<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended January 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-25601
------------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0409517
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
------------------------------
1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
(408) 487-8000
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock on February
28, 2000 was 54,237,911 shares.
Page 1 of 23 pages.
<PAGE> 2
BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JANUARY 29, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 29, 2000 and October 31, 1999 3
Condensed Statements of Operations for the Three Months Ended
January 29, 2000 and January 31, 1999 4
Condensed Statements of Cash Flows for the Three Months
Ended January 29, 2000 and January 31, 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
- --------------------------------------------------------------------------------
This Form 10-Q contains forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995), including but not limited to
statements regarding Brocade's expectations, hopes or intentions regarding the
future. Actual results and trends could differ materially from those discussed
in the forward-looking statements. In addition, past trends should not be
perceived as indicators of future performance. Among the factors that could
cause actual results to differ from the forward-looking statements are those
detailed elsewhere in this Report in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Brocade's Securities and
Exchange Commission reports.
- --------------------------------------------------------------------------------
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
January 29, October 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,889 $ 25,536
Short-term investments 70,540 63,769
--------- ---------
Total cash, cash equivalents and short-term investments 96,429 89,305
Accounts receivable, net of allowances of $4,035 and $2,447, 24,090 17,139
respectively
Inventories, net 1,962 3,686
Prepaid expenses and other current assets 2,470 2,197
--------- ---------
Total current assets 124,951 112,327
Property and equipment, net 7,089 4,947
Other assets 3,072 6
--------- ---------
Total assets $ 135,112 $ 117,280
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,791 $ 10,664
Payroll related liabilities 7,184 4,414
Other accrued liabilities 14,354 9,830
Deferred revenue 5,238 7,688
Current portion of capital lease obligations 365 478
--------- ---------
Total current liabilities 41,932 33,074
--------- ---------
Stockholders' equity:
Common stock, $.001 par value, 200,000,000 shares authorized:
Issued and outstanding: 54,145,552 and 53,520,040 at
January 29, 2000 and October 31, 1999, respectively 54 53
Additional paid-in capital 120,983 119,598
Deferred stock compensation (3,160) (3,440)
Notes receivable from stockholders (5,660) (5,660)
Accumulated deficit (19,037) (26,345)
--------- ---------
Total stockholders' equity 93,180 84,206
--------- ---------
Total liabilities and stockholders' equity $ 135,112 $ 117,280
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
-3-
<PAGE> 4
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
January 29, January 31,
2000 1999
----------- -----------
<S> <C> <C
Net revenues $42,740 $ 8,007
Cost of revenues 20,084 3,321
------- -------
Gross margin 22,656 4,686
------- -------
Operating expenses:
Research and development 6,028 2,905
Sales and marketing 6,247 1,729
General and administrative 2,036 741
Amortization of deferred stock compensation 280 1,157
------- -------
Total operating expenses 14,591 6,532
------- -------
Income (loss) from operations 8,065 (1,846)
Interest income, net 1,185 7
------- -------
Income (loss) before income taxes 9,250 (1,839)
Provision for income taxes 1,942 0
------- -------
Net income (loss) $ 7,308 $(1,839)
======= =======
Basic net income (loss) per share $ 0.14 $ (0.21)
======= =======
Diluted net income (loss) per share $ 0.12 $ (0.21)
======= =======
Shares used in the calculation of basic net income (loss) per share 50,520 8,698
======= =======
Shares used in the calculation of diluted net income (loss) per share 58,884 8,698
======= =======
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 5
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
January 29, January 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 7,308 $ (1,839)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 919 504
Provision for doubtful accounts receivable 1,588 --
Noncash compensation expense 280 1,157
Write down of non-marketable investment 1,000 --
Changes in assets and liabilities:
Accounts receivable (8,539) (2,598)
Inventories 1,724 894
Prepaid expenses and other assets (339) (1,929)
Accounts payable 4,127 1,616
Payroll related liabilities 2,770 977
Other accrued liabilities 4,524 1,596
Deferred revenue (2,450) --
-------- --------
Net cash provided by operating activities 12,912 378
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (3,061) (352)
Purchases of short-term investments (37,544) --
Proceeds from dispositions of short-term investments 30,773 --
Other investing activities (4,000) --
-------- --------
Net cash used in investing activities (13,832) (352)
-------- --------
Cash flows from financing activities:
Net proceeds from the issuance of common stock 1,386 135
Payments on capital lease obligations (113) (184)
Proceeds from notes payable -- 28
Repayments of notes payable -- (288)
-------- --------
Net cash provided by (used in) financing activities 1,273 (309)
-------- --------
Net increase (decrease) in cash and cash equivalents 353 (283)
Cash and cash equivalents at beginning of period 25,536 10,420
-------- --------
Cash and cash equivalents at end of period $ 25,889 $ 10,137
======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed financial statements.
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<PAGE> 6
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Information for the three months ended January 29, 2000
and January 31, 1999 is unaudited)
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Brocade Communications Systems, Inc. ("Brocade"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the disclosures are adequate to make the information not misleading.
The condensed balance sheet as of October 31, 1999 has been derived from the
audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles. These
financial statements and notes should be read in conjunction with the audited
financial statements and notes thereto, included in Brocade's Annual Report
filed on Form 10-K with the Securities and Exchange Commission.
The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods indicated. The results of operations for the three months ended January
29, 2000 are not necessarily indicative of the results that may be expected for
future quarters or the year ending October 28, 2000.
2. CHANGE IN FISCAL YEAR END
Brocade changed its fiscal year end to the last Saturday in October,
beginning with the fiscal year ended October 28, 2000. This change did not have
a material impact on Brocade's financial statements for the quarter ended
January 29, 2000.
3. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in
conformity with Statement of Financial Accounting Standards No. 128, "Earning
Per Share," ("SFAS No. 128") for all periods presented. Pursuant to Statement of
the 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 an initial public
offering must be included in the calculation of basic and diluted net income
(loss) per 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 income (loss) per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Basic and
diluted pro forma net income (loss) per share, have been computed as described
above and also give 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.
-6-
<PAGE> 7
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three months ended January 29, 2000
and January 31, 1999 is unaudited)
The following table presents the calculation of basic and diluted and
pro forma basic and diluted net income (loss) per common share (in thousands,
except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
JANUARY 29, JANUARY 31,
2000 1999
----------- -----------
<S> <C> <C>
Basic and diluted net income (loss) per share:
Net income (loss) $ 7,308 $ (1,839)
======== ========
Weighted-average shares of common stock outstanding 53,781 12,378
Less: weighted-average shares subject to repurchase (3,261) (3,680)
-------- --------
Weighted-average shares used in computing basic net income (loss) per share 50,520 8,698
Dilutive effect of common share equivalents 8,364 --
-------- --------
Weighted-average shares used in computing diluted net income (loss) per share 58,884 8,698
======== ========
Basic net income (loss) per share $ 0.14 $ (0.21)
======== ========
Diluted net income (loss) per share $ 0.12 $ (0.21)
======== ========
</TABLE>
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
All highly liquid investment securities with original maturities of
three months or less are considered cash equivalents, while investment
securities with original maturities of more than three months but less than one
year are considered short-term investments.
As of January 29, 2000 all short-term investments are classified as
available-for-sale and the fair market value of such investments approximated
cost. As such, unrealized holding gains and losses were insignificant.
5. COMPREHENSIVE INCOME (LOSS)
Brocade adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", ("SFAS No. 130") on November 1, 1997. SFAS No.
130 defines comprehensive income as the changes in equity of an enterprise
except those resulting from stockholder transactions. Accordingly, comprehensive
income (loss) includes certain changes in equity that are excluded from net
income (loss). Specifically, SFAS No. 130 requires unrealized holding gains and
losses on available-for-sale securities to be included in accumulated other
comprehensive income (loss). Unrealized holding gains (losses) for all periods
presented are not significant and accordingly, comprehensive income (loss) for
all periods presented approximated net income (loss).
6. CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS
Brocade is organized and operates as one business segment, the design,
development, manufacture, marketing and selling of switching solutions for
Storage Area Networks ("SANs").
For the three months ended January 29, 2000, revenues from five
customers accounted for 78% of total net revenues. 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. Loss of any one
of these customers could have a material adverse on Brocade's financial
condition or results of operations.
-7-
<PAGE> 8
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three months ended January 29, 2000
and January 31, 1999 is unaudited)
7. COMMITMENTS AND CONTINGENCIES
In December 1999, Brocade entered into an agreement to lease
approximately 210,000 square feet of general office, laboratory, and
administrative space in San Jose, California. The term of the lease agreement is
September 1, 2000 through August 31, 2010, and represents a lease commitment of
$6.2 million per year to Brocade. Brocade intends to occupy the space in
September 2000. In conjunction with entering into the lease agreement, Brocade
signed an unconditional, irrevocable letter of credit for $6.2 million as
security for the lease.
In February 2000, the lease agreement was amended to add an additional
39,043 square feet of general office space.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
JANUARY 29, OCTOBER 31,
2000 1999
----------- -----------
<S> <C> <C>
Accrued warranty $ 2,457 $ 1,856
Purchase commitments reserve 3,960 3,629
Other 7,937 4,345
------- -------
$14,354 $ 9,830
======= =======
</TABLE>
9. RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," ("SOP 98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending
the deferral of the application of certain provisions of SOP 97-2 amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. Brocade has not had significant software
sales to date and management does not expect the adoption of SOP 98-9 to have a
significant effect on the financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and hedging Activities" ("SFAS
133") which provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The statement is
effective for fiscal years commencing after June 15, 2000. Brocade does not
believe that SFAS 133 will have a material impact on earnings or financial
condition.
10. SUBSEQUENT EVENTS
On January 21, 2000, Brocade's board of directors approved a two-for-one
split of Brocade's common stock. The stock will begin trading on a
split-adjusted basis on March 14, 2000. Effects of this stock split are not
reflected in this document.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
condensed interim financial statements and the notes thereto included in Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Brocade's Annual
Report filed on Form 10-K with the Securities and Exchange Commission on January
31, 2000.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This Quarterly Report contains "forward-looking" statements that relate
to future events or future financial performance. While we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Brocade's actual results could differ materially from those
anticipated and discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below under "Risk
Factors", and to other risk factors detailed in Brocade's Annual Report filed on
Form 10-K with the Securities and Exchange Commission. All forward-looking
statements included in this document are based on information available to
Brocade on the date hereof. Brocade assumes no obligation to update any such
forward-looking statements.
OVERVIEW
Brocade is a leading provider of switching solutions for Storage Area
Networks ("SANs"). We sell our SAN switching solutions through leading storage
systems and server original equipment manufacturers, and through system
integrators. These original equipment manufacturers and our system integrator
customers combine our switching solutions with other system elements and
services for enterprise data centers.
Our revenue is derived primarily from sales of our SilkWorm family of
products. In fiscal 1999, four customers accounted for a combined total of 70%
of total revenue. In the first quarter of fiscal 2000, five customers
contributed 78% of total revenue. The level of sales to any customer may vary
from quarter to quarter. However, we expect that significant customer
concentration will continue in the foreseeable future. The loss of any one of
these customers, or a decrease in the level of sales to any one of these
customers, could have a material adverse impact on Brocade's financial condition
or results of operations. To date, substantially all of our sales have been in
the United States. However, we have recently launched sales and marketing
efforts in Western Europe and Japan.
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. As of
January 29, 2000, a few of our customers were implementing SAN solutions,
including our product, for their end-users for the first time. In addition, some
customers were implementing our SilkWorm 2000 family of products for the first
time and had not yet completed the product qualification cycle. Given the recent
adoption of the SAN model and Brocade's solution and because substantial Brocade
services are required to support the customer's product launches, the revenue
related to shipments to these customers has been deferred pending successful
customer product launches. The deferred revenue will be recognized on a
customer-by-customer basis as each customer successfully completes its product
launch. As of January 29, 2000, $5.2 million of revenue was deferred and
consisted principally of revenue associated with shipments of our new SilkWorm
2000 family of products made in the fourth quarter of fiscal 1999 and first
quarter of fiscal 2000. It is expected that this deferred revenue will be
recognized in the second quarter of fiscal year 2000 as customers begin volume
shipments of solutions that incorporate the Brocade SilkWorm 2000 family of
products. We believe that, as the SAN market matures, this revenue deferral
method for new customers may not be necessary.
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<PAGE> 10
Our average unit-selling price has decreased over the last several
quarters. 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. However, in the near future, we
do not anticipate that our gross margins will be affected by declines in average
unit selling prices due to anticipated product cost reductions.
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
Corporation. We conduct quality assurance, manufacturing engineering,
documentation control and repairs at our facility in San Jose, California.
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.
Selling and marketing expenses consist primarily of salaries,
commissions and related expenses for personnel engaged in marketing, sales and
customer engineering support functions, as well as costs associated with
promotional and travel expenses. We believe that continued investment in sales
and marketing is critical to the success of our strategy to expand our
relationships with leading original equipment manufacturers, to expand our
presence in the system integration channel, 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.
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 the related infrastructure necessary to support the growth of our
business.
In connection with the grant of certain stock options to employees, we
recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998
and 1999, respectively, representing the difference between the deemed value of
our common stock for accounting purposes and the option exercise price of these
options at the date of grant. Deferred compensation is presented as a reduction
of stockholders' equity and amortized ratably over the vesting period of the
applicable options. We amortized $280,000 of deferred compensation for the
quarter ended January 29, 2000.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
Percentage of Total Revenue
------------------------------------
Three Months Ended
------------------------------------
January 29, 2000 January 31, 1999
---------------- ----------------
<S> <C> <C>
Net revenues 100% 100%
Cost of revenues 47 41
--- ---
Gross margin 53 59
Operating expenses:
Research and development 14 36
Sales and marketing 14 22
General and administrative 5 9
Amortization of deferred compensation 1 15
--- ---
Total operating expenses 34 82
Income (loss) from operations 19 (23)
Interest income, net 3 --
--- ---
Income (loss) before provision for income taxes 22 (23)
Provision for income taxes 5 --
--- ---
Net income (loss) 17% (23)%
=== ===
</TABLE>
Revenues. Revenues increased from $8.0 million for the first quarter of
fiscal year 1999 to $42.7 million for the first quarter of fiscal year 2000.
This increase was due primarily to increased unit sales of our products through
an increased customer base and reflects the ramp-up of sales to significant
original equipment manufacture customers and system integrator customers in
conjunction with a growing demand for Storage Area Network switching products.
For the three months ended January 29, 2000, revenues from five
customers accounted for 78% of total revenues. 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. Loss of any one
of these customers could have a material adverse effect on Brocade's financial
condition or results of operations.
Gross margin. Total gross margin as a percentage of revenues decreased
from 58.5% for the first quarter of fiscal year 1999 to 53.0% for the first
quarter of fiscal year 2000. This change was due to the recognition of high
margin license revenue in the first quarter of fiscal year 1999. Product margin
increased from 48.3% in the first quarter of fiscal year 1999 to 53.0% in the
first quarter of fiscal year 2000.
Research and development expenses. Research and development expenses
increased 108% from $2.9 million for the first quarter of fiscal year 1999 to
$6.0 million for the first quarter of fiscal year 2000. This increase reflects
significant research and development efforts associated with new product
development, including the development of our entry level switch product.
Sales and marketing expenses. Sales and marketing expenses increased
261% from $1.7 million for the first quarter of fiscal year 1999 to $6.2 million
for the first quarter of fiscal year 2000. This increase was due to an increase
in direct selling costs associated with the increase in revenue and to the
hiring of additional sales and marketing personnel.
General and administrative expenses. General and administrative expenses
increased 175% from $741,000 for the first quarter of fiscal year 1999 to $2.0
million for the first quarter of fiscal year 2000. This increase was related to
increased staffing and other expenses necessary to manage and support our
increased scale of operations.
-11-
<PAGE> 12
Amortization of deferred compensation. In the first quarter of fiscal
2000, we did not record any deferred compensation in connection with stock
option grants. Amortization of deferred compensation was $1.2 million for the
first quarter of fiscal year 1999 and $280,000 for the first quarter of fiscal
year 2000.
Interest income, net. Net interest income increased from $7,000 in the
first quarter of fiscal year 1999 to $1.2 million in the first quarter of fiscal
2000. This increase was due primarily to an increased balance of cash, cash
equivalents, and short-term investments held during the first quarter of fiscal
2000 compared to the first quarter of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, capital equipment lease lines, bank debt and, in May 1999, we
raised approximately $66 million in our initial public offering. Our principal
sources of liquidity as of January 29, 2000 consisted of $96.4 million in cash,
cash equivalents and short-term investments.
Net cash provided by operating activities was $12.9 million for the
first quarter of fiscal 2000 compared to net cash provided by operating
activities of $378,000 for the first quarter of fiscal 1999. The change from
period to period was due primarily to increased profitability during the first
quarter of fiscal 2000.
Net cash used in investing activities for the first quarter of fiscal
2000 was $13.8 million compared to net cash used in investing activities for the
first quarter of fiscal 1999 of $352,000. The period to period change was due
mainly to increased purchases of property and equipment, the purchase of
short-term investments, and other investing activities during the first quarter
of fiscal 2000.
Net cash provided by financing activities was $1.3 million for the first
quarter of fiscal 2000 compared to net cash used in financing activities of
$309,000 for the first quarter of fiscal 1999. This increase is primarily
related to proceeds generated from the sale of common stock.
We believe that our existing cash, cash equivalents and short-term
investment balances 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.
In December 1999, Brocade entered into an agreement to lease
approximately 210,000 square feet of office, laboratory, and administrative
space in San Jose, California. The term of the lease agreement is September 1,
2000 through August 31, 2010, and represents a lease commitment of $6.2 million
per year to Brocade. Brocade intends to occupy the space in September 2000. In
conjunction with entering into the lease agreement, Brocade signed an
unconditional, irrevocable letter of credit for $6.2 million as security for the
lease. In connection with our occupation of this building, Brocade intends to
make significant tenant improvements. Brocade intends to finance these tenant
improvements and the lease commitment with internally generated funds. In
February 2000, the lease agreement was amended to add an additional 39,043
square feet of general office space.
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<PAGE> 13
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," ("SOP 98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending
the deferral of the application of certain provisions of SOP 97-2 amended by SOP
98-4 through fiscal years beginning on or before March 15, 1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. Brocade has not had significant software
sales to date and management does not expect the adoption of SOP 98-9 to have a
significant effect on the financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and hedging Activities" ("SFAS
133") which provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. The statement is
effective for fiscal years commencing after June 15, 2000. Brocade does not
believe that SFAS 133 will have a material impact on earnings or financial
condition.
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<PAGE> 14
RISK FACTORS
WE HAVE AN ACCUMULATED DEFICIT OF $19.0 MILLION AND MAY NOT MAINTAIN
PROFITABILITY
We have incurred significant losses since our inception. As a result, as
of January 29, 2000, we had an accumulated deficit of $19.0 million. Although
our revenues have grown in recent quarters, and we have remained profitable
since the third quarter of fiscal 1999, we cannot be certain that we will be
able to sustain these growth rates or that we will realize sufficient revenues
to maintain profitability. We expect to incur significant product development,
sales and marketing and administrative expenses and, as a result, we will need
to generate significant revenues to maintain profitability.
In addition, we have a limited operating history. Therefore, we cannot
forecast future operating results based on our historical results. We plan our
operating expenses based in part on future revenue projections. Our ability to
accurately forecast our quarterly revenue is limited for the reasons discussed
below in "-- We Expect Our Quarterly Revenues and Operating Results to Fluctuate
for a Number of Reasons Which Could Cause Our Stock Price to Fluctuate."
Moreover, most of our expenses are fixed in the short-term or incurred in
advance of receipt of corresponding revenue. As a result, we may not be able to
decrease our spending to offset any unexpected shortfall in our revenues. If
this were to occur, we would expect to incur significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly
in the past and are likely to vary significantly in the future due to a number
of factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
- fluctuations in demand for our SilkWorm family of products and
services;
- the timing of customer orders and product implementations,
particularly large orders from and product implementations of
our original equipment manufacturer customers;
- our ability to develop, introduce, ship and support new products
and product enhancements;
- announcements and new product introductions by our competitors;
- the expected decline in the average 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;
- our ability to attain and maintain production volumes and
quality levels for our SilkWorm family of products;
- the mix of our SilkWorm switches sold and the mix of
distribution channels through which they are sold;
- increased expenses, particularly in connection with our strategy
to continue to expand our relationships with key original
equipment manufacturers and system integrators;
- widespread adoption of SANs as an alternative to existing data
storage and management systems;
- decisions by end-users to reallocate their information resources
to other purposes, 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.
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<PAGE> 15
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS
Our SilkWorm family of Fibre Channel switching products is used
exclusively in storage area networks, or SANs. Accordingly, widespread adoption
of SANs as an integral part of data-intensive enterprise computing environments
is critical to our future success. In addition, our success depends upon market
acceptance of our SAN switching solutions as an alternative to the use of hubs
or other interconnect devices in SANs. The markets for SANs and SAN switching
products have only recently begun to develop and are rapidly evolving. Because
these markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow to adopt a new approach, like SANs. Our success in
generating revenue in these emerging markets will depend, among other things, on
our ability to educate potential original equipment manufacturers and system
integrator customers, as well as potential end-users, about the benefits of SANs
and SAN switching technology and our ability to maintain and enhance our
relationships with leading original equipment manufacturers and system
integrators. In addition, our products are designed to conform to the Fibre
Channel interconnect protocol and certain other industry standards. Some of
these standards may not be widely adopted, and competing standards may emerge
that will be preferred by original equipment manufacturers or end-users.
WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE
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 technologies, and the success and development of our original
equipment manufacturers and system integrators. Many of these factors are beyond
our control.
Our future success depends upon our ability to address the rapidly
changing needs of our customers by developing and introducing high-quality,
cost-effective products, product enhancements and services on a timely basis and
by keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
fiscal year 2000. 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 CUSTOMERS AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY
REDUCE OUR REVENUES
We depend on a few key customers. For example, in the first quarter of
fiscal 2000, sales to five customers accounted for 78% of our total revenues. We
anticipate that our operating results will continue to depend on sales to a
relatively small number of customers. Therefore, the loss of any of our key
customers, or a significant reduction in sales to these customers could
significantly reduce our revenues.
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<PAGE> 16
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES
Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
THE LOSS OF SOLECTRON CORPORATION, OUR SOLE MANUFACTURER, OR THE FAILURE TO
FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR MANAGE SUCCESSFULLY OUR
RELATIONSHIP WITH SOLECTRON, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS
Solectron, a third party manufacturer for numerous companies,
manufactures all of our products at its Milpitas, California facility on a
purchase order basis. We have entered into a three-year manufacturing agreement
with Solectron under which we provide to Solectron a twelve-month product
forecast and place purchase orders with Solectron sixty calendar days in advance
of the scheduled delivery of products to our customers. 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. In addition, we license certain
software that is incorporated into our Brocade Fabric Operating System from Wind
River Systems, Inc. If we are unable to buy these components on a timely basis,
we will not be able to manufacture our products. We use a rolling six-month
forecast based on anticipated product orders to determine our component
requirements. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing. In addition, lead times for materials and components we order
vary significantly and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. We also may experience
shortages of certain components from time to time, which also could delay our
manufacturing.
THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET Share
The markets for our SAN switching products are competitive, and are
likely to become even more competitive. Increased competition could result in
pricing pressures, reduced sales, reduced margins, reduced profits, reduced
market share or the failure of our products to achieve or maintain market
acceptance. Our products face competition from multiple sources. Some of our
competitors and potential competitors have longer operating histories, greater
name recognition, access to larger customer bases, or substantially greater
resources than we have. As a result, they may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements. For all of the foregoing reasons, we may not be able to
compete successfully against our current and future competitors.
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<PAGE> 17
THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND
GROSS MARGINS
The average unit price of our products continued to decrease in the
first quarter of fiscal 2000. We anticipate that the average unit price of our
products may continue to decrease in the future in response to changes in
product mix, competitive pricing pressures, increased sales discounts, new
product introductions by us or our competitors or other factors. If we are
unable to offset these factors by increasing our sales volumes, our revenues
will decline. In addition, to maintain our gross margins, we must develop and
introduce new products and product enhancements, and we must continue to reduce
the manufacturing cost of our products.
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.
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.
-17-
<PAGE> 18
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.
During fiscal 2000, we intend to focus on expanding our international sales
activities in Western Europe and Japan. Our international sales growth in these
countries will be limited if we are unable to establish relationships with
international distributors, establish additional foreign operations, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Even if we are able to
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products.
Our international operations, including our sales activities in Western Europe
and Japan, are subject to a number of risks, including:
- supporting multiple languages;
- recruiting sales and technical support personnel with the skills
to support our products;
- increased complexity and costs of managing international
operations;
- protectionist laws and business practices that favor local
competition;
- dependence on local vendors;
- multiple, conflicting and changing governmental laws and
regulations;
- longer sales cycles;
- difficulties in collecting accounts receivable;
- reduced or limited protections of intellectual property rights;
and
- political and economic instability.
To date, none of our international revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international revenues may be denominated in foreign currencies in the future,
including the Euro, which will subject us to risks associated with fluctuations
in those foreign currencies.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
We rely on a combination of patent, copyright, trademark and trade
secret laws and restrictions on disclosure to protect our intellectual property
rights. We also enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult, and we cannot be
certain that the steps we have taken will prevent unauthorized use of our
technology, particularly in foreign countries where the laws may not protect our
proprietary rights as fully as in the United States.
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-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:
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<PAGE> 19
- 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 make, use, sell, import and/or export 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, use, sell, import and/or export our products, which would reduce
our revenues.
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 that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
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.
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<PAGE> 20
PROVISIONS IN OUR CHARTER DOCUMENTS, CUSTOMER AGREEMENTS AND DELAWARE LAW COULD
PREVENT OR DELAY A CHANGE IN CONTROL OF BROCADE AND MAY REDUCE THE MARKET PRICE
OF OUR COMMON STOCK
Provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a merger or acquisition that a stockholder may
consider favorable. These provisions include:
- authorizing the issuance of preferred stock without stockholder
approval;
- providing for a classified board of directors with staggered,
three-year terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect certain amendments to
our certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of
stockholders; and
- prohibiting stockholder actions by written consent.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us. Further, our agreements with certain
of our customers require us to give prior notice of a change of control of
Brocade and grant certain manufacturing rights following the change of control.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT.
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships,
joint ventures or capital commitments;
- losses of major original equipment manufacturer customers;
- additions or departures of key personnel; and
- sales of common stock in the future.
In addition, the stock market has experienced extreme volatility that
often has been unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to fall regardless of our
performance.
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 our existing cash, cash equivalent, and short-term
investment balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.
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<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The majority of Brocade's operations are based in the U.S. and,
accordingly, a majority of our transactions are denominated in U.S. dollars. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, however, due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
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<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brocade's former contract manufacturer filed a suit against Brocade,
alleging that Brocade is liable for breaching certain contracts with the
contract manufacturer. The suit claimed damages in excess of $3.0 million plus
interest, an unspecified amount of consequential and incidental damages, costs
and attorneys' fees. Brocade filed a cross complaint against the contract
manufacturer for various credits Brocade claimed on its account with the
contract manufacturer. The suit was settled in December 1999. The settlement of
this litigation did not have a material impact on Brocade's financial
statements.
Brocade is subject to various claims that 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a special meeting held on November 3, 1999, a proposal to amend
Brocade's Certificate of Incorporation to increase the authorized number of
shares of Common Stock from 50,000,000 shares to 200,000,000 shares was
submitted to a vote of the stockholders of Brocade. 23,334,637 votes were cast
in favor of the amendment, representing 87.3% of the shares of Common Stock then
outstanding and 98.4% of the Common Stock present and voting at the special
meeting. 374,207 votes were cast against the proposal or withheld. There were
3,873 abstentions.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
10.26 Credit Agreement
27.1 Financial Data Schedule.
- ---------------
REPORTS ON FORM 8-K. On February 17, 2000, Brocade filed a report on
Form 8-K to report a change in fiscal year end for fiscal 2000 and
subsequent fiscal years from October 31 to the Saturday nearest October
31.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: March 13, 2000 BROCADE COMMUNICATIONS SYSTEMS, INC.
(Registrant)
/S/ MICHAEL J. BYRD
----------------------------------------
MICHAEL J. BYRD
Vice President, Finance and
Chief Financial Officer
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<PAGE> 24
EXHIBIT INDEX
Exhibit
No. Description
------- -----------
10.26 Credit Agreement
27.1 Financial Data Schedule.
<PAGE> 1
EXHIBIT 10.26
[COMERICA LOGO]
CREDIT AGREEMENT
This CREDIT AGREEMENT is entered into as of January 5, 2000 by and
between BROCADE COMMUNICATIONS, a Delaware corporation, with its principal place
of business at 1901 Guadalupe Parkway, San Jose, California 95131 ("Borrower"),
and COMERICA BANK-CALIFORNIA ("Bank"), a California banking corporation, with
its principal place of business at 333 West Santa Clara Street, San Jose,
California 95113.
RECITALS
A. Borrower wishes to obtain a standby letter of credit from Bank, and
Bank desires to issue such standby letter of credit. This Agreement sets forth
the terms on which Bank will issue the standby letter of credit to Borrower.
AGREEMENT
For good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as set forth below.
1. CERTAIN DEFINITIONS AND INDEX TO DEFINITIONS.
1.1 Accounting Terms. Unless otherwise specified herein, all
accounting terms used herein shall be interpreted, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
hereunder shall be prepared in accordance with GAAP consistently applied.
1.2 Definitions. Capitalized terms used but not otherwise
defined herein shall have the meaning given in the UCC. As used herein, and
unless otherwise defined herein, the following terms shall have the following
respective meanings except as the context shall otherwise require:
"Affiliate" means any Person, including any Person who is a
director, officer, partner or manager of such Person: (a) which directly or
indirectly controls, or is controlled by, or is under common control with, the
Borrower or a subsidiary; (b) which directly or indirectly beneficially owns or
holds five percent (5%) or more of any class of voting stock of the Borrower or
any subsidiary; or (c) five percent (5%) or more of the voting stock of which is
directly or indirectly beneficially owned or held by the Borrower or a
subsidiary. The term "control" means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
-1-
<PAGE> 2
"Agreement" means this Credit Agreement as it may be amended,
supplemented or otherwise modified from time to time.
"Borrower's Account" means any general deposit account of
Borrower maintained with Bank.
"Current Assets" means all assets of Borrower which should, in
accordance with GAAP, be classified as current assets.
"Current Liabilities" means all liabilities of Borrower which
should, in accordance with GAAP, be classified as current liabilities, including
the principal balance of any revolving credit facility and the current portion
of long-term indebtedness required to be paid within one year, but excluding
warranty reserve and deferred revenue.
"Events of Default" -- See Section 10.
"GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board that are applicable
to the circumstances as of the date of determination.
"Indebtedness" means all items of indebtedness which, in
accordance with GAAP would be deemed a liability as of the date as of which
indebtedness is to be determined and shall also include all indebtedness and
liabilities of others assumed or guaranteed or in respect of which such Borrower
is secondarily or contingently liable (other than by endorsement of instruments
in the course of collection) whether by reason of any agreement to acquire such
indebtedness, to supply or advance sums, or otherwise.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or insolvency law, including
assignments for the benefit of creditors, formal or informal moratoria,
compositions, extension generally with its creditors, or proceedings seeking
reorganization, arrangement, or other relief.
"Investment" means any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"Letter of Credit" means the standby letter of credit issued by
Bank for the account of Borrower, and for the benefit of Speiker Properties in
the amount of Six Million One Hundred Ninety Three Thousand Nine Hundred Four
and 00/100 Dollars ($6,193,904.00).
"Letter of Credit Agreement" means the Standby Letter of Credit
Application and Agreement dated the date hereof by and between Borrower and
Bank.
"Letter of Credit Documents" means this Agreement, the Letter of
Credit, and the Letter of Credit Agreement.
-2-
<PAGE> 3
"Maturity Date" means September 30, 2002.
"Obligations" means all obligations (monetary or otherwise) of
Borrower to Bank arising under or in connection with the Letter of Credit
Documents and all other documents, instruments and agreements (including
financing statements and certificates) executed and delivered from time to time
in connection with the Letter of Credit Documents.
"Permitted Investment" means: (a) Investments existing on the
Statement Date; (b) marketable direct obligations issued or unconditionally
guaranteed by the United States of America or any agency or any State thereof
maturing within one (1) year from the date of acquisition thereof, (c)
commercial paper maturing no more than one (1) year from the date of creation
thereof and currently having the highest rating obtainable from either Standard
& Poor's Corporation or Moody's Investors Service, Inc., and (d) certificates of
deposit maturing no more than one (1) year from the date of investment therein
issued by Bank.
"Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or governmental agency.
"Quick Ratio" means the ratio of Current Assets to Current
Liabilities.
"Tangible Effective Net Worth" means net worth as determined in
accordance with GAAP consistently applied, decreased by the following: patents,
licenses, goodwill, subscription lists, organization expenses, trade receivables
converted to notes, and money due from affiliates (including officers,
directors, subsidiaries and commonly held companies).
"UCC" means the Uniform Commercial Code as is in effect in the
State of California on the date of this Agreement.
2. INCORPORATION BY REFERENCE.
2.1 Letter of Credit Documents. The Letter of Credit Documents
are incorporated herein by this reference.
3. LETTER OF CREDIT.
3.1 Issuance of Letters of Credit. Subject to the terms and
conditions of the Letter of Credit Documents, Bank shall issue the Letter of
Credit.
3.2 Letter of Credit Fees. Borrower shall pay to Bank fees upon
the issuance of the Letter of Credit, and upon the payment by Bank of each draft
under the Letter of
-3-
<PAGE> 4
Credit, in accordance with Bank's standard fees and charges in effect at the
time the Letter of Credit is issued or amended or any draft is paid. In
addition, Borrower shall prepay to Bank an annual fee with respect to the Letter
of Credit in an amount equal to one half of one percent (0.50%) per annum of the
original face amount of the Letter of Credit for the time period equal to the
date of issuance of the Letter of Credit to and including the Maturity Date.
3.3 Reimbursement by Borrower. Borrower shall immediately
reimburse Bank for all sums paid by Bank on account of the Letter of Credit in
accordance with the Letter of Credit Agreement. 3.4 Indemnity. Borrower shall
indemnify Bank as set forth in the Letter of Credit Agreement.
3.5 Payment of Drafts. Bank shall pay drafts as set forth in the
Letter of Credit Agreement.
4. PAYMENTS BY BORROWER.
4.1 General. All payments hereunder shall be made by Borrower to
Bank at Bank's offices set forth above, or at such other place as Bank may
designate in writing, in lawful money of the United States.
4.2 Debit of Borrower's Account. In order to satisfy any of the
Obligations, Bank is hereby authorized by Borrower to initiate electronic debit
or credit entries to Borrower's Account.
5. CONDITIONS PRECEDENT.
5.1 Issuance of the First Letter of Credit. As conditions
precedent to Bank's obligation to issue the Letter of Credit under this
Agreement, Borrower shall deliver, or cause to be delivered, to Bank:
5.1.1 A duly executed copy of this Agreement;
5.1.2 A duly executed copy of the Letter of Credit
Agreement;
5.1.3 Borrowing resolution, in form satisfactory to
Bank, evidencing that Borrower's officers have the appropriate authority to
execute this Agreement and the Letter of Credit Agreement;
5.1.4 the UCC-1 Financing Statement of Imperial Bank
shall have been terminated;
5.1.5 All representations and warranties of Borrower to
Bank set forth in the Letter of Credit Documents shall be accurate and complete
in all respects; and
-4-
<PAGE> 5
5.1.6 There shall not exist an Event of Default or an
event which with the giving of notice of passage of time, or both, would be an
Event of Default.
6. REPRESENTATIONS AND WARRANTIES OF BORROWER. Borrower represents and
warrants to Bank as follows:
6.1 Capacity. Borrower is duly organized, validly existing, and
in good standing under the laws of the State of Delaware, and is authorized to
do business in the jurisdictions in which its ownership of property or conduct
of business legally requires such authorization, and has full power, authority,
and legal right to own its properties and assets and to conduct its business as
presently conducted or proposed to be conducted.
6.2 Authority. Borrower has full power, authority and legal
right to execute and deliver, and to perform and observe the provisions of the
Letter of Credit Documents to be executed by Borrower. The execution, delivery
and performance of such Letter of Credit Documents have been duly authorized by
all necessary action, and when duly executed and delivered, will be legal,
valid, and binding obligations of Borrower enforceable in accordance with their
respective terms.
6.3 Compliance. The execution and delivery of the Letter of
Credit Documents and compliance with their terms will not violate any provision
of applicable law and will not result in a breach of any of the terms or
conditions of, or result in the imposition of any lien, charge, or encumbrance
upon any properties of Borrower pursuant to, or constitute a default (with due
notice or lapse o time or both) or result in an occurrence of an event pursuant
to which any holder or holders of Indebtedness may declare the same due and
payable under any indenture, agreement, order, judgment, or other instrument to
which Borrower is a party or by which Borrower or its property may be bound or
affected, or Borrower's charter documents or by-laws.
6.4 Financial Statements. Borrower has furnished Bank with its
balance sheet as of October 31, 1999 (the "Statement Date"), and related
statements of income and retained earnings for the twelve (12) month period
ending on the Statement Date. Such balance sheet and statements are correct and
complete and fairly present the financial condition and results of operations of
Borrower for such fiscal period.
6.5 Material Adverse Events. Since the Statement Date, neither
the business, properties, nor financial condition of Borrower has been
materially and adversely affected in any way.
6.6 Litigation. Except as heretofore disclosed by Borrower to
Bank in writing, there are no actions or proceedings (whether or not purportedly
on behalf of Borrower) pending, or to the knowledge of Borrower threatened,
against or affecting Borrower at law or in equity or before or by any Person,
which, if adversely determined, could have a material adverse
-5-
<PAGE> 6
effect on the business, properties, or financial condition of Borrower or which
might materially affect the ability of Borrower to perform its obligations under
the Letter of Credit Documents. Borrower is not in default with respect to any
applicable laws or regulations which affect the operations or financial
condition of Borrower, nor is it in default with respect to any other writ,
injunction, demand, or decree of any court or any Person or in default under any
indenture, agreement, or other instrument to which Borrower is a party or by
which Borrower may be bound.
6.7 Taxes. Borrower has filed or caused to be filed all tax
returns which are required to be filed by it, pursuant to the laws, regulations,
or orders of each Person with taxing power over Borrower or the assets of
Borrower. Borrower has paid, or made provision for the payment of, all taxes
which have or may have become due pursuant to said returns or otherwise or
pursuant to an assessment received by Borrower, except such taxes, if any, as
are being contested in good faith and as to which adequate reserves have been
provided. The charges, accruals, and reserves in respect of income taxes on the
books of Borrower are adequate. Borrower knows of no proposed material tax
assessment against it and no extension of time for the assessment of federal,
state, or local taxes of Borrower is in effect or has been requested, except as
disclosed in the financial statements furnished to Bank.
7. AFFIRMATIVE COVENANTS OF BORROWER. Until payment in full of the
Obligations, Borrower agrees that: 7.1 Financial Statements, Reports and
Certifications. Borrower shall maintain a system of accounting established and
administered in accordance with sound business practices to permit preparation
of financial statements in conformity with GAAP. Borrower shall deliver to Bank
the financial statements and other reports described below:
7.1.1 Quarterly Reports. As soon as available and in any event
within forty-five (45) days after the end of each fiscal quarter, Borrower shall
deliver its Form 10-Q Quarterly Report filed pursuant to the Securities Exchange
Act of 1934, as amended from time to time, and any successor statute, and the
rules and regulations issued thereunder ("Exchange Act"), all as the same may be
in effect at the time.
7.1.2 Annual Report. As soon as available and in any
event within ninety (90) days after the end of each fiscal year, Borrower shall
deliver its Form 10-K Annual Report filed pursuant to the Exchange Act.
7.1.3 Other Information. Borrower shall, upon request,
furnish to Bank such information, statements, lists of property and accounts,
budgets, forecasts, or reports as Bank may reasonably request with respect to
the business, affairs, and financial condition of Borrower.
7.2 Deposit Accounts. Borrower shall maintain its principal
depository and operating accounts with Bank.
-6-
<PAGE> 7
7.3 Expenses. Borrower shall pay all reasonable out-of-pocket
expenses of Bank including, but not limited to, attorneys' fees and costs,
incident to (a) preparation and negotiation of the Letter of Credit Documents
and any amendments, extensions and renewal thereof, (b) the protection of the
rights of Bank under the Letter of Credit Documents, or (c) defense by Bank
against all claims against Bank relating to any of its acts of commission or
omission directly or indirectly relating to the Letter of Credit Documents, all
whether by judicial proceedings or otherwise. Borrower shall also pay and save
Bank harmless from any and all liability with respect to any stamp or other
taxes (other than transfer or income taxes) which may be determined to be
payable in connection with the making of the Letter of Credit Documents.
7.4 Notice of Events. Borrower shall at once give Bank written
notice of any Event of Default or any event which with the giving or notice of
passage of time, or both, would become an Event of Default.
7.5 Performance of Other Covenants. Borrower shall observe and
perform all covenants and agreements in any of the Letter of Credit Documents
executed by Borrower.
8. FINANCIAL COVENANTS OF BORROWER. Borrower covenants and agrees that
until payment in full of all Obligations and termination of the Letter of
Credit, unless Bank shall otherwise give its prior written consent, Borrower
shall comply with all covenants in this Section 8.
8.1 Quick Ratio. Borrower shall maintain, as of the last day of
each fiscal quarter, a Quick Ratio of at least 2.00 to 1.0.
8.2 Tangible Effective Net Worth. Borrower shall maintain, as of
the last day of each fiscal quarter, a Tangible Effective Net Worth of not less
than Sixty Five Million and 00/100 Dollars ($65,000,000.00), provided however
that this amount shall be reset on an annual basis within one hundred twenty
(120) days of Borrower's fiscal year end.
8.3 Profitability. Borrower shall have a minimum net profit
greater than Zero and 00/100 Dollars ($0.00) on a rolling four quarter basis,
provided however that Bank shall exclude from its profitability calculation for
approved acquisitions, in process research and development charges and any other
non-cash acquisition related write-offs.
-7-
<PAGE> 8
9. NEGATIVE COVENANTS OF THE BORROWER. Until payment in full of the
Obligations, without the prior written consent of Bank, Borrower shall not:
9.1 Liens. Create, incur, assume, or suffer to exist any lien
(including any encumbrance or security interest) of any kind upon any of its
assets, whether now owned or hereafter acquired, except: (a) liens disclosed in
Borrower's financial statements dated the Statement Date; or (b) liens for
purchase money obligations for Equipment; provided that: (i) the indebtedness
secured by any such lien does not exceed the purchase price of such Equipment;
and (ii) any such lien encumbers only the asset so purchased.
9.2 Negative Pledge. Enter into any agreement with any third
party which prohibits Borrower from granting Bank a security interest in any of
the assets of Borrower.
9.3 Dispositions. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its subsidiaries to
Transfer, all or any part of its assets, business or property, other than: (i)
Transfers of Inventory in the ordinary course of business; (ii) Transfers of
non-exclusive licenses and similar arrangements for the use of the property of
Borrower or its subsidiaries; or (iii) Transfers of worn-out or obsolete
Equipment.
9.4 Change in Business. Engage in any business, or permit any of
its subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
9.5 Change in Name. Change Borrower's name, or identity, or add
any new fictitious name. Borrower will give Lender at least thirty (30) days
advance written notice of any change of name or of any new trade name or
fictitious business name. Borrower's use of any trade name or fictitious
business name will be in compliance with all laws regarding the use of such
names.
9.6 Mergers or Acquisitions. Merge or consolidate, or permit any
of its subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, without
the prior written consent of Bank, further provided that Borrower remains the
surviving entity of any such merger or consolidation, Borrower's management
remain in their current positions, and no Event of Default results from such
merger or consolidation.
9.7 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, provided that Borrower may repurchase its shares from
former employees, directors and agents in accordance with any repurchase
agreements so long as an Event of Default has not occurred or would exist after
giving effect of such repurchase.
-8-
<PAGE> 9
9.8 Investments. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its subsidiaries so to do,
other than Permitted Investments.
9.9 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
10. EVENTS OF DEFAULT. One or more of the following events shall be an
"Event of Default"):
10.1 Payment Default. Borrower shall default in the due and
punctual payment of the Obligations or any part thereof, when the same become
due and payable, whether at maturity, upon acceleration, or otherwise;
10.2 Covenant Default. If Borrower fails to perform any
obligation hereunder or violates any of the covenants contained in this
Agreement, or fails or neglects to perform, keep, or observe any other material
term, provision, condition, covenant, or agreement contained in this Agreement,
in any of the Letter of Credit Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) business days after Borrower receives notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Advances will be required to be
made during such cure period);
10.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations;
10.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) business days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or
-9-
<PAGE> 10
encumbrance upon any material portion of Borrower's assets, or if a notice of
lien, levy, or assessment is filed of record with respect to any of Borrower's
assets by the United States Government, or any department, agency, or
instrumentality thereof, or by any state, county, municipal, or governmental
agency, and the same is not paid within ten (10) business days after Borrower
receives notice thereof, provided that none of the foregoing shall constitute an
Event of Default where such action or event is stayed or an adequate bond has
been posted pending a good faith contest by Borrower;
10.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
business days (provided that no Advances will be made prior to the dismissal of
such Insolvency Proceeding);
10.6 Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Million and 00/100
Dollars ($1,000,000) or that could have a Material Adverse Effect;
10.7 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Two Hundred
Fifty Thousand and 00/100 Dollars ($250,000) shall be rendered against Borrower
and shall remain unsatisfied and unstayed for a period of ten (10) business
days; or
10.8 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any officer pursuant
to this Agreement or to induce Bank to enter into this Agreement or any other
Letter of Credit Document.
11. REMEDIES. Upon the occurrence of an Event of Default, at the option
of Bank, (a) Bank's obligations under this Agreement shall terminate and all
Obligations shall, without presentment, demand, protest, or notice of any kind,
all of which are hereby expressly waived, be forthwith due and payable, and Bank
may, immediately and without expiration of any period of grace, enforce payment
of all Obligations and exercise any and all other remedies granted to it at law,
in equity, or otherwise, including, without limitation, under the Letter of
Credit Documents, and (b) Borrower shall immediately pay to Bank, to be held by
Bank as cash collateral, an amount equal to the undrawn amount of all Letters of
Credit.
-10-
<PAGE> 11
12. MISCELLANEOUS.
12.1 Entire Agreement. This Agreement, together with the Letter
of Credit Documents embodies the entire agreement and understanding among and
between the parties hereto, and supersedes all prior or contemporaneous
agreements and understandings between said parties, verbal or written, express
or implied, relating to the subject matter hereof. No promises of any kind have
been made by Bank or any third party to induce Borrower to execute this
Agreement. No course of dealing, course of performance or trade usage, and no
parol evidence of any nature, shall be used to supplement or modify any terms of
this Agreement.
12.2 No Waiver. No failure to exercise and no delay in
exercising any right, power, or remedy hereunder shall impair any right, power,
or remedy which Bank may have, nor shall any such delay be construed to be a
waiver of any of such rights, powers, or remedies, or any acquiescence in any
breach or default hereunder; nor shall any waiver by Bank of any breach or
default by Borrower hereunder be deemed a waiver of any default or breach
subsequently occurring. All rights and remedies granted to Bank hereunder shall
remain in full force and effect notwithstanding any single or partial exercise
of, or any discontinuance of action begun to enforce, any such right or remedy.
The rights and remedies specified herein are cumulative and not exclusive of
each other or of any rights or remedies which Bank would otherwise have. Any
waiver, permit, consent or approval by Bank of any breach or default hereunder
must be in writing and shall be effective only to the extent set forth in such
writing and only as to that specific instance.
12.3 Survival. All representations, warranties and agreements
herein contained on the part of Borrower shall survive the making of advances
hereunder and all such representations, warranties and agreements shall be
effective so long as the Obligations arising pursuant to the terms of this
Agreement remain unpaid or for such longer periods as may be expressly stated
therein.
12.4 Severability. In the event any one or more of the
provisions contained in this Agreement is held to be invalid, illegal or
unenforceable in any respect, then such provision shall be ineffective only to
the extent of such prohibition or invalidity, and the validity, legality, and
enforceability of the remaining provisions contained herein shall not in any way
be affected or impaired thereby.
12.5 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of Borrower, Bank, and their respective successors
and assigns, provided, however, that Borrower may not transfer its rights under
this Agreement without the prior written consent of Bank.
12.6 Choice of Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
-11
<PAGE> 12
12.7 Interpretation. This Agreement and all agreements relating
to the subject matter hereof are the product of negotiation and preparation by
and among each party and its respective attorneys, and shall be construed
accordingly. The parties waive the provisions of California Civil Code Section
1654.
12.8 Amendment and Waiver. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged or terminated, nor may any
consent to the departure from the terms hereof be given, orally (even if
supported by new consideration), but only by an instrument in writing signed by
all parties to this Agreement. Any waiver or consent so given shall be effective
only in the specific instance and for the specific purpose for which given.
12.9 Headings. Section and paragraph headings and numbers have
been set forth for convenience only.
12.10 Venue. The parties agree that any suit, action or
proceeding arising out of the subject matter hereof, or the interpretation,
performance or breach of this Agreement, shall be instituted in any United
States District Court or any court of the State of California located in Santa
Clara County.
12.11 JURY TRIAL WAIVER. IN RECOGNITION OF THE HIGHER COSTS AND
DELAY WHICH MAY RESULT FROM A JURY TRIAL, THE PARTIES HERETO WAIVE ANY RIGHT TO
TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING
HEREUNDER, OR (B) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT HERETO, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR
TORT OR OTHERWISE; AND EACH PARTY FURTHER WAIVES ANY RIGHT TO CONSOLIDATE ANY
SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH
A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED; AND EACH PARTY HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED
BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY HERETO MAY FILE AN ORIGINAL
COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE
CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
12.12 Counterparts. This Agreement may be signed in any number
of counterparts, each of which shall be an original, with the same effect as if
all signatures were upon the same instrument. Delivery of an executed
counterpart of the signature page to this Agreement by telefacsimile shall be
effective as delivery of a manually executed counterpart of this Agreement, and
any party delivering such an executed counterpart of the signature page to this
Agreement by telefacsimile to any other party shall thereafter also promptly
deliver a manually executed
-12-
<PAGE> 13
counterpart of this Agreement to such other party, provided that the failure to
deliver such manually executed counterpart shall not affect the validity,
enforceability, or binding effect of this Agreement. 1.1
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
BROCADE COMMUNICATIONS
By: /s/ [Signature Illegible]
----------------------------------
Title: VP FINANCE -- CFO
-------------------------------
COMERICA BANK-CALIFORNIA
/s/ MARY BETH SUHR
- -------------------------------------
Vice President
Mary Beth Suhr
Vice President
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM
10-Q FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-28-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-29-2000
<CASH> 25,889
<SECURITIES> 70,540
<RECEIVABLES> 28,125
<ALLOWANCES> (4,035)
<INVENTORY> 1,962
<CURRENT-ASSETS> 124,951
<PP&E> 7,089
<DEPRECIATION> 0
<TOTAL-ASSETS> 135,112
<CURRENT-LIABILITIES> 41,932
<BONDS> 0
0
0
<COMMON> 121,037
<OTHER-SE> (27,857)
<TOTAL-LIABILITY-AND-EQUITY> 135,112
<SALES> 42,740
<TOTAL-REVENUES> 42,740
<CGS> 20,084
<TOTAL-COSTS> 20,084
<OTHER-EXPENSES> 14,591
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,250
<INCOME-TAX> 1,942
<INCOME-CONTINUING> 7,308
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,308
<EPS-BASIC> 0.14
<EPS-DILUTED> 0.12
</TABLE>
