) of the original furniture invoice amount for such
furniture less any taxes, shipping and freight charges or discounts, warranty
charges, installation expenses and other soft costs and (3) eighty-five percent
(85%) of the original software invoice amount for such software less any taxes,
shipping and freight charges or discounts, warranty charges, installation
expenses and other soft costs. Notwithstanding the foregoing, Facility-B Loans
made for the purpose of financing (a) furniture shall be limited to a maximum
aggregate total amount of $250,000.00 and (b) software shall be limited to a
maximum aggregate total amount of $600,000.00.
i. INTEREST PAYMENTS. Borrower promises to pay to Bank from
the date of the advance of the initial Facility-B Loan through the Facility-B
Maturity Date, on or before the last business day of each month, interest on the
average daily unpaid and unamortized principal balance of the Facility-B Loan
Account during the immediately preceding month at a rate of interest equal to
one percent (1.0%) per annum, in excess of the Prime Rate, which shall vary
concurrently with any change in the Prime Rate. Interest shall be computed at
the above rate on the basis of the actual number of days during which the
principal balance of the Facility-B Loan Account is outstanding divided by 360,
which shall for interest computation purposes be considered one (1) year.
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<PAGE> 3
ii. QUARTERLY TERM OUT AND PRINCIPAL PAYMENTS.
(1) FIRST QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B Loan Account outstanding on
September 18, 1997, three months from the original loan agreement date (the
"First Quarter Term Out Date"), in thirty-six (36) equal monthly installments of
principal, beginning on October 18, 1997, plus (2) interest computed in
accordance with SECTION 2.A.i hereof.
(2) SECOND QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B, Loans made after the First
Quarter Term Out Date through December 31, 1997 (the "2nd Quarter Term Out
Date") in thirty-six (36) equal monthly installments of principal, beginning on
January 30, 1998, plus (2) interest computed in accordance with SECTION 2.A.i
hereof.
(3) THIRD QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B Loans made after the 2nd
Quarter Term Out Date through March 31, 1998 (the "3rd Quarter Term Out Date")
in thirty-six (36) equal monthly installments of principal, beginning on April
30, 1998, plus (2) interest computed in accordance with SECTION 2.A.i hereof.
(4) FOURTH QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B Loans made after the 3rd
Quarter Term Out Date through June 30, 1998 (the "4th Quarter Term Out Date") in
thirty-six (36) equal monthly installments of principal, beginning on July 31,
1998, plus (2) interest computed in accordance with SECTION 2.A.i hereof.
(5) FIFTH QUARTER TERM OUT. Borrower promises to pay to
Bank (1) the principal balance of the Facility-B Loans made after the 4th
Quarter Term Out Date through September 30, 1998 (the "5th Quarter Term Out
Date") in thirty-six (36) equal monthly installments of principal, beginning on
October 31, 1998, plus (2) interest computed in accordance with SECTION 2.A.i
hereof.
(6) FINAL TERM IN OUT. Borrower promises to pay to Bank
(1) the principal balance of the Facility-B Loans made after the 5th Quarter
Term Out Date through December 31, 1998 (the "Final Term Out Date") in
thirty-six monthly equal monthly installments of principal, beginning on January
31, 1999, plus (2) interest computed in accordance with SECTION 2.A.i hereof."
b. SECTION U.B. of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"B. Maintain a minimum tangible net worth (meaning all assets,
excluding any value for goodwill, trademarks, patents, copyrights,
organization expense and other similar intangible items, less all
liabilities, plus Subordinated Debt), of not less than $7,000,000.00."
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<PAGE> 4
c. SECTION 14.D. of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"D. Beginning with the fiscal quarter ending October 31, 1998 and
every quarter thereafter, maintain a minimum cash flow coverage ratio
(meaning for such quarter net income plus depreciation, plus
amortization, divided by the next fiscal quarter's current portion of
long term debt, including the next fiscal quarter's portion of capital
leases due within ninety (90) days), of not less than 1.25 to one
(1.25:1.00)."
d. A NEW SECTION 14J. is hereby added to the Loan Agreement as
follows:
"J. Maintain a maximum ratio of total liabilities (meaning all
liabilities, excluding long term Subordinated Debt) to tangible net
worth (as defined in Section 14.B. hereof) of 1.25 to one (1.25:1.00)."
e. The parenthetical contained in SECTION 17.B. of the Loan
Agreement is hereby amended to include SUBSECTION 14J., for which no cure period
shall exist.
f. EXHIBIT C to the Loan Agreement is hereby deleted in its
entirety and replaced with the EXHIBIT C attached to this Amendment.
3. LOAN FEES. Borrower shall pay Bank, in respect of this Amendment, a
fee in the amount of Five Thousand Six Hundred Twenty-Five Dollars ($5,625.00).
4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that
its representations and warranties in the Loan Documents continue to be true and
complete in all material respects as of the date hereof after giving effect to
this Amendment and that the execution, delivery and performance of this
Amendment are duly authorized, do not require the consent or approval of any
governmental body or regulatory authority and are not in contravention of or in
conflict with any law or regulation or any term or provision of any other
agreement entered into by Borrower.
5. CONDITIONS PRECEDENT. The legal effectiveness of this Amendment is
subject to the satisfaction of all of the following conditions precedent prior
to 5:00 p.m. January 30, 1998:
a. EXECUTED AMENDMENT. Bank shall have received this Amendment duty
executed and delivered by Borrower.
b. RESOLUTIONS AND OTHER CORPORATE DOCUMENTS OF BORROWER. Bank shall
have received resolutions of the Board of Directors of Borrower authorizing
Borrower to enter into this Amendment and such other corporate documents as Bank
shall reasonably request.
c. FINANCIAL CONDITION. There shall have occurred no material adverse
change in the financial condition or prospects of Borrower as shown on the most
recent financial statements
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<PAGE> 5
submitted to Bank or disclosed to Bank, respectively, and relied upon by Bank in
entering into this Amendment.
d. NO DEFAULT. There shall have occurred no Event of Default that
remains uncured and is continuing under any of the Loan Documents.
e. PAYMENT OF FEES. Bank shall have received reimbursement from
Borrower of its costs and expenses incurred in connection with this Amendment
and the transactions contemplated hereby, including, without limitation, its
reasonable attorneys' fees and expenses.
f. OTHER DOCUMENTS. Bank shall have received such other documents,
information and items from Borrower as it shall reasonably request.
6. RELEASE AND WAIVER.
a. Borrower hereby acknowledges and agrees that: (1) it has no claim
or cause of action against Bank or any parent, subsidiary or affiliate of Bank,
or any of Bank's officers, directors, employees, attorneys or other
representatives or agents (all of which parties other than Bank being,
collectively, "Bank's Agents") in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein and herein; (2) it has no
offset or defense against any of its respective obligations, indebtedness or
contracts in favor of Bank; and (3) it recognizes that Bank has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower.
b. Although Bank regards its conduct as proper and does not believe
Borrower to have any claim, cause of action, offset or defense against Bank or
any of Bank's Agents in connection with the Loan Documents, the loans thereunder
or the transactions contemplated therein, Bank wishes and Borrower agrees to
eliminate any possibility that any past conditions, acts, omissions, events,
circumstances or matters could impair or otherwise affect any rights, interests,
contracts or remedies of Bank. Therefore, Borrower unconditionally releases and
waives (1) any and all liabilities, indebtedness and obligations, whether known
or unknown, of any kind to Bank or of any of Bank's Agents to Borrower, except
the obligations remaining to be performed by Bank as expressly stated in the
Loan Agreement, this Amendment and the other Loan Documents executed by Bank;
(2) any legal, equitable or other obligations or duties, whether known or
unknown, of Bank or of any of Bank's Agents to Borrower (and any rights of
Borrower against Bank) besides those expressly stated in the Loan Agreement,
this Amendment and the other Loan Documents; (3) any and all claims under any
oral or implied agreement, obligation or understanding with Bank or any of
Bank's Agents, whether known or unknown, which is different from or in addition
to the express terms of the Loan Agreement, this Amendment or any of the other
Loan Documents; and (4) all other claims, causes of action or defenses of any
kind whatsoever (if any), whether known or unknown, which Borrower might
otherwise have against Bank or any of Bank's Agents, on account of any
condition, act, omission, event, contract, liability, obligation, indebtedness,
claim, cause of action, defense, circumstance or matter of any kind whatsoever
which existed, arose or occurred at any time prior to the execution and delivery
of this Amendment or which could arise concurrently with the effectiveness of
this Amendment.
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<PAGE> 6
c. Borrower agrees that it understands the meaning and effect of
Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General Release. 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.
BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES,
INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS AMENDMENT IN FAVOR OF
BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES ALL RIGHTS AND
BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542 OF
THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS,
LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY) WHICH ANY SUCH
LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE MAXIMUM EXTENT
PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY
OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE
EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS AMENDMENT.
7. Full Force And Effect; Entire Agreement. Except to the extent
expressly provided in this Amendment, the terms and conditions of the Loan
Agreement and the other Loan Documents shall remain in full force and effect.
This Amendment and the other Loan Documents constitute and contain the entire
agreement of the parties hereto and supersede any and all prior agreements,
negotiations, correspondence, understandings and communications between the
parties, whether written or oral, respecting the subject matter hereof. The
parties hereto further agree that the Loan Documents comprise the entire
agreement of the parties thereto and supersede any and all prior agreements,
negotiations, correspondence, understandings and other communications between
the parties thereto, whether written or oral respecting the extension of credit
by Bank to Borrower and/or its affiliates.
8. Counterparts; Effectiveness. This Amendment may be executed in any
number of counterparts, each of which when so delivered shall be deemed an
original, but all such counterparts taken together shall constitute but one and
the same instrument. Each such agreement shall become effective upon the
execution of a counterpart hereof or thereof by each of the parties hereto and
telephonic notification that such executed counterparts has been received by
Borrower and Bank.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
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<PAGE> 7
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be executed and delivered by its duly authorized officer as of the date first
written above.
BORROWER
BROCADE COMMUNICATIONS SYSTEMS, INC.
a California corporation
By: /s/ B. Carl Lee
----------------------------------------
B. Carl Lee
Vice President & Chief Financial Officer
BANK
IMPERIAL BANK
By: /s/ Kenneth W. Le Deit
----------------------------------------
Kenneth W. Le Deit
Assistant Vice President
<PAGE> 1
Exhibit 10.11
SECOND AMENDMENT TO LOAN DOCUMENTS
THIS SECOND AMENDMENT TO LOAN DOCUMENTS ("Second Amendment") is made and
entered into as of August 17, 1998, by and among BROCADE COMMUNICATIONS
SYSTEMS, INC., a California corporation ("Borrower"), and IMPERIAL BANK
("Bank").
RECITALS
A. Bank agreed to extend (1) a formula-based revolving credit facility
to Borrower in the maximum principal amount of $4,000,000.00 (the "Facility-A
Commitment") and (2) a term equipment credit facility to Borrower in the
maximum principal amount of $3,000,000.00 (the "Facility-B Commitment")
pursuant to the terms of that certain Security and Loan Agreement dated as of
June 19, 1997, as amended by that certain Amendment to Loan Documents dated as
of January 30, 1998 (the "First Amendment"), entered into between Borrower and
Bank (collectively, the "Loan Agreement").
B. The Facility-A Commitment originally matured on June 18, 1998. The
Facility-A Maturity Date has been extended to August 17, 1998 pursuant to the
terms of a certain letter agreement dated June 23, 1998 (the "Extension
Letter").
C. Borrower has requested and Bank has agreed (1) to further extend the
Facility-A Maturity Date and (2) to make an additional equipment term loan to
Borrower in the maximum principal amount of $2,000,000.00, subject to all of
the terms and conditions set forth in this Second Amendment.
D. The First Amendment, the Extension Letter, this Second Amendment and
the Loan Documents (as defined in the Loan Agreement), together with all other
documents entered into or delivered pursuant to any of the foregoing, in each
case as originally executed or as the same may from time to time be modified,
amended, supplemented, restated or superseded are hereinafter collectively
referred to as the "Loan Documents."
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants herein set forth and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound, and to induce Bank to enter into this Second Amendment, Borrower
and Bank hereby agree to amend the Loan Agreement as follows:
1. Definitions. Unless otherwise defined herein, all terms defined in
the Loan Agreement have the same meaning when used herein.
2. Amendment to Loan Agreement. The Loan Agreement is hereby amended as
follows:
2.1 The terms of the Facility-A Commitment are hereby amended as
follows:
(a) The Facility-A Maturity Date is hereby extended from August
17, 1998 to August 16, 1999.
<PAGE> 2
(b) The first sentence of Section 1.A. of the Loan Agreement is
hereby deleted in its entirety and the following sentence substituted therefor:
"At any time from the date hereof and prior to the Facility-A
Maturity Date, Borrower may from time to time request advances from
Bank up to an aggregate principal amount outstanding under the
Facility-A Commitment equal to the sum of (1) eighty percent (80.0%)
of Eligible Accounts plus (2) the lesser of $1,500,000.00 or 40% of
Finished Goods Inventory (such sum being hereinafter referred to as
the "Facility-A Borrowing Base")."
2.2 The following is hereby added as a new Section 3 under the Loan
Agreement:
"3. FACILITY-C COMMITMENT. Subject to all the terms and
conditions of this Loan Agreement and prior to the termination of its
commitment as hereinafter provided, Bank hereby agrees to make loans
(each a "Facility-C Loan") to Borrower in such amounts as Borrower
shall request pursuant to this Section 3 at any time prior to June
30, 1999 (the "Facility-C Availability End Date"), in an aggregate
principal amount not to exceed $2,000,000.00 (the "Facility-C
Commitment"). If at any time or for any reason, the outstanding
principal amount of the Facility-C Loan Account (as hereinafter
defined) is greater than the Facility-C Commitment, Borrower shall
immediately pay to Bank, in cash, the amount of such excess. Any
commitment of Bank, pursuant to the terms of this Loan Agreement, to
make Facility-C Loans shall expire on the Facility-C Availability End
Date, subject to Bank's right to renew said commitment in its sole
and absolute discretion at Borrower's request. Any such renewal of
said commitment shall not be binding upon Bank unless it is in
writing and signed by an officer of Bank. Facility-C Loans that are
repaid by Borrower may not be reborrowed. Borrower promises to pay to
Bank the outstanding unpaid principal balance (and all accrued unpaid
interest thereon) of the Facility-C Loan Account on the dates set
forth below, the final such date being June 30, 2002 ("Facility-C
Maturity Date").
A. FACILITY-C LOANS. The amount of each Facility-C Loan made
by Bank to Borrower hereunder shall be debited to the loan ledger
account of Borrower maintained by Bank for the Facility-C Commitment
(herein called the "Facility-C Loan Account") and Bank shall credit
the Facility-C Loan Account with all loan repayments in respect
thereof made by Borrower. When Borrower desires to obtain a
Facility-C Loan, Borrower shall notify Bank (which notice shall be
signed by an officer of Borrower and shall be irrevocable) in
accordance with Section 4 hereof, to be received no later than 3:00
p.m. Pacific time one (1) business day before the day on which the
Facility-C Loan is to be made. The notice shall be signed by an
officer of Borrower and contain a detailed schedule of the items
being financed, including copies of paid invoices and serial numbers
for the original equipment, furniture or software to be financed.
Facility-C Loans may only be used to finance equipment, furniture or
software purchased by the Borrower within ninety (90) days of the
invoice date for said items and will be limited to (1) one hundred
percent (100%) of the original equipment invoice amount for such
equipment less any taxes, shipping and freight charges or discounts,
warranty charges, installation expenses and other soft costs, (2) one
hundred percent (100%) of the original furniture invoice amount for
such furniture less any taxes, shipping and freight charges or
discounts, warranty
2
<PAGE> 3
charges, installation, expenses and other soft costs and (3)
eighty-five percent (85%) of the original software invoice amount for
such software less any taxes, shipping and freight charges or
discounts, warranty charges, installation expenses and other soft
costs. Notwithstanding the foregoing provisions (a) the initial three
(3) requests for advances of Facility-C Loans may be used to finance
equipment, furniture or software purchased by Borrower within one
hundred eighty (180) days of the invoice date for said items and (b)
Facility-C Loans made for the purpose of financing software shall be
limited to a maximum aggregate local amount of $300,000.00.
(i) Interest Payments. Borrower promises to pay to Bank from the
date of the advance of the initial Facility-C Loan through the
Facility-C Maturity Date, on or before the last business day of each
month, interest on the average daily unpaid and unamortized principal
balance of the Facility-C Loan Account during the immediately
preceding month at a rate of interest equal to one percent (1.0%) per
annum in excess of the Prime Rate, which shall vary concurrently with
any change in the Prime Rate. Interest shall be computed at the above
rate on the basis of the actual number of days during which the
principal balance of the Facility-C Loan Account is outstanding
divided by 360, which shall for interest computation purposes be
considered one (1) year.
(ii) Quarterly Term Out and Principal Payments.
(a) First Quarter Term Out. Borrower further promises to
pay the Bank, on or before October 31, 1998 and on or before the last
business day of each month thereafter through the Facility-C Maturity
Date, (1) the principal balance of the Facility-C Loan Account
outstanding on September 30, 1998 (the "1st Quarter Term Out Date"),
in thirty-six (36) equal monthly installments of principal plus (2)
interest computed in accordance with Section 3.A.(i) hereof.
(b) Second Quarter Term Out. Borrower further promises to
pay to Bank, on or before January 31, 1999 and on or before the last
business day of each month thereafter through the Facility-C Maturity
Date, (1) the principal balance of the Facility-C Loans made after the
1st Quarter Term Out Date through December 31, 1998 (the "2nd Quarter
Term Out Date") in thirty-six (36) equal monthly installments of
principal plus (2) interest computed in accordance with Section
3.A.(i) hereof.
(c) Third Quarter Term Out. Borrower further promises to
pay to Bank, on or before April 30, 1999 and on or before the last
business day of each month thereafter through the Facility-C Maturity
Date, (1) the principal balance of the Facility-C Loans made after the
2nd Quarter Term Out Date through March 31, 1999 (the "3rd Quarter
Term Out Date") in thirty-six (36) equal monthly installments of
principal plus (2) interest computed in accordance with Section
3.A.(i) hereof.
(d) Final Term Out. Borrower promises to pay to Bank, on or
before July 31, 1999 and on or before the last business day of each
month thereafter through the Facility-C Maturity Date, (1) the
principal balance of the Facility-C Loans made after the 3rd Quarter
Term Out Date through June
3
<PAGE> 4
30, 1999 in thirty-six (36) equal monthly installments of principal
plus (2) interest computed in accordance with Section 3.A.(1) hereof."
2.3 Sections 3 through 22 of the Loan Agreement are hereby renumbered
as Sections 4 through 23, respectively.
2.4 Any reference in the Loan Agreement to a specific Section or
subsection therein shall be deemed to mean those Sections or subsections as
amended and renumbered by the terms of Section 2.3 hereof.
2.5 Section 1.2 (Representations and Warranties) of the Loan
Agreement is hereby amended to add the following subparagraph (j) as an
additional Representation and Warranty thereunder:
"(j) Borrower and its subsidiaries have reviewed the areas within
their operations and business which could be adversely affected by, and
have developed or are developing a program to address on a timely
basis, the Year 2000 Problem and have made related appropriate inquiry
of material suppliers and vendors, and based on such review and
program, the Year 2000 Problem will not have a Material Adverse Effect
upon its financial condition, operations or business as now conducted."
2.6 Section 14 (Affirmative Covenants) of the Loan Agreement is
hereby amended to add a new subparagraph N thereunder:
"N. Borrower shall perform all acts reasonably necessary to
ensure that Borrower and any business in which Borrower holds a
substantial interest becomes Year 2000 Compliant in a timely manner.
Such acts shall include, without limitation, performing a comprehensive
review and assessment of all of Borrower's systems and adopting a
detailed plan, with an itemized budget, for the remediation, monitoring
and testing of such systems. If requested by Bank, Borrower shall
immediately deliver a statement to Bank summarizing the Year 2000
exposure, program or progress of Borrower and its Subsidiaries or other
evidence of Borrower's compliance with the terms of this Section,
certified by an officer of Borrower."
2.7 Section 15 (Financial Covenants and Information), Paragraphs A.
through J. of the Loan Agreement are hereby deleted in their entirety and the
following paragraphs substituted therefor:
"A. Maintain a minimum Quick Ratio of not less than 1.25 to
1.00. As listed herein, "Quick Ratio" shall mean all unrestricted cash
and cash equivalent plus Accounts divided by current liabilities less
warranty reserves and prepaid royalties.
B. Maintain a minimum Tangible Net Worth of not less than
$7,000,000.00. As used herein, "Tangible Net Worth" shall mean all
assets (excluding any value for goodwill, trademarks, patents,
copyrights, organization expense and other similar intangible items)
less all liabilities plus long term Subordinated Debt.
C. Maintain a maximum ratio of Total Liabilities to Tangible
Net Worth (as defined in Section 15.B, above) of not more than 1.50 to
1:00. As used herein, "Total Liabilities" shall mean all liabilities,
excluding warranty reserves, prepaid royalties and long term
Subordinated Debt.
4
<PAGE> 5
D. Maintain a minimum Liquidity Ratio of not less than 1:50 to
1:00. As used herein, "Liquidity Ratio" shall mean all unrestricted
cash and cash equivalents plus the net availability under the
Facility-A Commitment divided by the sum of the outstanding principal
balances under the Facility-B Loan Account and the Facility-C Loan
Account.
E. As soon as it is available, but not later than ninety (90)
days after the end of Borrower's fiscal year, deliver to Bank
unqualified copies of Borrower's consolidated financial statements
together with changes in financial position.
F. As soon as it is available, but not later than twenty-five
(25) days after and as of the end of the month, deliver to Bank
internally prepared financial statements prepared in accordance with
GAAP consisting of a balance sheet and profit and loss statement in
form satisfactory to Bank, and a Compliance Certificate in the form of
Exhibit C attached hereto and incorporated herein by this reference,
certified by an officer of Borrower.
G. So long as any Facility-A Loans remain outstanding and
unpaid under the Facility-A Loan Account, as soon as it is available,
but not later than fifteen (15) days after and as of the end of each
month, deliver to Bank, in such form and detail as Bank may require,
(1) statements showing aging and reconciliation of the Accounts and
collections thereon and Borrower's accounts payable, (2) an inventory
report and backlog report and (3) a Borrowing Base Certificate in the
form of Exhibit D attached hereto and incorporated herein by this
reference, certified by an officer of Borrower. Notwithstanding the
foregoing, if Borrower has not provided to Bank the statements and
reports described immediately above for the most recent month then
ended, as a condition to a request for a Facility-A Loan, Borrower
shall have delivered to Bank the statements and reports described
immediately above, as well as a Borrowing Base Certificate covering
the most recent month then ended at least twenty (20) days prior to
the date of Borrower's request for an advance for said Facility-A
Loan.
H. Upon the reasonable request of Bank, deliver to Bank current
budgets, sales projections, operating plans and other financial
exhibits and information in form and substance satisfactory to Bank.
I. Upon any officer becoming aware, deliver immediately to Bank
written notice of any pending or threatened litigation claiming, or
reasonably likely to result in, damages against Borrower in an amount
in excess of $50,000.00."
2.8 The definition of "Finished Goods Inventory" contained in Exhibit
A to the Loan Agreement is hereby deleted in its entirety and the following
definition substituted therefor:
"FINISHED GOODS INVENTORY" shall mean inventory, consisting
of fully configured systems (located at Borrower's corporate
headquarters at 1901 Guadalupe Parkway, San Jose, California)
that are supported by product backlog which is shippable within
ninety (90) days.
2.9 Exhibit A to the Loan Agreement is hereby amended to add the
following definition thereunder:
"YEAR 2000 COMPLIANT" means, in regard to Borrower or any
Person, that all software, hardware, firmware, equipment, goods or
systems utilized by or material to the
5
<PAGE> 6
business operations or financial condition of Borrower or such
Person, will properly perform date sensitive functions before,
during and after the year 2000.
YEAR 2000 PROBLEM "means the risk that any computer
applications used by Borrower and its Subsidiaries may be unable
to recognize and properly perform date-sensitive functions
involving certain dates prior to and any date on or after
December 31, 1999."
2.10 Exhibit C to the Loan Agreement is hereby deleted in its
entirety and replaced with the Exhibit C attached hereto and incorporated
herein by this reference.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that
its representations and warranties in the Loan Documents continue to be true and
complete in all material respects as of the date hereof after giving effect to
this Second Amendment (except to the extent such specifically relate to another
date or as specifically described on Schedule I attached hereto and incorporated
herein by this reference) and that the execution, delivery and performance of
this Second Amendment are duly authorized, do not require the consent or
approval of any governmental body or regulatory authority and are not in
contravention of or in conflict with any law or regulation or any term or
provision of any other agreement entered into by Borrower.
4. CONDITIONS PRECEDENT. The legal effectiveness of this Second
Amendment is subject to the satisfaction of all of the following conditions
precedent:
(a) EXECUTED AMENDMENT. Bank shall have received this Second
Amendment duly executed and delivered by Borrower.
(b) RESOLUTIONS AND OTHER CORPORATE DOCUMENTS OF BORROWER. Bank
shall have received resolutions of the Board of Directors of Borrower
authorizing Borrower to enter into this Second Amendment and to deliver such
other corporate documents as Bank shall reasonably request.
(c) FINANCIAL CONDITION. There shall have occurred no material
adverse change in the financial condition or prospects of Borrower as shown on
the most recent financial statements submitted to Bank or disclosed to Bank;
respectively, and relied upon by Bank in entering into this Second Amendment.
(d) NO DEFAULT. There shall have occurred no Event of Default
that remains uncured and is continuing under any of the Loan Documents.
(e) PAYMENT OF FEES. Bank shall have received (i) an extension
fee in the amount of $10,000.00 with respect to the Facility-A Commitment, (ii)
a loan fee in the amount of $7,500.00 with respect to the Facility-C Commitment
and (iii) reimbursement from Borrower of its costs and expenses incurred
(including, without limitation, its attorneys' fees and expenses) in connection
with this Second Amendment and the transactions contemplated hereby.
(f) OTHER DOCUMENTS. Bank shall have received such other
documents, information and items from Borrower as it shall reasonably request
to effectuate the transactions contemplated hereby.
5. RELEASE AND WAIVER.
(a) Borrower hereby acknowledges and agrees that: (1) it has no
claim or cause of action against Bank or any parent, subsidiary or affiliate of
Bank, or any of Bank's officers, directors,
6
<PAGE> 7
employees, attorneys or other representatives or agents (all of which parties
other than Bank being collectively, "Bank's Agents") in connection with the
Loan Documents, the loans thereunder or the transactions contemplated therein
and herein; (2) it has no offset or defense against any of its respective
obligations, indebtedness or contracts in favor of Bank; and (3) it recognizes
that Bank has heretofore properly performed and satisfied in a timely manner
all of its obligations to and contracts with Borrower.
(b) Although Bank regards it conduct as proper and does not
believe Borrower to have any claim, cause of action, offset or defense against
Bank or any of Bank's Agents in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein, Bank wishes and Borrower
agrees to eliminate any possibility that any past conditions, acts, omissions,
events, circumstances or matters could impair or otherwise affect any rights,
interests, contracts or remedies of Bank. Therefore, Borrower unconditionally
releases and waives (1) any and all liabilities, indebtedness and obligations,
whether known or unknown, of any kind to Bank or of any of Bank's Agents to
Borrower, except the obligations remaining to be performed by Bank as expressly
stated in the Loan Agreement, this Second Amendment and the other Loan
Documents executed by Bank; (2) any legal, equitable or other obligations or
duties, whether known or unknown, of Bank or of any of Bank's Agents to
Borrower (and any rights of Borrower against Bank) besides those expressly
stated in the Loan Agreement, this Second Amendment and the other Loan
Documents; (3) and all claims under any oral or implied agreement,
obligation or understanding with Bank or any of Bank's Agents, whether known or
unknown, which is different from or in addition to the express terms of the
Loan Agreement, this Second Amendment or any of the other Loan Documents; and
(4) all other claims, causes of action or defenses of any kind whatsoever (if
any), whether known or unknown, which Borrower might otherwise have against
Bank or any of Bank's Agents, on account of any condition, act, omission,
event, contract, liability, obligation, indebtedness, claim, cause of action,
defense, circumstance or matter of any kind whatsoever which existed, arose or
occurred at any time prior to the execution and delivery of this Second
Amendment or which could arise concurrently with the effectiveness of this
Second Amendment.
(c) Borrower agrees that it understands the meaning and effect of
Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General Release.
A general release does not extend to claims that 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.
BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD, DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES,
INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASE BY THIS SECOND AMENDMENT IN
FAVOR OF BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES ALL
RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED
SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH
UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION,
CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY)
WHICH ANY SUCH LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE
MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE
HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR
RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER
THIS SECOND AMENDMENT.
6. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent
expressly provided in this Second Amendment, the terms and conditions of the
Loan Agreement and the other Loan Documents
7
<PAGE> 8
shall remain in full force and effect. This Second Amendment and the other Loan
Documents constitute and contain the entire agreement of the parties hereto and
supersede any and all prior agreements, negotiations, correspondence,
understandings and communications between the parties, whether written or oral,
respecting the subject matter hereof. The parties hereto further agrees that the
Loan Documents comprise the entire agreement of the parties thereto and
supersede any and all prior agreements, negotiations, correspondence,
understandings and other communications between the parties thereto, whether
written or oral respecting the extension of credit by Bank to Borrower and/or
its affiliates.
11. COUNTERPARTS; EFFECTIVENESS. This Second Amendment may be executed in
any number of counterparts, each of which when so delivered shall be deemed an
original, but all such counterparts taken together shall constitute but one and
the same instrument. Each such agreement shall become effective upon the
execution of a counterpart hereof or thereof by each of the parties hereto and
telephonic notification that such executed counterparts has been received by
Borrower and Bank.
IN WITNESS WHEREOF, each of the parties hereto has caused this Second
Amendment to be executed and delivered by its duly authorized officer as of the
date first written above.
BORROWER
BROCADE COMMUNICATIONS SYSTEMS, INC.,
a California corporation
By: /s/ B. Carl Lee
----------------------------------------
Name: B. Carl Lee
--------------------------------------
Title: VP & CEO
-------------------------------------
BANK
IMPERIAL BANK
By: /s/ Kenneth W. Le Deit
----------------------------------------
Kenneth W. Le Deit, Vice President
<PAGE> 9
SCHEDULE 1
Schedule of Exceptions to Representations and Warranties
(List or indicate "NONE"
SCHEDULE 1
<PAGE> 10
EXHIBIT B.
COMPLIANCE CERTIFICATE
The consolidated financial statements dated as of ______________ of
BROCADE COMMUNICATIONS SYSTEMS, INC., a California corporation ("Borrower")
attached hereto and submitted to IMPERIAL BANK ("Bank") pursuant to that certain
Security and Loan Agrement dated as of June 19, 1997, entered into between
Borrower and Bank, as amended by that certain Amendment to Loan Agreement dated
of January 30, 1998, that certain letter agreement dated June 23, 1998, and
that certain Second Amendment to Loan Agreement dated as of August 17, 1998
(collectively, the "Loan Agreement"), are in compliance with all financial
covenants (unless otherwise noted below) as specified in Section 15 therein, as
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
COVENANT: ACTUAL:
<S> <C>
- ------------------------------------------------------------------------------
A. Minimum Quick Ratio:
1.25 to 1.00
- ------------------------------------------------------------------------------
B. Minimum Tangible Net Worth:
$7,000,000.00
- ------------------------------------------------------------------------------
C. Maximum Ratio of Total Liabilities to Tangible Net Worth:
1.50 to 1.00
- ------------------------------------------------------------------------------
D. Minimum Liquidity Ratio:
1.50 to 1.00
- ------------------------------------------------------------------------------
</TABLE>
Exceptions: (if none, so state):
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The undersigned authorized officer of Borrower hereby certifies that Borrower is
in complete compliance with the terms and conditions of the Loan Agreement for
the period ending _____________, _____, and as of the date of this Compliance
Certificate the representations and warranties stated therein are true, accurate
and complete as of the date hereof (except as to those representations and
warranties which specifically reference a particular date and except as noted
above).
The undersigned further certifies that s/he knows of no pending conditions which
may cause an Event of Default (as defined in the Loan Agreement) to exist in the
next thirty (30) days. The required support documents for this certification are
attached and prepared in accordance with OAAP consistently applied.
Date: ________________ BROCADE COMMUNICATIONS SYSTEMS, INC.
a California corporation
By: _______________________________
Name: _____________________________
Title: ____________________________
EXHIBIT B
<PAGE> 1
EXHIBIT 10.12
THIRD AMENDMENT TO LOAN DOCUMENTS
THIS THIRD AMENDMENT TO LOAN DOCUMENTS ("Third Amendment") is made and
entered into as of December 15, 1998, by and among BROCADE COMMUNICATIONS
SYSTEMS, INC., a California corporation ("Borrower"), and IMPERIAL BANK
("Bank").
RECITALS
A. Bank agreed to extend (1) a revolving credit facility to Borrower in
the maximum principal amount of $4,000,000.00 (the "Facility-A Commitment"), (2)
a term equipment credit facility to Borrower in the maximum principal amount of
$3,000,000.00 (the "Facility-B Commitment") and (3) a term equipment credit
facility to Borrower in the maximum principal amount of $2,000,000.00 (the
"Facility-C Commitment") pursuant to the terms of that certain Security and Loan
Agreement dated as of June 19, 1997 (the "Security and Loan Agreement"), entered
into between Borrower and Bank.
B. Pursuant to the terms of that certain Amendment to Loan Documents
dated as of January 30, 1998 (the "First Amendment"), entered into between
Borrower and Bank, Bank increased the amount of the Facility-B Commitment and
modified certain other financial covenants and reporting requirements.
C. Pursuant to the terms of a certain letter agreement dated June 23,
1998 (the "Extension Letter"), the maturity date of the Facility-A Commitment
was extended to August 17, 1998.
D. Pursuant to the terms of that certain Second Amendment to Loan
Documents dated as of August 17, 1998 (the "Second Amendment"), entered into
between Borrower and Bank, Bank (1) extended the Facility-A Maturity Date to
August 16, 1999 and (2) extended the Facility-C Commitment to Borrower. The
Security and Loan Agreement, the First Amendment, the Extension Letter and the
Second Amendment are sometimes hereinafter collectively refer-red to as the
"Loan Agreement."
E. Borrower has requested and Bank has agreed to amend certain financial
covenants and other terms of the Loan Agreement, subject to all of the terms and
conditions set forth in this Third Amendment.
F. The Loan Agreement, the First Amendment, the Extension Letter, the
Second Amendment, this Third Amendment and the other Loan Documents (as defined
in the Loan Agreement), together with all other documents entered into or
delivered pursuant to any of the foregoing, in each case as originally executed
or as the same may from time to time be modified, amended, supplemented,
restated or superseded are hereinafter collectively referred to as the "Loan
Documents."
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants herein set forth and for other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, and intending to
be legally bound, and to induce Bank to enter into this Third Amendment,
Borrower and Bank hereby agree to amend the Loan Agreement as follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms defined in
the Loan Agreement have the same meaning when used herein.
2. AMENDMENT TO LOAN AGREEMENT. The Loan Agreement is hereby amended as
follows:
2.1 SECTION 13-B. of the Loan Agreement is hereby deleted in its
entirety and the following section substituted therefor:
-1-
<PAGE> 2
"B. Permit representatives of Bank to conduct an audit of
Borrower's books and records relating to the Collateral and make
extracts therefrom with results satisfactory to Bank, provided that Bank
shall use its best efforts to not interfere with the conduct of
Borrower's business, and to the extent possible, to arrange for
verification and audit of the Accounts directly with the Persons
obligated thereon or otherwise, all under reasonable procedures
acceptable to Bank and at Borrower's sole expense; provided further
that, prior to an Event of Default, Borrower shall not be responsible
for the expense of more than two such audits in any fiscal year, the
cost for each such audit of which shall not exceed $1,500.00. Borrower
hereby acknowledges and agrees that upon completion of any such audit,
Bank shall have the right to adjust the Facility-A Borrowing Base
percentage, in its sole and reasonable discretion, based on its review
of the results of such Collateral audit;"
2.2 SECTIONS 15.A. through 15.D. of the Loan Agreement are hereby
deleted in their entirety and the following sections substituted therefor:
"A. Maintain a minimum Quick Ratio of not less than 1.15
to 1.00. As used herein, "Quick Ratio" shall mean all unrestricted cash
and cash equivalents plus Accounts divided by current liabilities less
warranty reserves and prepaid royalties.
B. Maintain either (1) a minimum Tangible Net Worth of not
less am $6,500,000.00 (as used herein, "Tangible Net Worth" shall mean
all assets, excluding any value for goodwill, trademarks, patents,
copyrights, organization expense and other similar intangible items,
less all liabilities plus long term Subordinated Debt), or (2) a minimum
of unrestricted cash and cash equivalents of not less than
$4,500,000.00.
C. Maintain a minimum Liquidity Ratio of not less dm 1.50
to 1.00. As used herein, "Liquidity Ratio" shall mean all unrestricted
cash and cash equivalents plus the. net availability under the
Facility-A Commitment divided by the sum of the outstanding principal
balances under the Facility-B Loan Account and the Facility-C Loan
Account."
2.3 SECTIONS 15.E. through 15.1. of the Loan Agreement are hereby
renumbered as SECTIONS 15.D. through 15.H., respectively. Any reference in the
Loan Agreement to a specific section or subsection therein shall be deemed to
mean those Sections or subsections as amended and renumbered by the terms of
this SECTION 2.3.
2.4 The definition of "APPROVED ACCOUNTS" under EXHIBIT A to the
Loan Agreement is hereby deleted in its entirety and the following definition
substituted therefor:
"APPROVED ACCOUNTS" means the account debtors, Sequent
Computer Systems, Inc. ("Sequent"), Compaq Computer Corporation, Dell
Computer Corporation, McDATA Corporation and any other account debtor as
shall be approved by Bank in its sole and reasonable discretion."
2.5 EXHIBIT A to the Loan Agreement is hereby amended to add the
following definition thereunder:
"PERSON" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, public
benefit corporation, firm, joint stock company, estate, entity or
governmental agency."
2.6 EXHIBIT C to the Loan Agreement is hereby deleted in its
entirety and replaced with the Exhibit C attached hereto and incorporated herein
by this reference.
3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants that
its representations and warranties in the Loan Documents continue to be true and
complete in all material respects as of the date hereof after giving effect to
this Third Amendment (except to the extent such specifically relate to another
date or as specifically
-2-
<PAGE> 3
described on Schedule 1 attached hereto and incorporated herein by this
reference) and that the execution, delivery and performance of this Third
Amendment are duly authorized, do not require the consent or approval of any
governmental body or regulatory authority and are not in contravention of or in
conflict with any law or regulation or any term or provision of any other
agreement entered into by Borrower.
4. CONDITIONS PRECEDENT. The legal effectiveness of this Third Amendment
is subject to the satisfaction of all of the following conditions precedent:
(a) EXECUTED AMENDMENT. Bank shall have received this
Third Amendment duly executed and delivered by Borrower.
(b) RESOLUTIONS AND OTHER CORPORATE DOCUMENTS OF BORROWER.
If requested by Bank, Bank shall have received resolutions of the Board of
Directors of Borrower authorizing Borrower to enter into this Third Amendment
and to deliver such other corporate documents as Bank shall reasonably request.
(c) FINANCIAL CONDITION. There shall have occurred no
Material Adverse Change in the financial condition or prospects of Borrower as
shown on the most recent financial statements submitted to Bank or disclosed to
Bank, respectively, and relied upon by Bank in entering into this Third
Amendment.
(d) NO DEFAULT. There shall have occurred no Event of
Default that remains uncured and is continuing under any of the Loan Documents.
(e) PAYMENT OF FEES. Bank shall have received
reimbursement from Borrower of its costs and expenses incurred (including,
without limitation, its attorneys' fees and expenses) in connection with this
Third Amendment and the transactions contemplated hereby.
(f) OTHER DOCUMENTS. Bank shall have received such other
documents, information and items from Borrower as it shall reasonably request to
effectuate the transactions contemplated hereby.
5. RELEASE AND WAIVER.
(a) Borrower hereby acknowledges and agrees that: (1) it
has no claim or cause of action against Bank or any parent, subsidiary or
affiliate of Bank, or any of Bank's officers, directors, employees, attorneys or
other representatives or agents (all of which parties other than Bank being,
collectively, "Bank's Agents") in connection with the Loan Documents, the loans
thereunder or the transactions contemplated therein and herein, (2) it has no
offset or defense against any of its respective obligations, indebtedness or
contracts in favor of Bank; and (3) it recognizes that Bank has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower.
(b) Although Bank regards its conduct as proper and does
not believe Borrower to have any claim, cause of action, offset or defense
against Bank or any of Bank's Agents in connection with the Loan Documents, the
loans thereunder or the transactions contemplated therein, Bank wishes and
Borrower agrees to eliminate any possibility that any past conditions, acts,
omissions, events, circumstances or matters could impair or otherwise affect any
rights, interests, contracts or remedies of Bank. Therefore, Borrower
unconditionally releases and waives (1) any and all liabilities, indebtedness
and obligations, whether known or unknown, of any kind to Bank or of any of
Bank's Agents to Borrower, except the obligations remaining to be performed by
Bank as expressly stated in the Loan Agreement, this Third Amendment and the
other Loan Documents executed by Bank; (2) any legal, equitable or other
obligations or duties, whether known or unknown, of Bank or of any of Bank's
Agents to Borrower (and any rights of Borrower against Bank) besides those
expressly stated in the Loan Agreement, this Third Amendment and the other Loan
Documents; (3) any and all claims under any oral or implied agreement,
obligation or understanding with Bank or any of Bank's Agents, whether known or
unknown, which is different from or in addition to the express terms of the Loan
Agreement, this Third Amendment or any of the other Loan Documents; and (4) all
other claims, causes of action
-3-
<PAGE> 4
or defenses of any kind whatsoever (if any), whether known or unknown, which
Borrower might otherwise have against Bank or any of Bank's Agents, on account
of any condition, act omission, event, contract, liability, obligation,
indebtedness, claim, cause of action, defense, circumstance or matter of any
kind whatsoever which existed, arose or occurred at any time prior to the
execution and delivery of this Third Amendment or which could arise concurrently
with the effectiveness of this Third Amendment.
(c) Borrower agrees that it understands the meaning and
effect of Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by
General Release. A general release does not extend
to claims that 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.
BORROWER AGREES TO ASSUME THE RISK OF ANY AND ALL UNKNOWN, UNANTICIPATED OR
MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES,
INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS THIRD AMENDMENT IN FAVOR
OF BANK AND BANK'S AGENTS, AND BORROWER HEREBY WAIVES AND RELEASES ALL RIGHTS
AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER THE AFOREMENTIONED SECTION 1542
OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE RELEASE OF SUCH UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS,
LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY) WHICH ANY SUCH
LAWS MAY BE APPLICABLE, BORROWER WAIVES AND RELEASES (TO THE MAXIMUM EXTENT
PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY
OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH MIGHT LIMIT OR RESTRICT THE
EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER THIS THIRD
AMENDMENT.
6. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent
expressly provided in this Third Amendment, the terms and conditions of the Loan
Agreement and the other Loan Documents shall remain in full force and effect.
This Third Amendment and the other Loan Documents constitute and contain the
entire agreement of the parties hereto and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
between the parties, whether written or oral, respecting the subject matter
hereof. The parties hereto further agree that the Loan Documents comprise the
entire agreement of the parties thereto and supersede any and all prior
agreements, negotiations, correspondence, understandings and other
communications between the parties thereto, whether written or oral respecting
the extension of credit by Bank to Borrower and/or its affiliates.
11. COUNTERPARTS; EFFECTIVENESS. This Third Amendment may be executed
in any number of counterparts, each of which when so delivered shall be deemed
an original, but all such counterparts taken together shall constitute but one
and the same instrument. Each such agreement shall become effective upon the
execution of a counterpart hereof or thereof by each of the parties hereto and
telephonic notification that such executed counterparts has been received by
Borrower and Bank.
-4-
<PAGE> 5
IN WITNESS WHEREOF, each of the parties hereto has caused this Third
Amendment to be executed and delivered by its duly authorized officer as of the
date first written above.
BORROWER
BROCADE COMMUNICATIONS SYSTEMS, INC.,
a California corporation
By: /s/ B. Carl Lee
---------------------------------
Name: B. Carl Lee
------------------------------
Title: VP & CFO
-----------------------------
BANK
IMPERIAL BANK
By:
---------------------------------
Kenneth W. Le Deit
Vice President and Team Leader
-5-
<PAGE> 6
SCHEDULE 1
Schedule of Exceptions to Representations and Warranties
(List or indicate "NONE")
Schedule 1
<PAGE> 7
EXHIBIT C
COMPLIANCE CERTIFICATE
(TO BE ATTACHED BY BANK)
Schedule C
<PAGE> 8
3. Compliance Certificate
COMPLIANCE CERTIFICATE
PLEASE SEND ALL REQUIRED REPORTING TO: Imperial Bank-Special Markets Div.
Loan Compliance Department
2550 Hanover Street
Palo Alto, CA 94304
Phone: (650) 846-6820
FROM:BROCADE COMMUNICATIONS SYSTEMS, INC. Fax: (650) 846-6840
The undersigned authorized Officer of BROCADE COMMUNICATIONS SYSTEMS
("Borrower"), hereby certifies that in accordance with the terms and conditions
of the Loan Agreement, as modified from time to time, the Borrower is in
complete compliance for the period ending _________________________________ with
all required terms and conditions, except as noted below. Attached herewith are
the required documents supporting the above certification. The Officer further
certifies that these are prepared in accordance with Generally Accepted
Accounting Principles (GAAP) and are consistent from one period to the next,
except as explained in an accompanying letter or footnotes.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
REPORTING COVENANTS REQUIRED COMPLIES
- ------------------- -------- --------
<S> <C> <C>
Company prepared F/S Monthly, within 25 days YES NO
Compliance Certificate Monthly, within 25 days YES NO
CPA Audited, Unqualified F/S Annually, within 90 days of FYE YES NO
A/R Aging Monthly, within 15 days YES NO
A11P Aging Monthly, within 15 days YES NO
Borrowing Bass Certificate Monthly, within 15 days YES NO
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANTS REQUIRED ACTUAL COMPLIES
- ------------------- -------- ------ --------
TO BE TESTED MONTHLY, UNLESS OTHERWISE NOTED:
<S> <C> <C> <C>
Minimum TNW -or- Minimum Cash $6,500,000 -or- $4.500,000 $________ YES NO
Minimum Quick Ratio 1.15:1.00 ________:1.00 YES NO
Minimum Liquidity Ratio 1.50:1.00 ________:1.00 YES NO
</TABLE>
Please Enter Below Comments Regarding Covenant Violations:
On behalf of Borrower, the Officer further acknowledges that at any such time as
Borrower is out of compliance with any of the terms set forth in the Loan
Agreement including, without limitation, any of the financial covenants,
Borrower cannot receive any advances.
BANK USE ONLY
____________________________
Authorized Signer Rec'd by: __________________
Date: ______________________
Reviewed by: _______________
Name:_______________________ Date: ______________________
Financial Compliance Status: YES/NO
Title: _______________________
<PAGE> 1
EXHIBIT 10.13
TO THE EXTENT THAT THIS LEASE AND ANY LEASE SCHEDULE CONSTITUTES
CHATTEL PAPER (AS DEFINED IN THE UNIFORM COMMERCIAL CODE, AS IN EFFECT IN ANY
APPLICABLE JURISDICTION), NO SECURITY INTEREST HEREIN OR THEREIN MAY BE CREATED
EXCEPT THROUGH THE TRANSFER AND POSSESSION OF THE ORIGINAL EXECUTED COUNTERPART
OF SUCH LEASE SCHEDULE, WHICH SHALL BE IDENTIFIED AS THE ORIGINAL EXECUTED
COUNTERPART NO. 1 BY THE LESSOR ON THE SIGNATURE PAGE THEREOF. NO SECURITY
INTEREST CAN BE CREATED IN THIS LEASE BY TRANSFER OR POSSESSION OF THIS LEASE
ALONE WITHOUT ANY ACCOMPANYING ORIGINAL COUNTERPART OF A LEASE SCHEDULE. NO
TRANSFER, SALE, MORTGAGE OR OTHER DISPOSITION OF ANY INTEREST IN THIS LEASE CAN
BE EFFECTED BY DISPOSITION OF THIS INSTRUMENT ALONE.
MASTER EQUIPMENT LEASE AGREEMENT
MASTER EQUIPMENT LEASE AGREEMENT dated as of September 5, 1996 (this
"Lease"), by and between VENTURE LENDING & LEASING, INC., a Maryland
corporation ("Lessor"), and BROCADE COMMUNICATIONS SYSTEMS, INC., a California
corporation ("Lessee").
Lessee desires to obtain from Lessor purchase money financing for
certain items of equipment used in Lessee's business, which equipment is
described more particularly under the caption "Description of Equipment" in one
or more Lease Schedules (as defined below) to this Lease (such equipment
together with all substitutions, renewals or replacements of, and all
additions, improvements and accessions to, any and all thereof, being
hereinafter collectively and separately referred to as the "Equipment").
Lessor is willing to provide financing for the Equipment to Lessee, all
on the terms and conditions hereinafter set forth, and on such additional terms
as are set forth in Lessor's commitment letter to Lessee dated August 14, 1996
(the "Commitment").
Accordingly, in consideration of the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
1. Lease. This Lease establishes the general terms and conditions by
which Lessor may provide financing to Lessee with respect to the Equipment
listed on each lease schedule (sometimes, a "Lease Schedule" or "Schedule")
executed periodically pursuant to this Lease. Each Schedule shall be in the
form provided by Lessor, shall incorporate by reference the terms of this
Lease, and shall be and constitute a separate agreement as to the Equipment
listed thereon for all purposes, including default. If any provision of a Lease
Schedule conflicts with or supplements the provisions of this Lease, the
provisions of such Schedule shall be controlling. Pursuant to the commitment,
Lessor has agreed to arrange for the furnishing and lease to Lessee, and Lessee
has agreed to accept and lease Equipment having an
<PAGE> 2
aggregate Equipment Cost (as defined in each Schedule) of not in excess of One
Million Dollars ($1,000,000.00). Borrower may increase the line up to $500,000
under the same terms and conditions without an increase in the number of
warrants. Notwithstanding anything in the Lease to the contrary, it is
understood and agreed that Lessee is purchasing the Equipment and Lessor is
financing such purchases. Accordingly, title to the Equipment, except for
licensed software, shall be vested in Lessee upon its acceptance thereof. To
secure its obligations hereunder to Lessor, Lessee hereby grants to Lessor a
security interest in all right title and interest of Lessee in: (i) all
Equipment, whether now owned or hereafter acquired by Lessee; (ii) all leases
and other agreements covering the Equipment and any and all subleases of such
Equipment (whether or not permitted under this Lease); (iii) all software,
source code escrow arrangements, object code, user manuals and other technical
documentation, and licenses purchased as part of or in connection with the
Equipment to the extent permissible under the applicable license agreement: and
(iv) and all additions and accessions to, substitutions for and proceeds
(whether cash or non-cash) and products of any of the foregoing, including,
without limitation, all payments under insurance. Upon payment in full of all
rentals for such Equipment in accordance with the applicable Schedule and the
other terms of this Lease, the provisions of Sections 6 through 22 excluding
Section 15 of this Lease shall no longer apply to such items of Equipment and
such security interest shall be released.
2. Term. The term of this Lease as to each item of Equipment leased
hereunder, shall commence on the date of acceptance of such item and shall end
at the expiration of the term therefor specified under "Term" in the applicable
Schedule.
3. Rent. Lessee shall pay to Lessor as rent for each item of Equipment
during the applicable Term, on each Rent Payment Date (as defined in the
Schedule), the amount specified under "Lease Rental Payments" in the Schedule
(hereinafter referred to as "Rent"). If any amount due hereunder is not paid
when due, Lessee shall pay to Lessor, on demand, a reasonable late charge in the
amount of 5% of such overdue amount and interest on such overdue amount at the
rate of 2% per month (the "Late Payment Rate"); such late charge and interest
shall apply only if permitted by applicable law, and if not so permitted, such
late charge and interest shall be calculated at the maximum rates permitted by
applicable law. All payments of Rent and other amounts payable by Lessee to
Lessor hereunder shall be made at the office of Lessor specified under "Lessor's
Address" in the Schedule, or to such other person, firm or corporation or
Assignee (as defined in Section 21, "Assignment by Lessor") and at such other
place as Lessor or Assignee, as the case may be, may from time to time designate
in writing to Lessee. Notwithstanding any provisions hereof to the contrary, any
payment, including Rent, required under this Lease which is due on a day which
is not a business day shall be made on the business day next preceding the day
on which such payment is due. This Lease is non-cancelable and irrevocable for
the entire term set forth in the Schedule. Lessee's obligation to pay all
rentals and other amounts payable hereunder are absolute and unconditional and
shall not be subject to any abatement, reduction, setoff, defense, counterclaim
or recoupment for any reason whatsoever, including but not limited to Lessee's
right to possession of
-1-
<PAGE> 3
the Equipment being terminated or Lessor retaking possession of the Equipment
because of a default by Lessee hereunder.
4. Lessee's Selection, Inspection and Acceptance. Lessee has selected or
will select all items of Equipment to be leased hereunder from the manufacturer
or vendor thereof on the basis of its own judgment, and is not relying on any
statements, representations or warranties made by Lessor or its representatives.
Lessee shall assure that each item of Equipment is properly invoiced and sold to
Lessor. Upon delivery, Lessee, at its own expense, shall make all necessary
inspections and tests of the Equipment in order to determine whether the
Equipment conforms to specifications and is in good condition and repair. If the
Equipment is in good condition and repair, Lessee shall execute and deliver to
Lessor a Certificate of Acceptance, in substantially the form thereof attached
hereto. Lessee warrants that each item of the Equipment is leased solely for
commercial or business use.
5. DISCLAIMER OF WARRANTIES BY LESSOR. LESSOR DOES NOT MAKE, HAS NOT
MADE, AND SHALL NOT BE DEEMED TO MAKE OR HAVE MADE, ANY REPRESENTATION OR
WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING,
WITHOUT LIMITATION, THE DESIGN OR CONDITION OF THE EQUIPMENT, ITS
MERCHANTABILITY, DURABILITY, SUITABILITY OR ITS FITNESS FOR ANY PARTICULAR
PURPOSE, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT, OR THE
CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE
ORDER OR ORDERS RELATING THERETO OR TITLE TO THE EQUIPMENT OR ANY COMPONENT
THEREOF, AND LESSOR HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR WARRANTY (WHICH
DISCLAIMER LESSEE HEREBY ACKNOWLEDGES, EXCEPT THAT LESSOR WARRANTS THAT NEITHER
LESSOR NOR ANY ONE ACTING OR CLAIMING THROUGH LESSOR, BY ASSIGNMENT OR
OTHERWISE, WILL INTERFERE WITH LESSEE'S QUIET ENJOYMENT OF THE USE OF THE
EQUIPMENT SO LONG AS NO EVENT OF DEFAULT HAS OCCURRED AND IS CONTINUING).
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, LESSOR SHALL NOT BE LIABLE OR
RESPONSIBLE FOR ANY DEFECTS, EITHER PATENT OR LATENT (WHETHER OR NOT
DISCOVERABLE BY LESSEE OR LESSOR), IN ANY UNIT OF THE EQUIPMENT, OR FOR ANY
DIRECT OR INDIRECT DAMAGE TO PERSONS OR PROPERTY RESULTING THEREFROM, OR FOR
INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING STRICT OR ABSOLUTE LIABILITY IN
TORT), it being agreed that all such risks, as between Lessor and Lessee, are to
be borne solely by Lessee. Lessee acknowledges that Lessor is not a dealer in or
manufacturer of equipment of any kind, and that each item of Equipment subject
to this Lease is of a type, size, design and capacity selected solely by Lessee.
If the Equipment is not properly installed, does not operate as represented or
warranted by the manufacturer or seller thereof, or is unsatisfactory for any
reason, Lessee shall make any claim on account thereof solely against the
manufacturer or seller, and no such occurrence shall relieve Lessee of any of
its obligations hereunder. Lessor hereby assigns to Lessee any interest Lessor
may have in any manufacturer's or seller's warranty, whether express or implied,
on such item. All claims or actions on any warranty shall be made or prosecuted
by Lessee, who may do so in Lessor's name, at its sole expense, and Lessor shall
have no obligation whatsoever
-2-
<PAGE> 4
to make any claim on such warranty. At Lessor's option, all cash proceeds or
equivalent thereof from such warranty recovery shall be used to repair or
replace the Equipment.
6. Equipment to be and Remain Personal Property. Lessee shall take all
such actions as may be required to assure that the Equipment shall be, and at
all times shall remain, personal property, notwithstanding the manner in which
the Equipment may be attached or affixed to real property. Lessee shall give
Lessor prompt notice of any circumstances which may permit any person to
acquire, and shall obtain and record such instruments and take such steps as may
be reasonably requested by Lessor to prevent any such person from acquiring, any
rights in the Equipment by reason of the Equipment being claimed or deemed to be
real property. If requested by Lessor, Lessee shall obtain and deliver to Lessor
valid and effective waivers, in recordable form, by the owners, landlords and
mortgagees of any real property upon which the Equipment is located, or
certificates of Lessee that it is the owner of such real property and that such
real property is not leased and/or mortgaged. Lessee will at all times protect
and defend, at its own cost, Lessor's security interests in the Equipment from
and against all claims, liens and legal process of creditors of Lessee.
7. Location and Right of Inspection. The Equipment at all times shall be
located at the address of Lessee specified under "Location of Equipment" in the
Schedule or such other place as shall be agreed upon in writing between Lessor
and Lessee, Upon prior notice, Lessor shall at all reasonable times during
customary business hours have the right to enter into and upon the premises
where the Equipment may be located for the purpose of inspecting the Equipment.
Lessee shall not move the Equipment from its agreed location except with the
prior written consent of Lessor which will not be unreasonably withheld or
delayed. Lessee shall promptly advise Lessor of any circumstances with respect
to location which adversely affects the Equipment or Lessor's security interests
therein.
8. Markings and Filings. Lessee shall affix to the Equipment such
labels, plates or decals as may by provided by Lessor, or conspicuously mark the
Equipment with such language as Lessor may reasonably request, to reflect the
interest of Lessor therein and, if there is an Assignee of Lessor, that such
Assignee has such interest in the Equipment specified by Lessor. Lessor is
hereby authorized to cause this Lease or any financing or other statement in
respect thereto, showing the interest of Lessor and any Assignee in and to this
Lease and the Equipment, to be filed or recorded with any governmental office
deemed appropriate by Lessor. Lessee shall execute any such financing statements
presented to it by Lessor or any Assignee, and shall be responsible for the
payment of any fees for filing or recording such statements.
9. Alterations. Lessee shall not make any material alterations,
additions or improvements to the Equipment without the prior written consent of
Lessor. Except as may be otherwise agreed between Lessor and Lessee, all such
alterations, additions and improvements shall be considered accessions to the
Equipment.
10. Use, Maintenance and Repair. Lessee shall use the Equipment solely
in the conduct of its business and shall comply with all laws, ordinances or
regulations, and all conditions contained in any insurance policies or
manufacturers' warranties, relating to the Equipment or its use, operation or
-3-
<PAGE> 5
maintenance. Lessee shall put the Equipment only to the use contemplated by the
manufacturers thereof. Lessee shall at Lessee's own expense maintain the
Equipment in good operating condition, repair and appearance furnish all parts
and labor required to keep the Equipment in such condition, protect same from
deterioration other than normal wear and tear. Lessee shall cause the Equipment
to be maintained in accordance with the supplier's standard preventive
maintenance contract, if available.
11. Insurance. Lessee will maintain at all times at its own expense,
with insurers of recognized standing, (i) insurance against "all physical loss"
perils subject to standard exclusions in an amount not less than the greater of
the full replacement value or the Stipulated Loss Value of such item of
Equipment as set forth on any Schedule B attached to the Lease Schedule and (ii)
public liability and property damage insurance policies insuring against third
party personal and property damage in respect of the use and operation of the
Equipment in an amount not less than $1,000,000 for each occurrence. Each policy
shall (i) name Lessor and Assignee, if any, as an additional insured and loss
payee, as their interests may appear; (ii) contain an agreement by the insurer
that any loss thereunder shall be payable to Lessor and Assignee notwithstanding
any breach of representation or warranty by Lessee; (iii) provide that there
shall he no recourse against Lessor or Assignee for payment of premiums or other
amounts with respect thereto; and (iv) provide that at least thirty (30) day's
prior written notice of cancellation change or lapse shall be given to Lessor
and Assignee by the insurer. All insurance for loss or damage shall provide that
losses, if any, shall be adjusted only with and payable to Lessor or its
Assignee, if any. Lessee shall pay all premiums for such insurance and shall
deliver to Lessor evidence of such payment and of the maintenance of the
insurance coverages required hereunder. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact to make claim for, receive payment of, and execute and
endorse all documents, checks or drafts received in payment for any loss or
damage under any such insurance policy.
12. All Risk of Loss. All risk of loss, damage, theft or destruction (a
"Loss") to the Equipment shall be borne entirely by Lessee, whether or not the
Loss is insured. Except as expressly provided in this Section, no Loss of any
kind shall relieve or release Lessee of its Rent and other obligations under
this Lease, all of which shall continue in full force and effect. In the event
of a Loss to any Equipment, Lessee shall promptly notify Lessor in writing of
such fact and of all details with respect thereto, and shall promptly, at
Lessee's option (or if an Event of Default has occurred and is continuing, at
the option of Lessor):
(a) repair and restore the item of Equipment to good mechanical
condition and working order; or
(b) replace the Equipment with other equipment of the same type,
capacity and condition, and free and clear of claims or encumbrances in favor of
any third party other than Lessor, whereupon such replacement equipment shall be
subject to this Lease and be deemed Equipment for purposes hereof; or
(c) pay to Lessor, on the Rent Payment Date next succeeding the
date on which the Loss occurred, an amount equal to the sum of (A) all accrued
and unpaid Rent payable for such
-4-
<PAGE> 6
Equipment through and including such Rent Payment Date, and (B) the Stipulated
Loss Value of the Equipment as of such Rent Payment Date as set forth on any
Schedule B attached to the Lease Schedule pertaining to such Equipment.
13. Licensing, Registration and Taxes. Lessee shall, at its sole cost
and expense, (i) obtain any licensing and registration of the Equipment as may
be required by law, (ii) pay and discharge when due all license and registration
fees, assessments, taxes (excluding any tax measured by Lessor's net income),
including, without limitation, sales, use, excise, personal property, ad
valorem, stamp, documentary and other taxes, and all other governmental charges,
fees, fines or penalties whatsoever, whether payable by or assessed to Lessor or
Lessee, on or relating to the Equipment or the use, registration, rental,
shipment, transportation, delivery, ownership, operation, or disposition
thereof, and on or relating to this Lease, (iii) file all returns required
therefor and furnish copies thereof to Lessor at its request, (iv) indemnify and
hold Lessor harmless from any of the foregoing. Notwithstanding the
foregoing, Lessee shall not be liable for any taxes, fees or charges to the
extent the same result from any sale or assignment or grant of security interest
by Lessor, or to the extent any such action by Lessor increases the taxes, fees
or charges that would otherwise be payable. Lessee reserves the right to contest
any taxes, fees or other charges asserted to be due hereunder.
14. Liens. Lessee will not directly or indirectly, voluntarily or by
operation of law, create, incur, assume or permit to exist any claim, mortgage,
security interest, pledge, lien, charge or other encumbrance ("Liens") against
the Equipment, except the following: (i) the rights of Lessee and Lessor under
this Lease, (ii) Liens against Lessor's interests in the Equipment created or
granted by Lessor or resulting from claims against Lessor not related to the
transactions contemplated hereby, (iii) Liens for taxes, assessments or
governmental charges or levies, not due and delinquent, and (iv) undetermined or
inchoate materialmen's, mechanics', workmen's, repairmen's or other like Liens
arising in the ordinary course of business which in each case, either are not
delinquent or have been bonded ("Permitted Liens"). Lessee, at its own cost and
expense, will promptly pay, satisfy, discharge and otherwise take such action as
may be necessary to keep the Equipment free and clear of, and duly to discharge,
any Lien other than Permitted Liens.
15. Indemnification. Lessee assumes liability for, will pay when due and
will indemnify, protect, save, defend and hold Lessor, its advents, employees,
successors and assigns harmless from and against, any and all obligations,
liabilities, losses, damages, injuries, fines, penalties, interest, claims,
demands, actions, suits, costs and expenses, including reasonable attorneys'
fees and expenses of every kind and nature whatsoever imposed on, incurred by or
asserted against, Lessor, its agents, employees, successors and assigns except
for those caused by Lender's gross negligence or willful misconduct in any way
relating to or arising out of (a) the manufacture, ordering, purchase,
acceptance or rejection, ownership, delivery, leasing, possession, use,
operation, or disposition of the Equipment by or for Lessee, including, without
limitation any of such as may arise from patent or latent defects in the
Equipment (whether or not discoverable by Lessee or Lessor), any claims based on
strict liability in tort, and any claims based on patent, trademark or copyright
infringement, arising from acts or events during the term of each Lease Schedule
and prior to re-delivery of the Equipment to Lessor in accordance with the terms
of the Lease, or (b) any failure on the part of Lessee to perform or comply with
any of the terms of this Lease. Lessee shall give written notice to
-5-
<PAGE> 7
Lessor of any occurrence, event or condition known to Lessee as a consequence of
which Lessor is entitled to indemnification hereunder. Lessee's obligations
under this Section 15 are contingent upon Lessor or an indemnified party, as
applicable, giving Lessee prompt written notice of any claim, providing Lessee
with all assistance reasonably requested and tending full control of the defense
and settlement of such claim to Lessee. If any action, suit or proceeding is
brought against any indemnified party in connection with any claim indemnified
against under this Section, Lessee may, and upon the request of such indemnified
party shall, at Lessee's expense, resist and defend such action, suit or
proceeding, or cause the same to be resisted or defended, by counsel selected by
Lessee and reasonably approved by such indemnified party, and Lessee shall pay
all reasonable costs and expenses (including without limitation attorneys' fees
and expenses) incurred by Lessee in connection with such action, suit or
proceeding. Lessor or any indemnified party may participate in such action at
its own expense. If a claim is made against any indemnified party with respect
to which such indemnified party is entitled to indemnification from Lessee under
this Section, Lessor shall promptly notify Lessee thereof. Lessee shall
forthwith upon demand of Lessor reimburse Lessor and any other indemnified party
for amounts reasonably expended by Lessor or such other indemnified party in
connection with, and as permitted under, any of the foregoing or pay such
amounts directly. The provisions of this Section shall apply from the date of
the execution of this Lease and shall survive the expiration or earlier
termination of this Lease.
16. Events of Default. The occurrence of any one or more of the
following events shall constitute an "Event of Default" hereunder (whether any
such event shall be voluntary or involuntary or come about or be effected by
operation of law or pursuant to or in compliance with any judgment, decree or
order of any court or any order, rule or regulation of any administrative or
governmental body):
(a) Default by Lessee in payment of any installment of Rent or
other monetary obligation now or hereafter owed by Lessee to Lessor under this
Lease and the continuance of such default for 5 consecutive days; (for purposes
of this subparagraph (a) "affiliate of Lessor" shall mean any person or entity
which controls or is controlled by or under common control with Lessor);
(b) Default by Lessee in the performance of any of the covenants
of Lessee set forth in Sections 7 ("Location and Right of Inspection"), 11
("Insurance"), 18 ("Return of Equipment") and 20 ("Assignment by Lessee") hereof
which default is not cured within 30 days of Lessor's written notice of such
default to Lessee;
(c) Default by Lessee in the payment or performance of any
obligation with respect to any indebtedness for any borrowing or the deferred
purchase of property or any lease of property, in excess of $250,000 and which
default results in the acceleration of such indebtedness, or a default by Lessee
under any agreement, license or other document relating to software required to
operate the Equipment, the effect of which would permit any licensor or third
party to terminate either Lessee's or Lessor's license or other rights with
respect to such software. Legitimate disputes arising out of transactions in the
ordinary course of Lessee's business are excluded from this paragraph (c);
-6-
<PAGE> 8
(d) Any representation or warranty made by Lessee in this Lease
or in any other document or certificate furnished to Lessor in connection
herewith or pursuant hereto, shall prove to be untrue or incorrect in any
material respect as of the date of issuance or making thereof;
(e) Lessee becomes insolvent or bankrupt or admits in writing its
inability or fails to pay its debts as they mature, or makes an assignment for
the benefit of creditors, or applies for or consents to the appointment of a
trustee or receiver for any of its properties or assets;
(f) Any proceedings shall be authorized by corporate action taken
by Lessee's shareholders or directors, or shall be commenced by or against
Lessee, for any relief under any bankruptcy or insolvency laws, or laws relating
to the relief of debtors, readjustments of indebtedness, reorganizations,
arrangements, compositions or extensions, unless, in the case of involuntary
proceedings only, such proceedings shall have been dismissed within 60 days
after such proceedings shall have been commenced;
(g) Default by Lessee under any warrant to purchase capital stock
of Lessee issued to Lessor in connection with the execution of this Agreement (a
"Warrant"), or breach of any undertaking, covenant or material representation or
warranty made by Lessee for the benefit of Lessor in any document, instrument or
agreement relating to the Warrant or made in connection therewith, including any
registration rights or antidilution provisions; or
(h) Default by Lessee in the performance or observance of any
other obligation, covenant or liability of Lessee contained in this Lease and
the continuance of such default for 30 consecutive days after written notice
thereof by Lessor to Lessee.
17. Remedies of Lessor, Upon the occurrence of any Event of Default and
at any time thereafter, Lessor M shall have no further obligations under the
Commitment, and (ii) may, without any further notice, exercise one or more of
the following remedies as Lessor in its sole discretion shall elect:
(a) Declare all unpaid Rent and other sums due or to become due
under this Lease to be immediately due and payable;
(b) Terminate this Lease, whereupon all rights of Lessee to the
use of the Equipment shall absolutely cease and terminate but Lessee shall
remain liable as herein provided; and thereupon Lessee will permit Lessor to
store the Equipment on Lessee's premises or wherever the Equipment may then be
located, without charge, until sold or otherwise disposed of and, if so
requested by Lessor, shall at the expense of Lessee, promptly deliver possession
of the Equipment to Lessor at such place as Lessor shall designate in the manner
provided in Section 18 hereof;
(c) Take possession of the Equipment wherever found, and for this
purpose enter upon any premises of Lessee without a breach of the peace and
remove the Equipment all without liability on the part of Lessor for or by
reason of such entry or taking of possession, whether for the restoration of
damage to property caused by such taking or otherwise except for damages caused
by
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<PAGE> 9
Lessors gross negligence or willful misconduct. Taking possession of the
Equipment shall not be construed to be an election to terminate this Lease and
this Lease shall remain in effect and Lessee shall remain liable for all
payments to be made hereunder;
(d) Sell the Equipment at public or private sale, in such
commercially reasonable manner as Lessor may deem appropriate (giving Lessee at
least ten (10) days' prior written notice of the time and place of any such
public sale, or the time after which a private sale may be made, which notice
Lessee hereby agrees is reasonable), or otherwise dispose of, hold, 'se, operate
or keep idle the Equipment, all as Lessor, in its sole discretion, may determine
and all free and clear of any rights of Lessee and without any duty to account
to Lessee (except as hereinafter provided) for such action or inaction or for
any proceeds resulting therefrom. Lessor shall apply the net proceeds (the
proceeds of any sale minus all costs and expenses incurred with the recovery,
repair, storage, sale) of any such sale to the payment of Lessee's obligations
hereunder, Lessee remaining liable for any deficiency, which at Lessor's option,
shall be paid monthly, as suffered, or immediately in a lump sum, or at the end
of the term, as damages for Lessee's default;
(e) By written notice to Lessee, cause Lessee to pay Lessor (as
liquidated damages for loss of a bargain and not as a penalty) on the date
specified in such notice, an amount equal to the sum of: (A) any unpaid Rent
that accrued on or before the occurrence of the Event of Default, and (B) the
Stipulated Loss Value of such Equipment, as of the date of occurrence of the
Event of Default, as set forth on any Schedule B attached to the Lease Schedule
pertaining to such Equipment. If Lessor proceeds pursuant to this subsection
(e), Lessor hereby appoints Lessee its agent to dispose of the Equipment at the
best price obtainable on an "as-is," "where is" basis, without representation or
warranty, express or implied. If Lessee has previously paid the amount of
liquidated damages specified above to Lessor, Lessee shall be entitled to the
proceeds of such sale of the Equipment to the extent they do not exceed the
liquidated damages amounts and shall pay any excess to Lessor; or
(f) Avail itself of any other remedy provided by any statute or
otherwise available at law, in equity or in bankruptcy.
No remedy referred to in this Section is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law, in equity or in bankruptcy, and the
exercise or beginning of exercise by Lessor of any one or more of such remedies
shall not preclude the simultaneous or later exercise by Lessor of any or all
such other remedies. No waiver by Lessor of any Event of Default hereunder shall
in any way be or be construed to be a waiver of any future or subsequent Event
of Default. Lessee shall be liable for all costs and expenses (including
reasonable attorneys' fees and disbursements and the costs of any retaking)
incurred by reason of the occurrence of any Event of Default and the exercise of
Lessor's remedies with respect thereto. To the extent permitted by applicable
law, Lessee hereby waives any rights now or hereafter conferred by statute or
otherwise which may require Lessor to sell, lease or otherwise use any Equipment
in mitigation of Lessor's damages as set forth in this Section or which may
otherwise limit or modify any of Lessor's rights or remedies under this Section.
-8-
<PAGE> 10
18. Return of Equipment After Default. Upon early termination of this
Lease pursuant to Section 17 ("Remedies of Lessor"), Lessee shall return each
item of Equipment to Lessor in good condition, ordinary wear and tear resulting
from proper use thereof excepted, in the following manner: by forthwith
delivering possession of the Equipment to Lessor. Lessee will, at its sole cost
and risk, forthwith prepare, dismantle, crate and deliver the Equipment at the
place designated by Lessor, arrange for storage of the Equipment until the
Equipment has been sold or otherwise disposed of by Lessor, and/or deliver the
same to any carrier for shipment (insurance and freight prepaid) to such place
within California as shall be designated by Lessor, all as directed by Lessor.
The preparation, dismantling, creating, delivery, storage and transporting of
the Equipment shall be at the expense and risk of Lessee and are of the essence
of this Lease, and upon application to any court of equity having jurisdiction
Lessor shall be entitled to a decree against Lessee requiring specific
performance of the covenants of Lessee so to prepare, dismantle, crate, deliver,
store and transport the Equipment. During any storage period until the
expiration Term of the Lease, Lessee will, at its own expense and risk, maintain
and keep the Equipment fully insured and in good order and repair and will
permit Lessor or any person designated by it, including the authorized
representative or representatives of any prospective purchaser of any item of
the Equipment, to inspect the same upon reasonable notice and during normal
business hours. Lessee shall be responsible, at its sole cost and expense, for
any repairs necessary to place the Equipment in the condition hereinabove
required upon return, and for the discharge of all Liens (other than Permitted
Liens) thereon at the time of such return.
19. Totality of Remedies. Notwithstanding anything to the contrary in
this Lease, specifically in Sections 11, 12, 17 and 18, the exercise of the
remedies of Lessor shall not result in Lessor's actually receiving in excess of
its actual losses, costs or damages.
20. Assignment by Lessee. Lessee shall not assign, pledge or hypothecate
this Lease in whole or in part, or any interest therein, nor shall Lessee
sublease or otherwise relinquish possession of, any item of the Equipment
without the prior written consent of Lessor, which will not be unreasonably
withheld or delayed. Lessee's interest herein may not be assigned or transferred
by operation of law. Consent to any of the foregoing acts by Lessor shall not be
deemed to be consent to any subsequent similar act by Lessor, Any assignment by
Lessee in violation of the provisions of this Section shall be void.
21. Assignment by Lessor. Lessor may at any time, with or without notice
to Lessee, transfer, sell, mortgage, grant a security interest in or assign this
Lease, any Lease Schedule (each such schedule constituting a separate Lease as
to the Equipment described therein), any Rent due or to become due hereunder, or
its security interests in the Equipment; and in such event Lessor's transferee,
purchaser, mortgagee, secured party, or assignee (an "Assignee") shall have all
of Lessor's rights, powers, privileges and remedies hereunder and shall not be
obligated to perform any duty, covenant or condition required to be observed or
performed by Lessor, subject only to the rights of Lessee to possession and
quiet enjoyment of the Equipment as long as no Event of Default has occurred and
is continuing under this Lease. After written notice from Lessor all amounts
payable to Lessor under this Lease shall be payable to Assignee at such address
as Assignee may designate in writing to Lessee. Lessee acknowledges and agrees
that the rights of any Assignee in and to the sums
-9-
<PAGE> 11
payable by Lessee under any provision of this Lease shall not be subject to any
abatement whatsoever aid shall not be subject to any defense, setoff,
counterclaim or recoupment of any nature whatsoever by reason of any liability
or obligation, howsoever and whenever arising, of Lessor to Lessee or to any
other person, firm or corporation or governmental authority, or for any other
cause whatsoever.
22. Successors and Assigns. All of the covenants, conditions and
obligations of each party contained in this Lease shall be binding upon, and,
subject to the provisions of Section 20, inure to the benefit of, the respective
successors and assigns of the parties hereto.
23. Lessor's Performance of Lessee's Obligations. If Lessee shall fail
to duly and promptly perform any of its obligations under this Lease with
respect to the Equipment, Lessor may (at its option) perform any act or make any
payment required of Lessee, and Lessee shall reimburse Lessor payable by Lessee
on demand) for all sums so paid or incurred by Lessor, together with interest at
the Late Payment Rate and any reasonable legal fees incurred by Lessor in
connection therewith. The performance of any act or payment by Lessor as
aforesaid shall not be deemed a waiver or release of any obligation or default
on the part of Lessee.
24. Managerial Assistance. During the Term and so long as any
obligations under this Lease remain outstanding:
(a) Lessor shall make available to Lessee, to be accepted at
Lessee's option, "significant managerial assistance", as defined in Section
2(a)(47) of the Investment Company Act of 1940, as amended, either in the form
of: (i) consulting arrangements with Lessor or any of its officers, directors,
employees or affiliates (ii) Lessee's allowing Lessor to propose potential
members of Lessee's Board of Directors, ox. (iii) Lessor, at Lessee's request,
seeking the services of third-party consultants to aid Lessee with respect to
its management and operations; and
(b) Lessee shall permit Lessor, as a "venture capital operating
company," to participate in, and influence the conduct of management of Lessee
through the exercise, in the manner set forth in Section 24(b), of "management
rights", as those terms are defined in Section 2510.3-101 of the U.S. Department
of Labor's regulations, Title 29 of the Code of Federal Regulations.
25. Financial and Other Reports. During the Term and so long as any
obligations under this Lease remain outstanding, Lessee shall:
(a) Furnish to Lessor and any Assignee of Lessor identified to
Lessee (i) within 120 days after the close of each fiscal year of Lessee, an
audited balance sheet and statement of changes in financial position of Lessee
at and as of the end of such fiscal year, together with an audited statement of
income of Lessee for such fiscal year; (ii) within 45 days after the close of
each calendar month (or, if the stock of Lessee is publicly traded, each fiscal
quarter) of each fiscal year of Lessee, an unaudited balance sheet and statement
of cash flows of Lessee at and as of the end of such month (or quarter, as the
case may be), together with an unaudited statement of income of Lessee for
-10-
<PAGE> 12
such month or quarter, as the case may be; and (iii) from time to time, such
other information as Lessor or Assignee may reasonably request regarding
Lessee's business, financial condition and prospects subject to reasonable
obligations of confidentiality; and
(b) Permit Lessor reasonable access to Lessee's management and/or
Board of Directors and opportunity to present Lessor's views with respect to
Lessee's equipment acquisition and financing plans, and such other matters
affecting the business, financial condition and prospects of Lessee as Lessor
shall reasonably deem relevant.
Lessee hereby warrants and represents that all financial statements delivered to
Lessor or such Assignee by or upon behalf of Lessee, and any statements and data
submitted in writing to Lessor or such Assignee in connection with this Lease,
are true and correct and fairly present the financial condition of Lessee for
the periods involved, and are prepared in accordance with generally accepted
accounting principles consistently applied, and that there has occurred no
material adverse change in the financial condition of Lessee since the date of
the last financial statement delivered to Lessor which has not been disclosed-in
writing to Lessor.
26. Power; Absence of Conflict. Lessee is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation. The execution, delivery and performance of this Lease, and the
obligations of Lessee hereunder have been duly authorized by all necessary
corporate action, and constitute the valid and binding obligations of Lessee
enforceable in accordance with their terms. The performance by Lessee of its
obligations hereunder will not result in a breach or violation of, or constitute
a default under, any statute, note, agreement, lease or other instrument to
which Lessee is a party or by which Lessee is bound, Lessee's articles of
incorporation or bylaws, or any order, rule or regulation of any court or
governmental agency-or body having jurisdiction over Lessee.
27. Attorneys' Fees. If Lessor or Lessee institutes legal action against
the other to interpret or enforce this Lease or to obtain damages for any
alleged breach thereof, the prevailing party in such action shall be entitled to
an award of reasonable attorneys' fees and costs.
28. Notices. All notices required or permitted under this Lease shall be
in writing and shall be deemed to have been duly given on the date of service if
served personally on the party to whom notice is to be given, or on the third
calendar day after deposit in the mail, if sent by first class mail, registered
or certified, postage prepaid, and properly addressed to Lessor or Lessee, as
the case may be, at their respective addresses set forth in the Schedule, or at
such other address as either party shall from time to time designate in the
manner provided above to the other party.
29. Governing Law. This Lease shall be governed by, and construed in
accordance with, the laws of the State of California, without regard to the
conflicts of laws provisions thereof. The parties acknowledge and agree that
this agreement and the transactions contemplated hereunder involve the provision
of equipment financing by Lessor and the creation of security interests in such
equipment, and shall not be deemed a lease as defined in Division 10 of the
California Commercial Code.
-11-
<PAGE> 13
30. Entire Agreement; Amendments; Waivers. This Lease, together with any
and all Schedules and exhibits attached hereto, constitutes the entire agreement
between Lessor and Lessee, and supersedes all prior oral or written agreements
or understandings, with respect to the subject matter hereof, and it shall not
be amended, altered or changed, except by written agreement signed by the
parties hereto. No waiver of any provision of this Lease and no consent to any
departure by Lessee therefrom shall be effective unless the same shall be in
writing and signed by both parties, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
31. Severability. If any term or provision of this Lease or the
application thereof shall, to any extent, be invalid or unenforceable, such
invalidity or unenforceability shall not affect or render invalid or
unenforceable any other provision of this Lease, and this Lease shall be valid
and enforced to the fullest extent permitted by law.
32. Headings. The Section headings used herein are solely for
convenience of reference and shall not be construed to define or limit any of
the terms or provisions hereof.
33. Further Assurances. Lessee shall execute and deliver to Lessor, upon
Lessor's request, such instruments and assurances as Lessor reasonably deems
necessary or desirable for the confirmation of Lessor's rights hereunder. In
furtherance thereof, Lessee agrees to take whatever action as may be reasonably
necessary to enable Lessor or any Assignee to file, register or record, and
refile, re-register and re-record, this Lease and any financing statements or
other documents requested by Lessor or any Assignee pursuant to the Uniform
Commercial Code or otherwise. Lessee authorizes Lessor to effect any such filing
(including, where permitted by applicable law, the filing of any financing
statements without the signature of Lessee) and Lessor's expenses with respect
hereto shall be payable by Lessee on demand except that Lessee shall not be
liable for any expenses arising from any sale or assignment or grant of Security
Interest by Lessor.
TO THE EXTENT THAT THIS LEASE AND ANY LEASE SCHEDULE CONSTITUTES CHATTEL
PAPER (AS DEFINED IN THE UNIFORM COMMERCIAL CODE, AS IN EFFECT IN ANY APPLICABLE
JURISDICTION), NO SECURITY INTEREST HEREIN OR THEREIN MAY BE CREATED EXCEPT
THROUGH THE TRANSFER AND POSSESSION OF THE ORIGINAL EXECUTED COUNTERPART OF SUCH
LEASE SCHEDULE, WHICH SHALL BE IDENTIFIED AS THE ORIGINAL EXECUTED COUNTERPART
NO. 1 BY THE LESSOR ON THE SIGNATURE PAGE THEREOF. NO SECURITY INTEREST CAN BE
CREATED IN THIS LEASE BY TRANSFER OR POSSESSION OF THIS LEASE ALONE WITHOUT AN
ACCOMPANYING ORIGINAL COUNTERPART OF A LEASE SCHEDULE. NO TRANSFER, SALE,
MORTGAGE OR OTHER DISPOSITION OF ANY INTEREST IN THIS LEASE CAN BE EFFECTED BY
DISPOSITION OF THIS INSTRUMENT ALONE.
-12-
<PAGE> 14
IN WITNESS WHEREOF, the parties have duly executed this Lease as of the
day and year first above written.
LESSOR:
VENTURE LENDING & LEASING, INC.,
a Maryland corporation
By: /s/ Ronald W. Swenson
__________________________________
Its: CEO
__________________________________
LESSEE:
BROCADE COMMUNICATIONS SYSTEMS, INC.
a California corporation
By: /s/ Bruce J. Bergman
__________________________________
Its: CEO
__________________________________
-13-
<PAGE> 15
INSURANCE AUTHORIZATION LETTER
In accordance with the insurance coverage requirements of the Master Equipment
Lease Agreement dated September 5, 1996 (the "Lease") between VENTURE LENDING &
LEASING, INC. ("Lessor"), and BROCADE COMMUNICATIONS SYSTEMS, INC., ("Lessee"),
coverage is to be provided as set forth below:
COVERAGE: All risk including liability and property damage
insurance as described in the Lease, attached
hereto as Exhibit 1.
INSURED: BROCADE COMMUNICATIONS SYSTEMS, INC.
457 East Evelyn Avenue
Suite E
Sunnyvale, CA 94086
LOCATION OF
EQUIPMENT: 457 East Evelyn Avenue
Suite E
Sunnyvale, CA 94086
15707 Rockfield Blvd., Suite 215
Irvine, CA 92718
ADDITIONAL INSURED AND LOSS PAYEE: Lessor and it's Assignee's as their
interest may appear.
Lessor: VENTURE LENDING & LEASING, INC.
2010 North First Street, Suite 310
San Jose, CA 95131
Assignee: FLEET BANK N.A.
(if any) 175 Water Street
New York, NY 10038-4924
Attn: John Topolovec
The above coverage is to be provided prior to funding the Lease. Lessee
hereby agrees to pay for the coverage above and by signing below acknowledges
its obligation to do so.
LESSEE: BROCADE COMMUNICATIONS
SYSTEMS, INC.
By: /s/ Bruce J. Bergman
_________________________________
Date: 11 Sept. 96
_________________________________
Insuring Agent: Calco Ins. - Hartford Fire Insurance
____________________________________
Address: 2000 Alameda de las Pulgas
__________________________
San Mateo, CA 94402
__________________________
Phone No.: 415 574-0773
_____________________
<PAGE> 16
EXHIBIT 1
Lessee will maintain at all times, at its own expense, with insurers of
recognized standing, (i) insurance against "all physical loss" perils subject to
standard exclusions in an amount not less than the greater of the full
replacement value or the Stipulated Loss Value of such item as set forth on any
Schedule B attached to the Lease Schedule, as of such date, and (ii) public
liability and property damage insurance policies insuring against third party
personal and property damage in respect of the use and operation of the
Equipment in an amount not less than $1,000,000 for each occurrence. Each policy
shall (i) name Lessor and Assignee, if any, as an additional insured and loss
payee, as their interests may appear; (ii) contain an agreement by the insurer
that any loss thereunder shall be payable to Lessor and Assignee notwithstanding
any breach of representation or warranty by Lessee; (iii) provide that there
shall be no recourse against Lessor or Assignee for payment of premiums or other
amounts with respect thereto; and (iv) provide that at least thirty (30) day's
prior written notice of cancellation, change or lapse shall be given to Lessor
and Assignee by the insurer. All insurance for loss or damage shall provide that
losses, if any, shall be adjusted-only with and payable to Lessor or its
Assignee, if any. The Lessee shall pay all premiums for such insurance and shall
deliver to Lessor evidence of such payment and of the maintenance of the
insurance coverages required hereunder. Lessee hereby appoints Lessor as
Lessee's attorney-in-fact to make claim for, receive payment of, and execute and
endorse all documents, checks or drafts received in payment for any loss or
damage under any such insurance policy.
-2-
<PAGE> 17
CERTIFICATE CONCERNING CAPITALIZATION
As Chief Executive Officer of BROCADE COMMUNICATIONS SYSTEMS, INC.,
("Lessee"), I hereby certify that as of the date hereof the following shares of
the Lessee's securities (listed by common and preferred by series)* were issued
and outstanding:
<TABLE>
<CAPTION>
NO. OF SHARES
-------------
<S> <C>
PREFERRED STOCK SERIES _______ 1,425,000
PREFERRED STOCK SERIES _______ 816,250
PREFERRED STOCK SERIES _______
PREFERRED STOCK SERIES _______
PREFERRED STOCK SERIES _______
COMMON STOCK 2,248,777
---------
TOTAL 4,490,027
</TABLE>
Signature: /s/ Bruce J. Bergman
____________________________________
Title: CEO
____________________________________
As of Date: 11 Sept. 96
___________________________________
- ------------------------------------
* Number of shares of Preferred Stock are stated in terms of number of
shares of Common Stock into which each series is convertible.
<PAGE> 1
EXHIBIT 16.1
[PRICEWATERHOUSECOOPERS LETTERHEAD]
March 19, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
BROCADE COMMUNICATIONS SYSTEMS, INC.
We have read the paragraph appearing under the caption "Change in Independent
Accountants and Fiscal Year End" on page 66 of Brocade Communications Systems,
Inc.'s Registration Statement on Form S-1 dated March 19, 1999 and are in
agreement with the statements contained therein insofar as such statements
relate to our firm.
Yours very truly
/s/ PricewaterhouseCoopers LLP
<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
March 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> OCT-31-1999 OCT-31-1998
<PERIOD-START> NOV-01-1998 NOV-01-1997
<PERIOD-END> JAN-31-1999 OCT-31-1998
<CASH> 10,137 10,420
<SECURITIES> 0 0
<RECEIVABLES> 6,288 3,715
<ALLOWANCES> 260 285
<INVENTORY> 2,528 1,744
<CURRENT-ASSETS> 19,184 15,814
<PP&E> 9,317 8,965
<DEPRECIATION> 4,069 3,642
<TOTAL-ASSETS> 24,576 21,301
<CURRENT-LIABILITIES> 14,684 10,538
<BONDS> 0 0
35,909 35,909
0 0
<COMMON> 10,309 2,225
<OTHER-SE> (38,134) (29,580)
<TOTAL-LIABILITY-AND-EQUITY> 24,576 21,301
<SALES> 6,429 22,414
<TOTAL-REVENUES> 8,007 24,246
<CGS> 3,321 15,759
<TOTAL-COSTS> 3,321 15,759
<OTHER-EXPENSES> 6,532 23,718
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (7) (120)
<INCOME-PRETAX> (1,839) (15,111)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,839) (15,111)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,839) (15,111)
<EPS-PRIMARY> (.42) (4.44)
<EPS-DILUTED> (.42) (4.44)
</TABLE>
