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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
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
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BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 77-0409517
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION NO.)
ORGANIZATION)
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1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
(408) 542-1500
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND
TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001
PAR VALUE
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference to Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $7,623,743,904 as of December 30, 1999, based upon
the closing price on the Nasdaq National Market reported for such date. This
calculation does not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.
The number of shares outstanding of the Registrant's Common Stock on
December 30, 1999 was 53,854,691 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders (the "Proxy Statement"), to be filed with the Securities and
Exchange Commission, are incorporated by reference to Part III of this Form 10-K
Report.
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BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-K
INDEX
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PART I
PAGE
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Item 1. Business.................................................... 2
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results
of Operations............................................... 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 27
Item 8. Financial Statements and Supplementary Data................. 27
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................... 46
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 48
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 48
Item 13. Certain Relationships and Related Transactions.............. 48
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 48
SIGNATURES............................................................ 53
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PART I
ITEM 1. BUSINESS
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements that relate to
future events or future financial performance. In some cases, forward-looking
statements can be identified by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although Brocade
believes that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
the risks outlined under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors" and elsewhere in this
Annual Report. 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 the leading provider, based on revenue and the number of ports
shipped, of Fibre Channel switching solutions for Storage Area Networks
("SANs"), which apply the benefits of a networked approach to the connection of
computer storage systems and servers. Our family of SilkWorm switches enables
companies to cost-effectively manage growth in their storage capacity
requirements, improve the performance between their servers and storage systems
and increase the size and scope of their SAN, while allowing them to operate
data-intensive applications, such as data backup and restore, and disaster
recovery, on the SAN. We sell our SAN switching solutions through leading
storage systems and server original equipment manufacturers, including Amdhal,
Compaq Computer, CNT, Data General (a division of EMC Corporation), Dell
Computer, IBM, Groupe Bull, McDATA Corporation (a division of EMC Corporation),
NEC, Network Appliance, Sequent Computer Systems, SGI, Fujitsu/Siemens Computer
Systems and StorageTek and through system integrators. These original equipment
manufacturers and system integrators combine our switching solutions with other
system elements and services for companies' data processing centers.
INDUSTRY BACKGROUND
Business-Critical Data Storage Requirements
The last decade has seen an explosion in the volume of business-critical
data that is being captured, processed, stored and manipulated in business
environments. This has fueled an increase in demand for data storage capacity.
Efficient data storage and management is becoming one of the most important
aspects of business-critical decision making. Increased reliance on applications
ranging from business intelligence and decision support, data warehousing and
data mining of large databases, disaster tolerance and recovery, enterprise
software, and imaging and graphics have all contributed to this trend. In
addition, the development of Web-based business operations and e-commerce in
particular, has intensified the demand placed on data centers. Customer
interactions over the Web have increased operational focus on the performance,
scalability, management and flexibility of systems that use business-critical
data. This dependence on data for fundamental business processes by employees,
customers and suppliers has greatly increased the number of input and output
transactions, or I/Os, required of computer storage systems and servers. In
addition, the complexity of enterprise computing and storage is further
compounded by the use of multiple incompatible server operating systems, such as
the proliferation of Windows NT in traditional UNIX environments. As a result,
organizations are being forced to dedicate substantial financial and personnel
resources to manage and maintain the distributed storage capabilities of their
networks.
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Bottleneck In Storage and Server Connections
Despite the increased attention and resources which have been devoted to
data storage requirements, the technical capabilities of data storage systems
have not kept pace with increasing data management demands and with the
advancements in other networking technologies. In the 1980s, the near ubiquity
of PCs, workstations and servers required broader connectivity, resulting in the
development of local and wide area networks to support messaging between
computer systems. The data used by computers and servers connected to local and
wide area networks are typically located on computer storage systems and
servers, which store, process and manipulate data. The adoption of high speed
messaging technologies such as gigabit Ethernet and asynchronous transfer mode,
or ATM, increased local and wide area network transmission speeds by more than
1,000 times during the 1990s. However, storage-to-server data transmission
speeds increased by less than ten times during this period, creating a
bottleneck between the local or wide area network and business-critical storage
systems and servers.
Traditionally, distributed systems have linked a single server with a
limited number of storage systems in close proximity. The Small Computer Systems
Interface, or SCSI, standard was adopted as the I/O interface standard for
storage-to-server and server-to-server connections in the 1980s. SCSI is a
parallel interface that permits throughput of 20 to 40 megabytes per second.
SCSI's throughput limitations have become much more pronounced as local and wide
area network transmission technologies have migrated from Ethernet, which
transfers data at 10 megabits per second, to gigabit Ethernet, which transfers
data at 1,000 megabits per second. In addition, SCSI allows a maximum
transmission distance of only 12 meters and supports just 32 devices on a single
bus. As a result, SCSI does not adequately support the increasing requirements
for speed, scalability and flexibility of today's data-intensive enterprises.
Introduction and Standardization of Fibre Channel
In response to the demand for high-speed and high-performance
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol, an industry networking standard, was developed in the
early 1990s. The Fibre Channel interconnect standard received American National
Standards Institute, or ANSI, approval in 1994 and has subsequently earned broad
support from industry and independent testing laboratories. Fibre Channel
supports large data block transfers at gigabit speeds and is therefore well
suited for data transfers between storage systems and servers. It also supports
multiple protocols such as SCSI and Internet Protocol, or IP. Furthermore, it
provides transmission reliability with guaranteed delivery and transmission
distances of up to 10 kilometers. Fibre Channel complements and supports
advancements in local and wide area network technologies, such as gigabit
Ethernet and ATM, which are not effective for large block data-intensive
transfers.
Advent of the Storage Area Network
Fibre Channel has enabled the development of a storage area network, or
SAN, to meet the requirements of data centers and other data-intensive,
distributed computing environments. Similar to local and wide area networks, the
SAN applies the distributed computing model to computer storage systems and
servers and takes advantage of the inherent benefits of a networked approach.
These benefits include the decoupling of computer storage systems and servers,
increasing scalability and a higher level of connectivity than currently exists
in the SCSI environment. Additionally, the SAN provides high-speed connectivity
for data-intensive applications across multiple operating systems, including
UNIX and Windows NT. By bringing networking technology into the data processing
center, a SAN also provides increased flexibility, fault tolerance, ease of
management and lower total cost of ownership. The SAN market is expected to grow
substantially as organizations embrace this emerging solution. According to the
Gartner Group, an independent industry research company, more than 70% of shared
storage in networked environments is projected to be reorganized into SANs by
the year 2002. According to Dataquest, an independent research company, the SAN
market is currently growing at a compound annual growth rate of 200%.
The simplest SAN configuration is a loop topology, which is similar to
traditional SCSI-based distributed systems and interconnects multiple nodes over
a shared Fibre Channel networking device, such as a hub. A
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Fibre Channel hub can support up to 126 devices, but the available bandwidth is
shared among all the devices, resulting in signal and performance degradation as
the number of devices in the loop increases. In addition, loop topologies suffer
from limited network management and fault isolation capabilities. For example,
when a single device is added to the loop, it will cause the loop to reset,
resulting in application disruption. The limitations of shared networks have
been addressed in local and wide area network environments by the development of
switching technologies that have yielded advancements in performance,
scalability, flexibility and management at competitive costs. In order for the
SAN model to become more widely adopted in data centers, today's enterprises
must be able to connect any device on the network to any other device on the
network, or any-to-any connectivity, without performance degradation in order to
effectively leverage distributed computer storage systems, servers, workstations
and other resources. Guaranteed reliability and availability are vital to the
storage, processing and manipulation of business-critical data. Networks require
dedicated connections operating at high performance levels to support large data
transfer demands. Finally, data processing centers are characterized by a high
degree of change that must be supported by a flexible network infrastructure.
THE BROCADE SOLUTION
Brocade is the leading provider of Fibre Channel SAN switching solutions.
We combine advanced switching technologies with our Fibre Channel technology
leadership and systems expertise to provide the Brocade Fabric, comprised of
Fibre Channel switches, a proprietary switch operating system, management tools,
management services and ready-to-deploy configurations. Our products provide an
infrastructure backbone that allows our customers to concurrently run multiple
applications across the SAN, reducing congestion of local and wide area
networks. Our Brocade Fabric helps enterprises cost-effectively manage the
growth in storage capacity, improve server-to-storage and server-to-server
performance, and increase the size and scope of their SANs, while enabling
data-intensive applications, such as reliable backup and restore and disaster
recovery. Our solutions have the following key benefits:
Address the input/output bottleneck. Deployment of SANs based on our
Brocade Fabric not only enhances point-to-point bandwidth with Fibre Channel
connections, but helps solve the I/O bottleneck between data storage systems and
servers. Our SilkWorm family of Fibre Channel switches delivers full-duplex 1
gigabit per second performance at every port. In addition, unlike hubs or other
shared devices, our switches are designed to provide any-to-any connectivity and
to maintain 1 gigabit per second performance per port as additional devices are
added to the SAN. Our superior frame-forwarding capability provides end-users
with rapid data retrieval and allows a greater number of user transactions.
Provide SAN scalability. Our modular Fibre Channel switches, supporting
from two to 16 ports per switch, enable incremental growth by interconnecting or
cascading multiple switches for hundreds of connections in a fully meshed
configuration. Our Brocade Fabric enables companies to grow clusters of high
performance servers or provide multiple servers with high bandwidth connections
to multiple storage systems. Additionally, Fibre Channel allows connections up
to 10 kilometers, enabling companies to interconnect separate SAN clusters or
islands into a single SAN.
Enable SAN applications. The Brocade Fabric creates a SAN backbone for
data-intensive applications, enabling organizations to solve complex problems in
data processing centers. Our products allow all departments within an
organization to share data storage resources despite operating within a
computing environment that includes incompatible operating systems sharing
storage resources. The Brocade Fabric allows highly flexible configurations and
supports a wide range of data traffic, including high throughput and low latency
processing. For example, high throughput applications, such as data backup and
restore, and disaster recovery can be performed on the SAN, freeing up valuable
bandwidth on the local and wide area network and eliminating the need for
expensive backup servers. Additionally, companies utilizing the Brocade Fabric
for their e-commerce and other low latency transaction processing applications
can leverage hundreds of computer storage devices and servers.
Support a mission-critical data processing center. We have designed our
solutions to provide high levels of resiliency and availability with maximum up
time for business-critical, data-intensive applications. Our
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switches have auto-configuration and reconfiguration capabilities that
incorporate redundant and alternate data paths for frame forwarding, which
enable our Brocade Fabric to be self-healing. They also support up to eight
parallel links to other switches. As a result, any cable, port, switch or link
failure can be isolated, providing a resilient solution. This increases the
availability and up time of the data processing center.
Enhance SAN management. Our Brocade Fabric Operating System and our
network management tools enable our customers to centrally manage storage
systems and servers handling business-critical data. Our products deliver a rich
set of SAN management information that can be accessed both locally and
remotely. Data-intensive connections in the organization can be centrally
managed to share resources with other points on the network. All of these
factors combine to help organizations reduce the overall costs and increase the
efficiency of their data network.
THE BROCADE STRATEGY
Our objective is to maintain our position as the leading provider of SAN
switching solutions. The key elements of our strategy include the following:
Leverage our SAN switching market leadership. We believe we were the first
company to provide a comprehensive Fibre Channel fabric solution and that we are
the market leader based upon the number of switch ports shipped. We intend to
capitalize on our first mover advantage and in-depth customer and product
knowledge. We believe we are well positioned to anticipate the future
requirements of the SAN marketplace.
Capitalize on leadership in Fibre Channel technologies and standards. We
have been a leader in the development of Fibre Channel technologies and the
implementation of ANSI Fibre Channel standards. Our technology efforts are led
by some of the most widely recognized members of the Fibre Channel industry. In
addition, our technical personnel have substantial expertise in storage, file
system, routing algorithms and network management technologies. We have also
provided major contributions to many of the ANSI Fibre Channel standards that
have been developed to date. We believe that taking a continued proactive role
in this expanding market will enable us to extend our leading market position.
Leverage core architecture. We are leveraging our core switching
expertise, ASIC architectures, Brocade Fabric Operating System and Fibre Channel
technology to expand our family of SilkWorm products to address the expanding
SAN market. We have been focusing on the workgroup, midrange, and enterprise
segments of the SAN market, and intend to leverage our leadership position in
these segments to broaden our reach into other segments of the SAN switch market
as they emerge. We expect that the demand for SAN switching solutions in entry
level applications will increase, particularly as Windows NT-based servers are
increasingly used in data processing centers. We have recently introduced
products designed to address the specific needs of organizations that use
Windows NT-based servers in anticipation of this growth.
Continue to expand network of original equipment manufacturers and system
integrators. We intend to continue to expand our relationships with key
computer storage system and server original equipment manufacturers and system
integrators, both domestically and abroad. Currently, our major original
equipment manufacturer customers include Amdhal, Compaq Computer, CNT, Data
General (a division of EMC Corporation), Dell Computer, IBM, Groupe Bull, McDATA
Corporation (a division of EMC Corporation), NEC, Network Appliance, Sequent
Computer Systems, SGI, Fujitsu/Siemens Computer Systems and StorageTek. These
relationships allow us to leverage the systems and services capabilities of
these industry-leading original equipment manufacturers. We have also recently
entered into relationships with system integrators including Advanced Systems
Group, Inc., Berkshire Computer Products, Inc., Ciprico, Compsat Technology,
Inc., Cranel, dcVAST, DataDirect Networks, Hitachi Data Systems Canada,
Integrated Systems Technologies, Inc., Kanatek Technologies Inc., Kingswell
Computer Company, LSI Logic's MetaStor(R) Storage Solutions, Leitch Technology,
Midrange Computer Solutions, Open Systems Solutions, Inc., PCC, RAID Power,
Rorke, Stonebridge Technologies, StorNet Inc, Sysix Technologies, Tokyo Electron
Ltd., Unique Digital, and XIOtech. We expect that our relationships with leading
system integrators will allow us to penetrate the market opportunities by
leveraging the reach of these distribution channels.
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Develop strategic partnerships. We are building strategic relationships
with Fibre Channel component and device vendors and storage management software
companies. For example, in November 1999, we entered into a strategic
relationship with Veritas Software Corporation to jointly develop technology for
centralized management of SANs. By partnering with these organizations, we
believe we can enhance SAN applications and interoperability, thereby
accelerating the time to market and overall deployment and functionality of our
products.
PRODUCTS
Brocade provides the SilkWorm family of Fibre Channel switches, which
creates a switch interconnect, enabling any-to-any connectivity between storage
devices and servers. SilkWorm switches can be used individually for server
clustering or storage consolidation, or cascaded with other switches to form a
powerful networking infrastructure, the Brocade Fabric. Brocade's software
solutions provide network administrators with tools to manage the switches and
the SAN. Brocade also provides extensive Fabric services, in order to optimize
the Brocade Fabric for an enterprise's particular needs. Moreover, Brocade
SOLUTIONware provides instructions to enterprises on implementing SANs.
SilkWorm Family of Switches
In March 1997, Brocade introduced the Silkworm 1000 family of products,
beginning with a configurable 16-port switch, used to connect servers to storage
devices to create a SAN. In April 1998, Brocade introduced SilkWorm Express, an
eight-port Fibre Channel switch.
In June 1999, Brocade introduced the SilkWorm 2000 product line that
delivers improved reliability, availability, and serviceability. The three
products introduced were the SilkWorm 2800, a 16-port fabric switch, the
SilkWorm 2400, an 8-port fabric switch, and the SilkWorm 2100, an 8-port loop
switch.
In November 1999, we announced the SilkWorm 2000 entry-level product line.
This product line includes the SilkWorm 2010, a managed hub alternative and the
SilkWorm 2040 and 2050.
The SilkWorm family of switches share a common platform designed to provide
the following features and benefits:
- High throughput. Each port delivers a 1-gigabit per second, full-duplex
data rate regardless of network connectivity.
- Hardware-based data path. SilkWorm reduces latency by eliminating
software processing from the path of data frames.
- Management. SilkWorm supports customers' existing management solutions,
such as local and wide area networks, SCSI tools and web tools.
- In-order delivery of data frames. SilkWorm guarantees that frames are
delivered to a destination in the same order as received by the switch
from the originator.
- Cut-through frame routing. Frames are sent without waiting for the
entire frame or for a response back from its destination, thereby
improving bandwidth utilization and minimizing transmission delays.
- Cascading. SilkWorm may be connected to as many other SilkWorm switches
as there are available ports creating in a meshed topology, enabling
hundreds of connections and large SANs.
- Flexible switch buffering. If the destination is busy, data frames are
stored by a SilkWorm switch for only as long as is necessary, thereby
moving data faster through the switch.
- Path selection. SilkWorm identifies failures automatically and
immediately, and reroutes data to alternate paths, creating a highly
resilient network.
- Registered state change notification. SilkWorm automatically detects
changes in configuration and port status to enable quick corrective
action.
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- Quickloop software. Software that emulates a loop environment with the
benefits of switching.
- Translative mode. Software that allows the intermixing of loop and
fabric devices on the same SAN.
- Media independent. SilkWorm enables the SAN to support diverse media,
including fiber optic connections up to 10 kilometers and copper
connections.
- Auto-configuration. SilkWorm enhances scalability by automatically
expanding the SAN as new devices are added or removed without
interrupting the operation of the rest of the network. SilkWorm
seamlessly incorporates more Brocade switches into the network, thereby
increasing aggregate bandwidth as connectivity increases; network
services automatically expand without additional system resources.
Brocade Fabric Operating System
The SilkWorm family of switches is supported by the Brocade Fabric
Operating System. The Brocade Fabric Operating System provides the intelligence
for the Brocade Fabric, provides services for the switch hardware, runs the
value-added Brocade Fabric services such as name service, which is used to
assist discovery of connected devices, monitors the status of the hardware and
fabric and notifies the host operating system as devices are added to or removed
from the Brocade Fabric.
The Brocade Fabric Operating System provides a common platform upon which
system services can be built. The Brocade Fabric Operating System is layered
with well-defined application interfaces, or APIs, that allow third parties,
such as data storage and data backup software vendors, to write applications
that leverage Brocade's Fabric Operating System. By incorporating API
technology, these third party vendors can develop applications, thereby
increasing the capabilities of the overall switch fabric solution.
Fabric Services
Fabric services are product features that increase the functionality of the
SAN. Our current Brocade Fabric Services include zoning and multicasting.
Brocade Zoning is an add-on software product that allows the creation of
multiple logical connectivity groups within a single SAN. By creating a zone,
the SAN provides the network with benefits that would otherwise only be possible
using multiple SANs. Through zoning, systems that have different operating
environments, such as UNIX and Window NT, can be isolated from each other
allowing both operating systems to co-exist on a single SAN. Zoning can be used
to create functional areas in the fabric and designate closed user groups for
greater security and control. Also, zoning facilitates time-sensitive functions,
such as creating a temporary zone used to backup storage devices that are
members of other zones. Brocade Zoning offers dynamic configuration and an
unlimited number of zones. Finally, Brocade Zoning allows devices to be a member
of more than one zone thereby increasing flexibility.
Brocade Multicasting enables up to 32 groups of devices to replicate data
in a one-to-one method or in a one-to-many method. By accomplishing this
replication through hardware, Brocade is able to maintain high throughput.
SOLUTIONware
Brocade's SOLUTIONware is a set of application notes that facilitates the
implementation of SAN solutions incorporating products and applications from
multiple vendors, including Brocade. These applications notes include specific
details including equipment requirements, software specifics, detailed
installation instructions and tested application software. This enables original
equipment manufacturers and system integrators to replicate high performance
solutions. We have delivered over 15 SOLUTIONware application notes covering
Brocade Tape Backup and Restore, storage consolidation and business continuance
applications for heterogeneous environments.
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Management Tools
Brocade Web Tools is an add-on software product that helps to remotely
manage a SAN of our SilkWorm family of switches via the Internet or intranet.
The information technology administrator can log onto a switch from a host with
a java-based Web browser. From that switch, the administrator can monitor the
status and performance of any switch in the SAN.
SALES AND MARKETING
Our sales and marketing strategy is focused on an indirect sales model
executed through original equipment manufacturers and system integrators. Our
distribution channels are supported by a sales and marketing organization
comprised of managers, sales representatives and technical and administrative
support personnel. Our marketing effort is focused on developing strategic
partnerships and relationships with industry analysts, providing customer sales
support, managing new product planning and supporting industry standard
initiatives.
Original equipment manufacturers. We have established key relationships
with storage systems and server original equipment manufacturers. Each original
equipment manufacturer provides installation, service and technical support to
its customers while we focus on high-level back-up support. In addition to
maintaining and enhancing our relationships with our existing original equipment
manufacturer customers, we intend to pursue relationships with additional
original equipment manufacturers that may offer products or distribution
channels that complement ours. We believe that these relationships allow us to
leverage the systems and services capabilities of our original equipment
manufacturers.
System integrators. We continue to develop our system integrator program
and have established several relationships within this channel. Revenues from
this channel have grown in excess of 10% in the fourth quarter of fiscal 1999
and we believe revenues from this channel may continue to increase significantly
in the future. Each system integrator provides installation, service and
technical support to its customers, while we focus on integration and technical
back-up support. We intend to continue to develop relationships with system
integrators who may offer products or distribution channels that complement
ours.
We have entered into relationships with international distributors and
integrators and plan to expand our international sales activities significantly.
In fiscal 2000, we intend to focus on expanding our international sales
activities in Western Europe and Japan.
CUSTOMERS
Our primary customers are original equipment manufacturers and system
integrators. Currently, our major original equipment manufacturer customers
include Amdhal, Compaq Computer, CNT, Data General (a division of EMC
Corporation), Dell Computer, IBM, Groupe Bull, McDATA Corporation (a division of
EMC Corporation), NEC, Network Appliance, Sequent Computer Systems, SGI,
Fujitsu/Siemens Computer Systems and StorageTek. Our major system integrators
including Advanced Systems Group, Inc., Berkshire Computer Products, Inc.,
Ciprico, Compsat Technology, Inc., Cranel, dcVAST, DataDirect Networks, Hitachi
Data Systems Canada, Integrated Systems Technologies, Inc., Kanatek Technologies
Inc., Kingswell Computer Company, LSI Logic's MetaStor(R) Storage Solutions,
Leitch Technology, Midrange Computer Solutions, Open Systems Solutions, Inc.,
PCC, RAID Power, Rorke, Stonebridge Technologies, StorNet Inc, Sysix
Technologies, Tokyo Electron Ltd., Unique Digital, and XIOtech.
Our revenue is derived primarily from sales of our SilkWorm family of
products. In fiscal 1997, McData and Sequent each contributed over 10% of our
total revenues for a combined total of 94% of total revenues. In fiscal 1998,
these same two customers each contributed over 10% of total revenues for a
combined total of 83% of total revenues. In fiscal 1999, Compaq, Data General,
McData, and Sequent each accounted for 10% or more of total revenues for a
combined total of 70%. 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. 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.
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CUSTOMER SERVICE AND SUPPORT
Our customer service and support organization provides technical support to
our original equipment manufacturers and system integrators, enabling them to
provide technical support to their end-users. We prepare our original equipment
manufacturer and system integrator customers for product launch through a
comprehensive training program. In addition, we employ systems engineers for
pre- and post-sales support and technical support engineers for field support.
Our original equipment manufacturers and system integrator customers provide
primary technical support.
We have developed an extensive training course for our original equipment
manufacturer and system integrator customers. The curriculum includes Fibre
Channel architecture, SAN implementation and Brocade product training.
MANUFACTURING
We currently use a third-party contract manufacturer, Solectron, to
manufacture our products. Solectron invoices Brocade based on prices and payment
terms agreed to by both parties and set forth in purchase orders issued by
Brocade. The pricing takes into account component costs, Solectron's
manufacturing costs and margin requirements. Although we use Solectron for final
turnkey product assembly, we maintain key component expertise internally. We
design and develop the key components of our products, including ASICs and
software, as well as certain details in the fabrication and enclosure of our
products. In addition, we determine the components that are incorporated in our
products and select the appropriate suppliers of the components.
Although we use standard parts and components for our products where
possible, we currently purchase several key components used in the manufacture
of our products from single or limited sources. Our principal single source
components include ASICs, power supplies and chassis, and our principal limited
source components include printed circuit boards and GBICs. In addition, we
license certain software from Wind River Systems, Inc. that is incorporated into
our Brocade Fabric Operating System.
TECHNOLOGY
Fibre Channel
Fibre Channel is an industry-standard, open protocol for server-to-storage
and server-to-server connectivity and data-intensive transfers. Fibre Channel
combines the high-speed I/O capabilities of a channel technology with the
increased functionality of a networking technology to seamlessly connect and
transfer data from one device to another.
Fibre Channel was designed for storage systems and is well suited for SANs.
It offers a single network for both server clustering and shared storage. It
accommodates both high throughput and low latency dependent traffic required for
large block data transfers and inter-processor communication messages. We
believe the following characteristics of Fibre Channel make it more suitable for
data-intensive and storage related applications than either gigabit Ethernet or
ATM, two widely used networking protocols:
- Fibre Channel has an industry standard interconnect rate of 1 gigabit per
second per port that is expected to increase to 2 gigabits per second in
2000 as compared to gigabit Ethernet's, 1 gigabit per second and ATM's
622 megabits per second speeds;
- Fibre Channel is designed to transmit large packets of information and is
therefore well-suited for data-intensive applications as compared to
gigabit Ethernet and ATM, which use smaller packets and are designed for
smaller but more frequent data transfers;
- Fibre Channel relies more on hardware than software during data transfers
and therefore, is better suited to handle the higher speeds and low
latency required during data transfers;
- In addition to supporting networking protocols including IP, Fibre
Channel also supports I/O storage protocols like SCSI;
9
<PAGE> 11
- Unlike gigabit Ethernet and ATM, which can lose or drop packets due to
congestion, Fibre Channel manages packet flow to ensure delivery; and
- Fibre Channel relieves each port from the responsibility of station
management and instead delegates that responsibility to the interconnect
device. Therefore, each Fibre Channel port only has to manage a single
point-to-point connection between itself and an interconnect device.
SilkWorm Architecture
Brocade is focused on implementing Fibre Channel standards in the Brocade
Fabric. We utilize a layered architecture to provide a high performance,
flexible, and extensible solution. This architecture is comprised of media
interfaces, a switching platform, the Brocade Fabric Operating System and
value-added services.
- Media interfaces. Media interfaces comprise the lowest layer of our
architecture. Fibre Channel standards specify numerous media interfaces.
The SilkWorm architecture supports removable gigabit copper interfaces up
to 13 meters, short wavelength laser interfaces up to 500 meters and long
wavelength laser interfaces up to 10 kilometers. Removable media
interfaces provide flexible product configurations and simple product
maintenance.
- Switching platform. Our SilkWorm products are based on a central memory
time multiplexed switching architecture. The architecture is implemented
through the use of highly integrated ASICs. The use of ASIC technology is
required to provide the high bandwidth and low latency necessary for
Fibre Channel switching to cater to both high throughput and low latency
data transfer. The switching architecture is non-blocking and utilizes
cut through routing techniques to achieve low latency. The data path of
the architecture is completely implemented in hardware and the CPU and
operating system are not in the data path.
- Brocade Fabric Operating System. The architecture of the Brocade Fabric
Operating System is highly structured, modular, hardware independent and
layered with well-defined interfaces. This extensible architecture is
easy to maintain and upgrade with new features. The base operating system
is a UNIX-like realtime operating system with extensive libraries and
services. The layers of the Brocade Fabric Operating System include
hardware drivers, a board level support package, a Fibre Channel layer,
services and application program interfaces.
- Value added services. Value-added services comprise the top layer of our
architecture. Brocade value-added services include Brocade Zoning, and
multicasting. The Brocade value-added services run on top of the Brocade
Fabric Operating System through well-defined application program
interfaces.
RESEARCH AND DEVELOPMENT
We believe that our future success depends on our ability to continue to
enhance our existing products and to develop new products that maintain
technological competitiveness. We focus our product development activities on
solving the needs of SAN users. We work closely with our original equipment
manufacturers and system integrators to monitor changes in the market place. We
design our products around current industry standards and will continue to
support emerging standards that are consistent with our product strategy. During
fiscal 1997, 1998 and 1999 our research and development expenses were $7.7
million, $14.7 million and $15.3 million, respectively.
Our products have been designed around a core system architecture, which
facilitates a relatively short product design and development cycle and reduces
the time to market for new products and features. We intend to continue to
leverage our architecture to develop and introduce additional products and
enhancements in the future.
COMPETITION
Although the competitive environment in the Fibre Channel switching market
has yet to develop fully, we anticipate that the current and potential market
for our products will be highly competitive, continually
10
<PAGE> 12
evolving and subject to rapid technological change. New SAN products are being
introduced by major server and storage providers, and existing products will be
continually enhanced. We currently face competition from other manufacturers of
SAN switches, including Ancor Communications, Inc. We also face competition from
manufacturers of hubs, including Gadzoox Networks, Inc. and Vixel Corporation.
In addition, as the market for SAN products grows, we may face competition from
traditional networking companies and other manufacturers of networking equipment
who may enter the SAN market with their own switching products. It is also
possible that customers could develop and introduce products competitive with
our product offerings. We believe the competitive factors in this market segment
include product performance and features, product reliability, price, ability to
meet delivery schedules, customer service and technical support.
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition, and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional Brocade products or
persuade them to replace our products with their products. Such increased
competition may result in price reductions, lower gross margins and loss of our
market share. There can be no assurance that we will have the financial
resources, technical expertise or marketing, manufacturing, distribution and
support capabilities to compete successfully in the future. There can also be no
assurance that we will be able to compete successfully against current or future
competitors or that competitive pressures will not materially harm our business.
INTELLECTUAL PROPERTY
We rely on a combination of patents, copyrights, trademarks, and trade
secrets, as well as confidentiality agreements and other contractual
restrictions with employees and third parties, to establish and protect our
proprietary rights. Despite these precautions, there can be no assurance that
the measures we undertake will be adequate to protect our proprietary
technology, or that they will preclude competitors from independently developing
products with functionality or features similar to our products. There can be no
assurance that the precautions we take will prevent misappropriation or
infringement of our technology. We currently have 2 design patents and 8 pending
patent applications in the United States, 5 utility applications and 3
provisional applications, with respect to our technology. However, it is
possible that patents may not be issued for these applications. Our issued
patents may not adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to protect our intellectual property could materially harm our business.
In addition, our competitors may independently develop similar or superior
technology. It is possible that litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Litigation
could result in substantial costs and diversion of our resources and could
materially harm our business.
We have received, and may receive in the future, notice of claims of
infringement of other parties' proprietary rights. Infringement or other claims
could be asserted or prosecuted against us in the future, and it is possible
that past or future assertions or prosecutions could harm our business. Any such
claims, with or without merit, could be time-consuming, result in costly
litigation and diversion of technical and management personnel, cause delays in
the development and release of our products, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to us, or at all. For these reasons, infringement claims could
materially harm our business.
11
<PAGE> 13
BACKLOG
Brocade's order backlog as of October 31, 1999 was approximately $44
million. Sales of Brocade's products are generally made pursuant to standard
purchase orders that are cancelable without significant penalties. In addition,
purchase orders are subject to price renegotiations and to changes in quantities
of products and delivery schedules in order to reflect changes in customers'
requirements and manufacturing availability. As a result, a portion of backlog
at any given time may never be realized by Brocade. Brocade's business is
characterized by short lead time orders and quick delivery schedules. In
addition, Brocade's actual shipments depend on the manufacturing capacity of
Brocade's suppliers and the availability of products from such suppliers. As a
result of the foregoing factors, Brocade does not believe that backlog at any
given time is a meaningful indicator of future sales.
EMPLOYEES
As of October 31, 1999, we had 182 full-time employees. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal administrative, sales and marketing, education, customer
support and research and development facilities are located in a single office
building in San Jose, California. We currently occupy approximately 35,000
square feet of office space in the San Jose facility under the terms of a lease
that expires in November 2000. We also lease office space for sales and
marketing in Nashua, New Hampshire.
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 for its corporate headquarters. 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 and sub-lease any excess space.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Brocade's common stock has been quoted on the Nasdaq National Market under
the symbol "BRCD" since our initial public offering on May 24, 1999. Prior to
this time, there was no public market for our stock.
12
<PAGE> 14
See "Item 6. -- Selected Financial Data" for the high and low closing sales
prices per share of our common stock as reported on the Nasdaq National Market,
for the periods indicated.
We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future. At October 31, 1999, there were
approximately 292 stockholders of record of Brocade's common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and other financial
information appearing elsewhere in this Annual Report. The statement of
operations data set forth below for each of the years in the three-year period
ended October 31, 1999 and the balance sheet data as of October 31, 1998 and
1999 are derived from, and qualified by reference to, our audited financial
statements appearing elsewhere in this Annual Report. The statement of
operations data for the period from inception on August 24, 1995 to October 31,
1995 and for the year ended October 31, 1996 and the balance sheet data as of
October 31, 1995, 1996 and 1997 are derived from audited financial statements
not included herein.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------
1995 1996 1997 1998 1999
----- ------- ------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ -- $ -- $ 8,482 $ 24,246 $68,692
Cost of revenues....................................... -- -- 6,682 15,759 33,497
----- ------- ------- -------- -------
Gross margin......................................... -- -- 1,800 8,487 35,195
----- ------- ------- -------- -------
Operating expenses:
Research and development............................. 124 3,091 7,666 14,744 15,267
Sales and marketing.................................. -- 152 2,112 5,154 13,288
General and administrative........................... 52 575 1,464 3,813 3,849
Amortization of deferred compensation................ -- -- -- 7 1,937
----- ------- ------- -------- -------
Total operating expenses........................... 176 3,818 11,242 23,718 34,341
Income (loss) from operations.......................... (176) (3,818) (9,442) (15,231) 854
Interest income (expense), net......................... 10 (116) (177) 120 1,737
----- ------- ------- -------- -------
Income (loss) before provision for income taxes........ (166) (3,934) (9,619) (15,111) 2,591
Provision for income taxes............................. -- -- -- -- 106
----- ------- ------- -------- -------
Net income (loss)...................................... $(166) $(3,934) $(9,619) $(15,111) $ 2,485
===== ======= ======= ======== =======
Basic net income (loss) per share...................... $ -- $ (4.75) $ (2.41) $ (2.22) $ 0.10
===== ======= ======= ======== =======
Diluted net income (loss) per share.................... $ -- $ (4.75) $ (2.41) $ (2.22) $ 0.05
===== ======= ======= ======== =======
Shares used in computing basic net income (loss) per
share................................................ -- 828 3,994 6,800 26,094
===== ======= ======= ======== =======
Shares used in computing diluted net income (loss) per
share................................................ -- 828 3,994 6,800 51,146
===== ======= ======= ======== =======
Pro forma basic net income (loss) per share
(unaudited).......................................... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share
(unaudited).......................................... $ (0.42) $ 0.05
======== =======
Shares used in computing pro forma basic net income
(loss) per share (unaudited)......................... 35,830 43,074
======== =======
Shares used in computing pro forma diluted net income
(loss) per share (unaudited)......................... 35,830 51,146
======== =======
</TABLE>
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<PAGE> 15
<TABLE>
<CAPTION>
AS OF OCTOBER 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------ ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................. $1,168 $ 700 $ 18,472 $ 10,420 $ 89,305
Working capital............................. 922 104 15,334 5,276 79,295
Total assets................................ 1,549 2,605 26,100 21,301 117,280
Long-term portion of debt and capital lease
obligations............................... -- 874 1,954 2,209 42
Redeemable convertible preferred stock...... 1,411 4,613 30,359 35,261 --
Total stockholders' equity (deficit)........ (166) (3,957) (13,458) (27,355) 84,206
</TABLE>
Note: all references to earnings per share and the number of common shares have
been retroactively restated to reflect a two-for-one stock split, effected on
December 3, 1999.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
QUARTERLY DATA:
YEAR ENDED OCTOBER 31, 1998
Net revenues........................................ $ 7,850 $ 6,420 $ 4,569 $ 5,407
Gross margin........................................ 3,153 2,748 218 2,368
Loss from operations................................ (1,398) (2,635) (8,221) (2,977)
Net loss............................................ $(1,355) $(2,515) $(8,107) $(3,134)
Per share amounts:
Basic............................................. $ (0.26) $ (0.40) $ (1.23) $ (0.43)
Diluted........................................... $ (0.26) $ (0.40) $ (1.23) $ (0.43)
Shares used in computing per share amounts:
Basic............................................. 5,140 6,284 6,616 7,284
Diluted........................................... 5,140 6,284 6,616 7,284
Stock prices:
High.............................................. N/A N/A N/A N/A
Low............................................... N/A N/A N/A N/A
YEAR ENDED OCTOBER 31, 1999
Net revenues........................................ $ 8,007 $10,540 $20,051 $30,094
Gross margin........................................ 4,686 5,103 10,130 15,276
Income (loss) from operations....................... (1,846) (877) 1,011 2,566
Net income (loss)................................... (1,839) (848) 1,611 3,561
Per share amounts:
Basic............................................. $ (0.21) $ (0.08) $ 0.05 $ 0.07
Diluted........................................... $ (0.21) $ (0.08) $ 0.03 $ 0.06
Shares used in computing per share amounts:
Basic............................................. 8,698 10,330 35,672 49,672
Diluted........................................... 8,698 10,330 55,014 58,282
Stock prices:
High.............................................. N/A N/A $ 64.50 $142.50
Low............................................... N/A N/A $ 22.63 49.09
</TABLE>
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<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data in Item 6 of this Annual Report and Brocade's financial
statements and notes thereto in Item 8 of this annual report.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This discussion contains forward-looking statements that relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"intend," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks outlined under "Risk Factors" and elsewhere in this annual
report. 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, including Amdhal, Compaq
Computer, CNT, Data General (a division of EMC Corporation), Dell Computer, IBM,
Groupe Bull, McDATA Corporation (a division of EMC Corporation), NEC, Network
Appliance, Sequent Computer Systems, SGI, Fujitsu/Siemens Computer Systems and
StorageTek 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 1997, McData and Sequent each contributed over 10% of our
total revenues for a combined total of 94% of total revenues. In fiscal 1998,
these same two customers each contributed over 10% of total revenues for a
combined total of 83% of total revenues. In fiscal 1999, Compaq, Data General,
McData, and Sequent each accounted for 10% or more of total revenues for a
combined total of 70%. 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. 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.
As noted above, we currently sell a large percentage of our products
through several major original equipment manufacturers. The initial evaluation
and product qualification cycle with original equipment manufacturers typically
takes six to twelve months and includes technical evaluation, integration,
testing, product launch planning and execution. Our sales strategy also includes
recruiting system integrators with a Fortune 500 data center presence and the
technical resources to design, implement and support SANs. To date,
substantially all of our sales have been in the United States. However, we have
launched sales and marketing efforts in Western Europe and 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
October 31, 1999, several of our customers were implementing SAN solutions,
including our product, for their end-users for the first time. In addition,
several customers were implementing our new SilkWorm 2000 family of products for
the first time. 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. Similarly, revenue is deferred for
new products that have not
15
<PAGE> 17
completed the beta test phase. As of October 31, 1999, $7.7 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. It is expected that this deferred revenue will be recognized in the first
and second quarters of fiscal year 2000 as customers begin volume shipments of
these 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.
Between fiscal 1998 and fiscal 1999 our average unit-selling price
decreased. 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 incur additional costs related to 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 $1.9 million of deferred compensation during
the year ended October 31, 1999. We will expense the balance ratably over the
remainder of the vesting period of the options. See note 7 to our financial
statements.
As of October 31, 1999, we had operating loss carryforwards of
approximately $44.0 million for federal income tax purposes and $14.7 million
for state tax purposes. The federal net operating loss carryforwards expire on
various dates between 2010 and 2019, and the state net operating loss
carryforwards will begin to expire in 2003. We have provided a full valuation
allowance against our deferred tax assets, consisting primarily of net operating
loss carryforwards, because of the uncertainty regarding their realization.
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<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net revenues................................................ 100% 100% 100%
Cost of revenues............................................ 79 65 49
---- --- ---
Gross margin.............................................. 21 35 51
---- --- ---
Operating expenses:
Research and development.................................. 90 61 22
Sales and marketing....................................... 25 21 19
General and administrative................................ 17 16 6
Amortization of deferred compensation..................... -- -- 3
---- --- ---
Total operating expenses............................... 132 98 50
---- --- ---
Income (loss) from operations............................... (111) (63) 1
Interest income (expense), net.............................. (2) 1 3
---- --- ---
Income (loss) before provision for income taxes............. (113) (62) 4
---- --- ---
Provision for income taxes.................................. -- -- --
---- --- ---
Net income (loss)........................................... (113)% (62)% 4%
==== === ===
</TABLE>
Revenues. We shipped our first commercial product in the second quarter of
fiscal 1997, generating revenues of $8.5 million for the year ended October 31,
1997. Net revenues increased by 185% to $24.2 million in fiscal 1998 and by 183%
to $68.7 million in fiscal 1999. The increase in net revenues from fiscal 1997
to fiscal 1998 reflects an increase in sales to a significant original equipment
manufacturer customer and the introduction of the SilkWorm Express product. The
increase in net revenues from fiscal 1998 to fiscal 1999 was due to increased
unit shipments of our SilkWorm 1000 family of products to an increasing customer
base, an increase in sales to several significant original equipment
manufacturer customers and increased sales in the system integrator channel. Net
revenues for the year ended October 31, 1999 exclude $7.7 million in deferred
revenue associated with shipments to new customers and shipments of our new
SilkWorm 2000 family of products. In fiscal 1999, revenues from four customers
accounted for 70% 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.
Gross margin. Gross margin increased from $1.8 million or 21.3% of net
revenues in fiscal 1997, to $8.5 million or 35.0% in fiscal 1998, and to $35.2
million or 51.2% in fiscal 1999. The increase from fiscal 1997 to fiscal 1998
was due to lower component and manufacturing costs, and the allocation of fixed
manufacturing costs over a greater revenue base. In addition, beginning in
fiscal 1998, gross margins increased as a result of the decision to outsource
all manufacturing activities during the year. The increase in gross margin from
fiscal 1998 to fiscal 1999 was due to lower component and manufacturing costs
and the allocation of fixed manufacturing costs over a greater revenue base. In
addition, for fiscal 1998, gross margin was adversely affected by the write-off
of obsolete inventory and the write-off of certain inventory and equipment
related to a change in contract manufacturers.
Research and development expenses. Research and development expenses
increased from $7.7 million in fiscal 1997, to $14.7 million in fiscal 1998 and
to $15.3 million in fiscal 1999. These increases reflect significant research
and development efforts required to bring the SilkWorm family of products to the
marketplace. The increase in fiscal 1998 expenses also reflects restructuring
costs associated with the cancellation of new product development and simulation
projects.
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<PAGE> 19
Sales and marketing expenses. Sales and marketing expenses increased from
$2.1 million in fiscal 1997, to $5.2 million in fiscal 1998, and to $13.3
million in fiscal 1999. The increases reflect the hiring of additional sales and
marketing personnel and increased direct selling expenses associated with
increased revenues.
General and administrative expenses. General and administrative expenses
increased from $1.5 million for fiscal 1997, to $3.8 million for fiscal 1998 and
fiscal 1999. The increase from fiscal 1997 to fiscal 1998 was primarily due to
increased staffing and associated expenses necessary to manage and support our
increased scale of operations. Fiscal 1998 expenses were also affected by costs
related to a business restructuring which totaled $1.2 million, primarily
related to the termination of employees. Fiscal 1999 expenses reflect costs
associated with increased staffing and other expenses necessary to manage and
support our increased scale of operations.
Amortization of deferred compensation. During fiscal 1998 and 1999 we
recorded deferred compensation of $307,000 and $5.1 million, respectively, in
connection with stock option grants. Deferred compensation is amortized over
vesting periods of the applicable options, resulting in amortization expense of
$7,000 and $1.9 million in fiscal 1998 and 1999, respectively.
Interest income, net. Net interest income increased from $120,000 in
fiscal year 1998 to $1.7 million in fiscal 1999 due to interest earned on the
funds associated with the closing of our initial public offering in May 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 $66.0 million in our initial public offering. Our principal sources of
liquidity as of October 31, 1999 consisted of $89.3 million in cash, cash
equivalents and short-term investments.
During fiscal 1997, cash used in operating activities was $7.3 million
compared to $11.6 million in fiscal 1998. In fiscal 1999, we generated $16.5
million in cash from operations. The increase in cash used in operations in
fiscal 1998 reflects the increased working capital required to fund expanding
operations and increases in inventories and accounts receivable. The cash
provided by operating activities in fiscal 1999 reflects net income of $2.5
million in fiscal 1999 compared to a net loss of $15.1 million in fiscal 1998,
plus favorable changes in the balances of operating assets and liabilities.
Net cash provided by investing activities for fiscal 1998 was $12.1 million
compared to net cash used in investing activities of $19.3 million for fiscal
1997. The period to period change was due mainly to sales of short-term
investments during fiscal 1998. Net cash used in investing activities for fiscal
1999 was $67.1 million compared to net cash provided by investing activities of
$12.1 million for fiscal 1998. The period to period change was due mainly to the
purchases of short-term investments during fiscal 1999.
Net cash provided by financing activities was $28.5 million, $7.3 million
and $65.7 million for fiscal 1997, 1998 and 1999, respectively. The primary
source of cash generated from financing for fiscal 1997 related to the issuance
of redeemable convertible preferred stock and warrants. For fiscal 1998, the
primary source of cash generation from financing related to the issuance of
redeemable convertible preferred stock and warrants, proceeds from the issuance
of notes payable, and borrowings under a credit facility. During fiscal 1999,
the primary source of cash generation from financing activities was the sale of
common stock in our initial public offering.
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.
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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 and sub-lease any excess
space. 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 improvement. Brocade intends to finance these tenant
improvements and the lease commitment with internally generated funds.
YEAR 2000 COMPLIANCE
Impact of the year 2000 computer problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
To date, we have not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any in the
future. To date, we have not experienced any year 2000 issues related to any of
our key third party suppliers and customers nor do we expect to experience any
in the future. Costs associated with remediating our internal systems were not
material.
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.
RISK FACTORS
WE HAVE AN ACCUMULATED DEFICIT OF $26.3 MILLION AND MAY NOT MAINTAIN
PROFITABILITY
We have incurred significant losses since our inception. As a result, as of
October 31, 1999, we had an accumulated deficit of $26.3 million. Although our
revenues have grown in recent quarters, and we achieved profitability in our
third and fourth quarters 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 achieve and 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
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offset any unexpected shortfall in our revenues. If this were to occur, we would
expect to incur significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
- fluctuations in demand for our SilkWorm family of products and services;
- the timing of customer orders and product implementations, particularly
large orders from and product implementations of our original equipment
manufacturer customers;
- our ability to develop, introduce, ship and support new products and
product enhancements;
- announcements and new product introductions by our competitors;
- the expected decline in the prices at which we can sell our SilkWorm
family of products to our customers;
- our ability to obtain sufficient supplies of sole or limited sourced
components, including application specific integrated circuits, or ASICs,
gigabit interface converters, or GBICs, and power supplies, for our
SilkWorm family of products;
- increases in the prices of the components we purchase;
- our ability to attain and maintain production volumes and quality levels
for our SilkWorm family of products;
- the mix of our SilkWorm and SilkWorm Express switches sold and the mix of
distribution channels through which they are sold;
- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key original equipment
manufacturers and system integrators;
- widespread adoption of SANs as an alternative to existing data storage
and management systems;
- decisions by end-users to reallocate their information resources to other
purposes, including year 2000 preparedness; and
- deferrals of customer orders in anticipation of new products, services or
product enhancements introduced by us or our competitors.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS
Our SilkWorm family of Fibre Channel switching products is used exclusively
in storage area networks, or SANs. Accordingly, widespread adoption of SANs as
an integral part of data-intensive enterprise computing environments is critical
to our future success. In addition, our success depends upon market acceptance
of our SAN switching solutions as an alternative to the use of hubs or other
interconnect devices in SANs. The markets for SANs and SAN switching products
have only recently begun to develop and are rapidly evolving. Because these
markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow
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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 ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND THE LOSS OF
ANY OF THEM COULD SIGNIFICANTLY REDUCE OUR REVENUES
We depend on a few key original equipment manufacturer customers. For
example, in the year ended October 31, 1999, sales to four customers accounted
for 70% of our total revenues. We anticipate that our operating results will
continue to depend on sales to a relatively small number of original equipment
manufacturers. Therefore, the loss of any of our key original equipment
manufacturers, or a significant reduction in sales to these original equipment
manufacturers could significantly reduce our revenues.
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES
Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
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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.
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 fiscal
1999. 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
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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. In April 1999, we hired a new Chief Financial Officer, and certain other
members of our management team, including Mr. Reyes, have only recently joined
us.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance and operations personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area. In particular, we have
experienced difficulty in hiring qualified ASIC, software, system and test, and
customer support engineers and there can be no assurance that we will be
successful in attracting and retaining these individuals. The loss of the
services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers and sales personnel, could delay the development and
introduction of and negatively impact our ability to sell our products. In
addition, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive such claims in
the future as we seek to hire qualified personnel or that such claims will not
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.
WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH
We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places a significant
demand on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS
We plan to expand our international sales activities significantly. In
fiscal 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
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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. See "Business -- Intellectual
Property."
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We were previously the
subject of a lawsuit alleging infringement of intellectual property rights.
Although this dispute was resolved and the lawsuit dismissed, and we are not
currently involved in any other intellectual property litigation, we may be a
party to litigation in the future to protect our intellectual property or as a
result of an alleged infringement of others' intellectual property. These claims
and any resulting lawsuit could subject us to significant liability for damages
and invalidation of our proprietary rights. These lawsuits, regardless of their
success, would likely be time-consuming and expensive to resolve and would
divert management time and attention. Any potential intellectual property
litigation also could force us to do one or more of the following:
- stop selling, incorporating or using our products or services that use
the challenged intellectual property;
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- 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 you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
YEAR 2000 COMPLIANCE
Impact of the year 2000 computer problem. The year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have
time-sensitive software may recognize a date represented as "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities.
To date, we have not experienced any year 2000 issues with any of our
internal systems or our products, and we do not expect to experience any in the
future. To date, we have not experienced any year 2000 issues related to any of
our key third party suppliers and customers nor do we expect to experience any
in the future. Costs associated with remediating our internal systems were not
material.
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
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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.
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.
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WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BROCADE COMMUNICATIONS SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... 28
Balance Sheets.............................................. 29
Statements of Operations.................................... 30
Statements of Redeemable Convertible Preferred Stock and
Stockholders' Equity (Deficit)............................ 31
Statements of Cash Flows.................................... 32
Notes to Financial Statements............................... 33
</TABLE>
27
<PAGE> 29
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Brocade Communications Systems, Inc.:
We have audited the accompanying balance sheets of Brocade Communications
Systems, Inc. (a Delaware corporation) as of October 31, 1999 and 1998 and the
related statements of operations, redeemable convertible preferred stock and
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended October 31, 1999. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Brocade Communications
Systems, Inc. as of October 31, 1999 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended October 31,
1999 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) is
presented for purposes of complying with the Securities and Exchange Commissions
rules and are not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
San Jose, California
November 24, 1999
28
<PAGE> 30
BROCADE COMMUNICATIONS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 10,420 $ 25,536
Short-term investments.................................... -- 63,769
-------- --------
Total cash, cash equivalents and short-term
investments...................................... 10,420 89,305
Accounts receivable, net of allowance for doubtful
accounts of $285 and $2,447, respectively............... 3,430 17,139
Inventories............................................... 1,744 3,686
Prepaid expenses and other current assets................. 220 2,197
-------- --------
Total current assets............................... 15,814 112,327
Property and equipment, net................................. 5,323 4,947
Other assets................................................ 164 6
-------- --------
Total assets....................................... $ 21,301 $117,280
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 3,247 $ 10,664
Accrued employee compensation............................. 628 4,414
Other accrued liabilities................................. 2,433 9,830
Deferred revenue.......................................... 543 7,688
Current portion of capital lease obligations.............. 784 436
Current portion of debt................................... 1,231 --
Borrowings under line of credit........................... 1,672 --
-------- --------
Total current liabilities.......................... 10,538 33,032
-------- --------
Long-term liabilities:
Long-term portion of capital lease obligations............ 478 42
Long-term portion of debt................................. 1,731 --
Commitments and contingencies (Note 4)
Redeemable convertible preferred stock, no par value:
Authorized -- 9,791,280 and no shares at October 31,
1998 and 1999, respectively.
Issued and outstanding (Series A, B, C and
D) -- 9,235,483 shares at October 31, 1998; no shares
at October 31, 1999.................................... 35,261 --
Warrants to purchase redeemable convertible preferred
stock................................................... 648 --
-------- --------
Total long-term liabilities........................ 38,118 42
-------- --------
Stockholders' equity (deficit):
Common stock, $.001 par value:
Authorized -- 200,000,000 shares at October 31, 1999
Issued and outstanding -- 10,389,530 shares at October
31, 1998 and 53,520,040 shares at October 31, 1999..... 10 53
Additional paid-in capital.................................. 2,215 119,598
Deferred stock compensation................................. (300) (3,440)
Notes receivable from stockholders.......................... (450) (5,660)
Accumulated deficit......................................... (28,830) (26,345)
-------- --------
Total stockholders' equity (deficit)............... (27,355) 84,206
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $ 21,301 $117,280
======== ========
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 31
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues................................................ $ 8,482 $ 24,246 $68,692
Cost of revenues............................................ 6,682 15,759 33,497
------- -------- -------
Gross margin........................................... 1,800 8,487 35,195
------- -------- -------
Operating expenses:
Research and development.................................. 7,666 14,744 15,267
Sales and marketing....................................... 2,112 5,154 13,288
General and administrative................................ 1,464 3,813 3,849
Amortization of deferred compensation..................... -- 7 1,937
------- -------- -------
Total operating expenses............................... 11,242 23,718 34,341
------- -------- -------
Income (loss) from operations............................... (9,442) (15,231) 854
Interest income (expense), net.............................. (177) 120 1,737
------- -------- -------
Income (loss) before provision for income taxes............. (9,619) (15,111) 2,591
Provision for income taxes.................................. -- -- 106
------- -------- -------
Net income (loss)........................................... $(9,619) $(15,111) $ 2,485
======= ======== =======
Basic net income (loss) per share........................... $ (2.41) $ (2.22) $ 0.10
======= ======== =======
Diluted net income (loss) per share......................... $ (2.41) $ (2.22) $ 0.05
======= ======== =======
Shares used in computing basic net income (loss) per
share..................................................... 3,994 6,800 26,094
======= ======== =======
Shares used in computing diluted net income (loss) per
share..................................................... 3,994 6,800 51,146
======= ======== =======
Pro forma basic net income (loss) per share (unaudited)..... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share (unaudited)... $ (0.42) $ 0.05
======== =======
Shares used in computing pro forma basic net income (loss)
per share (unaudited)..................................... 35,830 43,074
======== =======
Shares used in computing pro forma diluted net income (loss)
per share (unaudited)..................................... 35,830 51,146
======== =======
</TABLE>
See accompanying notes to financial statements.
30
<PAGE> 32
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
REDEEMABLE CONVERTIBLE COMMON
PREFERRED STOCK STOCK ADDITIONAL WARRANTS DEFERRED
---------------------------- --------------- PAID-IN FOR COMMON STOCK
SHARES AMOUNT WARRANTS SHARES AMOUNT CAPITAL STOCK COMPENSATION
------ -------- -------- ------ ------ ---------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at October 31, 1996...... 2,241 $ 4,613 $ 188 8,988 $ 9 $ 255 $ -- $ (121)
Exercise of options............... -- -- -- 768 1 89 -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 500 -- 75 -- --
Repurchase of common stock........ -- -- -- (430) -- (5) -- --
Issuance of Series C Redeemable
Convertible Preferred Stock, net
of issuance costs of $49........ 3,333 9,952 -- -- -- -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $42........ 2,796 15,794 -- -- -- -- -- --
Issuance of warrants related to
leases and notes payable........ -- -- 135 -- -- -- -- --
Issuance of warrants.............. -- -- 325 -- -- -- -- --
Deferred compensation............. -- -- -- -- -- -- -- 33
Net loss.......................... -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1997...... 8,370 30,359 648 9,826 10 414 -- (88)
Exercise of options............... -- -- -- 402 -- 55 -- --
Compensation charges.............. -- -- -- -- -- 1,067 -- 88
Deferred compensation............. -- -- -- -- -- 307 -- (307)
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $98........ 865 4,902 -- -- -- -- -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 450 -- 375 -- --
Stock in exchange for services.... -- -- -- 36 -- 41 -- --
Repurchase of common stock........ -- -- -- (324) -- (44) -- --
Net loss.......................... -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1998...... 9,235 35,261 648 10,390 10 2,215 -- (300)
Issuance of Series D Redeemable
Convertible Preferred Stock,
net............................. 299 2,322 (326) -- -- -- -- --
Conversion of Redeemable
Convertible Preferred Stock to
common stock.................... (9,534) (37,583) (322) 29,250 29 37,554 322 --
Issuance of common stock.......... -- -- -- 8,920 8 67,977 -- --
Issuance of stock for notes
receivable from stockholders.... -- -- -- 4,704 5 6,407 -- --
Repayments on notes receivable
from stockholders............... -- -- -- -- -- -- -- --
Exercise of warrants for common
stock........................... -- -- -- 568 1 381 (322) --
Compensation charges.............. -- -- -- -- -- 80 -- --
Deferred compensation............. -- -- -- -- -- 5,077 -- (5,077)
Amortization of deferred
compensation.................... -- -- -- -- -- -- -- 1,937
Repurchase of common stock........ -- -- -- (312) -- (93) -- --
Net income........................ -- -- -- -- -- -- -- --
------ -------- ----- ------ --- -------- ----- -------
Balances at October 31, 1999...... -- $ -- $ -- 53,520 $53 $119,598 $ -- $(3,440)
====== ======== ===== ====== === ======== ===== =======
<CAPTION>
NOTES TOTAL
RECEIVABLE STOCKHOLDERS
FROM ACCUMULATED EQUITY
STOCKHOLDERS DEFICIT (DEFICIT)
------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances at October 31, 1996...... $ -- $ (4,100) $ (3,957)
Exercise of options............... -- -- 90
Issuance of stock for notes
receivable from stockholders.... (75) -- --
Repurchase of common stock........ -- -- (5)
Issuance of Series C Redeemable
Convertible Preferred Stock, net
of issuance costs of $49........ -- -- --
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $42........ -- -- --
Issuance of warrants related to
leases and notes payable........ -- -- --
Issuance of warrants.............. -- -- --
Deferred compensation............. -- -- 33
Net loss.......................... -- (9,619) (9,619)
------- -------- --------
Balances at October 31, 1997...... (75) (13,719) (13,458)
Exercise of options............... -- -- 55
Compensation charges.............. -- -- 1,155
Deferred compensation............. -- -- --
Amortization of deferred
compensation.................... -- -- 7
Issuance of Series D Redeemable
Convertible Preferred Stock, net
of issuance costs of $98........ -- -- --
Issuance of stock for notes
receivable from stockholders.... (375) -- --
Stock in exchange for services.... -- -- 41
Repurchase of common stock........ -- -- (44)
Net loss.......................... -- (15,111) (15,111)
------- -------- --------
Balances at October 31, 1998...... (450) (28,830) (27,355)
Issuance of Series D Redeemable
Convertible Preferred Stock,
net............................. -- -- --
Conversion of Redeemable
Convertible Preferred Stock to
common stock.................... -- -- 37,905
Issuance of common stock.......... -- -- 67,985
Issuance of stock for notes
receivable from stockholders.... (6,412) -- --
Repayments on notes receivable
from stockholders............... 1,202 -- 1,202
Exercise of warrants for common
stock........................... -- -- 60
Compensation charges.............. -- -- 80
Deferred compensation............. -- -- --
Amortization of deferred
compensation.................... -- -- 1,937
Repurchase of common stock........ -- -- (93)
Net income........................ -- 2,485 2,485
------- -------- --------
Balances at October 31, 1999...... $(5,660) $(26,345) $ 84,206
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE> 33
BROCADE COMMUNICATIONS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $ (9,619) $(15,111) $ 2,485
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................ 1,093 2,374 3,693
Provision for doubtful accounts receivable............... 100 185 536
Noncash compensation expense............................. 33 1,202 2,017
Changes in assets and liabilities:
Accounts receivable................................... (2,746) (969) (14,245)
Inventories........................................... (471) (1,273) (1,942)
Prepaid expenses and other assets..................... (140) 205 (1,819)
Accounts payable...................................... 3,023 (45) 7,417
Accrued employee compensation......................... 474 154 3,786
Other accrued liabilities............................. 693 1,682 7,397
Deferred revenue...................................... 285 9 7,145
-------- -------- --------
Net cash provided by (used in) operating
activities....................................... (7,275) (11,587) 16,470
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........................ (3,423) (3,775) (3,317)
Purchases of short-term investments........................ (15,920) -- (75,769)
Proceeds from disposition of short-term investments........ -- 15,920 12,000
-------- -------- --------
Net cash provided by (used in) investing
activities....................................... (19,343) 12,145 (67,086)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of redeemable convertible preferred
stock and warrants....................................... 26,070 4,902 1,996
Proceeds from issuance of common stock..................... 90 56 67,985
Exercise of warrants for common stock...................... -- -- 60
Payments received on loans to stockholders................. -- -- 1,202
Repurchase of common stock................................. (5) (44) (93)
Line of credit borrowings.................................. 500 1,672 --
Line of credit repayments.................................. -- (500) (1,672)
Proceeds from capital lease financing...................... 1,258 -- --
Payments on capital lease obligations...................... (504) (677) (784)
Proceeds from notes payable................................ 1,091 2,594 247
Repayments of notes payable................................ (30) (693) (3,209)
-------- -------- --------
Net cash provided by financing activities........... 28,470 7,310 65,732
-------- -------- --------
Net increase in cash and cash equivalents.................. 1,852 7,868 15,116
Cash and cash equivalents, beginning of period............. 700 2,552 10,420
-------- -------- --------
Cash and cash equivalents, end of period................... $ 2,552 $ 10,420 $ 25,536
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................... $ 351 $ 557 $ 359
======== ======== ========
Conversion of redeemable convertible preferred stock upon
initial public offering............................... $ -- $ -- $ 37,905
======== ======== ========
Issuance of stock for notes receivable from
stockholders.......................................... $ 75 $ 375 $ 6,412
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
32
<PAGE> 34
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS OF BROCADE
Brocade Communications Systems, Inc. (Brocade) was incorporated on August
24, 1995. Effective May 14, 1999, Brocade reincorporated in the State of
Delaware. In connection with the reincorporation, Brocade was authorized to
issue 50,000,000 shares of common stock with a par value of $.001 per share and
5,000,000 shares of undesignated preferred stock with a par value of $.001 per
share. On October 5, 1999, the board of directors approved an increase in the
authorized shares of common stock to 200,000,000 shares. Subsequent to October
31, 1999, Brocade effected a two-for-one split of its common stock. All share
and per share information have been retroactively adjusted to reflect this
split.
Brocade provides Fibre Channel switching solutions for deployment in
storage area networks ("SANs"). Brocade's SilkWorm family of Fibre Channel
switches operate at gigabit speeds and create a switch interconnect enabling
any-to-any connectivity between storage devices and servers. Brocade sells its
products and services primarily to leading storage system and server original
equipment manufacturers and system integrators.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Such estimates relate to the useful lives of fixed assets,
allowances for doubtful accounts and product returns, inventory and warranty
reserves, accrued liabilities and other reserves. Actual results could differ
from those estimates and such differences may be material to the financial
statements.
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.
Brocade's short-term investments consist of U.S. Treasuries and Federal
Agency debt securities with original maturity dates between 90 days and one
year. The carrying value of short-term investments approximate fair value.
All of Brocade's investments are classified as available-for-sale.
Unrealized holding gains and losses are reported as a separate component of
other comprehensive income. At October 31, 1999, unrealized holding gains and
losses were not material. Realized gains and losses are included in interest
income in the statement of operations. The cost of securities sold is based on
the specific identification method.
Concentrations of Credit Risk
Financial instruments that potentially subject Brocade to concentrations of
credit risk consist primarily of cash equivalents and short-term investments and
accounts receivable. Brocade invests only in high credit quality short-term debt
instruments and limits the amount of credit exposure to any one entity. A
majority of Brocade's trade receivable balance is derived from sales to original
equipment manufacturers in the computer storage and server industry. At October
31, 1998 approximately 76% of accounts receivable was concentrated with four
customers. At October 31, 1999 approximately 74% of accounts receivable was
concentrated with four customers. Brocade performs on going credit evaluations
of its customers and generally does not require collateral on accounts
receivable. Brocade provides reserves for credit losses and product sales
returns.
33
<PAGE> 35
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories are stated at the lower of cost or market, using the first in,
first out method. Inventory costs include material, labor and overhead. Deferred
charges represent the product costs associated with product shipments that are
recorded in deferred revenue. Inventories consisted of the following, (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Raw materials.............................................. $1,203 $ 878
Work-in-process............................................ 6 173
Finished goods, including deferred charges................. 535 2,635
------ ------
$1,744 $3,686
====== ======
</TABLE>
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to four years. Leasehold improvements are amortized using the
straight-line method over the shorter of the assets useful lives or the
remaining term of the lease. Property and equipment consisted of the following,
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Computers and equipment.................................. $ 8,186 $10,530
Furniture and fixtures and leasehold improvements........ 779 711
Less: Accumulated depreciation and amortization.......... (3,642) (6,294)
------- -------
$ 5,323 $ 4,947
======= =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with a cost and related accumulated amortization of approximately
$2.6 million and $2.5 million, respectively, at October 31, 1999.
Software Development Costs
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," Brocade capitalizes eligible computer software development
costs upon the establishment of technological feasibility, which it has defined
as completion of designing, coding and testing activities. For the years ended
October 31, 1997, 1998 and 1999, the amount of costs eligible for
capitalization, after consideration of factors such as realizable value, were
not material and, accordingly, all software development costs have been charged
to research and development expense in the accompanying statements of operations
for all periods presented.
Accrued Employee Compensation
Accrued employee compensation consist of accrued wages, commissions and
payroll taxes, vacation payable, performance bonuses yet to be paid, payroll
deductions for the employee stock purchase plan and other benefit payroll
deductions.
34
<PAGE> 36
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Other Accrued Liabilities
Other accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accrued warranty........................................... $1,350 $1,856
Purchase commitments reserve............................... -- 3,629
Other...................................................... 1,083 4,345
------ ------
$2,433 $9,830
====== ======
</TABLE>
Stock-Based Compensation
Brocade accounts for its stock option plans and its Employee Stock Purchase
Plan in accordance with the provisions of Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees" ("APB 25"). In 1995, the
Financial Accounting Standards Board issued SFAS No. 123, "Accounting for
Stock-Based Compensation", which establishes a fair value based method of
accounting for stock-based plans. Companies that elect to account for
stock-based compensation plans in accordance with APB 25 are required to
disclose the pro forma net income (loss) that would have resulted from the use
of the fair value based method. Accordingly, pro forma disclosures that are
required under SFAS No. 123 are included in Note 7.
Stock Split
On November 8, 1999, Brocade's board of directors approved a two-for-one
split of Brocade's common stock. The stock began trading on a split-adjusted
basis on December 3, 1999. All references in the accompanying financial
statements to earnings per share and the number of common shares have been
retroactively restated to reflect the common stock split and the increase in
authorized common and preferred stock.
Revenue Recognition
Product revenue is generally recognized when products are shipped. Revenue
recognition is deferred for shipments to new customers where product returns
cannot be reasonably estimated or significant support services are required to
successfully launch the customer's product. These revenues are recognized when
the customer has successfully integrated and launched its products and Brocade
has met its support obligations. Allowances for warranty costs, credit losses
and estimated future returns are provided for upon shipment. Deferred revenues
as of October 31, 1998 and 1999 were approximately $543,000 and $7.7 million,
respectively.
In fiscal 1997, two customers contributed 67% and 27%, respectively of our
total revenues. In fiscal 1998, these same two customers accounted for 72% and
11%, respectively of our total revenues. In fiscal 1999, four customers
accounted for 34%, 14%, 12%, and 10%, respectively 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. 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.
35
<PAGE> 37
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Computation of Basic and Diluted Net Income (Loss) Per Share and Pro Forma
Basic and Diluted Net Income (Loss) Per Share
Basic and diluted net income (loss) per common share are presented in
conformity with SFAS No. 128, "Earnings Per Share," ("SFAS No. 128") for all
periods presented. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, common stock and convertible preferred stock issued
or granted for nominal consideration prior to the anticipated effective date of
an initial public offering must be included in the calculation of basic and
diluted net income (loss) per common share as if such stock had been outstanding
for all periods presented. To date, Brocade has not had any issuances or grants
for nominal consideration.
In accordance with SFAS No. 128, basic net income (loss) per common share
has been computed using the weighted average number of shares of common stock
outstanding during the period; less shares subject to repurchase. Diluted net
income (loss) per share is computed on the basis of the weighted average number
of common shares and common equivalent shares outstanding during the period.
Common equivalent shares result from the assumed exercise of outstanding stock
options that have a dilutive effect when applying the treasury stock method.
Brocade has excluded all convertible preferred stock, warrants for convertible
preferred stock, outstanding stock options and shares subject to repurchase from
the calculation of diluted net loss per common share for the years ended October
31, 1997 and 1998, because all such securities are antidilutive. The total
number of shares excluded from the calculations of diluted net loss per common
share were 35,123,546 and 39,012,626 for the years ended October 31, 1997 and
1998, respectively. See Notes 6 and 7 for further information on these
securities. Basic and diluted pro forma net income (loss) per common 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.
36
<PAGE> 38
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Net income (loss)........................................... $(9,619) $(15,111) $ 2,485
======= ======== =======
Basic and diluted net income (loss) per share:
Weighted average shares of common stock outstanding....... 9,188 10,348 30,264
Less: Weighted average shares subject to repurchase....... (5,194) (3,548) (4,170)
------- -------- -------
Weighted average shares used in computing basic net income
(loss) per share.......................................... 3,994 6,800 26,094
Dilutive effect of common share equivalents................. -- -- 25,052
------- -------- -------
Weighted average shares used in computing diluted net income
(loss) per share.......................................... 3,944 6,800 51,146
======= ======== =======
Basic net income (loss) per common share.................... $ (2.41) $ (2.22) $ 0.10
======= ======== =======
Diluted net income (loss) per share......................... $ (2.41) $ (2.22) $ 0.05
======= ======== =======
Pro forma net income (loss) per share:
Net income (loss)......................................... $(15,111) $ 2,485
======== =======
Weighted average shares used in computing basic net income
(loss) per share....................................... 6,800 26,094
Pro forma adjustment to reflect weighted effect of assumed
conversion of convertible preferred stock
(unaudited)............................................ 28,436 16,794
Pro forma adjustment to reflect assumed exercise and
conversion of preferred stock warrants to purchase
593,762 common shares in 1998 and 1999 at an exercise
price of $6.78 per share (unaudited)................... 594 186
-------- -------
Weighted average shares used in computing pro forma basic
net income (loss) per share (unaudited)................ 35,830 43,074
Dilutive effect of common share equivalents (unaudited)... -- 8,072
-------- -------
Weighted average shares used in computing pro forma
diluted net income (loss) per share (unaudited)........ 35,830 51,146
======== =======
Pro forma basic net income (loss) per share (unaudited)... $ (0.42) $ 0.06
======== =======
Pro forma diluted net income (loss) per share
(unaudited)............................................ $ (0.42) $ 0.05
======== =======
</TABLE>
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 was adopted by
Brocade beginning on November 1, 1997. This standard defines comprehensive
income as the changes in equity of an enterprise except those resulting from
stockholder transactions. 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) on available-for-sale
securities for all periods presented are not significant and accordingly,
comprehensive income (loss) for all periods presented approximated net income
(loss).
37
<PAGE> 39
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Reportable Segments
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures About Segments of an Enterprise and Related Information." ("SFAS
No. 131"). SFAS No. 131 was adopted by Brocade beginning on November 1, 1997.
SFAS No. 131 establishes standards for disclosures about operating segments,
products and services, geographic areas and major customers. Brocade is
organized and operates as one operating segment, the design, development,
manufacturing, marketing and selling of Fiber Channel switching solutions for
SAN's. Service revenues to date have not been significant. Brocade operates
principally in one geographic area, the United States. Major customers are
discussed above.
Capitalization of Internally Used Software
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use,"
("SOP No. 98-1"). SOP No. 98-1 requires entities to capitalize certain costs
related to internal-use software once certain criteria have been met. Brocade
adopted SOP 98-1 beginning on November 1, 1998. The adoption did not have a
material impact on Brocade's financial position or results of operations.
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.
3. LINE OF CREDIT AND DEBT
In June 1997, Brocade entered into a revolving line of credit agreement
with a bank under which it could borrow up to $4,000,000. The line of credit
bore interest at the bank's prime rate and was repaid upon expiration in August
1999.
As of October 31, 1998, Brocade had approximately $3.0 million payable to
the same bank under an equipment loan agreement. The equipment loan agreement
provided for borrowings of up to $5,000,000. Borrowings were secured by the
related capital equipment, bore interest at the bank's prime rate plus 1.0% and
were payable through June 30, 2002. As of October 31, 1999, all borrowings under
this loan agreement were repaid.
38
<PAGE> 40
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Notes payable as of October 31, 1998 and 1999 consisted of the following,
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Note payable to bank..................................... $ 2,962 $ --
Less: current portion.................................... (1,231) --
------- -------
Long-term portion........................................ $ 1,731 $ --
======= =======
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
Brocade leases its facilities under operating lease agreements expiring
through November 2000. The leases require that Brocade pay all costs of
maintenance, utilities, insurance and taxes. Rent expense for the years ended
October 31, 1997, 1998 and 1999 was $495,475, $804,057 and $1,284,178,
respectively.
Brocade leases computers, office equipment and furniture under long-term
lease agreements that are classified as capital leases. The leases expire
through January 2001 and require a final buyout payment at the end of the lease
term.
Future minimum lease payments, including the buyout payments, under all
lease arrangements at October 31, 1999 were as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDED OCTOBER 31, LEASES LEASES
- ---------------------- --------- -------
<S> <C> <C>
Fiscal year 2000.......................................... $847 $ 476
Fiscal year 2001.......................................... -- 42
---- -----
Total minimum lease payments.............................. $847 518
==== =====
Less: imputed interest (15.27% -- 17.65%)................. (40)
Present value of payments under capital leases............ 478
Less: current portion..................................... (436)
-----
Long-term capital lease obligations....................... $ 42
=====
</TABLE>
Subsequent to year end, Brocade entered into a lease for new office space
(See Note 10).
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, and
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 which arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.
5. RESTRUCTURING OF OPERATIONS
In the third quarter of fiscal 1998, Brocade initiated a plan to
restructure its operations to reduce its break even revenue level. The plan was
developed by management and approved by the Board of Directors with the
expectation that changes in certain programs and arrangements, with related head
count reductions, would immediately reduce operating expenses and improve cash
flows. The restructuring plan included the termination of the former Chief
Executive Officer for $1.1 million, the cancellation and abandonment of two
39
<PAGE> 41
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
research and development projects, one to develop a 64-port fibre channel switch
and another to develop storage area network simulation for a total of $300,000,
a change in contract manufacturer arrangements for $1.2 million, and a reduction
in labor force. In connection with this plan, Brocade recorded a $3.2 million
charge to operating expenses as follows: $1.3 million is included in cost of
revenues, $700,000 is included in research and development expense and $1.2
million is included in general and administrative expense in the 1998 statement
of operations. The restructuring charge includes $1.7 million of employee
related expenses for 20 employee terminations (8 manufacturing employees, 4
research and development employees and 8 employees from other departments),
including severance for Brocade's former Chief Executive Officer, $1.2 million
for the write-off of excess or abandoned equipment (specifically tooling and
fixtures) and inventories related to discontinued and newly established contract
manufacturer arrangements, and $300,000 for write-offs of other abandoned
tangible and intangible assets and facilities in Southern California related to
cancelled new product development and simulation projects. Employees were
formally notified of their termination beginning on July 31, 1998 and continuing
through August 4, 1998. The termination of 17 employees was immediate. The
remainder of the terminations occurred through January 31, 1999. As of October
31, 1999, Brocade had incurred all costs related to the restructuring.
6. PREFERRED STOCK
Brocade is authorized to issue, from time to time, in one or more series,
5,000,000 shares of preferred stock at a $.001 par value. The board of directors
may determine the rights, preferences, privileges and restrictions granted or
imposed upon any series of preferred stock. As of October 31, 1999, no preferred
stock is outstanding.
Redeemable Convertible Preferred Stock
In August 1995, Brocade issued 1,425,000 shares of its Series A Redeemable
Convertible Preferred Stock ("Series A"). In June 1996, Brocade issued 816,250
shares of its Series B Redeemable Convertible Preferred Stock ("Series B"). In
December 1996, Brocade issued 3,333,333 shares of its Series C Redeemable
Convertible Preferred Stock ("Series C"). In fiscal years 1997, 1998 and 1999
Brocade issued 2,795,848 shares, 865,052 shares and 298,522 shares,
respectively, of its Series D Redeemable Convertible Preferred Stock ("Series
D"). Effective May 24, 1999, the Series A, Series B, Series C and Series D
shares automatically converted into common stock upon the closing of Brocade's
initial public offering. Prior to the conversion into common stock, the rights
with respect to Series A, Series B, Series C and Series D were as follows:
Redemption. At the request of the holders of the majority of voting power
of the then outstanding preferred stock any time after August 28, 2002, Brocade
shall, to the extent funds are legally available, redeem the preferred stock in
increments over a three-year period. In such event, Brocade shall pay $1.00 per
share for Series A, $4.00 per share for Series B, $3.00 per share for Series C
and $5.78 for Series D plus any declared but unpaid dividends.
Voting. Each share of Series A, Series B, Series C and Series D has voting
rights equal to an equivalent number of shares of common stock into which it is
convertible.
Dividends. Holders of Series A, Series B, Series C and Series D are
entitled to receive noncumulative dividends when and as declared by the Board of
Directors at a rate of $0.08, $0.32, $0.24 and $0.46 per share, respectively,
per annum. After payment of such dividends, any additional dividends declared
will be paid to the holders of common stock and preferred stock in such amount
as they would be entitled to receive if their shares had been converted into
shares of common stock. No dividends have been declared.
Liquidation. In the event of any liquidation, dissolution or winding up of
Brocade, including a merger or sale of all or substantially all of the assets,
the holders of Series A, Series B, Series C and Series D are entitled
40
<PAGE> 42
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
to receive pari passu a distribution of $1.00, $4.00, $3.00 and $5.78 per share,
respectively, plus any declared but unpaid dividends prior to and in preference
to any distribution to the holders of common stock. The remaining assets, if
any, shall be distributed ratably among the holders of the common stock, Series
A, Series B, Series C and Series D, based on the number of shares held (assuming
conversion of the Series A, Series B, Series C and Series D).
Conversion. Each share of Series A, Series B, Series C and Series D is
convertible into common stock, at the holder's option or upon the consent of the
holders of a majority of the then outstanding Series A, Series B, Series C and
Series D shares voting as a single class. The Series A, Series B, Series C and
Series D shares are initially convertible into common stock at a ratio of eight
for one, four for one, two for one and two for one, respectively. The conversion
rates are protected by certain anti-dilution provisions. No adjustment in the
future conversion price of Series A, Series B, Series C or Series D shall be
made for the issuance of additional shares of common stock other than for a
common stock split, dividend, or distribution unless at the time of issuance of
the common stock the price per share for additional shares of common stock
issued is less than the conversion price in effect for the Series A, Series B,
Series C and Series D, respectively.
Warrants
Since inception, Brocade has issued warrants to purchase an aggregate of
51,197, 17,500 and 48,000 shares of Series A, Series B and Series C,
respectively. These warrants were issued in connection with equipment and
facilities lease agreements. Exercise prices range from $1.00 to $4.50 per
share. As of October 31, 1999, all these warrants have been exercised.
In connection with the initial sale and issuance of Series D, investors
were issued warrants to purchase 10% of the number of Series D shares purchased
by each investor at an exercise price of $6.78 per share. The total number of
shares of Series D purchasable upon exercise of these warrants was 296,881. As
of October 31, 1999, all these warrants have been exercised.
7. COMMON STOCK
Brocade completed an initial public offering on the Nasdaq National Market
on May 28, 1999 whereby 7,475,000 shares of common stock, including the exercise
of the underwriters over-allotment option, were sold with proceeds to Brocade of
$66.0 million.
At October 31, 1999, Brocade had reserved 7,938,180 shares related to stock
option plans of authorized but unissued shares of common stock for future
issuance.
Deferred Compensation
In connection with the grant of certain stock options to employees during
the years ended October 31, 1998 and 1999, Brocade recorded deferred
compensation of approximately $307,000 and $5.1 million, respectively,
representing the difference between the deemed value of the common stock for
accounting purposes and the option exercise price of such options at the date of
grant. Such amount is presented as a reduction of stockholders' equity and
amortized ratably over the vesting period of the applicable options.
Approximately $7,000 and $1.9 million was expensed during the years ended
October 31, 1998 and 1999, respectively, and the balance will be expensed
ratably over the period the options vest. Deferred compensation expense is
decreased in the period of forfeiture for any accrued but unvested compensation
arising from the early termination of an option holder's services. No
compensation expense related to any other periods presented has been recorded.
41
<PAGE> 43
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1999 Employee Stock Purchase Plan
In March 1999, the Board of Directors approved the adoption of Brocade's
1999 Employee Stock Purchase Plan (the "Purchase Plan"), and Brocade's
shareholders approved the Purchase Plan in April 1999. Per the terms of the
Purchase Plan, the maximum number of shares of Brocade's common stock available
for sale under the Purchase Plan is 400,000 shares, plus an annual increase to
be added on the first day of Brocade's fiscal year, equal to the lesser of
2,500,000 shares, or 2.5% of the outstanding shares at such date. Accordingly,
on November 1, 1999, 1,338,001 additional shares were made available for sale
under the Purchase Plan. The Purchase Plan permits eligible employees to
purchase shares of common stock through payroll deductions at 85% of the fair
market value of the common stock, as defined in the Purchase Plan.
1999 Stock Plan
In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan
(the "1999 Plan") and Brocade's shareholders approved the 1999 Plan in April
1999. The 1999 Plan provides for the grant of incentive stock options to
employees. Per the terms of the 1999 Plan, the maximum number of shares of
Brocade's common stock available for sale under the 1999 Plan is 15,214,000
shares, plus an annual increase to be added on the first day of Brocade's fiscal
year, equal to the lesser of 5,000,000 shares, or 5% of the outstanding shares
at such date. Accordingly, on November 1, 1999, 2,676,002 additional shares were
made available for sale under the 1999 Plan.
1999 Director Option Plan
In March 1999, the Board of Directors approved the 1999 Director Option
Plan (the "Director Plan") and Brocade's shareholders approved the Director Plan
in April 1999. The Director Plan provides for the grant of common stock to
non-employee directors. A total of 400,000 shares of common stock have been
reserved for issuance under the Director Plan.
1999 Nonstatutory Stock Option Plan
In September 1999, the Board of Directors approved Brocade's 1999
Nonstatutory Stock Option Plan (the "NSO Plan"). The NSO Plan provides for the
grant of nonstatutory stock options to employees and consultants. A total of
2,000,000 shares of common stock have been reserved for issuance under the NSO
Plan.
Stock Options
Brocade, under various stock option plans (the "Plans"), grants stock
options for shares of common stock to employees, directors and consultants of
Brocade. In accordance with the Plans, the stated exercise price shall not be
less than 85% of the estimated fair market value of common stock on the date of
grant. Incentive Stock Options ("ISOs") may not be granted at less than 100% of
the estimated fair market value of the common stock and stock options granted to
a person owning more than 10% of the combined voting power of all classes of
stock of Brocade must be issued at 110% of the fair market value of the stock on
the date of grant. The Plans provide that the options shall be exercisable over
a period not to exceed ten years, and the options generally vest over a period
of four years. The options typically vest 25% one year after the date of grant
and the remaining shares vest in equal monthly amounts over the following 36
months.
At October 31, 1999, an aggregate of 2,072,568 shares were available for
future option grants under all of the Plans.
Brocade accounts for the Plans and the Purchase Plan in accordance with APB
No. 25 whereby the difference between the exercise price and the fair value at
the date of grant is recognized as compensation expense. Had compensation
expense for the stock option plans been determined under the provisions of SFAS
42
<PAGE> 44
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
No. 123, net income (loss) would have decreased or increased, respectively, to
the following pro forma amounts, (in thousands except per share data):
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
------------------------------
1997 1998 1999
------- -------- -------
<S> <C> <C> <C>
Net income (loss) as reported........................ $(9,619) $(15,111) $ 2,485
Net loss Pro Forma................................... $(9,666) $(15,522) $(1,933)
Net income (loss) per share as reported.............. $ (2.22) $ 0.10
Net loss per share Pro Forma......................... $ (2.29) $ (0.07)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1997, 1998 and 1999, respectively: risk-free
interest rate of 5.71% to 6.63%, 5.58% to 5.86% and 5.02% to 5.26%; expected
dividend yields of zero percent for all three periods; expected life of .5 years
beyond vesting for all three periods; and expected volatility of .0001% for all
periods except the year ended October 31, 1999, for which a volatility factor of
60% was used.
The following table summarizes stock option plan activity under all of the
Plans:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, 1997 OCTOBER 31, 1998
----------------------------- ----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
----------- -------------- ---------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of
year......................... 1,168,000 $.10 2,110,334 $ .16
Granted........................ 2,631,000 $.17 6,309,824 $1.10
Exercised.................... (1,261,332) $.13 (851,140) $ .52
Cancelled.................... (427,334) $.11 (523,190) $ .53
----------- ----------
Outstanding at end of year..... 2,110,334 $.16 7,045,828 $ .92
=========== ==========
Exercisable at end of year..... 72,468 $.11 931,614 $ .76
Weighted fair value per
share........................ $ .0261 $ .1512
=========== ==========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31, 1999
-----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding at beginning of period................ 7,045,828 $ .92
Granted........................................... 5,356,024 $20.87
Exercised....................................... (6,151,368) $ 1.27
Cancelled....................................... (384,872) $ .94
-----------
Outstanding at end of period...................... 5,865,612 $18.78
===========
Exercisable at end of period...................... 449,754
Weighted fair value per share..................... $ 9.6708
===========
</TABLE>
43
<PAGE> 45
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------ -------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
OCTOBER 31, 1999 REMAINING AVERAGE EXERCISE
RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER PRICE
- ------------------------ --------- --------- -------------- ------- --------
<S> <C> <C> <C> <C> <C>
$ 0.100 - $ 0.900.................. 911,364 7.07 $ 0.36 153,674 $0.33
$ 1.125 - $ 4.000.................. 3,545,448 9.07 $ 1.90 296,080 $1.15
$49.063 - $109.938.................. 1,408,800 9.81 $72.31 -- --
--------- ---- ------ ------- -----
$ 0.100 - $109.938.................. 5,865,612 8.93 $18.78 449,754 $0.87
========= ==== ====== ======= =====
</TABLE>
At October 31, 1999, 3,621,806 shares issued upon exercise of stock options
with a weighted average exercise price of $.3524 were subject to repurchase by
Brocade.
8. INCOME TAXES
Brocade accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). A valuation allowance has been recorded for the
total deferred tax assets as a result of uncertainties regarding realization of
the assets based upon the limited operating history of Brocade, the lack of
profitability to date and the uncertainty of future profitability. The
components of net deferred tax assets are as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforwards....................... $ 8,100 $ 16,300
Tax credit carryforwards............................... 1,400 2,000
Capitalized startup costs.............................. 300 200
Reserves and accruals.................................. 2,200 7,900
Capitalized research expenditures...................... 700 1,400
-------- --------
Total deferred tax assets.............................. 12,700 27,800
Less: Valuation allowance.............................. (12,700) (27,800)
-------- --------
Net deferred tax assets........................... $ -- $ --
======== ========
</TABLE>
As of October 31, 1999, Brocade had federal net operating loss
carryforwards of approximately $44.0 million and state net operating loss
carryforwards of approximately $14.7 million. The federal net operating loss and
other tax credit carryforwards expire on various dates between 2010 through
2019. The state net operating loss carryforwards will expire beginning in 2003.
Under current tax law, net operating loss and credit carryforwards
available to offset future income in any given year may be limited upon the
occurrence of certain events, including significant changes in ownership
interests.
44
<PAGE> 46
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the difference between the U.S. Federal
statutory rate and Brocade's income tax provision for financial statement
purposes (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<S> <C>
Provision for income taxes at statutory rate.............. $ 907
State taxes, net of federal benefit....................... 149
Losses for which no tax benefit recognized................ (1,912)
Stock compensation not deductible for tax................. 822
Other..................................................... 140
-------
Provision for income taxes................................ $ 106
=======
</TABLE>
9. RELATED PARTY TRANSACTIONS
During fiscal 1997, 1998, and 1999, Brocade sold 500,000, 450,000 and 4.7
million shares, respectively, of its common stock to officers and a director of
Brocade in consideration for full recourse promissory notes in the aggregate
amount of $6.9 million. Should the officers terminate employment, these shares
are subject to a right of repurchase by Brocade. The right of repurchase lapses
over a four-year period. The notes bear interest at various rates ranging from
4.47% to 6.5% per annum and mature at various dates through May 2006.
10. SUBSEQUENT EVENTS (UNAUDITED)
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 and sub-lease any excess
space to offset the rental expense. 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.
45
<PAGE> 47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Certain information required by Part III is incorporated by reference from
Brocade's definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for Brocade's
fiscal 2000 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of December 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Gregory L. Reyes................ 37 President, Chief Executive Officer and Director
Paul R. Bonderson, Jr. ......... 47 Vice President, Engineering
Michael J. Byrd................. 39 Vice President, Finance and Chief Financial
Officer
Kumar Malavalli................. 56 Vice President, Technology
Victor M. Rinkle................ 46 Vice President, Operations
Charles W. Smith................ 38 Vice President, Worldwide Sales
Peter J. Tarrant................ 39 Vice President, Marketing and Business Development
Jean Zorzy...................... 47 Vice President, Program Management
Seth D. Neiman(1)............... 45 Chairman of the Board
Neal Dempsey(1)(2).............. 58 Director
Mark Leslie(2).................. 53 Director
Larry W. Sonsini................ 58 Director
</TABLE>
- ---------------
(1) Member of audit committee.
(2) Member of compensation committee.
Gregory L. Reyes has served as our President and Chief Executive Officer
and a member of our board of directors since July 1998. From January 1995 to
November 1997, Mr. Reyes served as Chairman of the board of directors, and from
January 1995 to June 1998, served as President and Chief Executive Officer of
Wireless Access, Inc., a wireless data communications products company. From
January 1991 to January 1995, Mr. Reyes served as Divisional Vice President and
general manager of Norand Data Systems, a data collection company. Mr. Reyes
also serves as a director of Proxim, Inc., a wireless networking company. Mr.
Reyes received a B.S. in Economics and Business Administration from Saint Mary's
College in Moraga, California.
Paul R. Bonderson, Jr. co-founded Brocade in August 1995 and has served as
Vice President, Engineering since August 1995. From March 1986 to August 1995,
Mr. Bonderson held several engineering positions at Sun Microsystems, Inc., most
recently as Director of Engineering. Mr. Bonderson received a B.S. in Electrical
Engineering from California Polytechnic State University, San Luis Obispo.
Michael J. Byrd joined Brocade in April 1999 and became our Vice President,
Finance and Chief Financial Officer effective May 3, 1999. From February 1994 to
April 1999, Mr. Byrd served as Vice President, Finance and Chief Financial
Officer of Maxim Integrated Products, Inc., a designer, developer and
manufacturer of linear and mixed-signal integrated circuits. From 1982 to 1994,
Mr. Byrd held various positions at Ernst & Young, most recently as Partner. Mr.
Byrd received a B.S. in Business Administration from California Polytechnic
State University, San Luis Obispo.
46
<PAGE> 48
Kumar Malavalli co-founded Brocade in August 1995 and has served as our
Vice President, Technology since October 1995. From July 1993 to October 1995,
Mr. Malavalli served as Manager of Architecture and Standards in the Canadian
Network Operation at Hewlett-Packard Company. Mr. Malavalli was a member of the
industry team that originated the Fibre Channel architecture, has helped guide
the technology through the industry standards committees and currently chairs
the ANSI T11 Technical Committee, which oversees all standards related to the
development of Fibre Channel. From 1993 to 1999, Mr. Malavalli was the chairman
of the Fibre Channel Association Technical Committee. Mr. Malavalli received
both a B.S. in Physics and Mathematics and a B.S. in Electrical Engineering from
the University of Mysore, India.
Victor M. Rinkle has served as our Vice President, Operations since January
1998. From April 1989 to December 1997, Mr. Rinkle held several managerial
positions at Apple Computer, Inc., most recently as Vice President, Global
Supply Base Management. Mr. Rinkle received a B.B.A. in Marketing and Production
Logistics from the University of Houston.
Charles W. Smith has served as our Vice President, Worldwide Sales since
February 1997. From June 1996 to February 1997, Mr. Smith served as Director,
Corporate Account Sales at IBM. From July 1990 to February 1996, Mr. Smith held
various senior sales management positions at Conner Peripherals, Inc., a storage
solutions company, most recently as Vice President, US Sales, Western Region.
Mr. Smith received an A.S. in Aeronautics and Business from the College of San
Mateo and a B.S. in Business Management from San Jose State University.
Peter J. Tarrant has served as our Vice President, Marketing and Business
Development since December 1997. From October 1994 to December 1997, Mr. Tarrant
served as Vice President, Product Management and Vice President, Business
Development at Bay Networks, Inc., a computer networking company. From April
1990 to October 1994, Mr. Tarrant held several product management positions at
SynOptics, a predecessor of Bay Networks, Inc. most recently as Director,
Product Management. Mr. Tarrant received a B.Sc. in Electronic Engineering from
the University of Southampton, United Kingdom.
Jean E. Zorzy has served as our Vice President, Program Management since
May 1999. From February 1998 to May 1999, Ms. Zorzy served as our Director of
Supplier Management. From July 1986 to February 1998, Ms. Zorzy held several
positions at Apple Computer, most recently as Director, External Operations. Ms.
Zorzy received a B.A. in Psychology from American University in Washington, D.C.
and an M.B.A. from San Jose State University.
Seth D. Neiman has served as Chairman of the board of directors of Brocade
since August 1995. Mr. Neiman formerly served as our Chief Executive Officer
from August 1995 to June 1996. Since August 1994, Mr. Neiman has held various
positions at Crosspoint Venture Partners, a venture capital firm, and has been a
partner of Crosspoint since January 1996. From September 1991 to July 1994, Mr.
Neiman was Vice President of Engineering at Coactive Networks, a local area
networks company. Mr. Neiman also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Neiman received a
B.A. in Philosophy from Ohio State University.
Neal Dempsey has served as a director of Brocade since December 1996. Since
May 1989, Mr. Dempsey has been a General Partner of Bay Partners, a venture
capital firm. Mr. Dempsey also serves on the boards of directors and
compensation committees of numerous private companies. Mr. Dempsey received a
B.A. in Business from the University of Washington.
Mark Leslie has served as a director of Brocade since January 1999. Mr.
Leslie has served as the Chief Executive Officer and a member of the board of
directors of VERITAS Software Corporation, a storage management software
company, since February 1990. Mr. Leslie also serves on the board of directors
of Versant Object Technology, as well as on the board of directors of a private
company. Mr. Leslie received a B.A. in Physics and Mathematics from New York
University.
Larry W. Sonsini has served as a director of Brocade since January 1999.
Mr. Sonsini has been a partner of the law firm of Wilson Sonsini Goodrich &
Rosati, P.C., since 1973 and is currently the Chairman of the Executive
Committee of the firm. Mr. Sonsini serves on numerous advisory boards and
committees, including the SEC's Advisory Committee on Capital Formation and
Regulatory Processes, the ABA Committee on
47
<PAGE> 49
Federal Regulation of Securities and the Legal Advisory Committee to the Board
of Governors, New York Stock Exchange. Mr. Sonsini serves on the boards of
directors of Novell, Inc., Lattice Semiconductor Corporation and Pixar Animation
Studios, as well as on the boards of directors of several private companies. Mr.
Sonsini received an A.B. from the University of California, Berkeley and an
L.L.B. from Boalt Hall School of Law, University of California, Berkeley.
The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors" in the Proxy
Statement. The required information concerning executive officers of the Company
is contained in the section entitled "Executive Officers and Directors of the
Registrant" in Part I of this Form 10-K.
Item 405 of Regulation S-K calls for disclosure of any known late filing or
failure by an insider to file a report required by Section 16 of the Exchange
Act. This disclosure is contained in the section entitled "Section 16 (a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated by reference from
the information in the sections entitled "Election of Directors -- Directors'
Compensation", "Executive Compensation" and "Stock Price Performance Graph" in
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors -- Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information in the section entitled "Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K
(1) Financial Statements:
Reference is made to the Index to Financial Statements of Brocade
Communications Systems, Inc. under Item 8 in Part II of this Form
10-K.
(2) Financial Statement Schedules:
The following financial statement schedule of Brocade Communications
Systems, Inc. for the years ended October 31, 1997, October 31, 1998,
and October 30, 1999 is filed as part of this Annual Report and
should be read in conjunction with the Financial Statements of
Brocade Communications Systems, Inc.
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ Page 52
</TABLE>
48
<PAGE> 50
(3) Exhibits:
The exhibits listed below are required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Form 10-K has been identified.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
<S> <C>
3.2(1) Amended and Restated Certificate of Incorporation.
3.4(2) Bylaws of the Registrant.
4.1(3) Form of Registrant's Common Stock certificate.
10.1(4) Form of Indemnification Agreement entered into between
Brocade with each of its directors and executive officers.
10.2(5) 1995 Equity Incentive Plan and forms of agreements
thereunder.
10.3(6) 1998 Equity Incentive Plan and forms of agreements
thereunder.
10.4(7) 1998 Executive Equity Incentive Plan and forms of agreements
thereunder.
10.5(8) 1999 Employee Stock Purchase Plan.
10.6(9) 1999 Director Option Plan and form of agreement thereunder.
10.7(10) 1999 Stock Plan and forms of agreements thereunder.
10.8(11) Sublease between Symmetricom, Inc. and Brocade dated May 6,
1997.
10.9(12) Security and Loan Agreement between Brocade and Imperial
Bank dated June 19, 1997.
10.10(13) Amendment to Loan Documents between Brocade and Imperial
Bank dated January 30, 1998.
10.11(14) Second Amendment to Loan Documents between Brocade and
Imperial Bank dated August 17, 1998.
10.12(15) Third Amendment to Loan Documents between Brocade and
Imperial Bank dated December 15, 1998.
10.13(16) Master Equipment Lease Agreement between Venture Lending &
Leasing, Inc. and the Registrant dated September 5, 1996.
10.14(17)+ Master Purchase Agreement between Dell Products L.P. and
Brocade dated November 1, 1998.
10.15(18)+ Purchase Agreement between Sequent Computer Systems, Inc.
and Brocade.
10.16(19)+ Supplement No. 1 to Purchase Agreement between Sequent
Computer Systems, Inc. and Brocade dated September 26, 1997.
10.17(20)+ OEM Agreement between Storage Technology Corporation and
Brocade dated May 1, 1998.
10.18(21) Acknowledgment between Wind River Systems, Inc. and Brocade,
dated April 22, 1999.
10.19(22) Confidential Agreement and General Release of Claims between
Bruce J. Bergman, The Bergman Family Trust and Brocade dated
September 23, 1998.
10.20(23) Letter Agreement with Michael J. Byrd dated April 5, 1999.
10.21(24)+ OEM and License Agreement between Brocade and McDATA
Corporation, dated April 27, 1999.
10.22(25) 1999 Nonstatutory Stock Option Plan and form of Agreements
thereunder.
10.23+ Volume Pricing Agreement between Brocade and Data General
Corporation dated October 1, 1998.
10.24+ Manufacturing Agreement between Brocade and Solectron
California Corporation dated July 30, 1999.
10.25 Master Lease Agreement between Brocade and Spieker
Properties dated .
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
49
<PAGE> 51
(2) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(3) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(4) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(5) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(6) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(7) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(8) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(9) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(10) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(11) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(12) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(13) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(14) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(15) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(16) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(17) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(18) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(19) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(20) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(21) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(22) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(23) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(24) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
50
<PAGE> 52
(25) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
(b) Reports on Form 8-K
None
51
<PAGE> 53
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO REVERSALS TO BALANCE AT
BEGINNING OF COSTS AND COSTS AND END OF
DESCRIPTION PERIOD EXPENSES EXPENSES (DEDUCTIONS) PERIOD
- ----------- ------------ ---------- ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
1997................................. $ -- $ 100 $-- $ -- $ 100
1998............................... 100 178 -- -- 278
1999............................... 278 596 (4) (52) 818
Sales returns and allowances:
1997............................... $ -- $ -- $-- $ -- $ --
1998............................... -- 7 -- -- 7
1999............................... 7 1,622 -- -- 1,629
</TABLE>
52
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment No. 1 to
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on January 28, 2000.
Brocade Communications Systems, Inc.
By: /s/ GREGORY L. REYES
------------------------------------
Gregory L. Reyes
President, Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* President, Chief Executive Officer, January 28, 2000
- ------------------------------------------ and Director
Gregory L. Reyes
* Vice President, Finance and Chief January 28, 2000
- ------------------------------------------ Financial Officer
Michael J. Byrd
* Chairman of the Board January 28, 2000
- ------------------------------------------
Seth D. Neiman
* Director January 28, 2000
- ------------------------------------------
Neal Dempsey
* Director January 28, 2000
- ------------------------------------------
Mark Leslie
Director January 28, 2000
- ------------------------------------------
Larry W. Sonsini
*By: /s/ MICHAEL J. BYRD
----------------------------------------
Michael J. Byrd
Attorney-in-Fact
</TABLE>
53
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ---------- -----------------------
<S> <C>
3.2(1) Amended and Restated Certificate of Incorporation.
3.4(2) Bylaws of the Registrant.
4.1(3) Form of Registrant's Common Stock certificate.
10.1(4) Form of Indemnification Agreement entered into between
Brocade with each of its directors and executive officers.
10.2(5) 1995 Equity Incentive Plan and forms of agreements
thereunder.
10.3(6) 1998 Equity Incentive Plan and forms of agreements
thereunder.
10.4(7) 1998 Executive Equity Incentive Plan and forms of agreements
thereunder.
10.5(8) 1999 Employee Stock Purchase Plan.
10.6(9) 1999 Director Option Plan and form of agreement thereunder.
10.7(10) 1999 Stock Plan and forms of agreements thereunder.
10.8(11) Sublease between Symmetricom, Inc. and Brocade dated May 6,
1997.
10.9(12) Security and Loan Agreement between Brocade and Imperial
Bank dated June 19, 1997.
10.10(13) Amendment to Loan Documents between Brocade and Imperial
Bank dated January 30, 1998.
10.11(14) Second Amendment to Loan Documents between Brocade and
Imperial Bank dated August 17, 1998.
10.12(15) Third Amendment to Loan Documents between Brocade and
Imperial Bank dated December 15, 1998.
10.13(16) Master Equipment Lease Agreement between Venture Lending &
Leasing, Inc. and the Registrant dated September 5, 1996.
10.14(17)+ Master Purchase Agreement between Dell Products L.P. and
Brocade dated November 1, 1998.
10.15(18)+ Purchase Agreement between Sequent Computer Systems, Inc.
and Brocade.
10.16(19)+ Supplement No. 1 to Purchase Agreement between Sequent
Computer Systems, Inc. and Brocade dated September 26, 1997.
10.17(20)+ OEM Agreement between Storage Technology Corporation and
Brocade dated May 1, 1998.
10.18(21) Acknowledgment between Wind River Systems, Inc. and Brocade,
dated April 22, 1999.
10.19(22) Confidential Agreement and General Release of Claims between
Bruce J. Bergman, The Bergman Family Trust and Brocade dated
September 23, 1998.
10.20(23) Letter Agreement with Michael J. Byrd dated April 5, 1999.
10.21(24)+ OEM and License Agreement between Brocade and McDATA
Corporation, dated April 27, 1999.
10.22(25) 1999 Nonstatutory Stock Option Plan and form of Agreements
thereunder.
10.23+ Volume Pricing Agreement between Brocade and Data General
Corporation dated October 1, 1998.
10.24+ Manufacturing Agreement between Brocade and Solectron
California Corporation dated July 30, 1999.
10.25 Master Lease Agreement between Brocade and Spieker
Properties dated .
23.1 Consent of Arthur Andersen LLP, Independent Public
Accountants.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
(1) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(2) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(3) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(4) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
54
<PAGE> 56
(5) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(6) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(7) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(8) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(9) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(10) Incorporated by reference from Brocade's Registration Statement on Form S-8
(Reg. No. 333-95653).
(11) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(12) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(13) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(14) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(15) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(16) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(17) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(18) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(19) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(20) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(21) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(22) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(23) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(24) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
(25) Incorporated by reference from Brocade's Registration Statement on Form S-1
(Reg. No. 333-74711), as amended.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
55
<PAGE> 1
EXHIBIT 10.23
VOLUME PRICING AGREEMENT 2085
VOLUME PRICING AGREEMENT NO. 2085
BUYER: DATA GENERAL CORPORATION
SUPPLIER: BROCADE COMMUNICATIONS SYSTEMS, INC.
TERM: Three (3) Years
MATERIAL: FIBRE CHANNEL SWITCHES ("SWITCHES") AND
GIGABIT INTERFACE CONVERTERS ("GBICs")
Page 1 of 45
<PAGE> 2
VOLUME PRICING AGREEMENT 2085
VOLUME PRICING AGREEMENT
This Volume Pricing Agreement Number 2085 (the "Agreement") is made as of
October 1, 1998 (the "Effective Date") between Data General Corporation, a
Delaware (U.S.A.) corporation with a principal place of business at 4400
Computer Drive, Westboro, Massachusetts 01580 (U.S.A.) (hereinafter referred to
as "DGC") and Brocade Communications Systems, Inc., a Delaware corporation with
a principal place of business at 1901 Guadalupe Parkway, San Jose, CA 95131
(U.S.A.) (hereinafter referred to as "SUPPLIER" or "BCS")
In consideration of the mutual covenants contained herein and other
consideration, DGC and BCS agree to the following terms and conditions:
1. MATERIAL, ORDER ENTRY PERIOD AND METHOD OF ORDER
1.1 The "Order Entry Period" (period during which DGC is entitled to place
orders for MATERIAL) shall commence on the Effective Date of this
Agreement, and shall continue until September 30, 2001 unless earlier
terminated pursuant to [*] below. The Order Entry Period shall then
continue after such date unless and until either party terminates the
Order Entry Period by not less than [*] days' written notice. (Provided
that the Agreement is not terminated for material breach by DGC, such
termination shall not affect orders issued before the designated
termination date.)
1.2 BCS agrees to sell the MATERIAL listed in Attachment A (a) to DGC; (b)
to the Affiliated Companies (as defined in Section 1.6 below); (c) for
use solely in the course of manufacture of products for DGC, to DGC's
contract manufacturer(s), in satisfaction of purchase orders issued in
writing during the Order Entry Period, in accordance with the terms and
conditions of this Agreement. The hardware components of the MATERIAL
("Hardware") and the GBICs shall conform to all specifications
referenced in Attachment B and the software components of the MATERIAL
("Software") shall substantially conform to all specifications
referenced in Attachment B, including without limitation DGC's
Specifications for safety [*] and RF emissions and telecommunications
compliance [*]. Further, all MATERIAL shall be "Year 2000 Qualified".
For purposes of the foregoing, "Year 2000 Qualified" means that MATERIAL
will correctly process, calculate, compare and sequence date data from,
into and between the twentieth and the twenty-first centuries, including
leap year calculations, when used in accordance with the associated
product documentation; provided that all hardware, firmware and software
used in combination with MATERIAL properly exchange accurate date data
in appropriate Year 2000 format. Except as set forth herein, (i) neither
party may make any changes to the specifications set forth in the
attachments hereto without written consent of the other party, and (ii)
only DGC shall be entitled to request modifications to the MATERIAL
(excluding GBICs).
1.3 DGC shall order MATERIAL under this Agreement only by means of its
written purchase order(s). Telephone or facsimile communications will be
accepted to initiate order processing, subject to a written confirmation
by DGC on DGC's purchase order within [*] days thereof; in such case,
the time of order placement shall relate back to the initial
communication. Subject to the terms and conditions of this Agreement,
BCS agrees to accept all purchase orders issued in accordance with this
Agreement during the Order Entry Period. BCS agrees to notify DGC in
writing of any improper order, within [*] business days of receipt.
1.4 This Agreement shall apply to all orders for any MATERIAL listed in
Attachment A which are identified by DGC's Specification Number(s). Any
term of a Purchase Order which conflicts with or
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 2 of 45
<PAGE> 3
VOLUME PRICING AGREEMENT 2085
adds to the terms of this Agreement shall be of no force or effect; the
parties agree that Purchase Orders shall only serve to state the
MATERIAL ordered, the desired delivery date, method of shipment,
"Ship-To" address and taxability of order status. In addition, this
Agreement shall also apply to any other Replacements and Repair and
Refurbishment services, provided that DGC's purchase order includes the
following legend:
"This Purchase Order is placed under Volume Pricing Agreement
No. 2085 dated October 1, 1998, which shall exclusively govern
this Purchase Order."
1.5 DGC estimates that it will purchase an average quarterly quantity of
units of MATERIAL as listed on Attachment A of this Agreement during the
term of this Agreement. However, [*]. If the purchases for the previous
two (2) quarters fall below [*] percent of the average quarterly
quantity mentioned in this paragraph 1.5 and detailed in Attachment A,
upon which initial pricing is herein based, BCS has the right to adjust
prices on subsequent orders placed by DGC upon written notice to DGC.
BCS will allow DGC [*] days to place sufficient non-cancelable orders to
bring the actual quantities purchased in line with the forecast herein
stated. If DGC's actual purchases of MATERIAL are [*] or more above the
original forecast, DGC can request pricing be adjusted on subsequent new
orders.
1.6 Any DGC divisions, plants, and companies controlled by, controlling or
under common control with DGC (being DGC's "Affiliated Companies") may
purchase MATERIAL, Replacements and Repair and Refurbishment services,
all as otherwise provided in this Agreement.
2. PRICES, F.O.B. POINT, PAYMENT TERMS
2.1 Prices for MATERIAL purchased hereunder shall be as stated in Attachment
A, F.O.B. [*], Place of Shipment, at BCS's contract manufacturer's
U.S. facility (hereafter, the "F.O.B. Point"). Freight terms shall be
freight charges collect. DGC shall not be liable for damage due to
improper packaging of MATERIAL or for MATERIAL improperly [*], or for
any concealed damage at the time of tender at the F.O.B. Point.
2.2 Payment shall be due, against BCS's invoice delivered to DGC, [*] days
after the date of invoice. Unless otherwise agreed, invoices
shall not issue until delivery of the MATERIAL at the F.O.B. Point.
2.3 BCS agrees that the [*] will be [*] than the [*] by BCS to any of its
customers [*] products in [*] upon [*]. In the event that BCS offers [*]
or other [*] to other customers for [*] in [*] upon [*] during the term
of this Agreement, then BCS shall [*] similar [*] in [*] and [*] to DGC.
DGC and BCS will meet quarterly to review pricing and, if mutually
agreed in a signed writing, implement price adjustments based on the
current market conditions and other related factors. The revised
pricing, if any, will only apply to MATERIAL purchased from the review
date forward, or upon a date agreed to in writing by both parties, and
be in effect until the next pricing review or other pricing action. Upon
DGC receipt of any amended pricing schedule or other document reflecting
BCS's adjustments in price, pricing hereunder shall be deemed amended by
substitution of such amended pricing schedule / document.
2.4 DGC acknowledges that MATERIAL, including documentation and other
technical data, are subject
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 3 of 45
<PAGE> 4
VOLUME PRICING AGREEMENT 2085
to export controls imposed by the U.S. Export Administration
Regulations, and the laws of other countries worldwide (the "Export
Laws"). DGC warrants and represents to BCS that it will not export or
re-export (directly or indirectly) any MATERIAL, or documentation or
other technical data therefor, in whole or in part, in violation of the
Export Laws and the regulations thereunder. DGC, at its costs, shall
obtain all necessary export documentation, licenses and authorizations
for international shipments, and BCS agrees to use commercially
reasonable efforts to assist DGC in such effort.
3. LEAD TIME; DELIVERY- DEFINITIONS AND REQUIREMENTS
3.1 Timeliness of delivery of MATERIAL pursuant to the requirements of this
Agreement is of the essence. BCS will use commercially reasonable
efforts to cause MATERIAL to be delivered to DGC's designated "Ship-To"
location no later than the "Date Due" specified on the purchase order(s)
submitted pursuant to Section 1.4 above, provided that DGC allows no
less that the lead time(s) stated in Attachment A (for MATERIAL) and
Attachment D (for Replacements). For such purpose, lead time shall mean
the time between BCS's receipt of DGC's order and the "Date(s) Due"
specified for such order. BCS shall not deliver MATERIAL more than four
(4) days before the specified "Date Due". BCS shall use commercially
reasonable efforts to accommodate and accept orders allowing less than
the required lead time. BCS will provide written acknowledgement of
committed delivery dates for all DGC orders within 5 business days after
BCS's receipt of DGC's order.
3.2 By the tenth (10th) business day of each month, DGC shall provide BCS
with a written rolling 26-week forecast of its anticipated MATERIAL
requirements.
3.3 Except as provided in Section 4.2, orders not delivered in a timely
manner (as described in Section 3.1) shall be subject to rescheduling,
at DGC's option and without charge, and without limitation of DGC's
other remedies.
3.4 In the event that BCS determines that it may be unable to make timely
delivery of MATERIAL not later than the committed delivery dates, then
BCS shall promptly: (1) make commercially reasonable efforts (e.g., use
of overtime, expedited procurement of parts and components, and
expedited shipment (such as use of air freight)) to minimize the delay,
and (2) inform DGC of the situation, the actions so taken and to be
taken by BCS, and when BCS expects to be able to effect delivery. BCS is
responsible for all incremental costs arising from actions taken to
minimize late deliveries, including without limitation any incremental
freight charges associated with expedited shipments.
3.5 Except as expressly otherwise stated herein, and subject to each term
and condition of this Agreement, BCS will supply the MATERIAL described
in Attachment A throughout the stated term of this Agreement. BCS shall
provide [*] days' written notice of intent to discontinue the
manufacture, sale or distribution of any or all MATERIAL ("End of Life"
or "EOL"). DGC may place orders for any demand during the [*] days of
such notice for delivery of affected MATERIAL prior to the end of the
notice period. To the extent that such orders exceed DGC's previous
forecast in Section 3.2 for MATERIAL, the orders shall be
non-cancelable. Unless BCS agrees in writing to the contrary, BCS shall
accept only forecasted orders in the last [*] days of the stated notice
period, and such orders shall be (i) for delivery within four (4) months
after the date such orders are placed, and (ii) non-cancelable.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
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4. RESCHEDULING; CANCELLATION; CHANGE OF DESTINATION
4.1 Rescheduling: Deferred Deliveries --- DGC may adjust the "Date Due" to a
later date specified by DGC in its notice, subject to the following
conditions and restrictions:
DEFERMENT SCHEDULE
------------------
<TABLE>
<CAPTION>
NOTICE PERIOD RESCHEDULING CONDITIONS
- ------------- -----------------------
<S> <C>
0-30 days before Date Due No rescheduling permitted
[*] days before Date Due MATERIAL can be rescheduled; rescheduled
date shall be no later than 90 days from
the Date Due stated on DGC's initial order
or the end of the current BCS Fiscal
Quarter, which whichever comes first.
[*] days or greater before Unlimited rescheduling permitted provided
Date Due that the MATERIAL is not identified in
Attachment A as DGC UNIQUE MATERIAL
</TABLE>
4.2 Rescheduling: Accelerated or Less-Than-Leadtime Deliveries --- BCS shall
accommodate DGC's requests to accelerate the date(s) of deliveries
and/or to manufacture and deliver MATERIAL (specifically excluding GBICs
which are not integrated into SWITCHES) in a shorter period than the
applicable lead time, as follows:
ACCELERATION SCHEDULE
---------------------
<TABLE>
<CAPTION>
NOTICE PERIOD CONDITIONS
- ------------- ----------
<S> <C>
0- 30 days before Date Due BCS shall use commercially reasonable
efforts to satisfy DGC's requirements
[*] days before Date Due BCS shall accommodate DGC's requirements,
insofar as not exceeding [*] above Monthly
Forecasted Demand
[*] days before Date Due BCS shall accommodate DGC's requirements,
insofar as not exceeding [*] above Monthly
Forecasted Demand
[*] days or greater before BCS shall accommodate DGC's requirements,
Date Due, or prior to BCS's insofar as not exceeding [*] above Monthly
leadtime, whichever is Forecasted Demand. Further, BCS shall use
earlier its commercially reasonable efforts to
accommodate any requested increase/
acceleration above that level.
</TABLE>
For these purposes, "Monthly Forecasted Demand" shall mean the average
of the last [*] months actual shipment quantities and the forecast for
the next 4 months, which forecast has been submitted to BCS pursuant to
Section 3.2 above no less than 30 days prior to the date of the request
for acceleration.
The parties agree that DGC shall not have the remedies set forth in
Section 3.3 above on account of BCS's failure to meet DGC's accelerated
Due Dates.
* Certain information on this page has been omitted and filed separately with
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VOLUME PRICING AGREEMENT 2085
4.3 Cancellation -- DGC may cancel any order, by notice given not later than
delivery of the MATERIAL to the F.O.B. Point. There shall be no
cancellation charges for orders canceled with a notice period greater
than the specified lead time for the MATERIAL being canceled, nor for
cancellation of any MATERIAL described below which is canceled with at
least the below-specified notice:
CANCELLATION SCHEDULE
<TABLE>
<CAPTION>
NOTICE PERIOD CANCELLATION CHARGES
------------- --------------------
<S> <C>
0-30 days before Date Due 100% of the Purchase Price
31-89 days before Date Due [*] of the Purchase Price
90 days or greater before Date No liability for cancellation
Due, or prior to the specified
leadtime, whichever is earlier
</TABLE>
All other cancellations may be subject to cancellation charges to be
negotiated between the parties, which shall not exceed the lesser of (i)
BCS's direct damages, or (ii) [*]. Without limitation, if cancelled
MATERIAL is not customized for, or a proprietary product of, DGC, then
if BCS can find an alternate customer to purchase cancelled MATERIAL
within three (3) months after the date upon which DGC would have been
obliged to take delivery of such MATERIAL, BCS agrees that its
restocking charges, if asserted, will not exceed [*] of the Purchase
Price.
4.4 Change of Destination -- By written notice given not later than [*] days
before shipment of MATERIAL, DGC may change the "ship-to" destination
designated in DGC's orders. Non-domestic shipments shall require 30 days
written notice of such change.
5. WARRANTIES
5.1 BCS agrees that the warranty extended to DGC herein for the MATERIAL is
the same or better than that extended by BCS to any of its customers
purchasing comparable products (the "Standard Warranty"). In the event
that BCS offers more favorable standard warranty terms (e.g., extended
length of the warranty granted over standard BCS products) to other
customers purchasing comparable products during the term of this
Agreement, then BCS shall immediately extend similar terms to DGC and
its Affiliated Companies for MATERIAL ordered after the date upon which
such more favorable terms are granted.
5.2 All MATERIAL shall be new (except repaired or refurbished MATERIAL
provided to DGC under warranty service by BCS) and, in the case of
Hardware, in compliance with DGC's specifications as referenced in
Attachment B and, to the extent not inconsistent, BCS's specifications,
and in the case of Software, in substantial compliance with DGC's
specifications as referenced in Attachment B and, to the extent not
inconsistent, BCS's specifications. From time to time, BCS may issue
notice of "Mandatory Field Changes", which are changes to MATERIAL
required to satisfy governmental environmental, safety or other
standards, reliability concerns, or to guarantee a continuity of supply.
BCS will make commercially reasonable efforts to provide DGC with [*]
days' prior written notice of Mandatory Field Changes prior to
implementing such changes; however this period may be
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the Commission. Confidential treatment has been requested with respect to the
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VOLUME PRICING AGREEMENT 2085
reduced if the change involves safety or reliability, or if otherwise
required by law. BCS shall issue Mandatory Field Change Orders ("MFCOs")
to effect such changes. The parties shall mutually agree on how DGC
shall implement the MFCOs. MFCOs shall include all documentation
necessary to properly define and implement any such change, and BCS
shall at its expense deliver to DGC kits of all parts and materials
necessary to effect MFCOs on all MATERIAL previously delivered as soon
as practical under the circumstances. BCS will reimburse DGC's actual
and reasonable costs incurred in implementing such MFCOs.
5.3 All Hardware shall be free from defects during the "Standard Warranty"
stated in Attachment A, and all Software shall be materially free of
defects during the Standard Warranty for Software stated in Attachment
A. BCS agrees to repair or replace all defective Hardware and Software
(as verified by BCS in its sole reasonable discretion) which is returned
to BCS during the Standard Warranty, and to return such Hardware or
Software to DGC within the "Warranty Cycle Time for MATERIAL" stated in
Attachment A or as specified under DGC's "Advanced Exchange" terms
stated below. In the event that Hardware or Software returned is not
defective, DGC will be responsible for freight costs for return shipment
to DGC. Defective Hardware or Software which is not repaired or
replaced, and returned, within the stated period shall be subject to
revocation of acceptance, whereupon BCS shall refund to DGC the
then-current purchase price (less any previous credits, refunds or
discounts) for such Hardware and Software. DGC shall comply with BCS's
reasonable Return Material Authorization ("RMA") procedures when making
returns under this Agreement; BCS shall use commercially reasonable
efforts to provide RMAs to DGC (or DGC's designated contractors) within
[*] of request. DGC shall be responsible for all charges arising from
return of warranty claims to BCS and BCS shall be responsible for
payment of all shipping charges relative to return of warranty claims to
DGC.
5.4 "Advanced Exchange" -- BCS agrees to support DGC's "Advanced Exchange"
requirements by delivering replacement MATERIAL prior to receipt of
defective MATERIAL from DGC. The parties acknowledge that such Advance
Exchange requests shall generally take between [*] and [*] calendar
days.
5.4.1 Notwithstanding the foregoing, upon written request from DGC for
"Expedited Next-Day Advanced Exchange", BCS will provide next business
day shipment of replacement MATERIAL for MATERIAL listed on Attachment A
of this Agreement that is covered by BCS's Standard Warranty to any DGC
designated U.S. or Canadian location (excepting only requests made on
weekends and holidays, which shall be delivered on the second business
day) for a [*] per incident charge, unless the necessity for exercising
Expedited Next-Day Advanced Exchange is attributable to delinquencies in
the delivery of MATERIAL or spare Field Replaceable Units ("FRUs"), or
of (normal) Advanced Exchange MATERIAL replacements, or of MATERIAL
serviced under BCS's warranty, to DGC by BCS.
5.5 BCS agrees to maintain an adequate inventory of replacement MATERIAL for
DGC to cover the estimated or actual annual replacement MATERIAL rate,
as stated in Attachment C of this Agreement.
5.6 Regardless of whether or not DGC avails itself of the Expedited Next-Day
Advance Exchange mechanism described in Section 5.4.1, DGC will be
required to return all defective MATERIAL to BCS no later than fifteen
(15) days after the replacement MATERIAL has been received by DGC. If
the defective MATERIAL are not returned by DGC within thirty (30) days
after receipt of the replacement MATERIAL, BCS will invoice DGC at the
then-current purchase price, with payment due no later than [*] days
after receipt of the invoice from BCS.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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VOLUME PRICING AGREEMENT 2085
5.7 Dead-on-Arrival ("DOA") MATERIAL and Catastrophic Failures of MATERIAL
5.7.1 Dead on Arrival: Insofar as requested by DGC in writing to meet its
business requirements, BCS agrees to use commercially reasonable efforts
to provide expedited assistance and replacement of MATERIAL found to be
defective upon initial inspection or use at DGC, in no event longer than
[*] days after receipt by BCS of the returned DOA MATERIAL.
5.7.2 "Catastrophic failures" are defined as MATERIAL demonstrating failure
rates materially in excess of [*] times those predicted by the
applicable specifications (under defect-per-million,
mean-time-between-failure and any other applicable parameters). BCS also
agrees that if a repair, recall or replacement is required, then BCS
will make commercially reasonable efforts and at its sole discretion to:
(A) provide sufficient replacement MATERIAL no later than [*] days after
repair, recall or replacement is initiated to retrofit DGC's installed
base, (B) repair, replace or accept for credit all affected MATERIAL in
a jointly agreeable manner, (C) reimburse DGC for all actual and [*] to
retrofit DGC's installed base, and (D) upon request, provide appropriate
technical and business support at DGC and DGC's customer sites. BCS will
reimburse DGC for all freight and freight related charges arising in
connection with verified catastrophic warranty claims on such MATERIAL.
5.8 Mutual Warranties. Each party certifies and represents to the other
party that as of the Effective Date, it has full power, right and
authority to execute this Agreement, to fulfill all its rights and
obligations herein.
5.9 Restrictions. The foregoing Standard Warranty shall not apply to
MATERIAL that have been (i) damaged by accident, Acts of God, shipment,
improper installation, abnormal physical or electrical stress, misuse or
misapplication, as determined by BCS in its sole reasonable discretion,
or (ii) modified without BCS's express written authorization.
5.10 GBICs. BCS warrants that the GBICs are new, and that the GBICs will
conform to the specifications established by the manufacturer of the
GBICs. Except as set forth herein, BCS makes no warranties of any kind
with respect to the performance of the GBICs that BCS may use in the
manufacture of MATERIAL. As a remedy for defective GBICs, BCS will
provide replacement parts as a service to DGC for verified GBICs
failures that occur within twelve (12) months of the date of shipment to
DGC, as set forth in Attachment A. Such replacements will be
administered in the same manner as warranty claims concerning Switches
(e.g., RMA process, Advanced Exchange capability, Warranty Cycle Time,
etc.).
5.11 Exclusive Remedy. DGC acknowledges and agrees that its sole and
exclusive remedy for breach of the Standard Warranty is as set forth in
this Section 5.
5.12 Disclaimer. EXCEPT AS STATED IN SECTION 7, THE FOREGOING WARRANTIES ARE
IN LIEU OF, AND BCS EXPRESSLY DISCLAIMS, ALL OTHER REPRESENTATIONS,
WARRANTIES OR CONDITIONS, WHETHER EXPRESS, IMPLIED, STATUTORY OR
OTHERWISE, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF
NON-INFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, OR FITNESS FOR
A PARTICULAR PURPOSE.
5.13 Indemnification by DGC. DGC agrees to defend, indemnify and hold BCS
harmless from any and all losses, damages, liabilities, costs and
expenses (including but not limited to reasonable attorneys' fees and
costs of litigation) incurred by BCS as a result of any third party
claim, regardless of the form of action, arising from a modification:
(i) to MATERIAL made by BCS at the request of DGC for MATERIAL sold by
BCS to DGC or any DGC-affiliated entity entitled to purchase MATERIAL
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
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VOLUME PRICING AGREEMENT 2085
hereunder pursuant to Section 1.2 above, which claim would not have
arisen but for the modification requested, or (ii) by DGC of the
Documentation (as defined herein); provided that BCS promptly notifies
DGC of any such claim in writing, gives DGC sole control of the defense
and all related settlement negotiations, and cooperates with DGC in
defending or settling any such claim.
6. QUALITY
6.1 It is BCS's intention and commitment to deliver Hardware and GBICs to
DGC which is free of defects and Software which is materially free of
defects. To that end, BCS will take those actions and make those reports
to DGC as described in Attachment C ("Quality Requirements"). BCS shall
establish and maintain a documented quality system as a means to ensure
that all Hardware and GBICs processes and operations conform, and all
Software processes and operations substantially conform, to the
applicable specifications of this Agreement.
6.2 Product Changes/Concerns in MATERIAL Manufactured by or for BCS
(Specifically Excluding GBICs) -- BCS shall use commercially reasonable
efforts to provide DGC with [*] days' notice of changes to MATERIAL
(specifically excluding GBICs) that affect the form, fit or function of
such MATERIAL ("Engineering Change Order" or "ECO"). The ECO shall
contain the reason for the change and test data to support the change.
If requested, BCS shall concurrently make samples available for
evaluation. BCS shall also notify DGC promptly should a concern arise
regarding the quality of MATERIAL already delivered, e.g., any condition
which might impact substantial compliance with specification,
reliability, or safety, or increase the rate of defects. If DGC does not
respond to BCS in writing with respect to an ECO within fifteen (15)
business days following receipt of such ECO, the ECO will be deemed
accepted by DGC. In the event that DGC objects in writing to an ECO in
the stated time period, then DGC may provide BCS with written notice of
such objection, and shall be entitled to (in addition to placing orders
for the changed MATERIAL) submit purchase orders for the unchanged
MATERIAL prior to the effective date of the implementation of the ECO,
for delivery no more than ninety (90) days after the effective date of
such implementation and in quantities which do not exceed the total
quantity of such MATERIAL ordered by DGC in the six (6) months
immediately preceding the date of notice of ECO.
6.3 Required Quality Levels for Hardware -- Without limitation, the parties
shall evaluate quality by using Defect Per Million (DPM) statistics and
other pertinent methods. BCS warrants that the aggregate DPM of the
Hardware shall meet or exceed the threshold(s) stated in Attachment C.
BCS agrees to seek to make continuous improvement in DPM statistics
during each succeeding years of the term.
6.4 Non-Conforming MATERIAL -- DGC reserves the right to reject MATERIAL
which in its reasonable determination does not conform to the
specifications as referenced in Attachment B. DGC reserves the right to
defer inspection until time of actual use of MATERIAL by DGC or the end
user, as the case may be, but not longer than [*] days from shipment.
Returns of rejected MATERIAL shall be by BCS's standard RMA procedure,
with DGC shipping the MATERIAL prepaid to BCS's U.S. repair facility and
BCS shipping prepaid return to DGC's U.S. warehouse.
6.5 Corrective Actions: Performance Review -- In the event BCS is unable to
maintain the quality levels required herein, BCS will promptly initiate
corrective action pursuant to the terms and conditions of Attachment F
(Service and Support Requirements). A permanent process modification and
root cause analysis will be made available within thirty (30) days or
such other reasonable timeframe that is mutually agreed upon. Results of
the failure or root cause analysis shall be provided to DGC in a written
report detailing the results of the investigation and corrective actions
plans to prevent its
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VOLUME PRICING AGREEMENT 2085
recurrence. DGC agrees to limit requests for failure or root analysis in
situations where the results would be important to DGC's business or
DGC's customer satisfaction. DGC and BCS shall meet on a quarterly basis
to review BCS's performance.
6.6 SEE ARTICLE 8.3 and ATTACHMENT F
7. PROPRIETARY RIGHTS
7.1 Intellectual Property Rights Infringement Indemnification.
7.1.1 Hardware and Software. BCS warrants that no part of the MATERIAL
(specifically excluding the GBICs) infringes any patent established
under any of the [*] or any copyright or other proprietary right of any
third party. BCS shall defend at its expense all claims, and pay all
awards and damages, based on any claim that the MATERIAL (specifically
excluding the GBICs) or its sale or use infringes any patent established
under any of the [*] or any copyright or other proprietary right of any
third party, provided that DGC promptly notifies BCS of such claim,
provides its full cooperation and grants BCS control of its defense. DGC
shall have the right to be represented by its own counsel (at DGC's
expense). If use of MATERIAL (specifically excluding the GBICs) is
enjoined, BCS shall make commercially reasonable efforts at its expense
either (i) to gain rights to make, use and sell the MATERIAL
(specifically excluding the GBICs) as set forth herein, or (ii) to
modify the MATERIAL (specifically excluding the GBICs) so that it
becomes non-infringing while remaining in conformity in all material
respects with specifications. Otherwise, at DGC's option, DGC may return
the MATERIAL (specifically excluding the GBICs), and BCS shall refund
the [*] of MATERIAL (specifically excluding the GBICs) (less any
previous credits, refunds or discounts) and accept its return.
7.1.2 GBICs. In the event that the GBICs are found to infringe the proprietary
rights of any third party, BCS will use commercially reasonable efforts
to assist DGC in procuring non-infringing GBICs from any manufacturer
and/or vendor from which BCS procures GBICs. Further, BCS assigns to DGC
its rights to pursue (as subrogated party) any rights and remedies BCS
may have against the GBIC manufacturers and vendors from which BCS
procures GBICs sold hereunder solely with respect to those GBICs sold to
DGC by BCS hereunder.
7.2 Restrictions. BCS will not be obligated to defend or be liable for costs
and damages to the extent that infringement, or a claim thereof, arises
out of or is related to (a) a modification to MATERIAL (specifically
excluding the GBICs) requested by DGC or made to MATERIAL (specifically
excluding the GBICs) by DGC or a third party, (b) use or combination of
MATERIAL (specifically excluding the GBICs) with products or data not
provided by BCS if use of the MATERIAL (specifically excluding the
GBICs) alone would not have so infringed and if such combination was not
contemplated by BCS's written specifications or written product
descriptions for the MATERIAL (specifically excluding the GBICs), (c)
use of other than the latest unmodified release of MATERIAL
(specifically excluding the GBICs) made available to DGC by BCS if such
infringement would have been avoided by the use thereof.
7.3 Limitations. THE FOREGOING SECTIONS 7.1 AND 7.2 STATE THE ENTIRE
LIABILITY OF BCS FOR INTELLECTUAL PROPERTY RIGHTS INFRINGEMENT BY
MATERIAL OR GBICs FURNISHED UNDER THIS AGREEMENT.
7.4 Trademark License. Subject to the terms of this Agreement, BCS grants to
DGC a non-exclusive, non-transferable right and license to use those BCS
trademarks, service marks, and trade names
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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the Commission. Confidential treatment has been requested with respect to the
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VOLUME PRICING AGREEMENT 2085
described in Exhibit I (herein "Trademarks") in DGC's marketing of
MATERIAL, provided that such use is in accordance with BCS's then
current guidelines for using the BCS Trademarks, as such guidelines may
be amended from time to time. Without limiting the foregoing, such use
must reference the Trademarks as being owned by BCS. Nothing in this
Agreement grants DGC ownership or any rights in or to use the
Trademarks, except in accordance with this Section. BCS will have the
exclusive right to own, use, hold, apply for registration for, and
register the Trademarks during the term of, and after the expiration or
termination of, this Agreement; provided, however, that nothing herein
shall limit DGC's ability to use any component part of any Trademark if
such component part is a word or term that is generic, descriptive or
otherwise not under proprietary control of BCS. DGC will neither take
nor authorize any activity inconsistent with such exclusive right. DGC
will not use any Trademark as part of DGC's trade name, service mark, or
trademark or other signifying mark, or in a manner that is confusingly
similar; provided, however, that nothing herein shall limit DGC's
ability to use any component part of any Trademark if such component
part is a word or term that is generic, descriptive or otherwise not
under proprietary control of BCS or in which BCS holds no enforceable
trademark rights. Upon request, but no less frequently than quarterly,
DGC shall regularly submit specimens of DGC's use of the Trademarks to
BCS, in no event less than quarterly, and DGC agrees to immediately
change or discontinue any improper Trademark use as requested by BCS,
and submit corrected specimens thereof for review by BCS.
7.5 Authorized Reseller. During the term of this Agreement, DGC may indicate
to End Users and to the public that it is an authorized reseller of
MATERIAL.
7.6 Ownership. Except for the specific licenses granted herein, the Software
and Documentation (as defined below) are and will remain the sole and
exclusive property of BCS and its suppliers, if any, including without
limitation all intellectual property rights of BCS in and to the
Software and the Documentation, and all modifications to, and derivative
works based upon, the Software and the Documentation, except as
expressly provided in Section 10.1.2.
8. FIELD SERVICE SUPPORT
8.1 REPLACEMENTS
8.1.1 BCS shall maintain at the stocking location(s) described in Attachment D
("Description of Replacements, Prices, Lead Times and Warranty Terms")
Replacements for all MATERIAL in reasonable quantities to service DGC's
routine and emergency requirements, including without limitation those
Replacements listed in Attachment D. BCS shall make Replacements for
MATERIAL available to DGC throughout the "Replacements Availability
Period" stated in Attachment D.
8.1.2 The provisions of this Agreement relative to MATERIAL shall also apply
in every respect to Replacements, except as otherwise stated.
8.1.3 Replacements for Hardware and Software (Specifically Excluding
GBICs)-BCS will sell Hardware Replacements to DGC for the price(s)
stated in Attachment D. All Hardware Replacements shall be new or equal
to new and shall conform to all applicable specifications hereunder,
including without limitation all packaging specifications, and be free
from defects for the "Period of Warranty for Replacements" stated in
Attachment D. BCS will sell Software Replacements to DGC for the
price(s) stated in Attachment D. All Software Replacements shall be new
or equal to new and shall substantially conform to all applicable
specifications hereunder, including without limitation all packaging
specifications, and be materially free from defects for the "Period of
Warranty for
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VOLUME PRICING AGREEMENT 2085
Replacements" stated in Attachment D. BCS agrees to repair or replace
all defective Replacements (as verified by BCS in its sole reasonable
discretion) which are returned to BCS during the relevant Replacements
warranty period, and to return such items to DGC within the "Warranty
Cycle Time for Replacements" stated in Attachment D.
8.1.4 GBICs Replacements. BCS will sell GBICs Replacements to DGC for the
price(s) stated in Attachment A. All GBICs Replacements shall be new.
BCS agrees to replace all defective GBICs Replacements (as verified by
BCS in its sole reasonable discretion) which are returned to BCS during
the relevant Replacements return period, and to replace such GBICs to
DGC within the "Warranty Cycle Time for Replacements" stated in
Attachment D.
8.2 OUT-OF-WARRANTY REPAIR AND REFURBISHMENT
8.2.1 BCS shall Repair and Refurbish MATERIAL and Replacements for DGC and
such third parties as DGC may from time to time designate in writing at
the rates stated in Attachment E ("Out-of Warranty Service Schedule").
"Repair" and "Refurbishment" shall have the meanings stated in
Attachment E, and shall be at no charge for MATERIAL and Replacements
covered by warranty.
8.2.2 BCS agrees to Repair or Refurbish MATERIAL and Replacements as ordered,
and to return items to DGC within the "cycle time" stated in Attachment
E. DGC shall be responsible for reimbursement of all shipping charges
relative to Repairs and Refurbishments. All Repairs and Refurbishments
shall be free from defects for the "Period of Warranty" stated in
Attachment E.
8.3 SERVICE AND SUPPORT REQUIREMENTS
8.3.1 BCS will make available to DGC appropriate training relative to the use,
installation, adjustment, operation, and maintenance of MATERIAL sold
hereunder per Attachment F.
8.3.2 BCS will provide DGC and DGC will provide its customers the support
defined in Attachment F.
9. DEFAULT AND TERMINATION
9.1 Default. The occurrence of any of the following acts or events shall
constitute default of this Agreement: (a) the failure by such party to
observe or perform any material covenant or obligation under this
Agreement, or (b) such party becomes insolvent, suffering the
appointment of a receiver, or making an assignment for the benefit of
creditors; or proceedings are commenced against such party under any
bankruptcy, insolvency or debtor's relief law, if such proceeding is not
vacated or set aside within sixty (60) days after the date of
commencement thereof;
9.2 Termination. In the case of default, if such default has not been cured
within thirty (30) days after a party has received written notice of
default from the other party, the party giving notice may give a second
(final) Notice of Intent to Terminate, directed in the case of notice to
DGC to its Vice President, Manufacturing, and in the case of BCS, to its
Vice President, Finance and Administration. In the event thereafter that
such default is not cured within five calendar days after the receipt of
such Notice of Intent to Terminate, the party giving notice may
terminate this Agreement by written notice at any time thereafter while
such default continues.
9.3 Effect of Termination. Upon the expiration or termination of this
Agreement, however arising: (a) DGC will cease holding itself out as an
authorized reseller of MATERIAL, but may continue to provide support
regarding MATERIAL to end users; (b) DGC will cease its use of the BCS
Page 12 of 45
<PAGE> 13
VOLUME PRICING AGREEMENT 2085
Trademarks; and (c) each party will cease its use of the Confidential
Information of the other party, and will return or destroy, at the other
party's direction, all such Confidential Information and any copies or
portions thereof which are incorporated into documents or archives,
except that DGC may retain a mutually agreed number of copies of BCS's
Confidential Information which is reasonably required in order to carry
out its support obligations to its resellers and end users. DGC
expressly acknowledges that the provisions of Section 10.4 shall remain
in full force and effect after the termination of this Agreement,
however arising.
9.3.1 If BCS has terminated this Agreement due to DGC's material breach of the
terms of this Agreement, the parties agree that the timing for all
amounts owed by DGC to BCS as of the effective date of such expiration
or termination shall accelerate, and such payment shall become payable
as of such effective date, whether or not longer payment periods had
originally been established. Otherwise, DGC shall be entitled to the
full payment period for the payment of amounts due and payable as of the
effective date of termination.
9.3.2 After termination of this Agreement and provided that BCS has terminated
this Agreement due to DGC's material breach of the terms of this
Agreement, DGC may submit orders for MATERIAL, which orders are subject
to approval by BCS in its sole discretion, provided that DGC pays BCS
for such MATERIAL at the time such purchase ordered are accepted by BCS.
The parties agree that orders submitted as set forth in this Section
shall not be considered approved by BCS until and unless BCS has
notified DGC of its acceptance of such order in writing.
9.4 No Damages for Termination. NEITHER PARTY WILL BE LIABLE TO THE OTHER
FOR DAMAGES OF ANY KIND, INCLUDING SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES, SOLELY ON ACCOUNT OF THE TERMINATION OR EXPIRATION OF THIS
AGREEMENT IN ACCORDANCE WITH ITS TERMS.
9.5 Nonexclusive Remedy. The exercise by either party of any remedy under
this Agreement will be without prejudice to its other remedies under
this Agreement or otherwise.
10. MISCELLANEOUS PROVISIONS
10.1 Documentation. Promptly following the Effective Date, BCS will provide
to DGC BCS's standard technical documentation ("Documentation")
including but not limited to data sheets, BCS Manuals (as defined below)
and other manuals distributed to resellers of MATERIAL (such as
technical manuals), all of which BCS will supply in electronic format,
relating to MATERIAL purchased by DGC for use as set forth herein.
Thereafter, during the term of this Agreement, BCS will provide all
updates and corrections thereto when first made commercially available.
10.1.1 Technical Documentation. Subject to the terms of this Agreement, BCS
hereby grants to DGC a nonexclusive, nontransferable worldwide license
to reproduce and use BCS's technical documentation provided to DGC by
BCS hereunder, solely for DGC's internal purposes in connection with the
marketing and support of MATERIAL. The foregoing license to technical
documentation shall not be transferable except by means of sublicense
to: (a) the Affiliated Companies, and the resellers of DGC and
Affiliated Companies, for use solely in the course of support of
MATERIAL; (b) DGC's contract manufacturer(s), for use solely in the
course of manufacture of products for DGC; (c) DGC's and Affiliated
Companies' service contractor(s) for use solely in the course of service
and support of MATERIAL on behalf of DGC or Affiliated Companies; (d) to
DGC's "Certified Maintenance Organizations" ("CMOs", being DGC customers
who have been qualified by DGC to be self-maintainers of DGC products
containing MATERIAL and to whom DGC is making disclosure of DGC's own
comparable technical DGC documentation), provided that such disclosure
of BCS technical documentation to such CMOs be upon no more
Page 13 of 45
<PAGE> 14
VOLUME PRICING AGREEMENT 2085
liberal or favorable terms as the disclosure of DGC's comparable
technical documentation.
10.1.2 Manuals. Subject to the terms of this Agreement, BCS hereby grants to
DGC a nonexclusive, nontransferable license to modify the BCS End User
manual(s) (including manual text and layouts) for MATERIAL ("BCS
Manuals"), subject to BCS's approval as described below, and to
reproduce and distribute such revised versions of the BCS Manuals (the
"DGC Manuals") worldwide with DGC's products. BCS acknowledges that DGC
will own all right, title and interest in and to any such DGC
modifications of the BCS End User Manuals, subject to BCS' ownership of
the underlying BCS End User Manuals. BCS will review and approve the DGC
Manuals as to form and content with respect to MATERIAL prior to their
use or distribution. Such approval shall not be unreasonably withheld
and shall be made within seven (7) business days following BCS's receipt
of the proposed DGC Manuals.
10.1.3 Expenses. DGC is solely responsible for all expenses incurred by DGC in
modifying, reproducing, distributing and using the Documentation.
10.1.4 Warranty and Disclaimers of Warranty.
(a) Limitations. BCS grants the licenses in this Section 10.1 to DGC
hereunder solely on an "AS IS" basis.
(b) Limited Warranty. BCS warrants that no part of the Documentation
infringes any copyright of any third party.
(c) Disclaimer. EXCEPT AS STATED HEREIN, BCS DISCLAIMS ALL OTHER
REPRESENTATIONS, WARRANTIES AND CONDITIONS, WHETHER EXPRESS, IMPLIED OR
STATUTORY, REGARDING THE DOCUMENTATION, INCLUDING WITHOUT LIMITATION THE
IMPLIED WARRANTIES OF MERCHANT ABILITY, NON-INFRINGEMENT OF THIRD PARTY
RIGHTS, OR FITNESS FOR A PARTICULAR PURPOSE. The parties agree that BCS
shall have no liability for errors introduced by DGC into the
Documentation in the process of modifying, reproducing and using the
Documentation.
10.2 Software License Agreement. The Software is licensed to DGC as set forth
in Attachment G.
10.3 Diagnostic Support Tools, Information and Firmware -- BCS will maintain
and make available to DGC throughout the "Replacements Availability
Period" stated in Attachment D all diagnostic support tools and
information for the MATERIAL which do not require license key activation
for use, as may be reasonably requested by DGC for maintenance and
support of the MATERIAL provided under this Agreement and in support of
DGC's products. BCS shall provide to DGC all software bug fixes and
corrections thereto which do not require a paid license key activation
for use as soon as the same are commercially available. BCS grants and
provides to DGC hereunder a license (which DGC may sublicense to DGC's
Affiliated Companies, DGC's maintenance and service contractors, and
DGC's authorized third party CMOs) to use all tools, information and
firmware for such support and maintenance purpose.
10.4 Confidentiality -- All information relating to this Agreement or the
items or services to be sold hereunder, insofar as marked as being the
confidential or proprietary information of the disclosing party or
identified as such at the time of disclosure and confirmed as such in
writing within 30 days after disclosure, shall be protected according to
the terms of this Section. Each party receiving such confidential
information shall exercise such care as the receiving party uses with
respect to its own confidential information of a similar nature, not to
disclose any such information to any third party and to limit
dissemination of such information to its employees or contractors on a
need-to-know basis only; all such employees and contractors shall be
bound by written contract, enforceable by the
Page 14 of 45
<PAGE> 15
VOLUME PRICING AGREEMENT 2085
disclosing party, to respect such confidences. The provisions of this
paragraph shall survive this Agreement in perpetuity for the Software
and Documentation, and for a period of [*] years for the Hardware,
but shall not apply to information: already known to the receiving party
at time of disclosure without breach of agreement or law, or
independently developed by the receiving party, or properly disclosed to
the receiving party by a third party without restriction or condition,
or available by lawful inspection of available goods or services. These
provisions shall not supersede any non-disclosure agreement(s) as may
otherwise bind the parties.
10.5 Advertising -- This Agreement aligns DGC and BCS in a strategic
relationship. Each party will permit a joint press announcement
following the execution of this Agreement or at another mutually agreed
upon time. The timing, nature and wording of all press announcements
relating to this relationship shall be only as mutually agreed by the
parties.
10.6 Subcontracting -- Except as to purchase of commodity supplies or
subassemblies for which no approval shall be required, BCS shall obtain
DGC's approval (not to be unreasonably withheld, delayed or conditioned)
before subcontracting to other than a BCS Affiliated Company (defined as
a company controlled by, controlling or under common control with BCS).
10.7 Equal Opportunity Clauses -- (A) When the MATERIAL, work or performance
furnished are for use in connection with a U.S. government contract or
subcontract, FAR 52.222-26 (Equal Opportunity, 41.CFR.60-1); FAR
52.222-35 (Affirmative Action for Special Disabled and Vietnam Era
Veterans, 41.CFR 60-250.5); and FAR 52.222-36 (Affirmative Action for
Individuals with Disabilities, 41.CFR 60-741.5) shall apply. Further BCS
shall, within 30 days of written request of DGC, furnish DGC with
appropriate certifications of compliance with such requirements. (B) BCS
hereby acknowledges notice of requirements for certification of
non-segregated facilities. Unless BCS is exempt from the provisions of
Executive Order 11246 concerning equal employment opportunities, BCS
shall not maintain any segregated facilities at any of its
establishments and shall complete a certification to the effect as
required by the May 9, 1967 Order of the Secretary of Labor of the
United States.
10.8 Survival of Terms -- The following provisions of this Agreement shall
survive the term of this Agreement: [*].
10.9 Notices -- Except as otherwise stated, all notices to be given under
this Agreement shall be in writing and shall be sufficient only if sent
by certified mail or air express, return receipt requested, or other
nationally-recognized delivery service providing proof of delivery, or
personally delivered to a party. Notice by mail or by personal delivery
shall be deemed received on actual receipt by the person to whose
attention it is directed, addressed as follows:
If to BCS: Attention: Chief Financial Officer
BROCADE COMMUNICATIONS SYSTEMS, INC.
1901 Guadalupe Parkway
San Jose, CA 95131
If to DGC: Attention: Director of Purchasing
DATA GENERAL CORPORATION
Technology Drive
Apex, NC. 27502
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 16
VOLUME PRICING AGREEMENT 2085
10.10 Limitation of Liability--
10.10.1 NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL,
EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT
LIMITATION LOST PROFITS, LOST REVENUES, LOSS OF DATA OR INTERRUPTION OF
SERVICE, ARISING FROM BREACH OF THIS AGREEMENT.
10.10.2 WITH THE EXCEPTION OF DAMAGES PAYABLE BY BCS TO DGC UNDER SECTION 5
("WARRANTIES"), WHICH DAMAGES SHALL NOT EXCEED THE TOTAL AMOUNT PAID BY
DGC TO BCS IN RESPECT OF THE AFFECTED MATERIAL IN THE WARRANTY PERIOD
IMMEDIATELY PRECEDING THE DATE LIABILITY IS IMPOSED, IN NO EVENT WILL
BCS's LIABILITY UNDER THIS AGREEMENT FOR ANY AND ALL CLAIMS, HOWEVER
CAUSED AND ON WHATEVER THEORY OF LIABILITY, EXCEED AN AMOUNT EQUAL TO
THE GREATER OF (i) TEN PERCENT (10%) OF THE AMOUNTS PAID TO BCS BY DGC
IN RESPECT OF THE AFFECTED MATERIAL IN THE TWELVE (12) MONTHS
IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO SUCH DAMAGES, OR (ii) TWO
MILLION DOLLARS ($2,000,000).
10.11 Whole Agreement; Amendment; Construction; Waiver -- This Agreement is
the exclusive statement of the contract between the parties concerning
the subject matter herein, and may be amended only in writing, duly
executed by each party. Captions are for convenience only and shall not
affect interpretation. This Agreement shall be construed according to
its terms, neither for or against either party, and under and governed
by the substantive laws of the State of [*] (U.S.A.), excluding its
conflict of law rules and the application of the UN Convention on the
International Sale of Goods. If any provision is declared invalid by any
tribunal, then this Agreement shall be deemed adjusted to conform to the
requirements for validity as declared at such time. Failure of either
party to insist in any instance upon performance by the other party
shall not be construed as a waiver.
10.12 "Year 2000" Assurance -- BCS agrees to take proper actions to anticipate
changes necessitated in its business by the transition to the next
millennium on January 1, 2000. Without limitation, BCS agrees that BCS's
performance of its obligations under this Agreement and provision of
MATERIAL to DGC will not be materially impaired or interrupted by causes
arising from such change of date, and that all MATERIAL shall be "Year
2000 Qualified" as stated in Section 1.2. BCS agrees to cooperate with
DGC relative to Year 2000 issues. BCS will keep DGC informed relative to
BCS's state of Year 2000 readiness and of any significant BCS concerns
that the foregoing assurances will not be fulfilled. BCS will use
reasonable commercial efforts to require that its contractors and
suppliers whose services or products are required by BCS in the
performance of its obligations under this Agreement, or in the
production of MATERIAL or Replacements for DGC hereunder, are
contractually bound by these undertakings.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 17
VOLUME PRICING AGREEMENT 2085
EXECUTED UNDER SEAL:
BROCADE COMMUNICATIONS
SYSTEMS, INC. DATA GENERAL CORPORATION
("BCS") ("DGC")
By: /s/ CHARLES SMITH By: /s/ WILLIAM F. O'NEILL
--------------------------------- --------------------------
Charles Smith William F. O'Neill
Vice President of Worldwide Sales Director, New Products and
Technology
Date: 8/4/99 Date: 7/29/99
------ -------
ATTACHMENTS:
A. Description of MATERIAL, Prices, Lead Times and Warranty Terms
B. Specifications
C. Quality Requirements
D. Description of Replacements, Prices, Lead Times and Warranty Terms
E. Out-of Warranty Service Schedule
F. Service and Support Requirements
G. Software License Agreement
H. Patent Coverage List
I. BCS Trademarks
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<PAGE> 18
VOLUME PRICING AGREEMENT 2085
ATTACHMENT A
DESCRIPTION OF MATERIAL, PRICES, LEAD TIMES AND WARRANTY TERMS
A.1 Description of Hardware Components of MATERIAL and Prices:
<TABLE>
<CAPTION>
DGC Average
Specification Vendor Part Quarterly
Number Number Description Price Volume
<S> <C> <C> <C> <C>
[*] B-1630-016 Silkworm 16 Port Fibre $ [*] *See Below
Channel Switch, with
[*]
[*] B-1630-008 Silkworm 8 Port Fibre $ [*] *See Below
Channel Switch, with
[*]
[*] BR-2802-0000 Silkworm 2800, 16 Port $ [*] *See Below
Fibre Channel Switch with
Dual Power Supply and
[*]
[*] BR-2402-0000 Silkworm 2400, 8 Port Fibre $ [*] *See Below
Channel Switch with Dual
Power Supply and [*]
TBD BR-2101-0000 SilkWorm 2100, 8 Port Fibre $ [*] *See Below
Channel Switch with single
power supply and
[*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 18 of 45
<PAGE> 19
VOLUME PRICING AGREEMENT 2085
A.2. Description of Software Components of MATERIAL and Prices:
<TABLE>
<S> <C> <C> <C>
[*] and Version 1.1 [*] (as described in $[*]
[*] Exhibit A to Attachment G)
[*] and Version 2.1 [*] (as described in $[*]
[*] Exhibit A to Attachment G)
TBD SW-200008-01 [*] version 2.1 for $[*]
[*] (BR-2802-
0000) or [*]
(BR-2402-000)
TBD SW-200024-02 [*] for BR $[*]
2101-0000 (DG PN TBD)
A.3 Description of GBICs and Prices:
[*] X1017 GBICs Module Copper $ [*] Per switch
requirement
[*] X1006 GBICs Module S/W Optical $ [*] Per switch
requirement
A.4 Description of Extended Warranty and Prices:
TBD TBD [*] Warranty for $ [*]
118030714
TBD TBD [*] Warranty for $ [*]
118030715
TBD TBD Extended Warranty-per year [*] of the
MATERIAL
purchase price
</TABLE>
*Average Quarterly Volume is [*] switches. The volume may be comprised of any
qty. of the 4 various switch types.
B. Minimum Lead Times: 90 days to F.O.B. point.
C. Standard Warranty (exclusive of GBICs; for GBICs see below): [*] months
after date of delivery to the F.O.B Point for Hardware, and [*] days for
the Software. An optional extended warranty of [*] years in duration may
be exercised by DGC within [*] from the date of purchase from BCS for
Hardware.
D. Warranty Cycle Time for MATERIAL: [*] days
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 19 of 45
<PAGE> 20
VOLUME PRICING AGREEMENT 2085
E. GBICs: Defective GBICs shall be replaced for a period of twelve (12)
months after date of delivery to the F.O.B. Point.
F. No Trouble Found (NTF) Repair Charges: BCS may request NTF Evaluation
Charges, as stated below, for verified NTF MATERIAL in excess of [*] of
the total return of MATERIAL to BCS over the previous 2 quarter period.
The charge will not exceed the Repair Pricing shown on Attachment E of
this Agreement. In the event DGC is charged for a NTF that is returned
to DGC and that MATERIAL continues to fail, BCS agrees to re-verify the
failure in a similar configuration.
<TABLE>
<CAPTION>
Part Number Description NTF Evaluation Charges
----------- ----------- ----------------------
<S> <C> <C>
[*](B-1630-008) 8 Port Switch [*]
[*](B-1630-016) 16 Port Switch [*]
[*](BR-2402-0000) 8 Port Switch [*]
[*](BR-2802-0000) 16 Port Switch [*]
</TABLE>
*Or the repair pricing shown on Attachment E, whichever is less.
G. DGC UNIQUE MATERIAL: None.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 20 of 45
<PAGE> 21
VOLUME PRICING AGREEMENT 2085
ATTACHMENT B
SPECIFICATIONS
DGC Specifications:
118026931
118029629
118029645
118029646
118030714
118030715
are referenced herein and made part of this Volume Pricing Agreement.
Additional applicable DGC Specifications shall be added to this reference page
as approved by mutual agreement of the parties in a signed writing.
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<PAGE> 22
VOLUME PRICING AGREEMENT 2085
ATTACHMENT C
QUALITY REQUIREMENTS
A. QUALITY COMMITMENTS:
B.
<TABLE>
<CAPTION>
DGC BCS Defects per Million
Part Number Part Number Description- (DPM) Target
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
[*} B-1630-016 16 Port Switch [*]
[*] B-1630-008 8 Port Switch [*]
[*] BR-2402-0000 8 Port Switch [*]
[*] BR-2802-0000 16 Port Switch [*]
</TABLE>
<TABLE>
<CAPTION>
DGC BCS
Part Number Part Number Description- MTBF Target
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
[*] B-1630-016 16 Port Switch [*]
[*] B-1630-008 8 Port Switch [*]
[*] BR-2402-0000 8 Port Switch [*]
[*] BR-2802-0000 16 Port Switch [*]
</TABLE>
<TABLE>
<CAPTION>
DGC BCS Annual
Part Number Part Number Description- Replacement Rate
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
[*] B-1630-016 16 Port Switch [*]
[*] B-1630-008 8 Port Switch [*]
[*] BR-2402-0000 8 Port Switch [*]
[*] BR-2802-0000 16 Port Switch [*]
</TABLE>
DOA Rate: [*]
Plug & Play Rate: [*]
B. TRACKING: BCS's commitments relative to identification of MATERIAL and
Replacements (e.g. by serial number tracking or date codes):
Tracking shall be by BCS Model Number, Serial Number, Revision
Number and via barcode label on the MATERIAL.
C. ADMINISTRATION: BCS shall make reasonable efforts to report to DGC's
designated Quality Engineering group on a quarterly basis, pertinent
statistics relating to MATERIAL hereunder, including, without
limitation, the following:
MTBF data
Failure rates
Repair history
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 22 of 45
<PAGE> 23
VOLUME PRICING AGREEMENT 2085
D. BCS's other pertinent data relative to MATERIAL and Replacement quality
data shall also be available to DGC, as and upon DGC's reasonable
requests from time to time. The initial reporting contact for purposes
of this paragraph (only) is
Attention: Director Purchasing
Data General Corporation
Technology Drive, P.O. Box 786,
Apex, NC 27502
Page 23 of 45
<PAGE> 24
VOLUME PRICING AGREEMENT 2085
ATTACHMENT D
DESCRIPTION OF REPLACEMENTS,
PRICES, LEAD TIMES AND WARRANTY TERMS
A. For so long as MATERIAL is available for purchase hereunder,
Replacements Pricing shall be BCS's price as listed on Attachment A or D
below, of this Agreement for Replacements upon the date of purchase.
Thereafter, commencing upon the anniversary of the termination of the
last Order Entry Period, and upon 90 days' notice to DGC, BCS may
increase the price for any Replacement annually, by mutual agreement of
the parties reduced to a signed writing.
B. Period of Warranty for Replacements: Three (3) months after date of
delivery to the F.O.B. Point or the remainder of the original Standard
Warranty for the Hardware, whichever is longer; 90 days for Software.
C. Warranty Cycle Time for Replacements: [*] days
D. "Replacements Availability Period" shall mean the period commencing upon
the effective date of this Agreement and ending, for any Replacement,
[*] years after EOL notification to DGC of the MATERIAL to which
such Replacement relates.
E. U.S. Stocking location(s): BCS shall stock and deliver Replacements at
the following stocking locations: San Jose, California.
F. Replacements shall include, but not be limited to the items listed in
Exhibit RPL (being, as of the effective date, the "Recommended
Replacements List", attached hereto).
SilkWorm II Switches are Field Replaceable Units (FRUs) with no
replacement parts internal to the switch. The GBICs are FRUs. Pricing
for replacement GBICs is as listed on Attachment A.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 24 of 45
<PAGE> 25
VOLUME PRICING AGREEMENT 2085
EXHIBIT RPL
RECOMMENDED REPLACEMENTS LIST
SilkWorm 2400 (118030714) and 2800 (118030715) have Field Replaceable Units
(FRU) and the pricing is as follows:
<TABLE>
<CAPTION>
Part Number Description Pricing
----------- ----------- -------
<S> <C> <C>
XBR-000010 Power Supply $ [*]
XBR-000008 2400 Fan Tray $ [*]
XBR-000013 2800 Fan Tray $ [*]
XBR-000007 2400 Main Board $ [*]
XBR-000012 2800 Main Board $ [*]
XBR-000009 2400 Chassis $ [*]
XBR-000014 2800 Chassis $ [*]
</TABLE>
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 25 of 45
<PAGE> 26
VOLUME PRICING AGREEMENT 2085
ATTACHMENT E
OUT-OF-WARRANTY SERVICE SCHEDULE
--------------------------------
A. Cycle Time to effect Out-of-Warranty Repair or Refurbishment: [*] days
B. Period of Warranty for Repaired/Refurbished Material: [*] days.
C. Cost (price) for Repair and Refurbishment: All out-of-warranty MATERIAL
submitted for repair or Replacement will be returned with a DGC Purchase
Order referencing a BCS RMA number. The DGC Purchase Order will include
an evaluation charge of $ 500 per unit returned. This evaluation charge
will be applied toward the repair cost, which repair cost will be billed
at BCS's then-current rates for such out-of-warranty repair, except as
set forth below relative to NTE Repair Pricing. Upon return of all
out-of-warranty MATERIAL, BCS will evaluate and submit to DGC within 5
days of the receipt of MATERIAL, a "Cost to Repair Proposal." No repair
work will be initiated until formal written approval to proceed and
authorizing Purchase Order is received by BCS from DGC. The repair will
be completed and shipped back to DGC within 30 days of receipt of the
written approval.
At no time shall the Repair and Refurbishment NTE Repair Pricing for the
Mainboard assembly exceed the price listed below for the SilkWorm 1000
8-Port switch (118029629) or 16-Port switch (118029631).
<TABLE>
<CAPTION>
Part Number Description NTE Repair Pricing
----------- ----------- ------------------
<S> <C> <C>
XDG-1001 Silkworm II Mainboard $[*]
</TABLE>
At no time shall the Repair and Refurbishment NTE Repair Pricing for the
Mainboard assembly exceed the price listed below for the SilkWorm 2400
8-Port switch (118030714) or 2800 16-Port switch (118030715).
<TABLE>
<CAPTION>
Part Number Description NTE Repair Pricing
----------- ----------- ------------------
<S> <C> <C>
XBR-000007 2400 Mainboard $[*]
XBR-000012 2800 Mainboard $[*]
</TABLE>
BCS will use reasonable efforts to evaluate the reparability of the
mainboard in its sole discretion.
Should DGC decide not to Repair and Refurbish MATERIAL, DGC has the
option to scrap the MATERIAL at BCS.
D. Description of Repair and Refurbishment Activities: To effect
Repair/Refurbishment of any MATERIAL, BCS shall use commercially
reasonable efforts to achieve both Functional Repair as well as
Refurbishment, as described below:
1. Functional Repair:
All actions required to clean, repair and restore MATERIAL to
the form, fit, and function established by the specifications,
including:
Verify and repair functional failures Install all
ECO/FCOs which affect form, fit, or function to latest
DG authorized revision.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 26 of 45
<PAGE> 27
VOLUME PRICING AGREEMENT 2085
Replace any broken, chipped, dented, or cracked material
affecting form, fit or function.
Perform adjustments and alignments as required. Test and verify
functional performance.
Clean and remove dirt, dust, grease, and customer-installed
labels.
Provide functional failure/repair report.
Packaging and shipping of the repaired unit shall conform to
Specification for MATERIAL.
Exchange units or subassemblies in lieu of the original material
are acceptable.
2. Refurbishment:
Functional Repair, as well as all actions required to correct
cosmetic defects, blemishes, and discolorations.
Page 27 of 45
<PAGE> 28
VOLUME PRICING AGREEMENT 2085
ATTACHMENT F
A. SERVICE AND SUPPORT REQUIREMENTS
1.0 Service and Support Requirement
DGC will be responsible for working directly with the end users, and BCS
Support will work directly with DGC to support DGC personnel, as set
forth below. DGC represents and warrants that it is experienced in,
capable of, and staffed to provide, Level 1 and Level 2 support (as
defined below). BCS offers training programs to assist in attaining this
level of expertise on MATERIAL. BCS will accept calls only from DGC
level II engineers who have successfully completed courses 2 and 3 set
forth below and/or who have undergone formal DGC training on MATERIAL.
BCS will provide Level 3 support (as defined below).
2.0 Support Level Definitions
2.1 Level 1 Support: Level 1 support is the first line, direct end
user contact, most likely via a telephone call handling group
provided by DGC.
Level One support includes:
* First contact direct DGC/End User interaction
* Information collection and analysis
* Identification of whether the problem is known
and has a known solution
* Troubleshooting and problem reproduction
* Problem report administration and tracking
The parties agree that End Users shall not have the right to
contact BCS directly for questions related to the Products.
2.2 Level 2 Support: Level 2 support is "technical support" provided
by DGC personnel. Level 2 support is typically provided by
experts in the applicable Product and who serve as the
escalation point for Level 1. Level 2 support personnel are
expected to resolve all known problems, installation and
configuration issues, assist in firmware or driver updates at
the End User site, search BCS posted Technical Notes and other
technical information supplied that will assist in providing
problem resolutions. All pertinent data shall be entered in
DGC's problem tracking database.
Should the Level 2 analyst be unable to resolve a problem,
either because of lack of expertise, exhausted troubleshooting
knowledge, or expiration of the allotted Level 2 resolution
time, the Level 2 analyst may escalate the problem to Level 3
for resolution as set forth below. Level 2 personnel of DGC will
continue to diligently work with Level 3 personnel of BCS to
accomplish resolution. Level 2 personnel of DGC will communicate
all resolutions back to the End Users.
Escalations should be presented to BCS engineers in the form of
a problem tracking data base record with all pertinent
configuration detail and failure information or symptoms
documented in detail.
In an effort to maintain an efficient support organization and
crisp exchange of information, DGC will limit the number of
support personnel (Level 2) authorized to contact BCS (Level 3)
to approximately 5 (or their designated alternates).
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<PAGE> 29
VOLUME PRICING AGREEMENT 2085
2.3 Level 3 Support: Level 3 support is provided by BCS System
Engineers (SE) and/or Technical Support Engineers (TSE). Level 3
is the first point of contact for technical issues between BCS
and DGC. Once the parties mutually agree that a problem should
be escalated to Level 3, BCS will be responsible for resolution
and will utilize commercially reasonable resources to resolve
such problem.
Prior to escalating to Level 3, it is expected that DGC shall
provide the following information and documentation:
* Any error information from the device connected
to the switch and from the switch.
* All names and revisions of hardware equipment.
* All firmware revisions of the drivers.
* Any log files from the devices connected to the
switch.
* Any trace file from the devices connected to the
switch.
* The configuration information of the equipment
being used.
* Detailed definition of all steps taken to
reproduce and resolve this situation prior to
escalation to Level 3.
Assigned Level 3 support personnel (SE and/or TSE) can be
contacted via direct dial, email to an established "support"
alias, web site initiated input, and by calling BCS's
1-888-ATFIBRE support number. Direct access to BCS support
personnel will be possible during normal BCS business hours (8
AM to 5 PM PST, M-F). Emergency situations for Severity 1
problems are handled via 7 X 24 pager coverage at 1-888-ATFIBRE
(1-888-283-4273)
3.0 BCS Severity Definitions and Support Goals
The goal for initial response time to all telephone support
requests is thirty (30) minutes or less during normal BCS
working hours. For after hours telephone requests, the goal is
one (1) hour or less. The targeted response time for requests
submitted by other means, such as email, or fax, is four (4)
hours.
<TABLE>
<CAPTION>
Severity Definition Service Objective Resolution Time
- -------- ---------- ----------------- ---------------
<S> <C> <C> <C>
1 BCS Product is completely non- Respond to initial request Less than 5 days,
functional, or deemed a safety hazard, within 30 minutes during using commercially
situation has high impact on normal BCS business hours, reasonable efforts
development or delivery efforts. and 1 hour for non-business
Installation problems. hours. Resources applied until
a solution or acceptable work-
around is found.
2 BCS Product is functionally impaired, Respond to initial request Less than 10 days
has substantially degraded performance within 1 (one) hour during
but is not completely dysfunctional. normal BCS business hours.
There are no available work-arounds. Resources applied
Situation has medium impact on DGC continuously, during business
activity hours, until a solution or
work-around is found.
3 BCS Product or advertised functionality Resources applied on a Next maintenance
may be slightly impaired but is priority basis, until a solution release.
operational, has low to no impact on or a work-around is found.
DGC activity, and there are work-
arounds available.
</TABLE>
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<PAGE> 30
VOLUME PRICING AGREEMENT 2085
<TABLE>
<S> <C> <C> <C>
4 Generic questions, and enhancement Answer generic questions or Commercially
requests. provide path to answers within reasonable efforts for
reasonable time frames. The generic questions.
BCS web site will be the Enhancement requests
prime repository for this type are processed on a
of information. Enhancement case by case basis.
requests will be reviewed and
implemented in the next major
release, where feasible, or
to meet specific commitments
made.
</TABLE>
4.0 Firmware/Software Enhancements and Bug Fixes
BCS periodically releases new versions of firmware that provide enhancements to
functionality and fix bugs (Severity 1,2, and 3 in the foregoing table). In
addition, new firmware versions may enhance current features or enable new
features. BCS provides license keys to enable features (i.e., Webtools, Zoning,
SES, etc.). DGC will need to obtain a license key to enable new features.
Item 118029629 and 118029631 Per Copy or Per Incident
New Firmware Release on [*]
SilkWorm 1000 with Licensed
Feature
New Feature [*]
Item 118030714 and 118030715 Per Copy or Per Incident
New Firmware Release on [*]
Silkworm 1000 with Licensed
Feature
New Features for 118030714-2400 [*]
Switch BFOS*
New Features for 118030715-2800 [*]
Switch BFOS*
New Features for Software Bundle [*]
(Webtools, Zoning, and SES)
*BFOS = Brocade Fabric Operating System (all firmware and functionality that is
standard with each switch)
Note: [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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VOLUME PRICING AGREEMENT 2085
B. TECHNICAL TRAINING PROGRAM
1. BCS TRAINING OUTLINE
<TABLE>
<CAPTION>
COURSE DAYS COST
<S> <C> <C> <C>
2 Switch intro & features: 3 $3,000
Audience: Sales/Marketing/SE's
3 Install/Config/Troubleshoot/Mgmt tools: 2 $3,000
Audience: SE's, Tech support
FULL COURSE (2 AND 3) 5 $6,000
</TABLE>
Note: Includes non-reproducible copy of all course materials for each
person. Additional binders of training materials may be purchased from
BCS.
1.1 Courses will be offered at BCS's offices in San Jose, CA or at
such other facility notified to DGC from time to time. A minimum
of five (5) students will be required to attend, or the course
in question may, at BCS's sole option, be canceled. DGC agrees
that it shall pay any and all travel and lodging expenses
related to such training. BCS will make these courses available
to End User customers, on terms to be negotiated at BCS's
then-current rates for end user training courses.
Page 31 of 45
<PAGE> 32
VOLUME PRICING AGREEMENT 2085
ATTACHMENT G
SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT
This Software License and Distribution Agreement (the "Software Agreement") is
entered into as October 1, 1999 ("Effective Date") by and between Brocade
Communications Systems, Inc., a corporation organized under the laws of the
state of California, U.S.A., and having its principal place of business at 1901
Guadalupe Parkway, San Jose, California 95131, ("BCS") and Data General
Corporation a Delaware corporation having its principal place of business at
4400 Computer Drive, Westboro, MA. 01580 ("DGC").
RECITALS
WHEREAS, DGC has agreed to purchase MATERIAL from BCS under Volume Pricing
Agreement No. 2085 ("VPA 2085"), including Software. (Unless otherwise
indicated, capitalized terms shall have the same meaning assigned in VPA 2085.)
WHEREAS, BCS and DGC desire to extend their original equipment manufacturer
relationship to include the Software, subject to the terms and conditions of
this Software Agreement.
NOW, THEREFORE, BCS and DGC enter into this Software Agreement on the following
terms and conditions:
1. Definitions.
1.1 Scope of Definitions. The definitions in this Section 1 shall
apply to this Software Agreement only. If a definition in this
Section 1 conflicts with a definition in VPA 2085, then the
definition in this Section 1 shall apply to this Software
Agreement, and the definition in VPA 2085 shall apply therein.
1.2 "Enhancements" shall mean new releases of Software with improved
features and capabilities for which a fee will be charged.
1.3 "DGC Products" shall mean DGC products, including but not
limited to servers, data storage, fibre channel interconnect
technology, total enterprise solutions, and any and all related
product information, programs or specifications.
1.4 "Hardware" shall mean BCS's hardware products and subassemblies,
as further described in VPA 2085, which are the subject of VPA
2085 and which DGC shall purchase under VPA 2085.
1.5 "Software" shall mean BCS's proprietary software for use with
the Hardware, as further described in Exhibit A hereto and as
may be amended from time to time by BCS in its usual course of
business.
1.6 "Updates" shall mean patches and bug fixes for which no fee will
be charged.
Page 32 of 45
<PAGE> 33
VOLUME PRICING AGREEMENT 2085
2. Prices.
2.1 Prices. The prices for licenses of Software and Enhancements to
DGC will be as set forth in Exhibit B hereto or provided to DGC
by BCS from time to time. DGC and BCS shall adjust such prices
for Software from time to time according to the schedule set
forth in VPA 2085.
2.2 Taxes. In addition to the prices shown on Exhibit B, DGC agrees
to pay any applicable federal, state, or local taxes which may
be levied on the license or use of Software or will provide BCS
with an appropriate reseller tax exemption certificate.
3. Terms for Licensing of Software
3.1 Controlling Terms. The terms and conditions of licenses set
forth in this Software Agreement apply to each order accepted or
fulfilled by BCS and will supersede the terms of DGC's purchase
order or other business forms notwithstanding BCS's acceptance
or acknowledgment of such business forms.
3.2 Supply and Activation. BCS shall pre-install Software on
Hardware to be shipped to DGC. DGC acknowledges that the
Software must be activated by loading the appropriate license
keys ("License Keys") onto the Software. DGC further
acknowledges that each License Key may be specific to a
particular Hardware unit and that separate License Keys may be
required to activate the same Software function on separate
Hardware units. Enhancements will also require License Keys.
Updates will be delivered to DGC in a manner mutually agreed by
the parties.
3.3 Prepaid License Keys. At BCS's sole discretion, DGC may order
License Keys by prepaying for a quantity of License Keys and
subsequently requesting License Keys for specific Hardware units
until the number of prepaid License Keys in DGC's prepaid
account is reduced to zero. BCS shall maintain records of the
License Keys (including their corresponding Hardware units)
charged against DGC's prepaid account. From time to time, DGC
may reasonably request BCS to provide a copy of such records to
DGC. Such records shall be deemed to be a correct and accurate
accounting of DGC's prepaid account unless DGC provides written
notification to BCS of an error in such records; DGC will use
commercially reasonable efforts promptly to review and report
any discrepancies noted therein. Any unused prepaid amounts are
not refundable.
3.4 Acceptance. All orders for License Keys are subject to
acceptance in writing by BCS and are not binding until written
acceptance or authorization of the License Keys, whichever is
earlier. In the case of acceptance by authorization, only the
portion of the order authorized shall be considered binding.
Notwithstanding the foregoing, each DGC purchase order will be
deemed accepted by BCS unless BCS provides written notice to DGC
of its decision to reject the purchase order within [*]
business days after BCS's receipt of that order.
3.5 Cancellation. BCS reserves the right to cancel any accepted
orders, or to refuse to deliver or delay delivery of authorized
License Keys, if DGC fails to meet the obligations of this
Software Agreement within the cure period set forth in Section
5.2 or if VPA 2085 is terminated due to DGC's breach.
3.6 Payment. All BCS invoices will be due and payable in U.S.
dollars within [*] calendar days of the date of the invoice, and
BCS will not send any invoice to DGC prior to the date of
acceptance covered by the invoice.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 33 of 45
<PAGE> 34
VOLUME PRICING AGREEMENT 2085
3.7 License Grant to DGC. Subject to the terms and conditions of
this Software Agreement, BCS grants to DGC a nonexclusive,
nontransferable, non-sublicensable license:
(i) to use the program modules or features of the Software
which have been activated by License Keys and for which
DGC has paid the requisite fees for the purpose of
manufacturing or testing DGC Products incorporating such
Software and Hardware;
(ii) to distribute the Software to DGC's customers only in
object code form as embedded in Hardware incorporated
into DGC Products sold or leased to such customers;
(iii) to distribute the Enhancements and Updates to DGC's
customers only in object form, including via electronic
means provided that DGC uses commercially reasonable
efforts to implement protections for the storage and
transmission of the Enhancements and Updates to ensure
that such electronic means are not circumvented by any
third party in contravention of the restrictions in this
Software Agreement.
3.8 Software Use by Second-Tier OEMs. Subject to the terms and
conditions of this Software Agreement, BCS grants to DGC a
nonexclusive, nontransferable, non-sublicensable license:
(i) to grant to DGC's OEMs ("Second-Tier OEMs") any of the
rights of Section 3.7 above or Section 3.9 below,
provided that any such use shall be governed by a
written agreement between DGC and Second-Tier OEM no
less favorable to and protective of BCS than the license
rights and restrictions of this Software Agreement; and
(ii) to distribute the Software to Second-Tier OEMs only in
object code form as embedded in Hardware incorporated
into DGC Products sold or leased to such Second-Tier
OEMs.
3.9 Software Use by DGC's Customers. Subject to the terms and
conditions of this Software Agreement, BCS grants to DGC a
limited right to distribute (i) the Software or Enhancements
which have been activated by License Keys and for which the
requisite fees have been paid to BCS, (ii) Updates, to (A) DGC
resellers with the right to further distribute to DGC customers,
and (B) DGC's customers, without the right to further to
distribute or sublicense, to use the program modules or
features; provided that any use by a customer shall be governed
by the End-User Software License Agreement attached hereto as
Exhibit C or a written sublicense agreement between DGC and
DGC's customer no less - favorable to and protective of BCS than
the End-User Software License Agreement attached hereto as
Exhibit C.
3.10 Provision of License Keys. Upon DGC's request, BCS and DGC shall
use reasonable efforts to mutually agree upon a procedure for
the distribution of License Keys from BCS to DGC's customers and
Second-Tier OEMs.
3.11 Limitations. Except as otherwise expressly provided under this
Software Agreement, DGC shall have no right, and DGC
specifically agrees not to remove the Software from the Hardware
in which it is embedded.
3.12 Ownership. DGC agrees that the foregoing licenses do not grant
any title or other right of ownership to the Software and that
BCS and/or its licensors shall continue to own all right, title
and interest in and to the Software.
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<PAGE> 35
VOLUME PRICING AGREEMENT 2085
3.13 Proprietary Notices. DGC agrees (i) not to remove or destroy any
copyright, trademark, patent, or other notice, legends or
markings of proprietary or confidential rights placed upon or
contained within the Software, and (ii) to place such notices,
legends and markings on and within the DGC product incorporating
the Software (the "DGC Product") or on or within the
documentation related to the DGC Product in accordance with the
reasonable written instructions of BCS.
3.14 Restrictions. DGC, on behalf of itself, the DGC Affiliated
Companies and the DGC contract manufacturer(s), agrees that it
will not: (a) disassemble, decompile, or reverse engineer any
Software; (b) except as authorized herein, copy or otherwise
reproduce any Software, in whole or in part; or (c) except as
set forth herein of in VPA 2085, create derivative works from,
adapt, modify, change or enhance Software without BCS's prior
written consent. DGC's rights in the Software will be limited to
those expressly granted in this Agreement. Notwithstanding the
foregoing, the parties agree that DGC shall have the right to
modify the Software as may be required in connection with DGC's
setup of the Software for a reseller or an end user, but shall
have no rights to otherwise modify the Software. All rights not
granted to DGC by BCS in the Software are reserved to BCS.
3.15 Restricted Rights. The Software shall be classified as
"commercial computer software" as defined in the applicable
provisions of the Federal Acquisition Regulation (the "FAR") and
supplements thereto, including the Department of Defense (DoD)
FAR Supplement (the "DFARS"). The parties acknowledge that the
Software was developed entirely at private expense and that no
part of the Software was first produced in the performance of a
Government contract. If the Software is supplied for use by DoD,
the Software is delivered subject to the terms of this Software
Agreement and either (i) in accordance with DFARS 227.7202-1(a)
and 227.7202-3(a), or (ii) with restricted rights in accordance
with DFARS 253.227-7013(c)(1)(ii) (OCT 1988), as applicable. If
the Software is supplied for use by a Federal agency other than
DoD, the Software is restricted computer software delivered
subject to the terms of this Software Agreement and (i) FAR
13.212(a); (ii) FAR 53.227-19; or (iii) FAR 53.227-14(ALT III),
as applicable.
4. Limited Warranty; Limitations of Liability.
4.1 Limited Warranty. BCS warrants that the Software will
substantially conform to its published specifications for a
period of ninety (90) days from the later of receipt of the
Hardware containing the Software or receipt of access to the
Software. This limited warranty extends only to DGC as the
original licensee. DGC's sole and exclusive remedy and the
entire liability of BCS and its suppliers under this limited
warranty will be, at BCS or its service center's option, repair,
replacement, or, if neither repair nor replacement is
commercially practicable in BCS's sole discretion, refund of the
Software if reported (or, upon request, returned) to BCS or its
designee. BCS does not warrant that the Software is error free
or that DGC will be able to operate the Software without
problems or interruptions. This warranty does not apply if the
Software or the Hardware containing the Software (a) is licensed
for beta, evaluation, testing or demonstration purposes for
which BCS does not receive a license fee, (b) has been altered,
except by BCS, (c) has not been installed, operated, repaired,
or maintained in accordance with instructions supplied by BCS,
(d) has been subjected to abnormal physical or electrical
stress, misuse, negligence, or accident, or (e) is used in
ultrahazardous activities.
4.2 BCS warrants that all Software shall be "Year 2000 Qualified".
For purposes of the foregoing, "Year 2000 Qualified" Software
will correctly process, calculate, compare and
Page 35 of 45
<PAGE> 36
VOLUME PRICING AGREEMENT 2085
sequence date data from, into and between the twentieth and the
twenty-first centuries, including leap year calculations, when
used in accordance with the associated product documentation and
provided that all hardware, firmware and software used in
combination with such products properly exchange accurate date
data in appropriate Year 2000 format. Neither party may make any
changes to specifications without written consent of the other
party.
4.3 Disclaimer of Warranty. BCS MAKES NO WARRANTIES OR
REPRESENTATIONS AS TO PERFORMANCE OF THE SOFTWARE OR DGC
PRODUCTS, EXCEPT AS SET FORTH ABOVE. ALL IMPLIED WARRANTIES AND
CONDITIONS, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND (EXCEPT AS
STATED BELOW) NONINFRINGEMENT, ARE HEREBY DISCLAIMED. EXCEPT AS
EXPRESSLY PROVIDED FOR IN THIS SECTION 4, THE SOFTWARE IS
PROVIDED "AS IS".
4.4 Limited Liability. THE LIABILITY OF BCS, IF ANY, FOR DAMAGES
RELATING TO OR ARISING OUT OF THIS SOFTWARE AGREEMENT OR THE
SUPPLY OF SOFTWARE HEREUNDER, WHETHER RESULTING FROM A TORT
(INCLUDING NEGLIGENCE), BREACH OF CONTRACT OR OTHER FORM OF
ACTION, SHALL BE LIMITED TO THE LIABILITY CAP SET FORTH IN
SECTION 10.10.2 OF THE VPA 2085, AND SHALL IN NO EVENT INCLUDE
LOSS OF PROFITS, COST OF PROCURING SUBSTITUTE GOODS OR SERVICES,
OR ANY INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY
KIND, EVEN IF BCS IS AWARE OF THE POSSIBILITY OF SUCH DAMAGES,
AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY
LIMITED REMEDY PROVIDED UNDER THIS SOFTWARE AGREEMENT.
4.5 Support and Service. DGC will provide service and support
directly to its resellers and customers for the Software,
Enhancements and Updates; BCS has no obligations to provide
support directly to DGC customers or resellers. BCS will provide
service and support for the Software, Enhancements and Updates
to DGC as set forth in Attachment F to VPA 2085.
4.6 Indemnity. The provisions of Section 7.1.1 of VPA 2085 are
incorporated herein by reference.
5. Term and Termination.
5.1 Term. The term of this Software Agreement shall be the same as
the term of VPA 2085.
5.2 Right to Terminate. Either party may terminate this Software
Agreement (i) immediately upon termination of VPA 2085; or (ii)
upon the occurrence of a default, as follows".
(1) The occurrence of any of the following acts or events shall
constitute default of this Agreement: (a) the failure by such
party to observe or perform any material covenant or obligation
under this Agreement, or (b) such party becomes insolvent,
suffers the appointment of a receiver, or makes an assignment
for the benefit of creditors; or proceedings are commenced
against such party under any bankruptcy, insolvency or debtor's
relief law, if such proceeding is not vacated or set aside
within sixty (60) days after the date of commencement thereof.
(2) In the case of default, if such default has not been cured
within thirty (30) days after a party has received written
notice of default from the other party, the party giving notice
may give a second (final) Notice of Intent to Terminate,
directed in the case of notice to DGC to its
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<PAGE> 37
VOLUME PRICING AGREEMENT 2085
Vice President, Manufacturing, and in the case of notice to BCS,
to its Vice President of Finance and Administration. In the
event thereafter that such default is not cured within five (5)
business days after the receipt of such Notice of Intent to
Terminate, the party giving notice may terminate this Agreement
by written notice at any time thereafter while such default
continues.
5.3 Effect of Termination for Default. In the event that BCS
terminates this Software Agreement on account of DGC's default,
BCS may: (i) declare all amounts owed by DGC to be immediately
due and payable and refuse to deliver any further License Keys
or ship any further Hardware under VPA 2085 until such amounts
have been paid; (ii) require C.O.D. payment; and (iii) pursue
any other remedies at law or in equity available to it.
Termination of the Software Agreement shall not terminate or
otherwise affect any licenses previously distributed by DGC
hereunder.
5.4 Liability for Termination. NEITHER PARTY SHALL BE LIABLE TO THE
OTHER AS A RESULT OF THE EXPIRATION OR ANY TERMINATION OF THIS
SOFTWARE AGREEMENT, INCLUDING FOR ANY MONEYS EXPENDED, DAMAGES
SUFFERED OR LIABILITIES INCURRED BY EITHER IN THE CONDUCTING OR
PROMOTING OF THEIR BUSINESS, OR FOR LOST PROFITS OR
CONSEQUENTIAL DAMAGES OF ANY KIND.
5.5 Survival. DGC's obligations to pay BCS all amounts due
hereunder, as well as Sections 1, 3.9 - 3.12 (inclusive), 4, 5,
6, 7, and 8 shall survive the expiration and any termination of
this Software Agreement. The licenses under Sections 3.7, 3.8
and 3.9 and the warranties under Section 4 shall survive the
expiration and termination of this Software Agreement.
6. Confidentiality
The confidentiality obligations set forth in VPA 2085 shall apply
equally to information disclosed under this Software Agreement. (The
provisions entitled "Protection of Information" in Exhibit C shall not
apply to DGC).
7. General
The general provisions in VPA 2085 concerning the following subject
matter, if any, are incorporated herein by reference and shall apply
equally to this Software Agreement: Controlling or Governing Law, Venue,
Arbitration or Alternate Dispute Resolution (relative only to claims
solely between the parties and not involving third parties), Assignment,
Injunctive or Equitable Relief, Relationship of the Parties, Compliance
with Laws including Export Laws, Severability, Notices, Force Majeure,
Headings, Modification, and Waiver.
8. Conflict Provision.
8.1 Entire Agreement. This Agreement, the exhibits hereto, and the
relevant portions of VPA 2085 (which are fully incorporated
herein by this reference) constitute the entire agreement
between the parties pertaining to the subject matter hereof, and
supersede in their entirety any prior or contemporaneous written
or oral agreements between the parties.
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<PAGE> 38
VOLUME PRICING AGREEMENT 2085
8.2 Conflicts. Except as expressly set forth herein, all other terms
and conditions of VPA 2085 shall remain in full force and
effect. In the event of conflict between this Software Agreement
and VPA 2085, the terms and conditions of this Software
Agreement shall apply to Software and the terms and conditions
of VPA 2085 shall apply to Hardware.
IN WITNESS WHEREOF, the parties have caused this Software License Agreement to
be executed by their duly authorized representatives.
BROCADE COMMUNICATIONS
SYSTEMS, INC. DATA GENERAL CORPORATION
("BCS") ("DGC")
By: /s/ Charles Smith By: /s/ William F. O'Neill
Charles Smith William F. O'Neill
Vice President of Worldwide Sales Director, New Products & Technology
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<PAGE> 39
VOLUME PRICING AGREEMENT 2085
EXHIBIT A
DESCRIPTION OF SOFTWARE*
BCS Software Bundle I (Version 1.1) PN SW-0000000007-0002
BCS Software Bundle II (Version 2.1) PN SW-200007-02
QuickLoop PN SW-2000008-01
*Includes WebTools, Zoning, and SCSI Enclosure Services (SES)
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<PAGE> 40
VOLUME PRICING AGREEMENT 2085
EXHIBIT B
PRICES
BCS Software Bundle I PN SW-0000000007-0002 $ [*] per license per switch
BCS Software Bundle II PN SW-200007-02 $ [*] per license per switch
QuickLoop PN SW-2000008-01 $ [*] per license per switch
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 41
VOLUME PRICING AGREEMENT 2085
EXHIBIT C
END-USER SOFTWARE LICENSE AGREEMENT
PLEASE READ THIS END-USER SOFTWARE LICENSE AGREEMENT CAREFULLY BEFORE USING THE
SOFTWARE CONTAINED IN THIS EQUIPMENT.
BY USING THE EQUIPMENT THAT CONTAINS THIS Software, YOU ARE CONSENTING TO BE
BOUND BY THIS AGREEMENT. IF YOU DO NOT AGREE TO ALL OF THE TERMS OF THIS
AGREEMENT, PROMPTLY RETURN THE EQUIPMENT AND DO NOT USE THE Software.
SINGLE USER LICENSE. Subject to the terms and conditions of this Agreement,
Brocade Communications Systems, Inc. ("BCS") and its suppliers grant to Customer
("Customer") a nonexclusive license to use (a) BCS software which provides the
basic operating environment for BCS equipment, and (b) the specific BCS program
modules or features which have been enabled by software keys supplied by BCS or
its authorized distributors and for which Customer has paid any applicable
license fees (collectively, the "Software"), both of the foregoing in object
code form only: (i) solely as embedded in BCS equipment owned or leased by
Customer, and (ii) for key-enabled software, solely on the single central
processing unit corresponding to the software key(s) supplied by BCS and to the
license fees paid by Customer.
LIMITATIONS. Except as otherwise expressly provided under this Agreement,
Customer shall have no right, and Customer specifically agrees not to:
(i) make error corrections to or otherwise modify or adapt the Software nor
create derivative works based upon the Software, or to permit third
parties to do the same;
(ii) copy, in whole or in part, decompile, reverse engineer, disassemble or
otherwise reduce the Software to human-readable form; or
(iii) remove the Software from the equipment in which it is embedded.
Only to the extent required by law, if any, BCS shall provide Customer with the
interface information needed to achieve interoperability between the Software
and another independently created program, upon Customer's request and upon
payment of BCS's applicable fee. Customer shall observe strict obligations of
confidentiality with respect to such information.
UPGRADES AND ADDITIONAL COPIES. For purposes of this Agreement, "Software" shall
include (and the terms and conditions of this Agreement shall apply to) any
upgrades, updates, bug fixes or modified versions (collectively, "Upgrades") or
backup copies of the Software licensed or provided to Customer by BCS or an
authorized distributor for which Customer has paid the applicable license fees
and holds the corresponding software keys. NOTWITHSTANDING ANY OTHER PROVISION
OF THIS AGREEMENT: (1) CUSTOMER HAS NO LICENSE OR RIGHT TO USE ANY SUCH
ADDITIONAL COPIES OR UPGRADES UNLESS CUSTOMER, AT THE TIME OF ACQUIRING SUCH
COPY OR UPGRADE, ALREADY HOLDS A VALID LICENSE AND THE CORRESPONDING Software
KEYS TO THE ORIGINAL Software; AND (2) USE OF UPGRADES IS LIMITED TO BCS
EQUIPMENT FOR WHICH CUSTOMER IS THE ORIGINAL END USER PURCHASER OR LESSEE.
NOTICES OF PROPRIETARY RIGHTS. Customer agrees to maintain and reproduce all
trademark, copyright, patent, and notices of other proprietary rights on all
copies, in any form, of the Software in the same form and manner that such
trademark, copyright, patent, and notices of other proprietary notices rights
are included on the Software. Except as expressly authorized in this Agreement,
Customer shall not make any copies or duplicates of any Software without the
prior written permission of BCS. Customer may make such backup copies of the
Software as may be necessary for Customer's lawful use, provided Customer
affixes to such copies all trademark, copyright, confidentiality, and patent,
and notices of other proprietary notices rights that appear on the original.
Page 41 of 45
<PAGE> 42
VOLUME PRICING AGREEMENT 2085
PROTECTION OF INFORMATION. Customer agrees that aspects of the Software and
associated documentation, including the specific design and structure of
individual programs, constitute trade secrets and/or copyrighted material of
BCS. Customer shall not disclose, provide, or otherwise make available such
trade secrets or copyrighted material in any form to any third party without the
prior written consent of BCS. Customer shall implement reasonable security
measures to protect such trade secrets and copyrighted material. Title to
Software and documentation shall remain solely with BCS.
LIMITED WARRANTY. BCS warrants that the Software will substantially conform to
its published specifications for a period of ninety (90) days from the later of
receipt of the equipment containing the Software or receipt of access to the
Software. This limited warranty extends only to Customer as the original
licensee. Customer's sole and exclusive remedy and the entire liability of BCS
and its suppliers under this limited warranty will be, at BCS or its service
center's option, repair, replacement, or refund of the Software if reported (or,
upon request, returned) to BCS or its designee. Except as expressly granted in
this Agreement, the Software is provided AS IS. BCS does not warrant that the
Software is error free or that Customer will be able to operate the Software
without problems or interruptions.
This warranty does not apply if the Software or the BCS equipment in which the
Software is embedded (a) is licensed for beta, evaluation, testing or
demonstration purposes for which BCS does not receive a license fee, (b) has
been altered, except by BCS, (c) has not been installed, operated, repaired, or
maintained in accordance with instructions supplied by BCS, (d) has been
subjected to abnormal physical or electrical stress, misuse, negligence, or
accident, or (e) is used in ultrahazardous activities.
DISCLAIMER. EXCEPT AS SPECIFIED IN THIS WARRANTY, ALL EXPRESS OR IMPLIED
CONDITIONS, REPRESENTATIONS, AND WARRANTIES INCLUDING, WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OR CONDITION OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, NONINFRINGEMENT, SATISFACTORY QUALITY OR ARISING FROM A COURSE OF
DEALING, USAGE, OR TRADE PRACTICE, ARE HEREBY EXCLUDED TO THE EXTENT ALLOWED BY
APPLICABLE LAW.
IN NO EVENT WILL BCS OR ITS SUPPLIERS BE LIABLE FOR ANY LOST REVENUE, PROFIT, OR
DATA, OR FOR SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL, OR PUNITIVE DAMAGES
HOWEVER CAUSED AND REGARDLESS OF THE THEORY OF LIABILITY ARISING OUT OF THE USE
OF OR INABILITY TO USE THE Software EVEN IF BCS OR ITS SUPPLIERS HAVE BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN NO EVENT SHALL BCS'S OR ITS
SUPPLIERS' LIABILITY TO CUSTOMER, WHETHER IN CONTRACT, TORT (INCLUDING
NEGLIGENCE), OR OTHERWISE, EXCEED THE PRICE PAID BY CUSTOMER. THE FOREGOING
LIMITATIONS SHALL APPLY EVEN IF THE ABOVE-STATED WARRANTY FAILS OF ITS ESSENTIAL
PURPOSE. BECAUSE SOME STATES OR JURISDICTIONS DO NOT ALLOW LIMITATION OR
EXCLUSION OF CONSEQUENTIAL OR INCIDENTAL DAMAGES, THE ABOVE LIMITATION MAY NOT
APPLY TO YOU.
TERM AND TERMINATION. This Agreement is effective until terminated. Customer's
license rights under this Agreement will terminate immediately without notice
from BCS if Customer fails to comply with any provision of this Agreement. Upon
termination, Customer must destroy all copies of Software and the corresponding
software keys in its possession or control.
CUSTOMER RECORDS. Customer grants to BCS and its independent accountants the
right to have conducted, through a mutually acceptable third party auditor,
under a suitable confidentiality agreement, an audit of Customer's books,
records and accounts during Customer's normal business hours to verify
compliance with this Agreement. In the event such audit discloses material
non-compliance with this Agreement, Customer shall promptly pay to BCS the
appropriate licensee fees.
EXPORT. SOFTWARE, including technical data, is subject to U.S. export control
laws, including the U.S. Export Administration Act and its associated
regulations, and may be subject to export or import regulations in other
countries. Customer agrees to comply strictly with all such regulations and
acknowledges that it has the responsibility to obtain licenses to export,
re-export, or import Software.
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<PAGE> 43
VOLUME PRICING AGREEMENT 2085
RESTRICTED RIGHTS. The Software shall be classified as "commercial computer
software" as defined in the applicable provisions of the Federal Acquisition
Regulation (the "FAR") and supplements thereto, including the Department of
Defense (DoD) FAR Supplement (the "DFARS"). The parties acknowledge that the
Software was developed entirely at private expense and that no part of the
Software was first produced in the performance of a Government contract. If the
Software is supplied for use by DoD, the Software is delivered subject to the
terms of this Agreement and either (i) in accordance with DFARS 227.7202-1(a)
and 227.7202-3(a), or (ii) with restricted rights in accordance with DFARS
252.227-7013(c)(1)(ii) (OCT 1988), as applicable. If the Software is supplied
for use by a Federal agency other than DoD, the Software is restricted computer
software delivered subject to the terms of this Agreement and (i) FAR 12.212(a);
(ii) FAR 52.227-19; or (iii) FAR 52.227-14(ALT III), as applicable.
GENERAL. This Agreement shall be governed by and construed in accordance with
the laws of the State of California, United States of America, as if performed
wholly within the state and without giving effect to the principles of conflict
of law. If any portion hereof is found to be void or unenforceable, the
remaining provisions of this Agreement shall remain in full force and effect.
This Agreement constitutes the entire agreement between the parties with respect
to the use of the Software
Page 43 of 45
<PAGE> 44
VOLUME PRICING AGREEMENT 2085
EXHIBIT H
[*]
[*]
[*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
Page 44 of 45
<PAGE> 1
EXHIBIT 10.24
MANUFACTURING AGREEMENT
Solectron California Corporation ("Solectron") whose principle place of business
is located at 847 Gibraltar Drive, Milpitas, California 95035 and Brocade
Communications Systems, Inc. ("Brocade") whose principle place of business is
located at 1901 Guadalupe Parkway, San Jose, California 95131 in their desire to
formulate a strategic business relationship and to define their expectations
regarding this relationship, hereby agree as follows:
1.0 PRECEDENCE:
1.1 This Standard Manufacturing Agreement (the "Agreement") is intended by
Solectron and Brocade to operate as a basic set of operating conditions
regarding their respective business relationship whereby Solectron would
manufacture certain models of Brocade's products as described in more
particularity in the addenda to this Agreement (the "Products").
Product-specific requirements along with specific business terms and
conditions with respect to each Product will be mutually agreed to and
documented by an executed addendum to this Agreement.
1.2 It is the intent of the parties that this Agreement and its addenda
shall prevail over the terms and conditions of any purchase order,
acknowledgment form or other instrument. In the event of a conflict
between the terms of this Agreement and the terms contained in any
addenda to this Agreement, the terms of the addenda shall be
controlling. Addenda shall not be binding until executed by authorized
representatives of each party.
1.3 This Agreement may be executed in one or more counterparts, each of
which will be deemed the original, but all of which will constitute but
one and the same document. The parties agree this Agreement and its
addenda may not be modified except in writing signed by both parties.
1.4 Nothing in this Agreement shall be construed or deemed to prevent or
otherwise inhibit Brocade's ability or right to manufacture, at
Brocade's facility or at a third party facility of Brocade's choice, the
Products. Further, nothing in this Agreement shall be construed or
deemed to (i) require Brocade to order any units of the Products to be
manufactured by Solectron, or (ii) prevent or otherwise inhibit
Brocade's ability or right to design, develop, manufacture, have
manufactured, market, use, sell, and or distribute any follow-on
products or derivatives of the Products.
2.0 TERM
2.1 The effective date of this Agreement shall be 7/30/, 1999 ("Effective
Date"). This Agreement shall commence on the Effective Date, and shall
continue for an initial term of three (3) years. Thereafter, this
Agreement shall automatically be renewed for successive one (1) year
renewal terms unless either party requests in writing, at least one
hundred twenty (120) days prior to the anniversary date of the
then-current term, that this Agreement not be so renewed.
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<PAGE> 2
3.0 PRODUCT FORECAST
3.1 It is agreed that Brocade will provide Solectron, on a monthly basis, a
non-binding rolling twelve (12) month Product forecast. This section, as
appropriate, may be modified in an addendum to reflect specific Product
requirements. Solectron shall view all such forecasts as Confidential
Information as provided in Section 11.
4.0 MATERIAL PROCUREMENT
4.1 Solectron is authorized to purchase materials using standard purchasing
practices including, but not limited to, acquisition of material
recognizing Economic Order Quantities, ABC buy policy and long lead time
component management in order to meet the PO and long lead time
requirements of Brocade, solely in accordance with the authorization
procedures set forth in Section 4.2. Brocade recognizes its financial
responsibility for the material purchased by Solectron on behalf of
Brocade.
4.2 Solectron will purchase specified quantities of long lead time material
and Brocade unique material as authorized by Brocade in advance and in
writing. Solectron will compile and maintain (and provide an updated
version to Brocade on a monthly basis that reflects Brocade's current
requirements) a report concerning this long lead time material which
will contain:
* Brocade part number
* Solectron part number
* Manufacturer name
* Manufacturer part number
* Manufacturer description
* Lead time
* Where used
* Quantity per unit of Product
* Purchase quantity authorized by Brocade
* Purchase price authorized by Brocade
* Extended price
It is understood and agreed that if Brocade orders Solectron to stop
production of Products for Brocade's convenience, prior to the
consumption of all material authorized for purchase by Brocade pursuant
to this Section 4.2, Brocade will purchase all material as provided in
Section 4.3. It is the intention of both parties that Solectron
effectively manages the long lead time and Brocade unique material
inventory such that the inventory will be completely consumed by the
end-of-support of the Products, and Brocade will consequently not have
any such material inventory liability.
4.3. In the event of a termination or a cancellation of a purchase order or a
material release, Solectron shall provide to Brocade within ten (10)
business days the cost of material inventory and value-add, whether in
raw form, work in process, or finished goods, and not returnable to the
vendor or usable for other customers, the cost of material on order
which cannot be canceled, and any vendor cancellation charges incurred
with respect to material canceled or returned to the vendor.
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<PAGE> 3
4.4. Solectron shall undertake reasonable efforts to cancel all applicable
component purchase orders and reduce component inventory through return
for credit programs or allocate components for alternate programs if
applicable. Charges will be finalized within thirty (30) business days.
4.5. Solectron shall define manufacturing capacity for each major step in the
manufacturing process and total manufacturing capacity for each Product
and/or family of Products. Solectron will also provide component
supplier supply capacity information with the exception of Brocade
Managed Components, as defined below in Section 7.3 (collectively
"Capacity Information"). Capacity Information along with up-to-date
information on Solectron's manufacturing capacity model and cycle time
plan will be provided to Brocade on the first day of each month in a
monthly report or as requested by Brocade. Component supplier capacity
information will be provided on an as-needed basis.
4.6. During the term of this Agreement, Solectron agrees to aggressively
monitor lead times and cycle times for the various Products as broken
down into the following major categories:
* Order processing cycle time
* Material lead time
* Manufacturing cycle time
* Pack out and shipping cycle time
This information will be reported to Brocade on a monthly basis, or as
otherwise requested by Brocade ("Lead time Reports"). Solectron agrees
to aggressively work with Brocade to develop strategies which will lead
to ongoing reductions in lead times and cycle times for the various
categories. The Lead time Reports will include the details and results
of the implementation of such strategies.
4.7. Solectron will perform a preferred supplier comparison on an ongoing
basis to ensure optimal use of Solectron's preferred supply base.
4.8. Upon written request by Brocade, Solectron agrees to increase or
decrease the quantity of Products scheduled to be delivered to Brocade
as follows:
[*]
Solectron agrees to use commercially reasonable efforts to meet the [*]
in the table above. The above flexibility percentages are the limit for
the sum of requested changes during any rolling [*] day planning cycle.
[*]. The maximum cumulative reschedule delay is sixty (60) days.
5.0 PURCHASE ORDERS AND PRICE REVIEWS
5.1 Brocade agrees to provide Solectron Purchase Orders or Material Releases
[*] calendar days in advance of the scheduled delivery date (or
as otherwise provided by an
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 4
addendum) and shall become effective upon acceptance of the order by
Solectron. Solectron shall accept or reject all Purchase Orders within
two (2) business days of receipt or such Purchase Orders shall be deemed
accepted by Solectron. Such confirmation must include acceptance of
requested delivery dates. If Solectron is unable to accept Brocade's
requested delivery dates, Solectron must immediately advise Brocade of
the reason such delivery dates cannot be met. Change orders shall be
provided by written or electronically dispatched notice from Brocade.
Solectron shall notify Brocade of acceptance of a change order within
two (2) business days after receipt of Brocade's change order.
5.2 In the event of termination or cancellation of a purchase order, the
terms of Section 4.3 shall apply.
5.3 Solectron and Brocade will meet every [*] months, or more frequently
upon the request of either party, during the term of this Agreement to
review pricing and determine whether any price increase or decrease is
required. Any price change shall apply only to purchase orders or
material releases issued after the effective date of such price change,
unless otherwise agreed to by Solectron and Brocade.
6.0 DELIVERY
6.1 Solectron acknowledges and agrees that Solectron shall make commercially
reasonable efforts to meet the target goal of 100% on-time delivery to
Brocade's customer, defined as the shipment of Product by Solectron
within a maximum window of 0 days early and 0 days late based on the
acknowledged delivery due date. This section, as appropriate, may be
modified by an addendum to reflect specific Product requirements.
6.2 All shipments shall be F.O.B. origin (Solectron's dock). Title and risk
of loss shall pass to Brocade upon Solectron's tendered delivery to the
common carrier or Brocade's designee.
6.3 Upon learning of any potential delivery delays, Solectron will notify
Brocade within one (1) business hour as to the cause and extent of such
delay.
6.4 If Solectron fails to make deliveries at the specified time and such
failure is caused by Solectron, Solectron will, at no additional cost to
Brocade, employ accelerated measures such as material expediting fees,
premium transportation costs, or labor overtime required to meet the
specified delivery schedule or minimize the lateness of deliveries;
however, [*].
6.5 Should Brocade require Solectron to undertake export activity on behalf
of Brocade, Brocade agrees to submit requested export information to
Solectron pursuant to Solectron Guidelines for Brocade-Driven Export
Shipments as provided in the addenda.
6.6 All Products shall be packaged and prepared for shipment in a manner
which (i) follows the requirements set forth in Brocade's Purchase
Order, (ii) follows good commercial practice, (iii) is acceptable to
common carriers for shipment, and (iv) is adequate to ensure safe
arrival. Each shipment shall be accompanied by a packing slip that
includes Brocade's part numbers, purchase order number and the quantity
shipped.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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<PAGE> 5
7.0 PAYMENT TERMS
7.1 Solectron and Brocade agree to payment terms of [*] after the date of
shipment of Product or Solectron's invoice, whichever is later.
7.2 Currency will be in U.S. Dollars unless specifically negotiated and
reflected in the addenda.
7.3 Solectron and Brocade agree that the prices for each unit of Product
manufactured by Solectron for Brocade pursuant to the Agreement shall be
set forth in the applicable addenda, and further agree that such prices
shall be generally based upon a formula of different percentage mark-ups
or margins contained in such applicable addenda for the different
components, depending upon whether the various components are either (i)
components for which Solectron is responsible for all aspects of the
management of the relationship with the supplier ("Solectron Managed
Components"), or (ii) components for which Brocade is responsible for
all aspects of the management of the relationship with the supplier
("Brocade Managed Components"). The applicable addenda for the products
manufactured by Brocade as of the Effective Date shall be Exhibit 1
attached hereto.
8.0 QUALITY
8.1 Solectron shall manufacture the Products in accordance with the process
quality requirements, standards, specifications and expectations as set
forth in Exhibit 2 ("Quality System and Product Quality Requirements").
8.2 Solectron will use best industry standards in manufacturing, assembly
and test, consistent with meeting Brocade's product specifications. As
far as practical, Solectron will use documented industry standards
(ASME, IPC, SPI, etc.).
8.3 Workmanship standards for the PCBA are IPC 610b Class II and IPC-R-700C
Class II. Workmanship standards for the system level are Cosmetic
Specifications of Molded Parts: SPI 1994 edition. As needed, Solectron
and Brocade can mutually agree to add industry or product-specific
standards.
9.0 ENGINEERING CHANGES
9.1 Brocade may, upon advance written notice to Solectron, submit
engineering changes (ECOs) for incorporation into the Product. It is
important that this notification include documentation of the change to
effectively support an investigation of the impact of the engineering
change. Solectron will use all reasonable efforts to review the
engineering change and report to Brocade within two (2) business days).
If any such change affects the price, delivery, or quality performance
of said Product, an equitable adjustment will be negotiated between
Solectron and Brocade prior to implementation of the change.
9.2 The parties agree that five (5) business days is a reasonable time
period to permit Solectron to evaluate ECO impact regarding potential
excess material liability, price, and delivery.
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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9.3 Solectron agrees not to undertake significant process changes, design
changes, or process step discontinuance affecting electrical performance
and/or mechanical form and fit without prior written notification and
concurrence of Brocade.
9.4 Brocade shall pay Solectron for their costs of implementing ECOs at the
rate of [*] each. [*] per sustaining product per month will not be
charged to Brocade. ECOs that are just for AVL changes will not be
charged to Brocade. ECOs before a product reaches General Availability
(GA) maturity will not be charged to Brocade.
10.0 INVENTORY MANAGEMENT
10.1 Solectron agrees to purchase components according to Brocade approved
vendor list (AVL)
10.2 All tools, tooling equipment, test equipment and other related items
furnished to Solectron by Brocade (See Attachment 1 for list effective
at contract signing date) or paid for by Brocade ("Brocade Property") in
connection with this Agreement will be clearly identified by Solectron
and will remain the property of Brocade and shall:
* Be clearly marked and remain the personal property of
Brocade.
* Be kept free of liens and encumbrances.
* Be certified by Brocade to be in compliance with the
GAO's Y2K guidelines.
10.3. Unless otherwise agreed, Brocade is responsible for the general
maintenance of Brocade tooling/equipment. Solectron will maintain
burn-in ovens, hi-pot tester and test fixtures at no labor cost to
Brocade, but will charge Brocade for parts and supplies.
10.4. Brocade hereby appoints Solectron its bailee and assigns to Solectron
the Brocade Property, and Solectron accepts such appointment and agrees
that it will not issue any negotiable bills or receipts on the Brocade
Property and shall neither file nor permit any lien or other claim to be
filed against any of the Brocade Property. In the event that such a lien
or claim is filed, Solectron shall promptly notify Brocade and shall
take all action necessary to cause such lien or claim against the
Brocade Property to be released or otherwise removed within forty-five
(45) days. If such lien or claim is not released within such forty-five
(45) days, then Solectron shall be deemed to have purchased the Brocade
Property at the then current replacement costs for such Brocade Property
and such amount shall be immediately payable to Brocade.
10.5. Solectron shall hold Brocade Property at its own risk and shall not
modify the property without the written permission of Brocade. Brocade
property will be used by Solectron only for purposes of this Agreement.
Upon Brocade's request, Solectron shall redeliver the property to
Brocade in the same condition as originally received by Solectron with
the exception of reasonable wear and tear. In the event the property is
lost, damaged or destroyed, Solectron's liability for the property is
limited to the book value of the property.
11.0 CONFIDENTIAL INFORMATION AND PROPRIETARY RIGHTS
11.1 Solectron and Brocade have executed as of April 21, 1998, as part of
this Agreement, a Nondisclosure Agreement for the reciprocal protection
of confidential information (the
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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"NDA Agreement"), as attached hereto as Attachment 2 and incorporated
herein by reference.
11.2 Subject to the terms of the NDA Agreement and the proprietary rights of
the parties, Solectron and Brocade agree to exchange, at least
semi-annually, relevant process development information and business
plans to include market trends, process technologies, product
requirements, new product developments, available capacity and other
information to support technology advancements by both Solectron and
Brocade.
11.3 Solectron acknowledges and agrees that all right, title and interest in
and to the Products manufactured by Solectron for Brocade pursuant to
this Agreement shall remain with Brocade (and/or its suppliers, as
applicable).
12.0 WARRANTY
12.1. Solectron warrants for a period of [*] from the date of completion of
the manufacture of the Product, that (i) the Product will conform to the
specifications applicable to such Product at the time of its
manufacture, which are furnished in writing by Brocade and accepted by
Solectron; (ii) such product will be of good material (except for
material supplied by Brocade) and workmanship and free from defects for
which Solectron is responsible in the manufacture; (iii) such Product
will be free and clear of all liens and encumbrances and that Solectron
will convey good and marketable title to such Product.
12.2. All Products are subject to Brocade's inspection and acceptance at
Brocade's facility or facility of the purchasers of the Products before
final acceptance. If any Product delivered hereunder fails to conform to
the specifications provided by Brocade and accepted by Solectron, then
Brocade shall notify Solectron of such failure and Solectron will have
up to five (5) business days after receipt of defective Product, to
either repair or replace the Product at Solectron's option and cost for
Solectron-caused problems. If Solectron fails to repair or replace such
Product within such five (5) business day period, then Brocade shall
have the right, without liability, to require expedited shipping of the
conforming Product at Solectron's sole cost.
12.3. In the event that any Product manufactured shall not be in conformity
with the foregoing warranties, Solectron shall, at Solectron's sole
expense, replace, repair or correct such Product within [*] of receipt
of such defective Product. Solectron shall waive any charges to Brocade
in order to effect the replacement of such defective Products to
Brocade. Solectron agrees to maintain a repair capability for products
under warranty. If Solectron is unable to repair, replace or correct
such product, then Solectron shall credit Brocade for the purchase price
paid by Brocade for such Product.
12.4. The foregoing constitutes Brocade's sole remedies against Solectron for
breach of warranty claims.
12.5. Solectron shall have no responsibility or obligation to Brocade under
warranty claims with respect to Products that have been subjected to
abuse, misuse, accident, alteration, neglect or unauthorized repair.
12.6. Solectron shall have no liability or responsibility for any losses,
damages, or failures to the extent that any such claims are a result of
(i) Solectron's compliance with Brocade's supplied specifications, (ii)
the negligence of Brocade in supplying the goods, services, or
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
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information in connection with the design, development, distribution,
and configuration of the product, (iii) modification or alteration of
product by a party other than Solectron, (iv) incorrect installation or
incorporation of product by either Brocade or Brocade's authorized field
representative, (v) inherent design flaws the product which may induce
intermittent failures, (vi) and transportation damage from approved
freight carriers.
12.7 THE WARRANTIES CONTAINED IN THIS SECTION ARE IN LIEU OF, AND SOLECTRON
EXPRESSLY DISCLAIMS AND BROCADE WAIVES ALL OTHER REPRESENTATIONS AND
WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR ARISING BY COURSE OF DEALING
OR PERFORMANCE, CUSTOM, USAGE IN THE TRADE OR OTHERWISE, INCLUDING
WITHOUT LIMITATION THE IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE AND
FITNESS FOR A PARTICULAR USE.
13.0 TERMINATION
13.1. If either party fails to meet any one or more of the terms and
conditions as stated in either this Agreement or the addenda, Solectron
and Brocade agree to negotiate in good faith to resolve such default.
Notwithstanding the foregoing, if the defaulting party fails to cure
such default or submit an acceptable written plan (as determined by the
non-defaulting party in its sole discretion) to resolve such default
within thirty (30) days following the date of written notice of default,
the nondefaulting party shall have the right to terminate this Agreement
by furnishing the defaulting party with thirty (30) days written notice
of termination.
13.2. Each party shall have the right to terminate this Agreement by giving
termination notice, which termination shall become effective ten (10)
days after mailing, if the other party:
13.2.a. files an application for or consents to or directs the
appointment of, or takes of possession by, a receiver, a
custodian, trustee or liquidator of all or substantially all of
such other party's property, whether tangible or intangible,
wherever located;
13.2.b. makes a general assignment for the benefit of creditors;
13.2.c. commences or has the intention of commencing a voluntary case
under the federal bankruptcy laws (as now or hereinafter may be
in effect);
13.2.d. is part of an adjudication that such other party is bankrupt or
insolvent;
13.2.e. files or has the intent to file a petition seeking to take
advantage of any other law providing for the relief of debtors;
13.2.f. acquiesces to or fails to have dismissed within ninety (90)
days, any petition filed against such other party in any
involuntary case under such bankruptcy law; or
13.2.g. terminates, dissolves, or ceases to continue all or
substantially all of its business affairs or distributes a
substantial portion of its assets.
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13.3 Either Solectron or Brocade may terminate this Agreement without cause
by giving one hundred twenty (120) days advance written notice to the
other party.
13.4 The following Sections shall survive the expiration or earlier
termination of this Agreement: sections 4.2, 4.3, 8, 11, 12, 13, 14, 15,
16, and 17.
14.0 DISPUTE RESOLUTION
14.1 In the spirit of continued cooperation, the parties intend to and hereby
establish the following dispute resolution procedure to be utilized in
the unlikely event any controversy should arise out of or concerning the
performance of this Agreement.
14.2. In the event of a dispute or claim arising between the parties on any
matter relating to this Agreement, either party may initiate negotiation
proceedings by written notice to the other party setting forth the
particulars of the dispute. Upon receipt of such notice, the parties
agree to meet in good faith within two (2) weeks of the date of such
notice, to jointly define the scope of and a method to remedy the
dispute. If such meeting does not resolve the dispute, then senior
management of Solectron and Brocade are authorized to and will meet
personally within ten (10) days to confer in a bona fide attempt to
resolve the matter. The parties will use diligent efforts to arrange
meetings or telephone conferences as needed to facilitate these
negotiations.
14.3. Should any disputes remain existent between the parties at the
conclusion of the time periods set forth above, then the parties shall
promptly submit any dispute to mediation with an independent mediator.
In the event mediation is not successful in resolving the dispute within
sixty (60) days of the beginning of the two-step resolution process set
forth above, the parties agree to submit the dispute to binding
arbitration in accordance with the rules of the Judicial Arbitration and
Mediation Services/Endispute in San Jose, California (hereinafter
"JAMS"), and judgment upon the award may be entered in any court having
jurisdiction. A single arbitrator shall be selected according to JAMS
rules within thirty (30) days of submission of the dispute to the JAMS.
The arbitrator shall conduct the arbitration in accordance with the
California Evidence Code. Except as expressly provided above, no
discovery of any kind shall be taken by either party without the written
consent of the other party, provided, however, that either party may
seek the arbitrator's permission to take any deposition which is
necessary to preserve the testimony of a witness who either is, or may
become, outside the subpoena power of the arbitrator or otherwise
unavailable to testify at the arbitration. The arbitrator shall have the
power to enter any award that could be entered by a Judge of the
Superior Court of the State of California sitting without a jury, and
only such power, except that the arbitrator shall not have the power to
award punitive damages, treble damages, or any other damages which are
not compensatory, even if permitted under the laws of the State of
California or any other applicable law. The arbitration award may be
enforced in any court having jurisdiction over the parties and the
subject matter of the arbitration. Notwithstanding the forgoing, the
parties irrevocably submit to the non-exclusive jurisdiction of the
Superior Court of the State of California, Santa Clara County, and the
United States District Court for the Northern District of California,
San Jose Branch, in any action to enforce an arbitration award.
9 of 12
<PAGE> 10
15.0 LIMITATION OF LIABILITY
IN NO EVENT, WHETHER AS A RESULT OF BREACH OF CONTRACT, WARRANTY, OR
TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY, OR
OTHERWISE, SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR ANY SPECIAL,
INCIDENTAL, CONSEQUENTIAL, EXEMPLARY DAMAGES OF ANY KIND WHETHER OR NOT
EITHER PARTY WAS ADVISED OF THE POSSIBILITY OF SUCH DAMAGE.
16.0 PATENT, COPYRIGHT AND TRADEMARK INDEMNITY
Each party (the "Indemnifying Party") shall defend, indemnify, and hold
harmless the other party from any claims by a third party of
infringement of intellectual properties resulting from the acts of the
Indemnifying Party pursuant to this Agreement, provided that the other
party (i) gives the Indemnifying Party prompt notice of any such claims,
(ii) renders reasonable assistance to the Indemnifying Party thereon,
and (iii) permits the Indemnifying Party to direct the defense of the
settlement of such claims.
17.0 GENERAL
17.1. Each of the parties shall at all times during the term of this Agreement
act as, and shall represent itself to be, an independent contractor, and
not an agent or employee of the other.
17.2. Each party to this Agreement will maintain insurance to protect itself
from claims (i) by the party's employees, agents and subcontractors
under Worker's Compensation and Disability Acts, (ii) for damages
because of injury to or destruction of tangible property resulting out
of any negligent act, omission or willful misconduct of the party or the
party's employees or subcontractors, (iii) for damages because of bodily
injury, sickness, disease or death of its employees or any other person
arising out of any negligent act, omission, or willful misconduct of the
party or the party's employees, agents or subcontractors.
17.3. Neither party shall delegate, assign or transfer its rights or
obligations under this Agreement, whether in whole or part, without the
written consent of the other party, except that Brocade may assign this
Agreement to a successor in interest in the event of a merger,
acquisition or purchase of all or substantially all of the stock or
assets of Brocade. A waiver of any default hereunder or of any of the
terms and conditions of this Agreement shall not be deemed to be a
continuing waiver or a waiver of any other default or of any other term
or condition, but shall apply solely to the instance to which such
waiver is directed. The exercise of any right or remedy provided in this
Agreement shall be without prejudice to the right to exercise any other
right or remedy provided by law or equity, except as expressly limited
by this Agreement.
17.4. In the event any provision of this Agreement is found to be invalid,
illegal or unenforceable, the validity, legality and enforceability of
any of the remaining provisions shall not in any way be affected or
impaired.
10 of 12
<PAGE> 11
17.5. Except for purchase orders which may be sent by normal carrier, all
notices and communications hereunder are required to be sent to the
address or telecopier number stated below (or such other address or
telecopier number as subsequently notified in writing to the other
party): (i) By facsimile with confirmation of transmission, (ii)
personal same or next day delivery or (iii) sent by commercial overnight
courier with written verification of delivery. All notices so given
shall be deemed given upon the earlier of receipt or one (1) day after
dispatch.
Any notices sent to Brocade hereunder should be sent to:
Brocade Communications Systems, Inc.
1901 Guadalupe Parkway
San Jose, CA 95131
Attn: Jean Zorzy
Fax No. (408) 487-8091
with a copy to:
Maureen S. Dorney, Esq.
Gary Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Fax No. (650) 327-3699
Any notices sent to Solectron hereunder should be sent to:
Solectron Corporation
847 Gibraltar Drive, Bldg. #5
Milpitas, CA 95035
Attn: Jayne Carthy
Fax No. 408-956-6056
with a copy to:
Solectron Corporation
847 Gibraltar Drive, Bldg. #5
Milpitas, CA 95035
Attn: Legal Department
Fax No. 408-957-2717
17.6. Neither party shall be liable for any failure or delay in its
performance under this Agreement due to acts of God, acts of civil or
military authority, fires, floods, earthquakes, riots, wars or any other
cause beyond the reasonable control of the delayed party provided that
the delayed party: (i) gives the other party written notice of such
cause within fifteen (15) days of the discovery of the event; and (ii)
uses its reasonable efforts to remedy such delay in its performance. If
Solectron is unable to deliver in accordance with agreed delivery
Schedule, the terms of section 6.4 shall apply.
17.7. This Agreement shall be governed by, and construed in accordance with
the laws of the State of California, excluding its conflict of laws
provisions. In any action to enforce this Agreement, the prevailing
party shall be awarded all court costs and reasonable attorney fees
incurred.
11 of 12
<PAGE> 12
17.8. Neither party shall object to the use of a photocopy of the original of
this Agreement for the purpose of making any required or allowed public
filings.
17.9. This Agreement, the NDA Agreement and the Exhibits hereto are intended
as the complete, final and exclusive statement of the terms of the
agreement between the parties regarding the subject matter hereof and
supersedes any and all other prior or contemporaneous agreements or
understandings, whether written or oral, between them relating to the
subject matter thereof. This Agreement may not be modified except in
writing executed by both parties.
Agreed:
Solectron California Corporation Brocade Communications Systems, Inc.
By: /s/ MICHAEL T. LING By: /s/ VICTOR RINKLE
-------------------------------- -------------------------------------
Name: Michael T. Ling Name: Victor Rinkle
Title: VP Ops Title: VP Ops
Date: 7-30-99 Date: 7-30-99
12 of 12
<PAGE> 13
Amendment No. 1 To The Manufacturing Agreement
This Amendment No. 1 ("Amendment") to the Standard Manufacturing
Agreement (the "Agreement") which was entered into effective 7/30, 1999, is by
and between Brocade Communication Systems, Inc., with a place of business at
1901 Guadalupe Parkway, San Jose, California 95131 ("Brocade") and Solectron
California Corporation, with its place of business at 847 Gibraltar Drive,
Milpitas, California 95035 ("Solectron").
RECITALS
WHEREAS, the parties have entered into an agreement whereby Solectron
acts as a contract manufacturer for Brocade; and
WHEREAS, under limited circumstances, Brocade desires to grant [*] with
a place of business at [*] with a limited right to purchase products direct from
Solectron.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained in this Agreement, the parties hereby agree as follows:
AGREEMENT
1. All capitalized terms not defined herein shall have the meaning
set forth in the Agreement.
2. A new Section 18 is hereby added to this Agreement, as follows:
18.1 In the event Brocade provides written notice to
Solectron, [*] shall be entitled to purchase products
directly from Solectron pursuant to the terms and
conditions of this Agreement and at the same prices at
which [*] could otherwise purchase such products from
Brocade.
18.2 Brocade shall provide Solectron with a list of products
which Solectron may offer to [*] and the associated
prices at which said products shall be offered. Such
list shall be deemed confidential and subject to the
non-disclosure agreement executed between Solectron and
Brocade.
18.3 Solectron shall remit to Brocade, in accordance with
procedures to be mutually agreed upon, the difference in
the price paid by [*] and the price which Brocade is
charged under this Agreement for each product.
18.4 Solectron acknowledges that in the event Brocade fails
to notify Solectron that [*] right to buy products
directly from Solectron has arisen, [*] may provide a
copy of the agreement between [*] and Brocade as
evidence to exercise such right. Prior to allowing [*]
to buy directly,
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
1
<PAGE> 14
Solectron shall notify Brocade of the request from [*]
to exercise this provision.
3. Except as amended by the terms of this Amendment, all other
terms and conditions of the Agreement, shall remain in full force and effect.
IN WITNESS WHEREOF, the parties, through their duly authorized officers,
have executed this Amendment.
Brocade: Solectron:
Brocade Communication Systems, Inc. Solectron California Corporation
By: /s/ VICTOR RINKLE By: /s/ MICHAEL T. LING
- ----------------------------------- --------------------------------
Print Name: VICTOR RINKLE Print Name: Michael T. Ling
Title: VP Ops Title: VP Ops
Date: 7-30-99 Date: 7-30-99
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
2
<PAGE> 15
EXHIBIT 1
PRICING
BROCADE COMMUNICATIONS MANUFACTURING AGREEMENT -- 7/20/98
ASSUMPTIONS:
1.) [*]
2.) [*]
3.) [*]
4.) [*]
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 16
<TABLE>
<CAPTION>
BROCADE COMMUNICATION SOLECTRON(R) SLR QUOTE # R05036-98
UNIT PRICING
ASSEMBLY # 40-0000220-02 REV. E SILKWORM II CPU
RECURRING EXPENSE (NRE)
<S> <C> <C> <C>
VOLUME/Quarter [*] [*] [*]
Material Cost [*] [*] [*]
Material Margin [*] [*] [*]
Material Price [*] [*] [*]
Assembly Labor [*] [*] [*]
ICT Labor [*] [*] [*]
TOTAL UNIT PRICE [*] [*] [*]
</TABLE>
MATERIAL LEAD TIME [*]
NONRECURRING EXPENSE (NRE)
<TABLE>
<CAPTION>
Manufacturing Tooling (taxable)
<S> <C>
Stencil [*]
Wave Fixture [*]
TOTAL Taxable Mfg
Mfg. Engineering (nontaxable)
Programming/Engineering [*]
TOTAL Non-Taxable Mfg [*]
Test Tooling (taxable)
ICT Fixture [*]
TOTAL Taxable Test [*]
Test Engineering (nontaxable)
ICT Program [*]
TOTAL Non-Taxable Test [*]
TOTAL Assembly NRE [*]
</TABLE>
ICT ATE: HP307X UNIQUE TO 40-0000220-02
A. Basic test program to cover:
- this device will use TestJet only: U16, U31, U19, U22,
U17, U20
- this device will use TestJet + Library Test: U4, U5, U9,
U10
B. This test is based on the following assumptions:
- based on (estimated) node count: 625
LEAD TIME 3-4 weeks (upon receipt of all necessary documentation and P.O. #)
Solectron Confidential SLS-10-021924 Rev: - Page 2 of 8 June 16, 1998
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 17
BROCADE COMMUNICATION SOLECTRON(R) SLR QUOTE # R05036-98
UNIT PRICING
ASSEMBLY # 40-0000273-01 REV.K G PORT
<TABLE>
<CAPTION>
RECURRING EXPENSE (NRE)
<S> <C> <C> <C>
VOLUME/Quarter [*] [*] [*]
Material Cost $[*] $[*] $[*]
Material Margin [*] [*] [*]
Material Price $[*] $[*] $[*]
Assembly Labor [*] [*] [*]
ICT Labor [*] [*] [*]
TOTAL UNIT PRICE $[*] $[*] $[*]
</TABLE>
MATERIAL LEAD TIME [*]
NONRECURRING EXPENSE (NRE)
<TABLE>
<CAPTION>
MANUFACTURING TOOLING (TAXABLE)
<S> <C>
Stencil $[*]
Pick & Place Fixture $[*]
Wave Fixture $[*]
TOTAL Taxable Mfg. $[*]
Mfg. Engineering (nontaxable)
Programming/Engineering $[*]
TOTAL Non-Taxable Mfg. $[*]
Test Tooling (taxable)
ICT Fixture $[*]
TOTAL Taxable Test $[*]
Test Engineering (nontaxable)
ICT Program $[*]
TOTAL Non-Taxable Test $[*]
TOTAL ASSEMBLY NRE $[*]
</TABLE>
ICT ATE: HP307X UNIQUE TO 40-0000273-01
A. Basic test program to cover:
- this device will use TestJet only: U1, U2, U3
B. This test is based on the following assumptions:
- based on (estimated) node count: 200
LEAD TIME 3 weeks (upon receipt of all necessary documentation and P.O. #)
Solectron Confidential SLS-10-021924 Rev: Page 3 of 8 June 16, 1998
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 18
BROCADE COMMUNICATION SOLECTRON(R) SLR QUOTE# R05036*98
UNIT PRICING
ASSEMBLY# 40-0000623-01 REV. 15 FLANNEL PORT BOARD
<TABLE>
<CAPTION>
RECURRING EXPENSE (NRE)
<S> <C> <C> <C>
VOLUME/Quarter [*] [*] [*]
Material Cost $[*] $[*] $[*]
Material Margin [*] [*] [*]
Material Price $[*] $[*] $[*]
Assembly Labor [*] [*] [*]
ICT Labor [*] [*] [*]
TOTAL UNIT PRICE $[*] $[*] $[*]
</TABLE>
MATERIAL LEAD TIME [*]
NONRECURRING EXPENSE (NRE)
<TABLE>
<CAPTION>
Manufacturing Tooling (taxable)
<S> <C>
Stencil $[*]
Pick & Place Fixture $[*]
Wave Fixture $[*]
TOTAL Taxable Mfg. $[*]
Mfg. Engineering (nontaxable)
Programming/Engineering $[*]
TOTAL Non-Taxable Mfg. $[*]
Test Tooling (taxable)
ICT Fixture $[*]
TOTAL Taxable Test $[*]
Test Engineering (nontaxable)
ICT Program $[*]
TOTAL Non-Taxable Test $[*]
TOTAL ASSEMBLY NRE $[*]
</TABLE>
ICT ATE: HP307X UNIQUE TO 40-0000623-01
A. Basic test program to cover:
- this device will use TestJet only: U8, U9, U10, U11
B. This test is based on the following assumptions:
- based on (estimated) node count: 235
LEAD TIME 3 weeks (upon receipt of all necessary documentation and P.O. #)
Solectron Confidential SLS-10-021924 Rev: - Page 4 of 8 June 16, 1998
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 19
BROCADE COMMUNICATION SOLECTRON (R) SLR QUOTE # R05036*98
UNIT PRICING
ASSEMBLY # 40-0000749-01 REV. A SILKWORM II MOTHER BOARD
<TABLE>
<CAPTION>
RECURRING EXPENSE (NRE)
<S> <C> <C> <C>
VOLUME/Quarter [*] [*] [*]
Material Cost $[*] $[*] $[*]
Material Margin [*] [*] [*]
Material Price $[*] $[*] $[*]
Assembly Labor [*] [*] [*]
ICT Labor [*] [*] [*]
TOTAL UNIT PRICE $[*] $[*] $[*]
</TABLE>
MATERIAL LEAD TIME [*]
NONRECURRING EXPENSE (NRE)
<TABLE>
<CAPTION>
Manufacturing Tooling (taxable)
<S> <C>
Stencil $[*]
Pick & Place Fixture $[*]
Wave Fixture $[*]
TOTAL Taxable Mfg. $[*]
Mfg. Engineering (nontaxable)
Programming/Engineering $[*]
TOTAL Non-Taxable Mfg. $[*]
Test Tooling (taxable)
ICT Fixture $[*]
TOTAL Taxable Test $[*]
Test Engineering (nontaxable)
ICT Program $[*]
TOTAL Non-Taxable Test $[*]
TOTAL ASSEMBLY NRE $[*]
</TABLE>
ICT ATE: HP307X UNIQUE TO 40-0000749-01
A. Basic test program to cover:
- this device will use TestJet only: U1, U2, U3, U27, U28,
U29, U30, U31, U32, U33, U34, U35
- this device will use TestJet + Library Test: U8-25
B. This test is based on the following assumptions:
- based on (estimated) node count: 1275
LEAD TIME 4-5 weeks (upon receipt of all necessary documentation and P.O. #)
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 20
Solectron Confidential SLS-10-021924 Rev: - Page 5 of 8 June 16, 1998
<PAGE> 21
BROCADE COMMUNICATION SOLECTRON(R) SLR QUOTE #R05036-98
UNIT PRICING
ASSEMBLY# 70-0000370-03 REV. 1 SILKWORM II
<TABLE>
<CAPTION>
RECURRING EXPENSE (NRE)
<S> <C> <C> <C>
VOLUME/Quarter [*] [*] [*]
Material Cost $[*] $[*] $[*]
Material Margin [*] [*] [*]
Material Price $[*] $[*] $[*]
Assembly Labor [*] [*] [*]
System Test [*] [*] [*]
Haas Test [*] [*] [*]
TOTAL UNIT PRICE $[*] $[*] $[*]
</TABLE>
Solectron Confidential SLS-10-021924 Rev: Page 6 of 8 June 16, 1998
* Certain information on this page has been omitted and filed separately with
the Commission. Confidential treatment has been requested with respect to the
omitted portions.
<PAGE> 22
EXHIBIT 2
QUALITY SYSTEM & PRODUCT QUALITY REQUIREMENTS
1 PURPOSE
1.1 This document outlines the Quality System and Product Quality
Requirements to Solectron. While this document defines quality
requirements that are the responsibility of Solectron, it is important
to note that it is Brocade's intention to establish an open quality
management relationship with Solectron.
2 SCOPE
2.1 The Quality System and Product Quality Requirements called out in this
document are for the Fibre Channel Switches and associated printed
circuit boards manufactured by Solectron.
2.2 Where the requirements called out in this document conflict with
requirements called out elsewhere, the order of precedence is as
follows:
2.2.1 Contractual agreements
2.2.2 Brocade Communications Purchase Order, Brocade Communications
Engineering drawing or specification noted in the Purchase Order
2.2.3 This document
3 DEFINITIONS
3.1 Unless otherwise specified the terms used in this document are defined
in:
3.1.1 ISO 8402-1986, Quality Vocabulary
3.1.2 ANSI/ASQC A3-1987, Quality Systems Terminology
3.2 Unit: In this document a unit is considered to be an assembled printed
circuit board (e.g. a CPU board), a subassembly (e.g., power supply), a
chassis, or a fully assembled switch made up of printed circuit boards,
subassemblies, displays, and chassis.
4 RESPONSIBILITY
4.1 The Supply Base Engineer reporting to the Manager, Product and Process
Quality in the Brocade Communications-Operations function is responsible
for implementing the requirements of this document.
5 REFERENCE DOCUMENTS
5.1 ISO STANDARD 840 Quality Vocabulary
5.2 ISO 9000:1994 Quality management and quality assurance
standards -Guide lines for selection and use
5.3 ISO 9002:1994 Quality Systems- Model for quality assurance in
design/development, production, installation and
servicing.
5.4 ANSI/ASQC A3- 1987 Quality Systems Terminology
5.5 ANSI/ASQC Q1 1986 Guide Lines for Quality System Audits
5.6 MIL STD 105E Sampling procedures and Tables for inspection
by Attributes
6 EQUIPMENT REQUIRED (HARDWARE AND SOFTWARE) (NONE REQUIRED)
7 QUALITY SYSTEM REQUIREMENTS
7.1 Quality System Requirements:
Brocade Communications' Quality System requirements are defined in the
document ISO 9002:1994. Solectron's conformance to these requirements
will be determined by a Quality Assessment organized by the Supply Base
Engineer and carried out with the
<PAGE> 23
assistance of other Brocade Communication groups.
<PAGE> 24
7.1.1 Brocade Communications reserves the right to conduct, with
proper notification, periodic reviews of Solectron's Process and
Quality Control system. These reviews can include all aspects of
materials management, manufacturing, test, and quality records
associated with products and services sold or provided to
Brocade Communications by Solectron.
7.2 If the Quality Assessment shows that Solectron is does not meet the ISO
9002 requirements, the deficiencies will be noted and corrective action
may be required. (See the ANSI/ASQC Q1 1986: Guide Lines for Quality
System Audits).
7.3 Process Definition:
Prior to the start of production, Brocade Communications' Supply Base
Engineer (SBE) and Solectron's representative will determine the key
steps of the process flow. The key steps of the process flow will be
documented using either Brocade's or Solectron's documentation.
7.4 Process Changes:
Once the key process steps are defined, they can not be changed without
written notification and approval from the Brocade Communications'
Quality Engineer prior to the implementation of the changes. Examples of
process changes are: using parts not called out on the Approved Vendor
List (AVL), alterations to the agreed on process flow, changing
pass/fail parameters, increasing or decreasing test times, changes in
test equipment, relocation of the process to a different location, etc.
7.5 Process Reporting:
Prior to the start of volume production Brocade Communications' Quality
Engineer and Solectron's representative will agree on the content,
format, and frequency of the Process Reports.
7.5.1 The Process Reports will include, at a minimum, yields at each
operation, defect paretos at each operation, and corrective
actions to address the significant defects. The reports will
include data from the On-Going Reliability Test and the Out-Of
the Box Audit (OOBA).
7.5.2 Brocade will, as far as practical, use Solectron's data
collection process and reports, provided they meet Brocade's
requirements. The data will be sent electronically.
7.6 Process Qualification and Improvement
7.7 Prior to the start of volume shipments the Brocade and Solectron will
conduct a Product Verification Test (PVT). The PVT is a controlled build
of a predetermined number of units with the purpose of demonstrating the
capability of the process to produce defect free product in a cost
efficient way.
7.7.1 The Brocade Quality Engineer and Solectron's representative will
determine prior to the start of the volume production the target
yield for the PVT build.
7.7.1.1 If the target yield is reached, the process is considered
capable and ready for volume production.
7.7.1.2 If the target yield is not met, the Brocade Supply Base Engineer
and Solectron's representative will jointly develop a corrective
action plan to improve the process yield. When the corrective
actions have been implemented, a second PVT build will be done.
If this build meets the predetermined goals, the volume
production can begin. If the yield is not met, the corrective
action process will be duplicated until the predetermined yield
criterion is reached.
7.7.2 Once volume production starts, the Brocade Supply Base Engineer
and Solectron's representative will agree on a yield improvement
plan. The Yield Improvement Plan (YIP) will set targets for
quarterly yield or process improvements. If the quarterly goals
are not reached, the Brocade and Solectron will determine what
corrective actions are necessary to reach the quarterly goals.
7.8 On-Going Reliability Test
Brocade Communications uses an On-going Reliability Test (ORT) as a
measure of the production process performance. Prior to the start of
volume production Brocade's Supply Base Engineer and Solectron's
representative will agree on the how the
<PAGE> 25
On-going Reliability test will be implemented. The implementation will
follow the guidelines called out in the Brocade Communications' Process
number 99-0000401-01
June 18, 1999 Page 3 of 4 Quality System
and
Product Quality Requirements
<PAGE> 26
7.8.1 If there is a failure in the ORT, Solectron will immediately
notify Brocade's Supply Base Engineer. Solectron's
representative and Brocade's SBE will immediately start the
failure analysis process and take any corrective action
necessary. When the failure analysis is completed, the Brocade
SBE will inform Brocade's Manager of Process and Product Quality
of the findings and the status of the corrective action.
7.9 Failure Analysis:
Solectron is required to do failure analysis on all in-warranty units
returned from Brocade's customers. At Brocade's request Solectron is
required to perform the first level failure analysis (determine the
failed component) within one working day after receiving the failed
unit. The root-cause analysis (analysis of the defective component) must
be done within ten working days after the receipt of the failed unit.
7.10 Epidemic Failure:
Epidemic failures are unit failures that are the result of defects in
material, workmanship, and/or other deficiencies attributable to or
within the control of Solectron, including but not limited to, incorrect
use of components with inherent or latent defects, or consistent
maladjustments during manufacture. The Epidemic Failure rate is defined
as three times the Normal Annualized Failure rate specified in the
Product Specification.
7.10.1 If the unit manufactured by Solectron for Brocade Communications
is found to fail at an Epidemic rate, Solectron and Brocade
Communications will mutually agree on a corrective action plan
to be carried out by Solectron, at Solectron's expense to repair
and replace the defective units.
7.11 Field Failure Rates as a Measure of Solectron Performance:
Solectron's performance in delivering a quality product is determined by
the Field Failure Rate and is measured as the Annualized Field Failure
Rate. This is rate is calculated as the average number of returns over
the last three months divided by the installed base, then multiplied by
twelve to give an annualized rate.
7.11.1 If the Field Failure Rate of the unit manufactured by Solectron
for Brocade Communications exceeds the Normal Annualized Failure
Rate called out in the Product specification, Solectron and
Brocade Communications will mutually implement a program to
determine the root causes of the Field Failure Rate and
implement corrective actions.
June 18, 1999 Page 4 of 4 Quality System
and
Product Quality Requirements
<PAGE> 27
ATTACHMENT 1 BRC CONSIGNED EQUIPMENT LIST
<TABLE>
<CAPTION>
Item Equip. Description Serial Number BRC Asset No. SLR ID # Comments
<S> <C> <C> <C> <C> <C>
1 Dell Monitor 17" 7117360 100018
2 Dell Monitor 17" 04036a606p 100007
3 PC CPU DELL Dimension 88jpx 100013
xps 166
4 Dell Monitor 17", lab 04036a7fiv 102079
5 PC CPU HP Vectra XA us74152334 107074
6 HP Vectra- PC us75150685 107159
7 Sony Monitor 200ES 4036166 100302
8 Sony Monitor 200ES 4034244 100306
9 HP Vectra- CPU 75150693 100307
10 HP- CPU us75150707 100345
11 Ascend P50 - SLR -GW 7196010 106349
12 Dell Laptop Latitude 7147346byk8642 106365
13 Dell XPS CPU 88jq8 102064
14 LinkSys 16 port 10bT Hub N/A 107401
15 LinkSys 16 port 10bT Hub N/A 107402
16 Bur-In Oven #1 N/A N/A BRCOVEN1
17 Bur-In Oven #2 N/A N/A BRCOVEN2
18 Bur-In Oven #3 N/A N/A BRCOVEN3
19 Bur-In Oven #4 N/A N/A BRCOVEN4
20 Bur-In Oven #5 N/A N/A BRCOVEN5
21 Bur-In Oven #6 N/A N/A BRCOVEN6
22 Bur-In Oven #7 N/A N/A BRCOVEN7
23 Run-In Oven #1 N/A N/A BRCOVEN8
24 Run-In Oven #2 N/A N/A BRCOVEN9
25 Run-In Oven #3 N/A N/A BRCOVEN10
26 ICT Fixture 40-0000749-01 N/A N/A Located on C4 shelf
27 ICT Fixture 40-0000623-01 N/A N/A Located on C1 shelf
28 ICT Fixture 40-0000220-01 N/A N/A Located on C1 shelf
29 ICT Fixture 40-0000004-01 N/A N/A Located on C1 shelf
30 ICT Fixture 40-0000273-01 N/A N/A Located on C1 shelf
31 ICT Fixture 40-0000003-01 N/A N/A Located on C1 shelf
32 SMT Stencil 40-0000623-04 Top N/A N/A Located on F01
Shelf SMT
33 SMT Stencil 40-0000623-04 Bot N/A N/A Located on F02
Shelf SMT
34 SMT Stencil 40-0000749-01 Top N/A N/A Located on F03
Shelf SMT
35 SMT Stencil 40-0000749-01 Bot N/A N/A Located on F04
Shelf SMT
36 SMT Stencil 40-0000220-03 T & B N/A N/A Located on F05
Shelf SMT
37 SMT Stencil 40-0000273-03 Top N/A N/A Located on F06
Shelf SMT
38 SMT Stencil 40-0000273-03 Bot N/A N/A Located on F07
Shelf SMT
39 SMT Stencil 40-0200003-03 Top N/A N/A Located on F09
Shelf SMT
40 SMT Stencil 40-0200003-03 Bot N/A N/A Located on F08
Shelf SMT
41 SMT Stencil 40-0000001-01 T & B N/A N/A Located on F10
Shelf used on
proto run SMT
42 SMT Stencil 40-0000727-05 Top N/A N/A Located on F11
Shelf SMT
</TABLE>
<PAGE> 28
<TABLE>
Item Equip. Description Serial Number BRC Asset No. SLR ID # Comments
<S> <C> <C> <C> <C> <C>
43 SMT Stencil 40-0000727-05 Bot N/A N/A Located on F12
Shelf SMT
44 SMT Stencil 40-0000004-03 Top N/A N/A Located on F13
Shelf SMT
45 SMT Stencil 40-0000004-03 Bot N/A N/A Located on F14
Shelf SMT
46 SMT Stencil 40-0000003-01 Top N/A N/A Located on F15
Shelf SMT
47 SMT Stencil 40-0000003-01 Bot N/A N/A Located on F16
Shelf SMT
48 Functional Test Fixture 2400 BRC2400 F/T 1
49 Functional Test Fixture 2400 BRC2400 F/T 2
50 Functional Test Fixture 2800 BRC2800 F/T 1
51 Functional Test Fixture 2400 BRC2800 F/T 2
52 Functional Test Debug Fixt. 2400 BRC2400 F/T DBG 1
53 Functional Test Debug Fixt. 2800 BRC2800 F/T DBG 1
54 Dell Optiplex PC UN6JL Used On ESS Chamber
55 Dell Monitor 84779-DVYN-29 Used On ESS Chamber
56 6681A Power Supply US36400338 Used On ESS Chamber
57 6681A Power Supply US36400327 Used On ESS Chamber
58 6680A Power Supply US36480139 Used On ESS Chamber
59 6680A Power Supply US36480130 Used On ESS Chamber
60
61
62
63
</TABLE>
<PAGE> 29
ATTACHMENT 2 MUTUAL NONDISCLOSURE AGREEMENT
All parties below acknowledge that, by reason of their relationship, they may
have access to certain information and materials concerning the other's
business, plans, products and technical data which are confidential and of
substantial value which would be impaired if such information were disclosed to
third parties. Accordingly, for the purposes of protecting and preserving the
confidential and/or proprietary nature of information to be disclosed or made
available by each party to the others under this Mutual Nondisclosure Agreement
("Agreement"), the parties hereto agree as follows:
1. Confidential Information. For the purposes of this Agreement,
Confidential Information means any technical, business, financial, contractual
terms and conditions or other information or data furnished by one party to the
other: (i) in written or other tangible form marked with a proprietary legend,
or (ii) in oral or visual form, identified as being confidential at the time of
the disclosure and thereafter summarized in a writing which identifies the
Confidential Information and is transmitted to the receiving party within thirty
(30) days after such oral or visual disclosure.
2. Period of Protection. The period of protection during which Confidential
Information received pursuant to this Agreement shall be subject to an
obligation of confidentiality and protection is five (5) years from the date of
first receipt of the Confidential Information.
3. Standard of Care. The standard of care which each party shall be
required to employ in protecting and handling a Confidential Information
received pursuant to this Agreement is the same degree of care which the
receiving party uses to protect and safeguard its own Confidential Information
of the kind, but not less than a reasonable degree of care.
4. Restrictions on Use. Confidential Information shall be used solely for
internal evaluation and use pertaining to the purpose of this Agreement and
shall not otherwise be used for the benefit of the receiving party or others.
Confidential Information shall be disclosed only to the employees of the
receiving party who have a "need to know" and executed an internal nondisclosure
agreement.
5. Information Not Subject to Confidentiality. The Confidential Information
of a party shall not include and the foregoing obligations shall not apply to
information or data which: (i) was generally available to the public at the time
of receipt from the disclosing party, or thereafter to have become generally
available to the public; (ii) is known to the receiving party on a
non-confidential basis prior to its receipt from the disclosing party; (iii)
disclosed with the prior written consent of the disclosing party; (iv) becomes
known to the receiving party from a source other than the disclosing party
without breach of this Agreement by the receiving party; (v) was required to be
disclosed pursuant to law; (vi) developed independently by personnel of the
receiving party who had no substantive knowledge of the disclosing party's
Confidential Information at the time of such independent development.
6. No License. The disclosure of Confidential Information shall not be
construed as granting either a license under any patent, patent application or
any right of ownership in said Confidential Information.
7. Equitable Relief. The receiving party acknowledges and agrees that in
the event of a breach or threatened breach of any provision of this Agreement,
the disclosing party shall have no adequate remedy at law and shall therefore be
entitled to enforce any such provision by temporary or permanent injunctive or
mandatory relief obtained in any court without the necessity of proving damages,
posting any bond or other security, and without prejudice or diminution of any
other rights or remedies which may be available at law or in equity. This
Agreement shall be construed in accordance with the laws of the State of
California.
8. Termination. This Agreement may be terminated by either party giving the
other parties a thirty (30) day termination notice in writing. Upon expiration
or termination of this Agreement, each party shall cease all use of the other
party's Confidential Information and return to the other party all tangible
copies of the other party's Confidential Information.
<PAGE> 30
<TABLE>
<CAPTION>
AGREED:
<S> <C> <C>
SOLECTRON Brocade Communications Systems, Inc.
- ------------------------------------- ------------------------------------- -------------------------------------
Name of Other Party Name of Other Party
/s/ Kelly Priest /s/ Jean Zorzy
-------------------------------------
Authorized Representative's Signature Authorized Representative's Signature Authorized Representative's Signature
KELLY PRIEST Jean Zorzy
- --------------------------------------- ---------------------------------------
Name Name -------------------------------------
Name
DIRECTOR OF SALES DIRECTOR, SUPPLIER MGMT
- ------------------------------------- ------------------------------------- -------------------------------------
Title Title Title
4-15-98 4/21/98
- --------------------------------------- ---------------------------------------
Date Date -------------------------------------
Date
1901 Guadalupe Pkwy -------------------------------------
MILPITAS, CA San Jose, CA 95131
- --------------------------------------- -------------------------------------- -------------------------------------
Address Address Address
SLRNDA3P doc (Date 11/22/95) Confidential
</TABLE>
<PAGE> 1
EXHIBIT 10.25
BASIC LEASE INFORMATION
OFFICE NET
<TABLE>
<S> <C>
LEASE DATE: December 17, 1999
(same as date in first paragraph of Lease)
TENANT: Brocade Communications Systems, Inc., a Delaware
corporation
TENANT'S NOTICE ADDRESS: 1901 Guadalupe Parkway
San Jose, California 95131
TENANT'S BILLING ADDRESS: 1901 Guadalupe Parkway
San Jose, California 95131
TENANT CONTACT: Mr. Victor Rinkle, PHONE NUMBER: 408/487-8100
Vice President, Operations FAX NUMBER: 408/487-8101
LANDLORD: Spieker Properties, L.P., a California limited
partnership
LANDLORD'S NOTICE ADDRESS: 1735 Technology Drive, Suite 125
San Jose, CA 95110
LANDLORD'S REMITTANCE ADDRESS: P.O. Box 45587 Dept. #12196
San Francisco, CA 94145-0587
PROJECT DESCRIPTION: That certain Class A office project located on
the parcel bounded by Airport Parkway on the
north, Technology Drive on the East, Guadalupe
Parkway on the West and Skyport Drive on the
South, situated in the County of Santa Clara,
City of San Jose, State of California.
BUILDING DESCRIPTION: That certain real property commonly
known as Concourse VI, and located at 1745
Technology Drive, San Jose, California, and as
depicted on Exhibit B attached hereto.
PREMISES: Approximately two hundred ten thousand six hundred
seventy-seven (210,677) rentable square feet,
which consists of one hundred percent (100%) of
the Building and as depicted on Exhibit B
attached hereto.
TEMPORARY PREMISES: Approximately seven thousand eight hundred sixty
four (7,864) rentable square feet at the building
located at 2055 Gateway Place, San Jose,
California (the "PHASE I TEMPORARY PREMISES
BUILDING"), and as depicted on Exhibit D,
attached hereto.
Approximately thirty-nine thousand forty-three
(39,043) rentable square feet at the building
located at 1741 Technology Drive, San Jose,
California (the "PHASE II TEMPORARY PREMISES
BUILDING"), and as depicted on Exhibit E,
attached hereto. Approximately twenty-seven
thousand seven (27,007) rentable square feet are
located on the 5th floor of the Temporary
Premises Building and approximately twelve
thousand thirty-six (12,036) rentable square
feet are located on the 2nd floor of the
Temporary Premises Building.
PERMITTED USE: General office and administrative, and up to
twenty percent (20%) of the rentable area of the
Premises may be used for communications
laboratory purposes.
OCCUPANCY DENSITY: 4.5 per 1,000 rentable square feet of the Premises.
PARKING DENSITY: 3.6 spaces per 1,000 usable square feet of the
Premises.
PARKING CHARGE: Initially at $0 per space/per month for
nonreserved parking spaces during the initial
Term of this Lease, thereafter subject to
adjustment pursuant to Paragraph 37 hereof.
SCHEDULED TERM COMMENCEMENT DATE: September 1, 2000, subject to adjustment pursuant
to the terms of this Lease.
SCHEDULED LENGTH OF TERM: One hundred twenty (120) months following the
Term Commencement Date.
</TABLE>
1
<PAGE> 2
<TABLE>
<S> <C>
SCHEDULED TERM EXPIRATION DATE: August 31, 2010, subject to adjustment pursuant
to the terms of this Lease.
BASE RENT: With respect to the Premises, see Paragraph 39. A
hereof. With respect to each of the Phase I
Temporary Premises and the Phase II Temporary
Premises, see Paragraph 39.D(1) and (2) hereof.
SECURITY DEPOSIT: Six Million One Hundred Ninety-Three Thousand
Nine Hundred Four Dollars and No/100
($6,193,904.00) Letter of Credit delivered in
accordance with the terms of Paragraph 39.E
(subject to adjustment as provided in Paragraphs
39.E and 19 hereof).
TENANT'S NAICS CODE: 51121
TENANT'S PROPORTIONATE SHARE OF BUILDING: 100.00%
TENANT'S PROPORTIONATE SHARE OF PROJECT: 23.73%
</TABLE>
The foregoing Basic Lease Information is incorporated into and made a part of
this Lease. Each reference in this Lease to any of the Basic Lease Information
shall mean the respective information above and shall be construed to
incorporate all of the terms provided under the particular Lease paragraph
pertaining to such information. In the event of any conflict between the Basic
Lease Information and the Lease, the latter shall control.
<TABLE>
<S> <C>
LANDLORD TENANT
Spieker Properties, L.P., Brocade Communications Systems, Inc.
a California limited partnership a Delaware corporation
By: Spieker Properties, Inc.,
a Maryland corporation, By:
its general partner -----------------------------------
Michael J. Byrd
Its: Vice President, Finance,
Chief Financial Officer
By: By:
-------------------------------- -----------------------------------
John W. Petersen Victor Rinkle
Its: Vice President Its: Vice President, Operations
</TABLE>
2
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Basic Lease Information................................................. 1
Table of Contents....................................................... 3
1. Premises................................................................ 4
2. Possession and Lease Commencement....................................... 4
3. Term.................................................................... 4
4. Use..................................................................... 4
5. Rules and Regulations................................................... 6
6. Rent.................................................................... 6
7. Operating Expenses...................................................... 6
8. Insurance and Indemnification........................................... 8
9. Waiver of Subrogation................................................... 9
10. Landlord's Repairs and Maintenance...................................... 10
11. Tenant's Repairs and Maintenance........................................ 10
12. Alterations............................................................. 10
13. Signs................................................................... 11
14. Inspection/Posting Notices.............................................. 12
15. Services and Utilities.................................................. 12
16. Subordination........................................................... 13
17. Financial Statements.................................................... 13
18. Estoppel Certificate.................................................... 13
19. Security Deposit........................................................ 13
20. Limitation of Tenant's Remedies......................................... 13
21. Assignment and Subletting............................................... 14
22. Authority of Tenant..................................................... 15
23. Condemnation............................................................ 15
24. Casualty Damage......................................................... 15
25. Holding Over............................................................ 16
26. Default................................................................. 16
27. Liens................................................................... 18
28. Substitution............................................................ 18
29. Transfers by Landlord................................................... 18
30. Right of Landlord to Perform Tenant's Covenants......................... 18
31. Waiver.................................................................. 18
32. Notices................................................................. 18
33. Attorney's Fees......................................................... 19
34. Successors and Assigns.................................................. 19
35. Force Majeure........................................................... 19
36. Surrender of Premises................................................... 19
37. Parking................................................................. 19
38. Miscellaneous........................................................... 20
39. Additional Provisions................................................... 21
40. Jury Trial Waiver....................................................... 24
Signatures.............................................................. 24
Exhibits:
Exhibit A................................ Rules and Regulations
Exhibit B................................ Site Plan, Property Description
Exhibit C................................ Lease Improvement Agreement
Exhibit D................................ Phase I Temporary Premises
Exhibit E................................ Phase II Temporary Premises
</TABLE>
Additional Exhibits as Required
3
<PAGE> 4
LEASE
THIS LEASE is made as of the 17th day of December, 1999, by and between Spieker
Properties, L.P., a California limited partnership (hereinafter called
"LANDLORD"), and Brocade Communications Systems, Inc., a Delaware corporation
(hereinafter called "TENANT").
1. PREMISES
Landlord leases to Tenant and Tenant leases from Landlord, upon the terms
and conditions hereinafter set forth, those premises (the "PREMISES") outlined
in red on EXHIBIT B and described in the Basic Lease Information. The Premises
shall be all or part of a building (the "BUILDING") and of a project (the
"PROJECT"), which may consist of more than one building and additional
facilities, as described in the Basic Lease Information. The Building and
Project are outlined in blue and green respectively on EXHIBIT B. Landlord and
Tenant acknowledge that physical changes may occur from time to time in the
Premises, Building or Project, and that the number of buildings and additional
facilities which constitute the Project may change from time to time, which may
result in an adjustment in Tenant's Proportionate Share, as defined in the Basic
Lease Information, as provided in Paragraph 7.A.
2. POSSESSION AND LEASE COMMENCEMENT
A. INTENTIONALLY OMITTED.
B. CONSTRUCTION OF IMPROVEMENTS. The term commencement date ("TERM COMMENCEMENT
DATE") shall be the earlier of the date on which: (1) Tenant commences business
operations in the Premises, as evidenced by, among other things, the presence in
all or a portion of the Premises of business files and, during normal business
hours, employees (excluding employees or other agents of Tenant installing and
testing Tenant's equipment, furniture and fixtures); or (2) substantial
completion of the Base Building Work and Tenant Improvements as described in
EXHIBIT C attached hereto, or (3) September 1, 2000. If for any reason Landlord
cannot deliver possession of the Premises to Tenant on the scheduled Term
Commencement Date, Landlord shall not be subject to any liability therefor, nor
shall Landlord be in default hereunder nor shall such failure affect the
validity of this Lease, and Tenant agrees to accept possession of the Premises
at such time as such improvements have been substantially completed, which date
shall then be deemed the Term Commencement Date. Tenant shall not be liable for
any Rent for any period prior to the Term Commencement Date (but without
affecting any obligations of Tenant under any improvement agreement appended to
this Lease). In the event of any dispute as to substantial completion of work
performed or required to be performed by Landlord, the certificate of Landlord's
architect or general contractor shall be conclusive. Substantial completion (as
defined in EXHIBIT C hereto) shall have occurred notwithstanding Tenant's
submission of a punchlist to Landlord, which Tenant shall submit, if at all,
within fifteen (15) business days after the Term Commencement Date or otherwise
in accordance with any improvement agreement appended to this Lease. After the
Term Commencement Date and upon Landlord's request, Tenant shall promptly
execute and return to Landlord a "Start-Up Letter" in which Tenant shall agree,
among other things, to acceptance of the Premises (subject to Landlord's
obligation to correct punchlist items as submitted by Tenant to Landlord in
accordance with the term of this Paragraph 2.B) and to the determination of the
Term Commencement Date, in accordance with the terms of this Lease, but Tenant's
failure or refusal to do so shall not negate Tenant's acceptance of the Premises
or affect determination of the Term Commencement Date.
C. DELIVERY OF POSSESSION. Landlord shall deliver possession of the Premises to
Tenant with Base Building Work substantially complete (except for life safety
testing) on or before July 6, 2000. In the event Landlord fails to deliver
possession of the Premises to Tenant on or before July 6, 2000, Landlord shall
grant to Tenant, for each day after July 6, 2000 until the day Landlord delivers
possession of the Premises to Tenant with the Base Building Work substantially
complete, a credit against Base Rent in an amount equal to the daily amount of
Base Rent in effect for the first month of the Term of this Lease. The credit
described in the preceding sentence shall be granted against Tenant's obligation
to pay Base Rent in the second month of the Term. Tenant may terminate this
Lease by delivering written notice to Landlord on or before January 31, 2001 if:
(i) Landlord has not substantially completed the Base Building Work (as defined
in EXHIBIT C) to be constructed by Landlord as described in EXHIBIT C to this
Lease by December 31, 2000); (ii) Tenant has given Landlord at least twenty (20)
days' prior written notice ("TENANT'S TERMINATION NOTICE PERIOD") of Landlord's
failure to do so, except for punchlist items, and except for delays caused by
Tenant or other third parties (including delays caused by the contractor or
anyone else performing services on behalf of Tenant) or by events beyond
Landlord's control and other force majeure events, including, but not limited
to, strikes, material shortages, delays of governmental agencies and Acts of
God, which delays will not be cause for termination hereunder; and (iii)
Landlord has not, as of the expiration of Tenant's Termination Notice Period,
substantially completed the Premises and delivered possession of the Premises to
Tenant. In the event of such termination, Landlord shall return any Security
Deposit to Tenant as well as any other sums paid hereunder by Tenant to
Landlord. All obligations of Tenant and Landlord under this Lease shall
thereafter terminate and no party shall have any further obligations under this
Lease.
3. TERM
The term of this Lease (the "TERM") shall commence on the Term Commencement
Date and continue in full force and effect for the number of months specified as
the Scheduled Length of Term in the Basic Lease Information or until this Lease
is terminated as otherwise provided herein. If the Term Commencement Date is a
date other than the first day of the calendar month, the Term shall be the
number of months of the Length of Term in addition to the remainder of the
calendar month following the Term Commencement Date.
4. USE
A. GENERAL. Tenant shall use the Premises for the permitted use specified in the
Basic Lease Information ("PERMITTED USE") and for no other use or purpose.
Tenant shall control Tenant's employees, agents, customers, visitors, invitees,
licensees, contractors, assignees and subtenants (collectively, "TENANT'S
PARTIES") in such a manner that Tenant and Tenant's Parties cumulatively do not
exceed the occupant density (the "OCCUPANCY DENSITY") or the parking density
(the "PARKING DENSITY") specified in the Basic Lease Information at any time.
Tenant shall pay the Parking Charge specified in the Basic Lease Information as
Additional Rent (as hereinafter defined) hereunder. So long as Tenant is
occupying the Premises, Tenant and Tenant's Parties shall have the nonexclusive
right to use, in common with other parties occupying the Building or Project,
the parking areas, driveways and other common areas of the Building and Project,
including at no cost to Tenant during the initial Term of this Lease, Landlord's
fitness facility, subject to the terms of this Lease and such rules and
regulations as Landlord may from time to time prescribe. Landlord reserves the
right, without notice or liability to Tenant, and without the same constituting
an actual or constructive eviction, to alter or modify the common areas from
time to time, including the location and configuration thereof, and the
amenities and facilities which Landlord may determine to provide from time to
time, provided that any such alteration or modification shall not materially
adversely affect Tenant's use of the Premises or the parking area as provided
hereunder, and provided further that any such alteration or modification shall
not detract from the first-class quality of the Building. In the event that any
alteration or modification of the common area materially and adversely affects
Tenant's use of the parking areas of the
4
<PAGE> 5
Project, Landlord may provide to Tenant a reasonable alternate parking area for
Tenant's and Tenant's Parties' use. During the Term hereof, provided that Tenant
comply with the reasonable requirements of Landlord's security system, Tenant
shall have the right to access the Premises via Landlord's security system,
twenty-four (24) hours per day, three hundred sixty-five (365) days per calendar
year, in accordance with the terms and conditions of this Lease, subject to
Landlord's repair and maintenance obligations pursuant to this Lease which
obligations may require the performance of after-hours repair or maintenance
work by Landlord which work may temporarily prevent after-hours access to the
Building. As of the date of this Lease, Landlord employs a roving security
service covering the Project. Notwithstanding the foregoing, nothing in this
Lease shall be deemed to require that Landlord provide security services to
Tenant or any tenant of the Project at any time.
B. LIMITATIONS. Tenant shall not permit any odors, smoke, dust, gas, substances,
noise or vibrations to emanate from the Premises or from any portion of the
common areas as a result of Tenant's or any Tenant's Party's use thereof, nor
take any action which would constitute a nuisance or would disturb, obstruct or
endanger any other tenants or occupants of the Building or Project or elsewhere,
or interfere with their use of their respective premises or common areas.
Storage outside the Premises of materials, vehicles or any other items is
prohibited. Tenant shall not use or allow the Premises to be used for any
immoral, improper or unlawful purpose, nor shall Tenant cause or maintain or
permit any nuisance in, on or about the Premises. Tenant shall not commit or
suffer the commission of any waste in, on or about the Premises. Tenant shall
not allow any sale by auction upon the Premises, or place any loads upon the
floors, walls or ceilings which could endanger the structure, or place any
harmful substances in the drainage system of the Building or Project. No waste,
materials or refuse shall be dumped upon or permitted to remain outside the
Premises. Landlord shall not be responsible to Tenant for the non-compliance by
any other tenant or occupant of the Building or Project with any of the
above-referenced rules or any other terms or provisions of such tenant's or
occupant's lease or other contract.
C. COMPLIANCE WITH REGULATIONS. Subject to punchlist items, if any, provided by
Tenant to Landlord in accordance with Paragraph 2.B above, when entering the
Premises, Tenant accepts the Premises in the condition existing as of the date
of such entry. Tenant shall at its sole cost and expense strictly comply with
all existing or future applicable municipal, state and federal and other
governmental statutes, rules, requirements, regulations, laws and ordinances,
including zoning ordinances and regulations, and covenants, easements and
restrictions of record (to the extent Tenant has actual or constructive
knowledge of such restrictions of record) governing and relating to Tenant's
Permitted Use or other specific use by Tenant or Tenant's Parties, occupancy or
possession of the Premises, to Tenant's use of the common areas, or to the use,
storage, generation or disposal of Hazardous Materials (hereinafter defined) by
Tenant or Tenant's Parties (collectively "REGULATIONS"). Tenant hereby
acknowledges that Landlord has provided information regarding restrictions of
record existing as of the date of this Lease. Tenant shall at its sole cost and
expense obtain any and all licenses or permits necessary for Tenant's use of the
Premises. Tenant shall at its sole cost and expense promptly comply with the
requirements of any board of fire underwriters or other similar body now or
hereafter constituted. Tenant shall not do or permit anything to be done in, on,
under or about the Project or bring or keep anything which will in any way
increase the rate of any insurance upon the Premises, Building or Project or
upon any contents therein or cause a cancellation of said insurance or otherwise
affect said insurance in any manner. Tenant shall indemnify, defend (by counsel
reasonably acceptable to Landlord), protect and hold Landlord harmless from and
against any loss, cost, expense, damage, attorneys' fees or liability arising
out of the failure of Tenant to comply with any Regulation to the extent that
such compliance is required of Tenant under this Lease. Tenant's obligations
pursuant to the foregoing indemnity shall survive the expiration or earlier
termination of this Lease. Landlord represents that, on the date Landlord
delivers possession of the Premises to Tenant, the Premises shall comply in all
material respects with those Regulations applicable to real property located in
Santa Clara County and pertaining to the Premises. Landlord shall be responsible
for complying with Regulations (including ADA and Title 24 to the extent any
such compliance requirement of Landlord is expressly stated herein) pertaining
to the common areas of the Project prior to and except to the extent arising out
of Tenant's occupancy or use of the Premises or common areas or construction of
any Tenant Improvements or Alterations made by or on behalf of Tenant, whether
by Landlord or otherwise and whether performed before or after the Term
Commencement Date, or installation of any equipment, fixtures, furniture or
other personal property in or about the Premises. Tenant shall have the sole
responsibility for complying, at Tenant's cost, with any and all provisions of
the Americans with Disabilities Act of 1990, as it has been and may later be
amended ("ADA"), (i) with respect to the Premises; and (ii) with respect to the
common areas of the Project where in the case of this clause (ii) such
compliance has been brought about by: (A) any Tenant Improvements or Alterations
to the Premises or to the common areas made by or on behalf of Tenant, whether
by Landlord or otherwise, and performed after the Term Commencement Date; (B)
requirements of Tenant's employees, or any changes to Tenant's use of the
Premises; or (C) any architectural barriers caused by Tenant's installation of
any equipment, fixtures, furniture, or other personal property in or about the
Premises (items (i) and (ii) collectively, "TENANT'S ADA RESPONSIBILITIES").
Tenant shall indemnify, defend and hold Landlord, its agents and employees
harmless from and against any and all claims, damages, or liabilities
(including, without limitation, reasonable attorneys' fees and costs) arising
directly or indirectly from Tenant's failure to satisfy any of Tenant's ADA
Responsibilities. Landlord shall indemnify, defend and hold Tenant, its agents
and employees harmless from and against any and all claims, damages or
liabilities arising directly or indirectly from Landlord's failure to comply
with any obligations of a landlord under the ADA, other than such claims,
damages or liabilities arising from Tenant's failure to satisfy any of Tenant's
ADA Responsibilities; provided, however, that Landlord may treat costs of ADA
compliance with respect to the common areas of the Project to the extent
incurred after the date Landlord delivers possession of the Premises to Tenant
as an Operating Expense. Notwithstanding anything to the contrary contained in
Paragraph 7.A of this Lease, costs of ADA and Title 24 compliance brought about
by alterations to the common areas performed before the date Landlord delivers
possession of the Premises to Tenant for Tenant's construction of the Tenant
Improvements, or which are expressly made Landlord's responsibility under this
Lease, will be borne solely by Landlord and shall neither be treated as an
Operating Expense nor be the responsibility of Tenant, except to the extent
provided herein. Landlord represents that, as of the date Landlord delivers
possession of the Premises to Tenant, to the best of Landlord's actual
knowledge, the Premises and the Building shall comply in all material respects
with the ADA and Title 24 as the ADA and Title 24 have, as of the date Landlord
delivers possession of the Premises to Tenant, been interpreted in Santa Clara
County and pertain to the Premises and the Building. Notwithstanding anything to
the contrary contained in this Lease, regardless of whether the cost of
compliance with Regulations shall be borne by Tenant, or Tenant and other
tenants of the Project as an Operating Expense (as defined herein), Landlord
shall perform or cause to be performed any compliance with Regulations items as
described in this Lease which items are located in the common area or are
structural in nature; provided, however, that the costs of such compliance items
shall be allocated in accordance herewith
D. HAZARDOUS MATERIALS. As used in this Lease, "HAZARDOUS MATERIALS" shall
include, but not be limited to, hazardous, toxic and radioactive materials and
those substances defined as "hazardous substances," "hazardous materials,"
"hazardous wastes," "toxic substances," or other similar designations in any
Regulation. Tenant shall not cause, or allow any of Tenant's Parties to cause,
any Hazardous Materials to be handled, used, generated, stored, released or
disposed of in, on, under or about the Premises, the Building or the Project or
surrounding land or environment in violation of any Regulations. Tenant must
obtain Landlord's written consent prior to the introduction of any Hazardous
Materials onto the Project. Notwithstanding the foregoing, Tenant may handle,
store, use and dispose of products containing small quantities of Hazardous
Materials for "general office purposes" (such as toner for copiers) to the
extent customary and necessary for the Permitted Use of the Premises; provided
that Tenant shall always handle, store, use, and dispose of any such Hazardous
Materials in a safe and lawful manner and never allow such Hazardous Materials
to contaminate the Premises, Building, or Project or surrounding land or
environment. Tenant shall immediately notify Landlord in writing of any
Hazardous Materials' contamination of any portion of the Project of which Tenant
becomes aware, whether or not caused by Tenant. Landlord shall have the right at
all reasonable times and if Landlord determines in good faith that Tenant may
not be in compliance with this Paragraph 4.D to inspect the Premises and to
conduct tests and investigations to determine whether Tenant is in compliance
with the foregoing provisions,
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the costs of all such inspections, tests and investigations to be borne by
Tenant. Tenant shall indemnify, defend (by counsel reasonably acceptable to
Landlord), protect and hold Landlord harmless from and against any and all
claims, liabilities, losses, costs, loss of rents, liens, damages, injuries or
expenses (including reasonable attorneys' and consultants' fees, and court
costs), demands, causes of action, or judgments directly or indirectly arising
out of or related to the use, generation, storage, release, or disposal of
Hazardous Materials by Tenant or any of Tenant's Parties in, on, under or about
the Premises, the Building or the Project or surrounding land or environment,
which indemnity shall include, without limitation, damages for personal or
bodily injury, property damage, damage to the environment or natural resources
occurring on or off the Premises, losses attributable to diminution in value or
adverse effects on marketability, the cost of any investigation, monitoring,
government oversight, repair, removal, remediation, restoration, abatement, and
disposal, and the preparation of any closure or other required plans, whether
such action is required or necessary prior to or following the expiration or
earlier termination of this Lease. Neither the consent by Landlord to the use,
generation, storage, release or disposal of Hazardous Materials nor the strict
compliance by Tenant with all laws pertaining to Hazardous Materials shall
excuse Tenant from Tenant's obligation of indemnification pursuant to this
Paragraph 4.D. Tenant's obligations pursuant to the foregoing indemnity shall
survive the expiration or earlier termination of this Lease.
5. RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the building rules and
regulations attached hereto as EXHIBIT A and any other rules and regulations and
any modifications or additions thereto which Landlord may from time to time
prescribe in writing for the purpose of maintaining the proper care,
cleanliness, safety, traffic flow and general order of the Premises or the
Building or Project. Tenant shall cause Tenant's Parties to comply with such
rules and regulations. Landlord shall not be responsible to Tenant for the
non-compliance by any other tenant or occupant of the Building or Project with
any of such rules and regulations, any other tenant's or occupant's lease or any
Regulations.
6. RENT
A. BASE RENT. Tenant shall pay to Landlord and Landlord shall receive, without
notice or demand throughout the Term, Base Rent as specified in the Basic Lease
Information, payable in monthly installments in advance on or before the first
day of each calendar month, in lawful money of the United States, without
deduction or offset whatsoever, at the Remittance Address specified in the Basic
Lease Information or to such other place as Landlord may from time to time
designate in writing. Base Rent for the first full month of the Term for the
Premises shall be paid by Tenant upon Tenant's execution of this Lease. Such
payment of Base Rent for the first full month of the Term shall be applied to
the first full month of the Term by Landlord upon its receipt thereof so that,
upon such application by Landlord of such payment, no additional payment of Base
Rent allocable to the first full month of the Term shall be due from Tenant. If
the obligation for payment of Base Rent commences on a day other than the first
day of a month, then Base Rent shall be prorated and the prorated installment
shall be paid on the first day of the calendar month next succeeding the Term
Commencement Date. The Base Rent payable by Tenant hereunder is subject to
adjustment as provided elsewhere in this Lease, as applicable. As used herein,
the term "Base Rent" shall mean the Base Rent specified in the Basic Lease
Information as it may be so adjusted from time to time.
B. ADDITIONAL RENT. All monies other than Base Rent required to be paid by
Tenant hereunder, including, but not limited to, Tenant's Proportionate Share of
Operating Expenses, as specified in Paragraph 7 of this Lease, charges to be
paid by Tenant under Paragraph 15, the interest and late charge described in
Paragraphs 26.D. and E., and any monies spent by Landlord pursuant to Paragraph
30, shall be considered additional rent ("ADDITIONAL RENT"). "RENT" shall mean
Base Rent and Additional Rent.
7. OPERATING EXPENSES
A. OPERATING EXPENSES. In addition to the Base Rent required to be paid
hereunder, Tenant shall pay as Additional Rent, Tenant's Proportionate Share of
the Building and/or Project (as applicable), as defined in the Basic Lease
Information, of Operating Expenses (defined below) in the manner set forth
below. Tenant shall pay the applicable Tenant's Proportionate Share of each such
Operating Expenses. Landlord and Tenant acknowledge that if the number of
buildings which constitute the Project increases or decreases, or if physical
changes are made to the Premises, Building or Project or the configuration of
any thereof, Landlord may reasonably adjust Tenant's Proportionate Share of the
Building or Project to equitably and fairly reflect the change. Landlord's
determination of Tenant's Proportionate Share of the Building and of the Project
shall be conclusive so long as it is reasonably and consistently applied.
"OPERATING EXPENSES" shall mean all expenses and costs of every kind and nature
which Landlord shall pay or become obligated to pay, because of or in connection
with the ownership, management, maintenance, repair, preservation, replacement
and operation of the Building or Project and its supporting facilities and such
additional facilities now and in subsequent years as may be determined by
Landlord to be necessary or desirable to the Building and/or Project (as
determined in a reasonable manner) other than those expenses and costs which are
specifically attributable to Tenant or which are expressly made the financial
responsibility of Landlord or specific tenants of the Building or Project
pursuant to this Lease. Operating Expenses shall include, but are not limited
to, the following:
(1) TAXES. All real property taxes and assessments, possessory interest
taxes, sales taxes, personal property taxes, business or license taxes
or fees, gross receipts taxes, service payments in lieu of such taxes or
fees, annual or periodic license or use fees, excises, transit charges,
and other impositions, general and special, ordinary and extraordinary,
unforeseen as well as foreseen, of any kind (including fees "in-lieu" of
any such tax or assessment) which are now or hereafter assessed, levied,
charged, confirmed, or imposed by any public authority upon the Building
or Project, its operations or the Rent (or any portion or component
thereof), or any tax, assessment or fee imposed in substitution,
partially or totally, of any of the above. Operating Expenses shall also
include any taxes, assessments, reassessments, or other fees or
impositions with respect to the development, leasing, management,
maintenance, alteration, repair, use or occupancy of the Premises,
Building or Project or any portion thereof, including, without
limitation, by or for Tenant, and all increases therein or reassessments
thereof whether the increases or reassessments result from increased
rate and/or valuation (whether upon a transfer of the Building or
Project or any portion thereof or any interest therein or for any other
reason). Operating Expenses shall not include inheritance or estate
taxes imposed upon or assessed against the interest of any person in the
Building or the Project, or taxes computed upon the basis of the net
income of any owners of any interest in the Building or the Project. If
it shall not be lawful for Tenant to reimburse Landlord for all or any
part of such taxes, the monthly rental payable to Landlord under this
Lease shall be revised to net Landlord the same net rental after
imposition of any such taxes by Landlord as would have been payable to
Landlord prior to the payment of any such taxes.
(2) INSURANCE. All insurance premiums and costs, including, but not
limited to, any deductible amounts, premiums and other costs of
insurance incurred by Landlord, including for the insurance coverage set
forth in Paragraph 8.A. herein.
(3) COMMON AREA MAINTENANCE.
(a) Repairs, replacements, and general maintenance of and for the
Building and Project and public and common areas and facilities
of and comprising the Building and Project, including, but not
limited to, the roof and roof membrane, windows, elevators,
restrooms, conference rooms, health club facilities, lobbies,
mezzanines, balconies, mechanical rooms, building exteriors,
alarm systems, pest extermination, landscaped areas, parking and
service areas,
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driveways, sidewalks, loading areas, fire sprinkler systems,
sanitary and storm sewer lines, utility services,
heating/ventilation/air conditioning systems, electrical,
mechanical or other systems, telephone equipment and wiring
servicing, plumbing, lighting, and any other items or areas which
affect the operation or appearance of the Building or Project,
which determination shall be at Landlord's discretion, except
for: those items to the extent paid for by the proceeds of
insurance or paid by Tenant or other third parties; and those
items attributable solely or jointly to specific tenants of the
Building or Project.
(b) Repairs, replacements, and general maintenance shall include
the cost of any improvements made to or assets acquired for the
Project or Building that in Landlord's discretion may reduce any
other Operating Expenses, including present or future repair
work, are reasonably necessary for the health and safety of the
occupants of the Building or Project, or for the operation of the
Building systems, services and equipment, or are required to
comply with any Regulation, such costs or allocable portions
thereof to be amortized over such reasonable period as Landlord
shall determine which period is substantially in accordance with
generally accepted accounting principles, together with interest
on the unamortized balance at the publicly announced "prime rate"
charged by Wells Fargo Bank, N.A. (San Francisco) or its
successor at the time such improvements or capital assets are
constructed or acquired, plus two (2) percentage points, or in
the absence of such prime rate, then at the U.S. Treasury
six-month market note (or bond, if so designated) rate as
published by any national financial publication selected by
Landlord, plus four (4) percentage points, but in no event more
than the lesser of (i) ten percent (10%) or (ii) the maximum rate
permitted by law, plus reasonable financing charges.
(c) Payment under or for any easement, license, permit, operating
agreement, declaration, restrictive covenant or instrument
relating to the Building or Project.
(d) All expenses and rental related to services and costs of
supplies, materials and equipment used in operating, managing and
maintaining the Premises, Building and Project, the equipment
therein and the adjacent sidewalks, driveways, parking and
service areas, including, without limitation, expenses related to
service agreements regarding security, fire and other alarm
systems, janitorial services, window cleaning, elevator
maintenance, Building exterior maintenance, landscaping and
expenses related to the administration, management and operation
of the Project, including without limitation salaries, wages and
benefits and management office rent.
(e) The cost of supplying any services and utilities which
benefit all or a portion of the Premises, Building or Project,
including without limitation services and utilities provided
pursuant to Paragraph 15 hereof.
(f) Legal expenses and the cost of audits by certified public
accountants; provided, however, that legal expenses chargeable as
Operating Expenses shall not include the cost of negotiating
leases, collecting rents, evicting tenants nor shall it include
costs incurred in legal proceedings with or against any tenant or
to enforce the provisions of any lease.
(g) A management and accounting cost recovery fee not to exceed
four percent (4%) of the sum of the Project's revenues.
If the rentable area of the Building and/or Project is not fully occupied during
any fiscal year of the Term as determined by Landlord, an adjustment shall be
made in Landlord's discretion in computing the Operating Expenses for such year
so that Tenant pays an equitable portion of all variable items (e.g., utilities,
janitorial services and other component expenses that are affected by variations
in occupancy levels) of Operating Expenses, as reasonably determined by
Landlord; provided, however, that in no event shall Landlord be entitled to
collect in excess of one hundred percent (100%) of the total Operating Expenses
actually incurred by Landlord from all of the tenants in the Building or
Project, as the case may be.
Operating Expenses shall not include the cost of providing tenant improvements
or other specific costs incurred for the account of specific tenants of the
Building or Project other than Tenant, the initial construction cost of the
Building, or debt service on any mortgage or deed of trust recorded with respect
to the Project other than pursuant to Paragraph 7.A(3)(b) above. Moreover, if
Landlord does not provide janitorial service to the Premises, Operating Expenses
with respect to the Premises shall not include the cost of janitorial service.
In addition, notwithstanding anything in the definition of Operating Expenses in
this Lease to the contrary, Operating Expenses shall not include the following,
except to the extent specifically provided: costs of capital improvements,
replacements or equipment and any depreciation or amortization expenses thereon,
except to the extent included in Operating Expenses in Paragraph 7.A of this
Lease; marketing costs, including leasing commissions, attorneys' fees in
connection with the negotiation and preparation or enforcement of letters, deal
memos, letters of intent, leases, subleases and/or assignments, space planning
costs, and other costs and expenses incurred in connection with lease, sublease
and/or assignment negotiations and transactions with present or prospective
tenants or other occupants of the Building or the Project; except to the extent
included in Operating Expenses in Paragraph 7.A(3) above, interest, principal,
points and fees on debt or amortization payments on any mortgage or deed of
trust or any other debt instrument encumbering the Building or Project or the
land on which the Building or Project is situated; and advertising and
promotional expenditures; Landlord's general corporate overhead and general
administrative expenses not related to the operation of the Building or the
Project (including executive salaries), except as specifically set forth in
Paragraph 7.A of this Lease.
Notwithstanding anything herein to the contrary, in any instance wherein
Landlord, in Landlord's reasonable discretion, deems Tenant to be responsible
for any amounts greater than Tenant's Proportionate Share, Landlord shall have
the right to allocate costs in any manner Landlord reasonably deems appropriate.
Landlord shall not collect from the tenants of the Project an amount greater
than 100% of the Operating Expenses incurred in the Project.
The above enumeration of services and facilities shall not be deemed to impose
an obligation on Landlord to make available or provide such services or
facilities except to the extent if any that Landlord has specifically agreed
elsewhere in this Lease to make the same available or provide the same. Without
limiting the generality of the foregoing, Tenant acknowledges and agrees that it
shall be responsible for providing adequate security for its use of the
Premises, the Building and the Project and that Landlord shall have no
obligation or liability with respect thereto, except to the extent if any that
Landlord has specifically agreed elsewhere in this Lease to provide the same.
B. PAYMENT OF ESTIMATED OPERATING EXPENSES. "ESTIMATED OPERATING EXPENSES" for
any particular year shall mean Landlord's estimate of the Operating Expenses for
such fiscal year made with respect to such fiscal year as hereinafter provided.
Landlord shall have the right from time to time to revise its fiscal year and
interim accounting periods so long as the periods as so revised are reconciled
with prior periods in a reasonable manner. During the last month of each fiscal
year during the Term, or as soon thereafter as practicable, Landlord shall give
Tenant written notice of the Estimated Operating Expenses for the ensuing fiscal
year. Tenant shall pay Tenant's Proportionate Share of the Estimated Operating
Expenses with installments of Base Rent for the fiscal year to which the
Estimated Operating Expenses applies in monthly installments on the first day of
each calendar month during such year, in advance. Such payment
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shall be construed to be Additional Rent for all purposes hereunder. If at any
time during the course of the fiscal year, Landlord reasonably determines that
Operating Expenses are projected to vary from the then Estimated Operating
Expenses by more than five percent (5%), Landlord may, by written notice to
Tenant, revise the Estimated Operating Expenses for the balance of such fiscal
year, and Tenant's monthly installments for the remainder of such year shall be
adjusted so that by the end of such fiscal year Tenant has paid to Landlord
Tenant's Proportionate Share of the revised Estimated Operating Expenses for
such year, such revised installment amounts to be Additional Rent for all
purposes hereunder.
C. COMPUTATION OF OPERATING EXPENSE ADJUSTMENT. "OPERATING EXPENSE ADJUSTMENT"
shall mean the difference between Estimated Operating Expenses and actual
Operating Expenses for any fiscal year determined as hereinafter provided.
Within one hundred twenty (120) days after the end of each fiscal year, or as
soon thereafter as practicable, Landlord shall deliver to Tenant a statement of
actual Operating Expenses for the fiscal year just ended, accompanied by a
computation of Operating Expense Adjustment. If such statement shows that
Tenant's payment based upon Estimated Operating Expenses is less than Tenant's
Proportionate Share of Operating Expenses, then Tenant shall pay to Landlord the
difference within thirty (30) days after receipt of such statement, such payment
to constitute Additional Rent for all purposes hereunder. If such statement
shows that Tenant's payments of Estimated Operating Expenses exceed Tenant's
Proportionate Share of Operating Expenses, then (provided that Tenant is not in
default under this Lease) Landlord shall pay to Tenant the difference within
thirty (30) days after delivery of such statement to Tenant. If this Lease has
been terminated or the Term hereof has expired prior to the date of such
statement, then the Operating Expense Adjustment shall be paid by the
appropriate party within thirty (30) days after the date of delivery of the
statement. Should this Lease commence or terminate at any time other than the
first day of the fiscal year, Tenant's Proportionate Share of the Operating
Expense Adjustment shall be prorated based on a month of 30 days and the number
of calendar months during such fiscal year that this Lease is in effect.
Notwithstanding anything to the contrary contained in Paragraph 7.A or 7.B,
Landlord's failure to provide any notices or statements within the time periods
specified in those paragraphs shall in no way excuse Tenant from its obligation
to pay Tenant's Proportionate Share of Operating Expenses. During the Term
hereof, and only in the event Landlord is holding a Letter of Credit (as defined
in Paragraph 39.E hereof) as a Security Deposit on behalf of Tenant, Landlord
shall credit to Tenant by way of an Operating Expense Adjustment an amount equal
to fifty percent (50%) of the annual fee charged by the issuing bank for the
Letter of Credit up to an amount not to exceed Fifteen Thousand Dollars
($15,000).
D. NET LEASE. This shall be a triple net Lease and Base Rent shall be paid to
Landlord absolutely net of all costs and expenses, except as specifically
provided to the contrary in this Lease. The provisions for payment of Operating
Expenses and the Operating Expense Adjustment are intended to pass on to Tenant
and reimburse Landlord for all costs and expenses of the nature described in
Paragraph 7.A. incurred in connection with the ownership, management,
maintenance, repair, preservation, replacement and operation of the Building
and/or Project and its supporting facilities and such additional facilities now
and in subsequent years as may be determined by Landlord to be necessary or
desirable to the Building and/or Project.
E. TENANT AUDIT. If Tenant shall dispute the amount set forth in any statement
provided by Landlord under Paragraph 7.B. or 7.C. above, Tenant shall have the
right, not later than thirty (30) days following receipt of such statement and
upon the condition that Tenant shall first deposit with Landlord the full amount
in dispute, to notify Landlord of such dispute and to request an audit in
writing, and within sixty (60) days after Landlord's receipt of such written
notice, to cause Landlord's books and records with respect to Operating Expenses
for such fiscal year to be audited by certified public accountants selected by
Tenant and subject to Landlord's reasonable right of approval. The Operating
Expense Adjustment shall be appropriately adjusted on the basis of such audit.
If such audit discloses a liability for a refund in excess of six percent (6%)
of Tenant's Proportionate Share of the Operating Expenses previously reported,
the cost of such audit shall be borne by Landlord; otherwise the cost of such
audit shall be paid by Tenant. If Tenant shall not request an audit in
accordance with the provisions of this Paragraph 7.E. within thirty (30) days
after receipt of Landlord's statement provided pursuant to Paragraph 7.B. or
7.C., such statement shall be final and binding for all purposes hereof. Tenant
acknowledges and agrees that any information revealed in the above described
audit may contain proprietary and sensitive information and that significant
damage could result to Landlord if such information were disclosed to any party
other than Tenant's auditors, Tenant's executives and financial managers and
Tenant's legal counsel, all of whom Tenant shall require to keep confidential
any information discovered through such audit, which requirement of
confidentiality shall survive the termination of this Lease. Except to the
extent required by an order of a court with proper jurisdiction, Tenant shall
not in any manner disclose, provide or make available any information revealed
by the audit to any person or entity without Landlord's prior written consent,
which consent may be withheld by Landlord in its sole and absolute discretion.
The information disclosed by the audit will be used by Tenant solely for the
purpose of evaluating Landlord's books and records in connection with this
Paragraph 7.E.
8. INSURANCE AND INDEMNIFICATION
A. LANDLORD'S INSURANCE. All insurance maintained by Landlord shall be for the
sole benefit of Landlord and under Landlord's sole control.
(1) PROPERTY INSURANCE. Landlord agrees to maintain property insurance
insuring the Building against damage or destruction due to risk
including fire, vandalism, and malicious mischief in an amount not less
than the replacement cost thereof, in the form and with deductibles and
endorsements as selected by Landlord. At its election, Landlord may
instead (but shall have no obligation to) obtain "All Risk" coverage,
and may also obtain earthquake, pollution, and/or flood insurance in
amounts selected by Landlord.
(2) OPTIONAL INSURANCE. Landlord, at Landlord's option, may also (but
shall have no obligation to) carry (i) insurance against loss of rent,
in an amount equal to the amount of Base Rent and Additional Rent that
Landlord could be required to abate to all Building tenants in the event
of condemnation or casualty damage for a period of twelve (12) months;
and (ii) liability insurance and such other insurance as Landlord may
deem prudent or advisable, in such amounts and on such terms as Landlord
shall determine. Landlord shall not be obligated to insure, and shall
have no responsibility whatsoever for any damage to, any furniture,
machinery, goods, inventory or supplies, or other personal property or
fixtures which Tenant may keep or maintain in the Premises, or any
leasehold improvements, additions or alterations within the Premises.
B. TENANT'S INSURANCE. Tenant shall procure at Tenant's sole cost and expense
and keep in effect from the date of this Lease and at all times until the end of
the Term the following:
(1) PROPERTY INSURANCE. Insurance on all personal property and fixtures
of Tenant and all improvements, additions or alterations made by or for
Tenant to the Premises on an "All Risk" basis, insuring such property
for the full replacement value of such property.
(2) LIABILITY INSURANCE. Commercial General Liability insurance covering
bodily injury and property damage liability occurring in or about the
Premises or arising out of the use and occupancy of the Premises and the
Project, and any part of either, and any areas adjacent thereto, and the
business operated by Tenant or by any other occupant of the Premises.
Such insurance shall include contractual liability insurance coverage
insuring all of Tenant's indemnity obligations under this Lease. Such
coverage shall have a minimum combined single limit of liability of at
least Two Million Dollars ($2,000,000.00), and a minimum general
aggregate limit of Three Million Dollars ($3,000,000.00), with an
"Additional Insured - Managers or Lessors
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of Premises Endorsement." All such policies shall be written to apply to
all bodily injury (including death), property damage or loss, personal
and advertising injury and other covered loss, however occasioned,
occurring during the policy term, shall be endorsed to add Landlord and
any party holding an interest to which this Lease may be subordinated as
an additional insured, and shall provide that such coverage shall be
"PRIMARY" and non-contributing with any insurance maintained by
Landlord, which shall be excess insurance only. Such coverage shall also
contain endorsements including employees as additional insureds if not
covered by Tenant's Commercial General Liability Insurance. All such
insurance shall provide for the severability of interests of insureds;
and shall be written on an "OCCURRENCE" basis, which shall afford
coverage for all claims based on acts, omissions, injury and damage,
which occurred or arose (or the onset of which occurred or arose) in
whole or in part during the policy period.
(3) WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY INSURANCE. Workers'
Compensation Insurance as required by any Regulation, and Employers'
Liability Insurance in amounts not less than One Million Dollars
($1,000,000) each accident for bodily injury by accident; One Million
Dollars ($1,000,000) policy limit for bodily injury by disease; and One
Million Dollars ($1,000,000) each employee for bodily injury by disease.
(4) COMMERCIAL AUTO LIABILITY INSURANCE. Commercial auto liability
insurance with a combined limit of not less than One Million Dollars
($1,000,000) for bodily injury and property damage for each accident.
Such insurance shall cover liability relating to any auto of Tenant
(including owned, hired and non-owned autos, and automobiles used within
the scope of employment under Tenant).
(5) ALTERATIONS REQUIREMENTS. In the event Tenant shall desire to
perform any Alterations, Tenant shall deliver to Landlord, prior to
commencing such Alterations (i) evidence reasonably satisfactory to
Landlord that Tenant carries "Builder's Risk" insurance covering
construction of such Alterations in an amount and form approved by
Landlord, (ii) such other insurance as Landlord shall
nondiscriminatorily and reasonably require, and (iii) a lien and
completion bond or other security in form and amount satisfactory to
Landlord in Landlord's reasonable discretion (which amount of such bond
or other security shall be approximately one hundred fifty percent
(150%) of the total cost of completion of the portion of the Tenant
Improvements for which Landlord requires such additional security).
Landlord shall in no event be required to accept an instrument of
security for purposes of the foregoing sentence which instrument of
security is not customarily accepted by Landlord for such purposes in
the ordinary course of Landlord's business operations.
(6) GENERAL INSURANCE REQUIREMENTS. All coverages described in this
Paragraph 8.B. shall be endorsed to (i) provide Landlord with thirty
(30) days' notice of cancellation or change in terms; and (ii) waive all
rights of subrogation by the insurance carrier against Landlord. If at
any time during the Term the amount or coverage of insurance which
Tenant is required to carry under this Paragraph 8.B. is, in Landlord's
reasonable judgment, materially less than the amount or type of
insurance coverage typically carried by owners or tenants of properties
located in the general area in which the Premises are located which are
similar to and operated for similar purposes as the Premises or if
Tenant's use of the Premises should change with or without Landlord's
consent, Landlord shall have the right to require Tenant to increase the
amount or change the types of insurance coverage required under this
Paragraph 8.B. All insurance policies required to be carried by Tenant
under this Lease shall be written by companies rated A X or better in
"Best's Insurance Guide" and authorized to do business in the State of
California. With respect to the Tenant named hereunder (Brocade
Communications Systems, Inc."), in any event deductible amounts under
all insurance policies required to be carried by Tenant under this Lease
shall not exceed One Hundred Thousand Dollars ($100,000.00) per
occurrence, provided that Tenant maintains a tangible net worth of at
least Fifty Million and No/100 Dollars ($50,000,000.00) as reasonably
determined by Landlord, or, if Tenant's net worth is less than Fifty
Million and No/100 Dollars ($50,000,000.00), such deductible amounts
shall not exceed Twenty-Five Thousand and No/100 Dollars ($25,000.00)
per occurrence. With respect to any other party which becomes "Tenant"
under this Lease, by assignment or operation of law, or otherwise, in
any event deductible amounts under all insurance policies required to be
carried by Tenant under this Lease shall not exceed Five Thousand
Dollars ($5,000.00) per occurrence. Tenant shall deliver to Landlord on
or before the Term Commencement Date, and thereafter at least fifteen
(15) days before the expiration dates of the expired policies, certified
copies of Tenant's insurance policies, or a certificate evidencing the
same issued by the insurer thereunder; and, if Tenant shall fail to
procure such insurance, or to deliver such policies or certificates,
Landlord may, at Landlord's option and in addition to Landlord's other
remedies in the event of a default by Tenant hereunder, procure the same
for the account of Tenant, and the cost thereof shall be paid to
Landlord as Additional Rent.
C. INDEMNIFICATION. Tenant shall indemnify, defend by counsel reasonably
acceptable to Landlord, protect and hold Landlord, Spieker Properties, Inc., and
each of their respective directors, shareholders, partners, lenders, members,
managers, contractors, affiliates and employees (collectively, "LANDLORD
INDEMNITEES") harmless from and against any and all claims, liabilities, losses,
costs, loss of rents, liens, damages, injuries or expenses, including reasonable
attorneys' and consultants' fees and court costs, demands, causes of action, or
judgments, directly or indirectly arising out of or related to: (1) claims of
injury to or death of persons or damage to property or business loss occurring
or resulting directly or indirectly from the use or occupancy of the Premises,
Building or Project by Tenant or Tenant's Parties, or from activities or
failures to act of Tenant or Tenant's Parties; (2) claims arising from work or
labor performed, or for materials or supplies furnished to or at the request or
for the account of Tenant in connection with performance of any work done for
the account of Tenant within the Premises or Project; (3) claims arising from
any breach or default on the part of Tenant in the performance of any covenant
contained in this Lease; and (4) claims arising from the negligence or
intentional acts or omissions of Tenant or Tenant's Parties. The foregoing
indemnity by Tenant shall not be applicable to claims to the extent arising from
the gross negligence or willful misconduct of Landlord or Landlord's agents,
employees, or contractors or Landlord's breach of a material term of this Lease
beyond any applicable cure periods. Landlord shall not be liable to Tenant and
Tenant hereby waives all claims against Landlord for any injury to or death of,
or damage to any person or property or business loss in or about the Premises,
Building or Project by or from any cause whatsoever (other than Landlord's gross
negligence or willful misconduct or Landlord's breach of a material term of this
Lease beyond any applicable cure periods) and, without limiting the generality
of the foregoing, whether caused by water leakage of any character from the
roof, walls, basement or other portion of the Premises, Building or Project, or
caused by gas, fire, oil or electricity in, on or about the Premises, Building
or Project, acts of God or of third parties, or any matter outside of the
reasonable control of Landlord. The provisions of this Paragraph shall survive
the expiration or earlier termination of this Lease.
9. WAIVER OF SUBROGATION
Landlord and Tenant each waives any claim, loss or cost it might have
against the other for any injury to or death of any person or persons, or damage
to or theft, destruction, loss, or loss of use of any property (a "LOSS"), to
the extent the same is insured against (or is required to be insured against
under the terms hereof) under any property damage insurance policy covering the
Building, the Premises, Landlord's or Tenant's fixtures, personal property,
leasehold improvements, or business, regardless of whether the negligence of the
other party caused such Loss.
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10. LANDLORD'S REPAIRS AND MAINTENANCE
Landlord shall maintain in good repair, reasonable wear and tear excepted, the
structural soundness of the roof, foundations, and exterior walls of the
Building. The term "exterior walls" as used herein shall not include windows,
glass or plate glass, doors, special store fronts or office entries. Any damage
caused by or repairs necessitated by any negligence or act of Tenant or Tenant's
Parties may be repaired by Landlord at Landlord's option and Tenant's expense.
Tenant shall promptly give Landlord written notice of any defect or need of
repairs in such components of the Building for which Landlord is responsible
upon Tenant's knowledge of the same, after which Landlord shall have a
reasonable opportunity and the right to enter the Premises at all reasonable
times to repair same. Landlord shall make commercially reasonable efforts to
cause its agents, employees and contractors who enter the Premises to use
commercially reasonable efforts not to unreasonably interfere with Tenant's
Permitted Use of the Premises. Landlord's liability with respect to any defects,
repairs, or maintenance for which Landlord is responsible under any of the
provisions of this Lease shall be limited to the cost of such repairs or
maintenance, and there shall be no abatement of rent and no liability of
Landlord by reason of any injury to or interference with Tenant's business
arising from the making of repairs, alterations or improvements in or to any
portion of the Premises, the Building or the Project or to fixtures,
appurtenances or equipment in the Building, except as provided in Paragraph 24.
Subject to punchlist items described in Paragraph 2.B hereof, by taking
possession of the Premises, Tenant accepts them "as is," as being in good order,
condition and repair and the condition in which Landlord is obligated to deliver
them and suitable for the Permitted Use and Tenant's intended operations in the
Premises, whether or not any notice of acceptance is given. Landlord shall
promptly commence the correction of the punchlist items described in Paragraph
2.B hereof, if any, following Landlord's receipt of any such punchlist items
list in accordance with this Lease.
11. TENANT'S REPAIRS AND MAINTENANCE
Tenant shall at all times during the Term at Tenant's expense maintain all
parts of the Premises and such portions of the Building as are within the
exclusive control of Tenant in a first-class, good, clean and secure condition
and promptly make all necessary repairs and replacements, as reasonably
determined by Landlord, with materials and workmanship of the same character,
kind and quality as the original. Notwithstanding anything to the contrary
contained herein, Tenant shall, at its expense, promptly repair any damage to
the Premises or the Building or Project resulting from or caused by any
negligence or act of Tenant or Tenant's Parties.
12. ALTERATIONS
A. Tenant shall not make, or allow to be made, any alterations, physical
additions, improvements or partitions, including without limitation the
attachment of any fixtures or equipment, in, about or to the Premises
("ALTERATIONS") without obtaining the prior written consent of Landlord, which
consent shall not be unreasonably withheld or delayed with respect to proposed
Alterations which: (a) comply with all applicable Regulations; (b) are, in
Landlord's reasonable opinion, compatible with the Building or the Project and
its mechanical, plumbing, electrical, heating/ventilation/air conditioning
systems, and will not cause the Building or Project or such systems to be
required to be modified to comply with any Regulations (including, without
limitation, the Americans With Disabilities Act), unless Tenant in its sole
discretion agrees in writing to pay for all costs and expenses associated with
such compliance requirement (which agreement shall survive termination of this
Lease); and (c) will not interfere with the use and occupancy of any other
portion of the Building or Project by any other tenant or its invitees.
Specifically, but without limiting the generality of the foregoing, Landlord
shall have the right of written consent for all plans and specifications for the
proposed Alterations, construction means and methods, all appropriate permits
and licenses, any contractor or subcontractor to be employed on the work of
Alterations, and the time for performance of such work, and may impose
reasonable rules and regulations for contractors and subcontractors performing
such work. Tenant shall also supply to Landlord any documents and information
reasonably requested by Landlord in connection with Landlord's consideration of
a request for approval hereunder. Notwithstanding the foregoing, Tenant shall
have the right, without consent of, but upon at least ten (10) business days'
prior written notice (as provided under Paragraph 12.B below) to, Landlord, to
make non-structural, cosmetic Alterations within the interior of the Premises
(and which are not visible from the outside of the Premises), which do not
impair the value of the Building, and which cost, in the aggregate, less than
Twenty-Five Thousand Dollars ($25,000.00) in any twelve (12) month period during
the Term of this Lease, provided that such Alterations shall nevertheless be
subject to all of the remaining requirements of this Paragraph 12, including
without limitation, subparagraphs (a) through (c) above, other than the
requirement of Landlord's prior consent. In addition, all Alterations shall be
performed by duly licensed contractors or subcontractors reasonably acceptable
to Landlord, proof of insurance shall be submitted to Landlord as required under
Paragraph 8.B above, and Landlord reserves the right to impose reasonable rules
and regulations for contractors and subcontractors. Tenant shall, if requested
by Landlord, promptly furnish Landlord with complete as-built plans and
specifications for any Alterations performed by Tenant to the Premises, at
Tenant's sole cost and expense. Tenant shall cause all Alterations to be
accomplished in a first-class, good and workmanlike manner, and to comply with
all applicable Regulations and Paragraph 27 hereof. Tenant shall at Tenant's
sole expense, perform any additional work required under applicable Regulations
due to the Alterations hereunder. No review or consent by Landlord of or to any
proposed Alteration or additional work shall constitute a waiver of Tenant's
obligations under this Paragraph 12, nor constitute any warranty or
representation that the same complies with all applicable Regulations, for which
Tenant shall at all times be solely responsible. Tenant shall reimburse Landlord
for all costs which Landlord may incur in connection with granting approval to
Tenant for any such Alterations, including any costs or expenses which Landlord
may incur in electing to have outside architects and engineers review said plans
and specifications, and shall pay Landlord an administration fee of five percent
(5%) of the cost of the Alterations as Additional Rent hereunder. All such
Alterations shall remain the property of Tenant until the expiration or earlier
termination of this Lease, at which time they shall be and become the property
of Landlord; provided, however, that Landlord may, at Landlord's option, require
that Tenant, at Tenant's expense, remove any or all Alterations (excluding the
initial Tenant Improvements and any improvements installed by Landlord on behalf
of Tenant in the Phase I Temporary Premises or the Phase II Temporary Premises
(each as herein defined)) made by or on behalf of Tenant and restore the
Premises by the expiration or earlier termination of this Lease, to their
condition existing prior to the construction of any such Alterations, reasonable
wear and tear excepted. All such removals and restoration shall be accomplished
in a first-class and good and workmanlike manner so as not to cause any damage
to the Premises or Project whatsoever. If Tenant fails to remove such
Alterations or Tenant's trade fixtures or furniture or other personal property,
Landlord may keep and use them or remove any of them and cause them to be stored
or sold in accordance with applicable law, at Tenant's sole expense. In addition
to and wholly apart from Tenant's obligation to pay Tenant's Proportionate Share
of Operating Expenses, Tenant shall be responsible for and shall pay prior to
delinquency any taxes or governmental service fees, possessory interest taxes,
fees or charges in lieu of any such taxes, capital levies, or other charges
imposed upon, levied with respect to or assessed against its fixtures or
personal property, on the value of Alterations within the Premises, and on
Tenant's interest pursuant to this Lease, or any increase in any of the
foregoing based on such Alterations. To the extent that any such taxes are not
separately assessed or billed to Tenant, Tenant shall pay the amount thereof as
invoiced to Tenant by Landlord.
At Landlord's election and notwithstanding the foregoing, however, Tenant shall
pay to Landlord the cost of removing any such Alterations and restoring the
Premises to their original condition, such cost to include a reasonable charge
for Landlord's overhead and profit as provided above at the time Landlord grants
written consent to a requested Alteration; provided, however, that Landlord
shall not require that Tenant pay to Landlord the cost of removing any such
Alterations and restoring the Premises to their original condition as described
in the foregoing sentence if the following conditions precedent are satisfied by
Tenant: (i) Tenant (and not a sublessee or assignee of Tenant) shall be the
party for which the Alterations are requested and Tenant is in possession of the
portion of the Premises upon which the Alterations shall be made, and (ii) the
removal costs of such Alterations described above are determined by Landlord in
its
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reasonable discretion to be less than a cumulative total of one hundred thousand
and no/100 dollars ($100,000.00) with respect to all existing Alterations which
Landlord may require to be removed pursuant to the terms of this Lease. Nothing
in the foregoing sentence shall be interpreted to relieve Tenant of its
obligations described in this Lease to remove Alterations and restore the
Premises at Tenant's cost in accordance with this Paragraph 12, Paragraph 36 and
with other applicable terms and conditions of this Lease. In the event that
Tenant does remove any such Alterations and restores the Premises in accordance
with the terms of this Lease, Landlord shall return any monies delivered by
Tenant to Landlord in accordance with the preceding sentence. In the event
Tenant fails to remove Alterations and restore the Premises in accordance with
the terms of this Lease, Landlord may perform the same on Tenant's behalf apply
monies collected by Landlord for such purpose to the removal and restoration or,
in the event Landlord does not require any such payment by Tenant, the amount
due from Tenant may be deducted from the Security Deposit or any other sums or
amounts held by Landlord under this Lease.
B. In compliance with Paragraph 27 hereof, at least ten (10) business days
before beginning construction of any Alteration, Tenant shall give Landlord
written notice of the expected commencement date of that construction to permit
Landlord to post and record a notice of non-responsibility. Upon substantial
completion of construction, if the law so provides, Tenant shall cause a timely
notice of completion to be recorded in the office of the recorder of the county
in which the Building is located.
C. Notwithstanding anything to the contrary contained in Paragraph 12.A, at the
time Landlord gives its consent for any Alterations, Tenant shall also be
notified whether or not Landlord will require that such Alterations be removed
upon the expiration or earlier termination of this Lease. Landlord shall respond
to Tenant's written request within fifteen (15) business days. In the event
Landlord fails to respond to Tenant's written request within such fifteen (15)
business day time period, Landlord shall not be in default hereof nor shall
Tenant be deemed to have received consent to the requested Alterations; however
Tenant is entitled to provide a second written request for consent to Landlord.
Landlord shall respond to Tenant's second written request for consent described
in this Paragraph 12.C within ten (10) business days after Landlord's receipt
thereof. In the event Landlord fails to so respond to Tenant's second written
request, Landlord shall be deemed to have consented to Tenant's request to make
Alterations; provided, however, that if the total cost of any proposed
Alterations by Tenant during the previous six (6) month period is equal to or
more than One Hundred Thousand Dollars ($100,000.00), Landlord shall be deemed
to have rejected Tenant's second request to make such Alterations.
13. SIGNS
Tenant shall not place, install, affix, paint or maintain any signs, notices,
graphics or banners whatsoever or any window decor which is visible in or from
public view or corridors, the common areas or the exterior of the Premises or
the Building, in or on any exterior window or window fronting upon any common
areas or service area without Landlord's prior written approval which Landlord
shall have the right to withhold in its absolute and sole discretion; provided
that Tenant's name shall be included in any Building-standard door and directory
signage, if any, in accordance with Landlord's Building signage program,
including without limitation, payment by Tenant of any fee charged by Landlord
for maintaining such signage, which fee shall constitute Additional Rent
hereunder. Any installation of signs, notices, graphics or banners on or about
the Premises or Project approved by Landlord shall be subject to any Regulations
and to any other requirements imposed by Landlord. Tenant shall remove all such
signs or graphics by the expiration or any earlier termination of this Lease.
Such installations and removals shall be made in such manner as to avoid injury
to or defacement of the Premises, Building or Project and any other improvements
contained therein, and Tenant shall repair any injury or defacement including
without limitation discoloration caused by such installation or removal. Any
signage rights granted by Landlord to Tenant shall be exclusive to Tenant and
such rights shall not be assigned, subleased or otherwise conveyed without the
prior written approval of Landlord of which Landlord shall have the right to
withhold in its absolute and sole discretion. Tenant's signage rights under this
Paragraph are personal to the original Tenant named in this Lease and shall not
inure to the benefit of any assignees or subtenants. Notwithstanding anything
contained in this Paragraph 13 to the contrary, Tenant shall be entitled to two
(2) signs to be located as follows (a) one (1) sign on the upper-most portion of
the side of the Building facing Technology Drive, and (b) one (1) sign the
upper-most portion of the side of the Building facing Guadalupe Parkway, each in
a location reasonably determined by Landlord. Such signage right is personal to
Tenant and subject to the following terms and conditions:
1. Tenant shall submit plans and drawings for such signage to the City
of San Jose and to any other public authorities having jurisdiction
and shall obtain written approval from each such jurisdiction prior
to installation, and shall fully comply with all applicable
Regulations;
2. Tenant shall, at Tenant's sole cost and expense, design, construct
and install such signage;
3. All signs shall be subject to Landlord's prior written approval,
which Landlord shall have the right to withhold in its absolute and
sole discretion;
4. Tenant shall maintain its signage in good condition and repair, and
all costs of maintenance and repair shall be borne by Tenant.
Maintenance shall include, without limitation, cleaning and, if such
signage is illuminated, relamping at reasonable intervals. Tenant
shall be responsible for any electrical energy used in connection
with its signs;
5. At Landlord's option, Tenant's signage rights granted hereby may be
revoked and terminated upon occurrence of any of the following
events:
(a) Tenant shall be in material default, as defined in Paragraph 26
as determined by Landlord in its sole discretion, and shall not
have cured said default for a period of ninety (90) days;
(b) Except with respect to Permitted Transfers described in
Paragraph 21.A(3) hereof, Tenant shall assign this Lease or
sublet any portion of the Premises without Landlord's prior
written consent in accordance with Paragraph 21, or Tenant
occupies less than fifty percent (50%) of the Premises;
(c) This Lease shall terminate or otherwise no longer be in effect.
6. Upon the expiration or earlier termination of this Lease if Tenant
fails to remove its signage in accordance with this Paragraph 13, or
at such other time that Tenant's signage rights are terminated
pursuant to the terms hereof, Landlord shall cause Tenant's signage
to be removed from the Building and the Building to be repaired and
restored to the condition which existed prior to the installation of
Tenant's signage (including, if necessary, the replacement of any
precast concrete panels), all at the sole cost and expense of Tenant
and otherwise in accordance with Paragraph 36 of this Lease, without
further notice from Landlord notwithstanding anything to the
contrary contained in this Lease. Tenant shall pay all costs and
expenses for such removal and restoration within thirty (30) days
following delivery of an invoice therefor.
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14. INSPECTION/POSTING NOTICES
After reasonable notice, except in emergencies where no such notice shall be
required, Landlord and Landlord's agents and representatives, shall have the
right to enter the Premises to inspect the same, to clean, to perform such work
as may be permitted or required hereunder, to make repairs, improvements or
alterations to the Premises, Building or Project or to other tenant spaces
therein, to deal with emergencies, to post such notices as may be permitted or
required by law to prevent the perfection of liens against Landlord's interest
in the Project or to exhibit the Premises to prospective tenants, purchasers,
encumbrancers or to others, or for any other purpose as Landlord may deem
necessary or desirable; provided, however, that Landlord shall use reasonable
efforts not to unreasonably interfere with Tenant's business operations. Tenant
shall not be entitled to any abatement of Rent by reason of the exercise of any
such right of entry. Tenant waives any claim for damages for any injury or
inconvenience to or interference with Tenant's business, any loss of occupancy
or quiet enjoyment of the Premises, and any other loss occasioned thereby.
Landlord shall at all times have and retain a key with which to unlock all of
the doors in, upon and about the Premises, excluding Tenant's vaults and safes
or special security areas (designated in advance), and Landlord shall have the
right to use any and all means which Landlord may deem necessary or proper to
open said doors in an emergency, in order to obtain entry to any portion of the
Premises, and any entry to the Premises or portions thereof obtained by Landlord
by any of said means, or otherwise, shall not be construed to be a forcible or
unlawful entry into, or a detainer of, the Premises, or an eviction, actual or
constructive, of Tenant from the Premises or any portions thereof. At any time
within six (6) months prior to the expiration of the Term or following any
earlier termination of this Lease or agreement to terminate this Lease, Landlord
shall have the right to erect on the Premises, Building and/or Project a
suitable sign indicating that the Premises are available for lease.
15. SERVICES AND UTILITIES
A. Provided Tenant shall not be in default hereunder, and subject to the
provisions elsewhere herein contained and to the rules and regulations of the
Building, Landlord shall furnish to the Premises during ordinary business hours
of generally recognized business days, to be reasonably determined by Landlord
(but exclusive, in any event, of Saturdays, Sundays and legal holidays), water
for lavatory and drinking purposes and electricity, heat and air conditioning as
usually furnished or supplied for use of the Premises for reasonable and normal
office use as of the date Tenant takes possession of the Premises as determined
by Landlord (but not including above-standard or continuous cooling for
excessive heat-generating machines, excess lighting or equipment), janitorial
services during the times and in the manner that such services are, in
Landlord's judgment, customarily furnished in comparable office buildings in the
immediate market area, and elevator service, which shall mean service either by
nonattended automatic elevators or elevators with attendants, or both, at the
option of Landlord. Tenant acknowledges that Tenant has inspected and accepts
the water, electricity, heat and air conditioning and other utilities and
services being supplied or furnished to the Premises as of the date Tenant takes
possession of the Premises, as being sufficient for use of the Premises for
reasonable and normal office use in their present condition, "as is," and
suitable for the Permitted Use, and for Tenant's intended operations in the
Premises. Landlord shall have no obligation to provide additional or after-hours
electricity, heating or air conditioning, but if Landlord elects to provide such
services at Tenant's request, Tenant shall pay to Landlord, upon demand, a
reasonable charge for such services as reasonably determined by Landlord. Tenant
agrees to keep and cause to be kept closed all window covering when necessary
because of the sun's position, and Tenant also agrees at all times to cooperate
fully with Landlord and to abide by all of the regulations and requirements
which Landlord may reasonably prescribe for the proper functioning and
protection of electrical, heating, ventilating and air conditioning systems.
Wherever heat-generating machines, excess lighting or equipment are used in the
Premises which affect the temperature otherwise maintained by the air
conditioning system, Landlord reserves the right to install supplementary air
conditioning units in the Premises and the cost thereof, including the cost of
installation and the cost of operation and maintenance thereof, shall be paid by
Tenant to Landlord upon demand by Landlord.
B. Tenant shall not without written consent of Landlord use any apparatus,
equipment or device in the Premises, including without limitation, computers,
electronic data processing machines, copying machines, and other machines, using
excess lighting or using electric current, water, or any other resource in
excess of or which will in any way increase the amount of electricity, water, or
any other resource being furnished or supplied for the use of the Premises for
reasonable and normal office use, and the Permitted Use, in each case as of the
date Tenant takes possession of the Premises and as determined by Landlord, or
which will require additions or alterations to or interfere with the Building
power distribution systems; nor connect with electric current, except through
existing electrical outlets in the Premises or water pipes, any apparatus,
equipment or device for the purpose of using electrical current, water, or any
other resource. If Tenant shall require water or electric current or any other
resource in excess of that being furnished or supplied for the use of the
Premises as of the date Tenant takes possession of the Premises as determined by
Landlord, Tenant shall first procure the written consent of Landlord which
Landlord may refuse, to the use thereof, and Landlord may cause a special meter
to be installed in the Premises so as to measure the amount of water, electric
current or other resource consumed for any such other use. Tenant shall pay
directly to Landlord upon demand as an addition to and separate from payment of
Operating Expenses the cost of all such additional resources, energy, utility
service and meters (and of installation, maintenance and repair thereof and of
any additional circuits or other equipment necessary to furnish such additional
resources, energy, utility or service). Landlord may add to the separate or
metered charge a recovery of additional expense incurred in keeping account of
the excess water, electric current or other resource so consumed. Following
receipt of Tenant's request to do so, Landlord shall use good faith efforts to
restore any service specifically to be provided under Paragraph 15 that becomes
unavailable and which is in Landlord's reasonable control to restore; provided,
however, that Landlord shall in no case be liable for any damages directly or
indirectly resulting from nor shall the Rent or any monies owed Landlord under
this Lease herein reserved be abated by reason of: (a) the installation, use or
interruption of use of any equipment used in connection with the furnishing of
any such utilities or services, or any change in the character or means of
supplying or providing any such utilities or services or any supplier thereof;
(b) the failure to furnish or delay in furnishing any such utilities or services
when such failure or delay is caused by acts of God or the elements, labor
disturbances of any character, or otherwise or because of any interruption of
service due to Tenant's use of water, electric current or other resource in
excess of that being supplied or furnished for the use of the Premises as of the
date Tenant takes possession of the Premises; (c) the inadequacy, limitation,
curtailment, rationing or restriction on use of water, electricity, gas or any
other form of energy or any other service or utility whatsoever serving the
Premises or Project, whether by Regulation or otherwise; or (d) the partial or
total unavailability of any such utilities or services to the Premises or the
Building or the diminution in the quality or quantity thereof, whether by
Regulation or otherwise; or (e) any interruption in Tenant's business operations
as a result of any such occurrence; nor shall any such occurrence constitute an
actual or constructive eviction of Tenant or a breach of an implied warranty by
Landlord. Landlord shall further have no obligation to protect or preserve any
apparatus, equipment or device installed by Tenant in the Premises, including
without limitation by providing additional or after-hours heating or air
conditioning. Landlord shall be entitled to cooperate voluntarily and in a
reasonable manner with the efforts of national, state or local governmental
agencies or utility suppliers in reducing energy or other resource consumption.
The obligation to make services available hereunder shall be subject to the
limitations of any such voluntary, reasonable program. In addition, Landlord
reserves the right to change the supplier or provider of any such utility or
service from time to time. Tenant shall have the right to directly contract with
or otherwise obtain any electrical or janitorial service for or with respect to
the Premises or Tenant's operations therein from any supplier or provider of any
such service. Tenant shall cooperate with Landlord and any supplier or provider
of such services designated by Landlord from time to time to facilitate the
delivery of such services to Tenant at the Premises and to the Building and
Project, including without limitation allowing Landlord and Landlord's suppliers
or providers, and their respective agents and contractors, reasonable access to
the Premises for the purpose of installing, maintaining, repairing, replacing or
upgrading such service or any equipment or machinery associated therewith.
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C. Tenant shall pay, upon demand, for all utilities furnished to the Premises,
or if not separately billed to or metered to Tenant, Tenant's Proportionate
Share of all charges jointly serving the Project in accordance with Paragraph 7.
All sums payable under this Paragraph 15 shall constitute Additional Rent
hereunder.
D. Tenant may contract separately with providers of telecommunications or
cellular products, systems or services for the Premises. Even though such
products, systems or services may be installed or provided by such providers in
the Building, in consideration for Landlord's permitting such providers to
provide such services to Tenant, Tenant agrees that Landlord and the Landlord
Indemnitees shall in no event be liable to Tenant or any Tenant Party for any
damages of any nature whatsoever arising out of or relating to the products,
systems or services provided by such providers (or any failure, interruption,
defect in or loss of the same) or any acts or omissions of such providers in
connection with the same or any interference in Tenant's business caused
thereby. Tenant waives and releases all rights and remedies against Landlord and
the Landlord Indemnitees that are inconsistent with the foregoing.
16. SUBORDINATION
Without the necessity of any additional document being executed by Tenant for
the purpose of effecting a subordination, this Lease shall be and is hereby
declared to be subject and subordinate at all times to: (a) all ground leases or
underlying leases which may now exist or hereafter be executed affecting the
Premises and/or the land upon which the Premises and Project are situated, or
both; and (b) any mortgage or deed of trust which may now exist or be placed
upon the Building, the Project and/or the land upon which the Premises or the
Project are situated, or said ground leases or underlying leases, or Landlord's
interest or estate in any of said items which is specified as security.
Notwithstanding the foregoing, Landlord shall have the right to subordinate or
cause to be subordinated any such ground leases or underlying leases or any such
liens to this Lease. If any ground lease or underlying lease terminates for any
reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of
foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and become the Tenant of the successor in interest to
Landlord provided that Tenant shall not be disturbed in its possession under
this Lease by such successor in interest so long as Tenant is not in default
under this Lease. Within ten (10) days after request by Landlord, Tenant shall
execute and deliver any additional documents evidencing Tenant's attornment or
the subordination of this Lease with respect to any such ground leases or
underlying leases or any such mortgage or deed of trust, in the form requested
by Landlord or by any ground landlord, mortgagee, or beneficiary under a deed of
trust, subject to such nondisturbance requirement. If requested in writing by
Tenant, Landlord shall use commercially reasonable efforts to obtain a
subordination, nondisturbance and attornment agreement for the benefit of Tenant
reflecting the foregoing from any ground landlord, mortgagee or beneficiary, at
Tenant's expense, subject to such other terms and conditions as the ground
landlord, mortgagee or beneficiary may require.
17. FINANCIAL STATEMENTS
At the request of Landlord from time to time, Tenant shall provide to Landlord
Tenant's and any guarantor's current financial statements or other information
discussing financial worth of Tenant and any guarantor, which Landlord shall use
solely for purposes of this Lease and in connection with the ownership,
management, financing and disposition of the Project. Landlord shall not
disclose, provide or make available any confidential information revealed by
Tenant's private financial information to any person or entity without Tenant's
prior written consent.
18. ESTOPPEL CERTIFICATE
Tenant agrees from time to time, within ten (10) days after request of Landlord,
to deliver to Landlord, or Landlord's designee, an estoppel certificate stating
that this Lease is in full force and effect, that this Lease has not been
modified (or stating all modifications, written or oral, to this Lease), the
date to which Rent has been paid, the unexpired portion of this Lease, that
there are no current defaults by Landlord or Tenant under this Lease (or
specifying any such defaults), that the leasehold estate granted by this Lease
is the sole interest of Tenant in the Premises and/or the land at which the
Premises are situated, and such other matters pertaining to this Lease as may be
reasonably requested by Landlord or any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or Project or any interest therein.
Failure by Tenant to execute and deliver such certificate shall constitute an
acceptance of the Premises and acknowledgment by Tenant that the statements
included are true and correct without exception. Tenant agrees that if Tenant
fails to execute and deliver such certificate within such ten (10) day period,
Landlord may execute and deliver such certificate on Tenant's behalf and that
such certificate shall be binding on Tenant. Landlord and Tenant intend that any
statement delivered pursuant to this Paragraph may be relied upon by any
mortgagee, beneficiary, purchaser or prospective purchaser of the Building or
Project or any interest therein. The parties agree that Tenant's obligation to
furnish such estoppel certificates in a timely fashion is a material inducement
for Landlord's execution of this Lease, and shall be an event of default
(without any cure period that might be provided under Paragraph 26.A(3) of this
Lease) if Tenant fails to fully comply or makes any material misstatement in any
such certificate.
19. SECURITY DEPOSIT
Tenant agrees to deposit with Landlord upon execution of this Lease, a security
deposit as stated in the Basic Lease Information (the "SECURITY DEPOSIT"), which
sum shall be held and owned by Landlord, without obligation to pay interest, as
security for the performance of Tenant's covenants and obligations under this
Lease. The Security Deposit is not an advance rental deposit or a measure of
damages incurred by Landlord in case of Tenant's default. Upon the occurrence of
any event of default by Tenant, Landlord may from time to time, without
prejudice to any other remedy provided herein or by law, use such fund as a
credit to the extent necessary to credit against any arrears of Rent or other
payments due to Landlord hereunder, and any other damage, injury, expense or
liability caused by such event of default, and Tenant shall pay to Landlord, on
demand, the amount so applied in order to restore the Security Deposit to its
original amount. Although the Security Deposit shall be deemed the property of
Landlord, any remaining balance of such deposit shall be promptly returned by
Landlord to Tenant at such time after termination of this Lease that all of
Tenant's obligations under this Lease have been fulfilled to Landlord's
reasonable satisfaction, reduced by such amounts as may be required by Landlord
(i) to remedy defaults on the part of Tenant in the payment of Rent or other
obligations of Tenant under this Lease, (ii) to repair damage to the Premises,
Building or Project caused by Tenant or any Tenant's Parties, and (iii) to clean
the Premises to the extent Tenant fails to comply with Paragraph 36 hereof.
Landlord may use and commingle the Security Deposit with other funds of
Landlord. Tenant hereby waives the provisions of Section 1950.7 of the
California Civil Code, and all other provisions of any Regulations, now or
hereinafter in force, which restricts the amount or types of claim that a
landlord may make upon a security deposit or imposes upon a landlord (or its
successors) any obligation with respect to the handling or return of security
deposits.
20. LIMITATION OF TENANT'S REMEDIES
The obligations and liability of Landlord to Tenant for any default by Landlord
under the terms of this Lease are not personal obligations of Landlord or of the
individual or other partners of Landlord or its or their partners, directors,
officers, or shareholders, and Tenant agrees to look solely to Landlord's
interest in the Project for the recovery of any amount from Landlord, and shall
not look to other assets of Landlord nor seek recourse against the assets of the
individual or other partners of Landlord or its or their partners, directors,
officers or shareholders. Any lien obtained to enforce any such judgment and any
levy of execution thereon shall be subject and subordinate to any lien, mortgage
or deed of trust on the Project. Under no circumstances shall Tenant have the
right to offset against or recoup Rent or other payments due and to become due
to Landlord hereunder except as expressly provided in this Lease, which Rent and
other payments shall
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be absolutely due and payable hereunder in accordance with the terms hereof. In
no case shall Landlord be liable to Tenant for any lost profits, damage to
business, or any form of special, indirect or consequential damage on account of
any breach of this Lease or otherwise, notwithstanding anything to the contrary
contained in this Lease.
21. ASSIGNMENT AND SUBLETTING
A. (1) GENERAL. This Lease has been negotiated to be and is granted as
an accommodation to Tenant. Accordingly, this Lease is personal to
Tenant, and Tenant's rights granted hereunder do not include the right
to assign this Lease or sublease the Premises, or to receive any excess,
either in installments or lump sum, over the Rent which is expressly
reserved by Landlord as hereinafter provided, except as otherwise
expressly hereinafter provided. Tenant shall not assign or pledge this
Lease or sublet the Premises or any part thereof, whether voluntarily or
by operation of law, or permit the use or occupancy of the Premises or
any part thereof by anyone other than Tenant, or suffer or permit any
such assignment, pledge, subleasing or occupancy, without Landlord's
prior written consent except as provided herein. If Tenant desires to
assign this Lease or sublet any or all of the Premises in the case where
Landlord's consent is required, Tenant shall give Landlord written
notice (the "TRANSFER NOTICE") at least thirty (30) days prior to the
anticipated effective date of the proposed assignment or sublease, which
shall contain all of the information reasonably requested by Landlord to
address Landlord's decision criteria specified hereinafter. Landlord
shall then have a period of ten (10) business days following receipt of
the Transfer Notice to notify Tenant in writing that Landlord elects
either: (i) to terminate this Lease as to the space so affected as of
the date so requested by Tenant; or (ii) to consent to the
proposed assignment or sublease, subject, however, to Landlord's prior
written consent of the proposed assignee or subtenant and of any related
documents or agreements associated with the assignment or sublease. If
Landlord should fail to notify Tenant in writing of such election within
said period, Landlord shall be deemed to have waived option (i) above,
but written consent by Landlord of the proposed assignee or subtenant
shall still be required. If Landlord does not exercise option (i) above,
Landlord's consent to a proposed assignment or sublease shall not be
unreasonably withheld. Consent to any assignment or subletting shall not
constitute consent to any subsequent transaction to which this Paragraph
21 applies. Notwithstanding the foregoing, Landlord hereby waives its
right to recapture a portion of the Premises, as such right is described
in clause (i) above, in the following circumstance only: (X) Such
proposed sublease shall commence during the first thirty-six (36) months
of the Term of this Lease, and (Y) the term of such proposed sublease
shall expire before the expiration of the forty-second (42nd) month
following the Term Commencement Date and no extension options shall be
granted in such sublease, and (Z) Tenant shall at all times during such
period possess and occupy no less than fifty percent (50%) of the
Premises. With respect to any sublease that occurs during the initial
forty-two (42) months of the Term of this Lease, the standard of "sound
financial condition" described as a condition to Landlord's consent
shall be based upon a determination by Landlord, in its reasonable
discretion, that such proposed transferee shall have a tangible net
worth, evidenced by audited financial statements delivered to Landlord
pursuant to the terms of this Lease, that is reasonably sufficient,
taking into account all expected obligations of the transferee with
respect to the proposed transfer and all of its other contingent and
noncontingent obligations, to service when due the obligations of the
transferee with respect to the proposed transfer.
(2) CONDITIONS OF LANDLORD'S CONSENT. Without limiting the other instances
in which it may be reasonable for Landlord to withhold Landlord's
consent to an assignment or subletting, Landlord and Tenant acknowledge
that it shall be reasonable for Landlord to withhold Landlord's consent
in the following instances: if the proposed assignee does not agree to
be bound by and assume the obligations of Tenant under this Lease in
form and substance reasonably satisfactory to Landlord; the use of the
Premises by such proposed assignee or subtenant would not be a Permitted
Use or would violate any exclusivity or other arrangement which Landlord
has with any other tenant or occupant or any Regulation or would
increase the Occupancy Density or Parking Density of the Building or
Project, or would otherwise result in an undesirable tenant mix for the
Project as determined by Landlord; the proposed assignee or subtenant is
not of sound financial condition as determined by Landlord in Landlord's
sole discretion; the proposed assignee or subtenant is a governmental
agency; the proposed assignee or subtenant does not have a good
reputation as a tenant of property or a good business reputation; the
proposed assignee or subtenant is a person with whom Landlord is
negotiating to lease space in the Project or is a present tenant of the
Project; the assignment or subletting would entail any Alterations which
would lessen the value of the leasehold improvements in the Premises or
use of any Hazardous Materials (except as expressly approved in this
Lease) or other noxious use or use which may unreasonably disturb other
tenants of the Project; or Tenant is in default of any obligation of
Tenant under this Lease, or Tenant has defaulted under this Lease on
three (3) or more occasions during any twelve (12) months preceding the
date that Tenant shall request consent. Failure by or refusal of
Landlord to consent to a proposed assignee or subtenant shall not cause
a termination of this Lease. Upon a termination under Paragraph
21.A(1)(i), Landlord may lease the Premises to any party, including
parties with whom Tenant has negotiated an assignment or sublease,
without incurring any liability to Tenant. At the option of Landlord, a
surrender and termination of this Lease shall operate as an assignment
to Landlord of some or all subleases or subtenancies. Landlord shall
exercise this option by giving notice of that assignment to such
subtenants on or before the effective date of the surrender and
termination. In connection with each request for assignment or
subletting, Tenant shall pay to Landlord Landlord's standard fee (which
amount shall not exceed $1,500.00) for approving such requests, as well
as all costs reasonably incurred by Landlord and all costs incurred by
any mortgagee or ground lessor in approving each such request and
effecting any such transfer, including, without limitation, reasonable
attorneys' fees.
(3) PERMITTED TRANSFERS. An "Affiliate" means any entity that (i) controls,
is controlled by, or is under common control with Tenant (ii) results
from the transfer of all or substantially all of Tenant's assets or
stock, or (iii) results from the merger or consolidation of Tenant with
another entity. "Control," as used in the previous sentence, means the
direct or indirect ownership of more than fifty percent (50%) of the
voting securities of an entity or possession of the right to vote more
than fifty percent (50%) of the voting interest in the ordinary
direction of the entity's affairs. Notwithstanding anything to the
contrary contained in this Lease, Landlord's consent is not required for
any assignment of this Lease or sublease of all or a portion of the
Premises to an Affiliate so long as the following conditions are met:
(a) at least five (5) days after any such assignment or sublease,
Landlord receives written notice of such assignment or sublease (as well
as any documents or information reasonably requested by Landlord
regarding the transfer and the transferee in support of the requirements
of this Paragraph 21.A(3)); (b) Tenant is not then in default under this
Lease; (c) if the transfer is an assignment or any other transfer to an
Affiliate other than a sublease, the intended assignee assumes in
writing all of Tenant's obligations under this Lease relating to the
Premises in form satisfactory to Landlord or, if the transfer is a
sublease, the intended sublessee accepts the sublease in form
satisfactory to Landlord; (d) the intended transferee has a tangible net
worth, as evidenced by financial statements delivered to Landlord and
certified by an independent certified public accountant in accordance
with generally accepted accounting principles that are consistently
applied, at least equal to Tenant as of the date of this Lease; (e) the
Premises shall continue to be operated solely for the use specified in
the Basic Lease Information; and (f) Tenant shall pay to Landlord
Landlord's standard fee (which amount shall not exceed $1,500.00) for
approving assignments and subleases and all costs reasonably incurred by
Landlord and all costs incurred by any mortgagee or ground lessor for
such assignment or subletting, including, without limitation, reasonable
attorneys' fees. No transfer to an Affiliate in accordance with this
subparagraph shall relieve Tenant named herein of any obligation under
this Lease or alter the liability of Tenant named herein for the payment
of Rent or for the performance of any other obligation to be performed
by Tenant, including the obligations contained in Paragraph 25 with
respect to any Affiliate.
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B. BONUS RENT. Any Rent or other consideration realized by Tenant under any such
sublease or assignment in excess of the Rent payable hereunder, after
amortization of a reasonable brokerage commission and reasonable attorneys' fees
incurred by Tenant solely in connection with the sublease or assignment,
reasonable, actual out of pocket costs of tenant improvements made solely in
connection with the sublease or assignment and paid for by Tenant, and
reasonable, out-of-pocket marketing costs, shall be divided and paid, fifty
percent (50%) to Tenant, fifty percent (50%) to Landlord. In any subletting or
assignment undertaken by Tenant, Tenant shall diligently seek to obtain the
then-fair market rental amount (as reasonably determined by Landlord and Tenant)
available in the marketplace for comparable space available for leasing (using
as a basis for such determination other Landlord-owned Buildings and Projects of
the same stature and located in the same geographic area in which the Premises
are located).
C. CORPORATION. If Tenant is a corporation, a transfer of corporate shares by
sale, assignment, bequest, inheritance, operation of law or other disposition
(including such a transfer to or by a receiver or trustee in federal or state
bankruptcy, insolvency or other proceedings) resulting in a change in the
present control of such corporation or any of its parent corporations by the
person or persons owning a majority of said corporate shares, shall constitute
an assignment for purposes of this Lease. Notwithstanding anything to the
contrary in this Lease, the transfer of outstanding capital stock or other
listed equity interests, or the purchase of outstanding capital stock or other
listed equity interests, or the purchase of equity interests issued in an
initial public offering of stock, by persons or parties other than "insiders"
within the meaning of the Securities Exchange Act of 1934, as amended, through
the "over-the-counter" market or any recognized national or international
securities exchange shall not be included in determining whether control has
been transferred.
D. UNINCORPORATED ENTITY. If Tenant is a partnership, joint venture,
unincorporated limited liability company or other unincorporated business form,
a transfer of the interest of persons, firms or entities responsible for
managerial control of Tenant by sale, assignment, bequest, inheritance,
operation of law or other disposition, so as to result in a change in the
present control of said entity and/or of the underlying beneficial interests of
said entity and/or a change in the identity of the persons responsible for the
general credit obligations of said entity shall constitute an assignment for all
purposes of this Lease.
E. LIABILITY. No assignment or subletting by Tenant, permitted or otherwise,
shall relieve Tenant of any obligation under this Lease or any guarantor of this
Lease of any liability under its guaranty or alter the primary liability of the
Tenant named herein for the payment of Rent or for the performance of any other
obligations to be performed by Tenant, including obligations contained in
Paragraph 25 with respect to any assignee or subtenant. Landlord may collect
rent or other amounts or any portion thereof from any assignee, subtenant, or
other occupant of the Premises, permitted or otherwise, and apply the net rent
collected to the Rent payable hereunder, but no such collection shall be deemed
to be a waiver of this Paragraph 21, or the acceptance of the assignee,
subtenant or occupant as tenant, or a release of Tenant from the further
performance by Tenant of the obligations of Tenant under this Lease or of any
guarantor. Any assignment or subletting which conflicts with the provisions
hereof shall be void.
22. AUTHORITY
Landlord represents and warrants that it has full right and authority to enter
into this Lease and to perform all of Landlord's obligations hereunder and that
all persons signing this Lease on its behalf are authorized to do. Tenant and
the person or persons, if any, signing on behalf of Tenant, jointly and
severally represent and warrant that Tenant has full right and authority to
enter into this Lease, and to perform all of Tenant's obligations hereunder, and
that all persons signing this Lease on its behalf are authorized to do so.
23. CONDEMNATION
A. CONDEMNATION RESULTING IN TERMINATION. If the whole or any substantial part
of the Premises should be taken or condemned for any public use under any
Regulation, or by right of eminent domain, or by private purchase in lieu
thereof, and the taking would prevent or materially interfere with the Permitted
Use of the Premises, either party shall have the right to terminate this Lease
at its option. If any material portion of the Building or Project is taken or
condemned for any public use under any Regulation, or by right of eminent
domain, or by private purchase in lieu thereof, Landlord may terminate this
Lease at its option. In either of such events, the Rent shall be abated during
the unexpired portion of this Lease, effective when the physical taking of said
Premises shall have occurred.
B. CONDEMNATION NOT RESULTING IN TERMINATION. If a portion of the Project of
which the Premises are a part should be taken or condemned for any public use
under any Regulation, or by right of eminent domain, or by private purchase in
lieu thereof, and the taking prevents or materially interferes with the
Permitted Use of the Premises, and this Lease is not terminated as provided in
Paragraph 23.A. above, the Rent payable hereunder during the unexpired portion
of this Lease shall be reduced, beginning on the date when the physical taking
shall have occurred, to such amount as may be fair and reasonable under all of
the circumstances, but only after giving Landlord credit for all sums received
or to be received by Tenant by the condemning authority, subject to the last
sentence of Paragraph 23.C of this Lease. Notwithstanding anything to the
contrary contained in this Paragraph, if the temporary use or occupancy of any
part of the Premises shall be taken or appropriated under power of eminent
domain during the Term, this Lease shall be and remain unaffected by such taking
or appropriation and Tenant shall continue to pay in full all Rent payable
hereunder by Tenant during the Term; in the event of any such temporary
appropriation or taking, Tenant shall be entitled to receive that portion of any
award which represents compensation for the use of or occupancy of the Premises
during the unexpired Term. In the event a portion or the whole of Tenant's
Premises shall be taken or appropriated under the power of eminent domain or
conveyed in lieu thereof and such restoration cannot be made, in Landlord's sole
opinion, within one hundred eight (180) days from the time of taking, Landlord
shall notify Tenant within sixty (60) days of such taking and Tenant shall have
the right to cancel this Lease by giving Landlord written notice of its
intention to cancel within thirty (30) days of the date of Landlord's notice.
If, however, within sixty (60) days after the date that the nature and extent of
the taking are finally determined, Landlord notifies Tenant that Landlord at its
cost will add on to the remaining Premises so that the area and the approximate
layout of the Premises will be substantially the same after the date of taking
as they were before the date of taking, and Landlord commences the restoration
immediately and completes the restoration within one hundred eighty (180) days
after Landlord so notifies Tenant, this Lease shall continue in full force and
effect without any reduction in Rent, except the abatement made pursuant to this
paragraph.
C. AWARD. Landlord shall be entitled to (and Tenant shall assign to Landlord)
any and all payment, income, rent, award or any interest therein whatsoever
which may be paid or made in connection with such taking or conveyance and
Tenant shall have no claim against Landlord or otherwise for any sums paid by
virtue of such proceedings, whether or not attributable to the value of any
unexpired portion of this Lease, except as expressly provided in this Lease.
Notwithstanding the foregoing, any compensation specifically and separately
awarded Tenant for Tenant's personal property and moving costs, shall be and
remain the property of Tenant.
D. WAIVER OF CCP Section 1265.130. Each party waives the provisions of
California Civil Code Procedure Section 1265.130 allowing either party to
petition the superior court to terminate this Lease as a result of a partial
taking.
24. CASUALTY DAMAGE
A. GENERAL. If the Premises or Building should be damaged or destroyed by fire,
tornado, or other casualty (collectively, "CASUALTY"), Tenant shall give
immediate written notice thereof to Landlord upon learning of the same. Within
thirty (30) days after Landlord's receipt of such notice, Landlord shall notify
Tenant whether in Landlord's good faith estimation material restoration of the
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Premises can reasonably be made within one hundred eighty (180) days from the
date of such notice and receipt of required permits for such restoration.
Landlord's determination shall be binding on Tenant.
B. WITHIN 180 DAYS. If the Premises or Building should be damaged by Casualty to
such extent that material restoration can in Landlord's estimation be reasonably
completed within one hundred eighty (180) days after the date of such notice and
receipt of required permits for such restoration, this Lease shall not
terminate. Provided that insurance proceeds are received by Landlord to fully
repair the damage, Landlord shall proceed to rebuild and repair the Premises
diligently and in the manner determined by Landlord, except that Landlord shall
not be required to rebuild, repair or replace any part of any Alterations which
may have been placed on or about the Premises or paid for by Tenant. If the
Premises are untenantable in whole or in part following such damage, the Rent
payable hereunder during the period in which they are untenantable shall be
abated proportionately.
C. GREATER THAN 180 DAYS. If the Premises or Building should be damaged by
Casualty to such extent that material restoration cannot in Landlord's
estimation be reasonably completed within one hundred eighty (180) days after
the date of such notice and receipt of required permits for such rebuilding or
repair, and such damage materially and adversely interferes with the conduct of
Tenant's business in the Premises, then either Party shall have the right to
cancel this Lease by giving the other party written notice within ten (10) days
from the date of Landlord's notice that material restoration cannot in
Landlord's estimation be reasonably completed within such one hundred eighty
(180) day period. Said cancellation shall be effective thirty (30) days from the
first day that either party gives its notice to cancel. If neither party elects
to so cancel this Lease, Landlord shall proceed to rebuild and repair the
Premises diligently and in the manner determined by Landlord, except that
Landlord shall not be required to rebuild, repair or replace any part of any
Alterations which may have been placed on or about the Premises by Tenant. If
the Premises are untenantable in whole or in part following such damage, the
Rent payable hereunder during the period in which they are untenantable shall be
abated proportionately. Notwithstanding the above, Landlord shall not be
required to rebuild, repair or replace any part of any Alterations which may
have been placed, on or about the Premises or paid for by Tenant. If the
Premises are untenantable in whole or in part following such damage, the Rent
payable hereunder during the period in which they are untenantable shall be
abated proportionately, but only to the extent of rental abatement insurance
proceeds received by Landlord during the time and to the extent the Premises are
unfit for occupancy.
D. TENANT'S FAULT. Notwithstanding anything herein to the contrary, if the
Premises or any other portion of the Building are damaged by Casualty resulting
from the fault, negligence, or breach of this Lease by Tenant or any of Tenant's
Parties, Base Rent and Additional Rent shall not be diminished during the repair
of such damage and Tenant shall be liable to Landlord for the cost and expense
of the repair and restoration of the Building caused thereby to the extent such
cost and expense is not covered by insurance proceeds; provided that Tenant
shall not be liable for that portion of the repair costs for which Landlord was
obligated under the terms of this Lease to carry insurance but failed to carry
such insurance.
E. INSURANCE PROCEEDS. Notwithstanding anything herein to the contrary, if the
Premises or Building are damaged or destroyed and are not fully covered by the
insurance proceeds received by Landlord or if the holder of any indebtedness
secured by a mortgage or deed of trust covering the Premises requires that the
insurance proceeds be applied to such indebtedness, then, Landlord shall
promptly notify Tenant of the same and, in either case, Landlord shall have the
right to terminate this Lease by delivering written notice of termination to
Tenant within thirty (30) days after the date of notice to Landlord that said
damage or destruction is not fully covered by insurance or such requirement is
made by any such holder, as the case may be, whereupon this Lease shall
terminate thirty (30) days after Landlord delivers such notice. In the event
that the Premises are damaged or destroyed and are not fully covered by the
insurance proceeds received by Landlord or if the holder of any indebtedness
secured by a mortgage or deed of trust covering the Premises requires that the
insurance proceeds be applied to such indebtedness, and Landlord consequently
determines not to repair or restore the Premises, Tenant may terminate this
Lease by providing written notice of such termination to Landlord and such
termination shall be effective fifteen (15) days following Landlord's receipt of
such written notice from Tenant.
F. WAIVER. This Paragraph 24 shall be Tenant's sole and exclusive remedy in the
event of damage or destruction to the Premises or the Building. As a material
inducement to Landlord entering into this Lease, Tenant hereby waives any rights
it may have under Sections 1932, 1933(4), 1941 or 1942 of the Civil Code of
California with respect to any destruction of the Premises, Landlord's
obligation for tenantability of the Premises and Tenant's right to make repairs
and deduct the expenses of such repairs, or under any similar law, statute or
ordinance now or hereafter in effect.
G. TENANT'S PERSONAL PROPERTY. In the event of any damage or destruction of the
Premises or the Building, under no circumstances shall Landlord be required to
repair any injury or damage to, or make any repairs to or replacements of,
Tenant's personal property.
25. HOLDING OVER
Unless Landlord expressly consents in writing to Tenant's holding over, Tenant
shall be unlawfully and illegally in possession of the Premises, whether or not
Landlord accepts any rent from Tenant or any other person while Tenant remains
in possession of the Premises without Landlord's written consent. If Tenant
shall retain possession of the Premises or any portion thereof without
Landlord's consent following the expiration of this Lease or sooner termination
for any reason, then Tenant shall pay to Landlord for each day of such retention
the greater of the following: (i) one hundred seventy-five percent (175%) of the
amount of daily rental as of the last month prior to the date of expiration or
earlier termination, or (ii) the amount of the fair market rental as such amount
is reasonably determined by Landlord (Landlord shall use as a basis for its
determination other buildings and projects owned by Landlord, located in the
same geographic area as the Premises, and of the same class and stature as the
Building and Project). Tenant shall also indemnify, defend, protect and hold
Landlord harmless from any loss, liability or cost, including consequential and
incidental damages and reasonable attorneys' fees, incurred by Landlord
resulting from delay by Tenant in surrendering the Premises, including, without
limitation, any claims made by the succeeding tenant founded on such delay.
Acceptance of Rent by Landlord following expiration or earlier termination of
this Lease, or following demand by Landlord for possession of the Premises,
shall not constitute a renewal of this Lease, and nothing contained in this
Paragraph 25 shall waive Landlord's right of reentry or any other right.
Additionally, if upon expiration or earlier termination of this Lease, or
following demand by Landlord for possession of the Premises, Tenant has not
fulfilled its obligation with respect to repairs and cleanup of the Premises or
any other Tenant obligations as set forth in this Lease, then Landlord shall
have the right to perform any such obligations as it deems necessary at Tenant's
sole cost and expense, and any time required by Landlord to complete such
obligations shall be considered a period of holding over and the terms of this
Paragraph 25 shall apply. The provisions of this Paragraph 25 shall survive any
expiration or earlier termination of this Lease.
26. DEFAULT
A. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute an
event of default on the part of Tenant:
(1) ABANDONMENT. Abandonment or vacation of the Premises for a
continuous period in excess of five (5) days. Tenant waives any right to
notice Tenant may have under Section 1951.3 of the Civil Code of the
State of California, the terms of this Paragraph 26.A. being deemed such
notice to Tenant as required by said Section 1951.3.
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(2) NONPAYMENT OF RENT. Failure to pay any installment of Rent or any
other amount due and payable hereunder when said payment is due, such
failure continuing for three (3) days after written notice of such
failure, as to which time is of the essence, provided that Landlord
shall not be required to provide such notice more than once during the
twelve (12) month period commencing with the date of such notice. The
second failure to pay any such amount within three (3) days after said
payment is due during such 12-month period shall be an event of default
hereunder without notice. Such notice shall replace rather than
supplement any statutory notice required under Code of Civil Procedure
Section 1161 or any similar or successor statute.
(3) OTHER OBLIGATIONS. Failure to perform any obligation, agreement or
covenant under this Lease other than those matters specified in
subparagraphs (1) and (2) of this Paragraph 26.A., and in Paragraphs 8,
16, 18 and 25, such failure continuing for thirty (30) days after
written notice of such failure, as to which time is of the essence;
provided, however, that in the event that any such cure cannot
reasonably be completed within such thirty (30) day period and provided
further that Tenant has commenced and is diligently pursuing such cure,
Tenant shall have an additional period of fifteen (15) days to complete
such cure. Notwithstanding anything to the contrary contained in this
Lease, the following shall constitute an event of default under this
Paragraph 26.A(3) without any such notice or lapse of time: (i) failure
to provide an estoppel certificate when and as required under Paragraph
18 hereof; (ii) failure to maintain insurance required under Paragraph 8
hereof; (iii) failure to vacate the Premises upon the expiration or
earlier termination of this Lease; (iv) failure to comply with any
obligation under this Lease pertaining to Hazardous Materials; (v) any
other matter provided for in another subparagraph of this Paragraph 26.A
or for which another time limit is provided elsewhere in this Lease,
including without limitation, under Exhibit C to this Lease.
(4) GENERAL ASSIGNMENT. A general assignment by Tenant for the benefit
of creditors.
(5) BANKRUPTCY. The filing of any voluntary petition in bankruptcy by
Tenant, or the filing of an involuntary petition by Tenant's creditors,
which involuntary petition remains undischarged for a period of thirty
(30) days. If under applicable law, the trustee in bankruptcy or Tenant
has the right to affirm this Lease and continue to perform the
obligations of Tenant hereunder, such trustee or Tenant shall, in such
time period as may be permitted by the bankruptcy court having
jurisdiction, cure all defaults of Tenant hereunder outstanding as of
the date of the affirmance of this Lease and provide to Landlord such
adequate assurances as may be necessary to ensure Landlord of the
continued performance of Tenant's obligations under this Lease.
(6) RECEIVERSHIP. The employment of a receiver to take possession of
substantially all of Tenant's assets or Tenant's leasehold of the
Premises, if such appointment remains undismissed or undischarged for a
period of fifteen (15) days after the order therefor.
(7) ATTACHMENT. The attachment, execution or other judicial seizure of
all or substantially all of Tenant's assets or Tenant's leasehold of the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of fifteen (15) days after the levy thereof.
(8) INSOLVENCY. The admission by Tenant in writing of its inability to
pay its debts as they become due.
B. REMEDIES UPON DEFAULT.
(1) TERMINATION. In the event of the occurrence of any event of default,
Landlord shall have the right to give a written termination notice to
Tenant, and on the date specified in such notice, Tenant's right to
possession shall terminate, and this Lease shall terminate unless on or
before such date all Rent in arrears and all costs and expenses incurred
by or on behalf of Landlord hereunder shall have been paid by Tenant and
all other events of default of this Lease by Tenant at the time existing
shall have been fully remedied to the satisfaction of Landlord. At any
time after such termination, Landlord may recover possession of the
Premises or any part thereof and expel and remove therefrom Tenant and
any other person occupying the same, including any subtenant or
subtenants notwithstanding Landlord's consent to any sublease, by any
lawful means, and again repossess and enjoy the Premises without
prejudice to any of the remedies that Landlord may have under this
Lease, or at law or equity by any reason of Tenant's default or of such
termination. Landlord hereby reserves the right, but shall not have the
obligation, to recognize the continued possession of any subtenant. The
delivery or surrender to Landlord by or on behalf of Tenant of keys,
entry codes, or other means to bypass security at the Premises shall not
terminate this Lease.
(2) CONTINUATION AFTER DEFAULT. Even though an event of default may have
occurred, this Lease shall continue in effect for so long as Landlord
does not terminate Tenant's right to possession under Paragraph 26.B(1)
hereof. Landlord shall have the remedy described in California Civil
Code Section 1951.4 ("Landlord may continue this Lease in effect after
Tenant's breach and abandonment and recover Rent as it becomes due, if
Tenant has the right to sublet or assign, subject only to reasonable
limitations"), or any successor code section. Accordingly, if Landlord
does not elect to terminate this Lease on account of any event of
default by Tenant, Landlord may enforce all of Landlord's rights and
remedies under this Lease, including the right to recover Rent as it
becomes due. Acts of maintenance, preservation or efforts to lease the
Premises or the appointment of a receiver under application of Landlord
to protect Landlord's interest under this Lease or other entry by
Landlord upon the Premises shall not constitute an election to terminate
Tenant's right to possession.
(3) INCREASED SECURITY DEPOSIT. If Tenant is in default under Paragraph
26.A(2) hereof and such default remains uncured for ten (10) days after
such occurrence or such default occurs more than three times in any
twelve (12) month period, Landlord may require that Tenant increase the
Security Deposit to the amount of three times the current month's Rent
at the time of the most recent default if the Security Deposit is less
than the amount of three times the current month's Rent.
C. DAMAGES AFTER DEFAULT. Should Landlord terminate this Lease pursuant to the
provisions of Paragraph 26.B(1) hereof, Landlord shall have the rights and
remedies of a Landlord provided by Section 1951.2 of the Civil Code of the State
of California, or any successor code sections. Upon such termination, in
addition to any other rights and remedies to which Landlord may be entitled
under applicable law or at equity, Landlord shall be entitled to recover from
Tenant: (1) the worth at the time of award of the unpaid Rent and other amounts
which had been earned at the time of termination, (2) the worth at the time of
award of the amount by which the unpaid Rent and other amounts that would have
been earned after the date of termination until the time of award exceeds the
amount of such Rent loss that Tenant proves could have been reasonably avoided;
(3) the worth at the time of award of the amount by which the unpaid Rent and
other amounts for the balance of the Term after the time of award exceeds the
amount of such Rent loss that the Tenant proves could be reasonably avoided; and
(4) any other amount and court costs necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease or which, in the ordinary course of things, would be likely to
result therefrom. The "worth at the time of award" as used in (1) and (2) above
shall be computed at the Applicable Interest Rate (defined below). The "worth at
the time of award" as used in (3) above shall be computed by discounting such
amount at the Federal Discount Rate of the Federal Reserve Bank of San Francisco
at the time of award plus one percent (1%). If this Lease provides for any
periods during the Term during which Tenant is not required to pay Base Rent or
if Tenant otherwise receives a Rent concession, then upon the occurrence of an
event of default, Tenant shall owe to Landlord the full amount of such Base Rent
or value of such Rent concession, plus interest at the Applicable Interest Rate,
calculated from the date that such Base Rent or Rent concession would have been
payable.
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D. LATE CHARGE. In addition to its other remedies, Landlord shall have the right
without notice or demand to add to the amount of any payment required to be made
by Tenant hereunder, and which is not paid and received by Landlord on or before
the first day of each calendar month, an amount equal to an amount equal to six
percent (6%) of the delinquent amount, or $150.00, whichever amount is greater,
for each month or portion thereof that the delinquency remains outstanding to
compensate Landlord for the loss of the use of the amount not paid and the
administrative costs caused by the delinquency, the parties agreeing that
Landlord's damage by virtue of such delinquencies would be extremely difficult
and impracticable to compute and the amount stated herein represents a
reasonable estimate thereof. Any waiver by Landlord of any late charges or
failure to claim the same shall not constitute a waiver of other late charges or
any other remedies available to Landlord.
E. INTEREST. Interest shall accrue on all sums not paid when due hereunder at
the lesser of ten percent (10%) per annum or the maximum interest rate allowed
by law ("APPLICABLE INTEREST RATE") from the due date until paid.
F. REMEDIES CUMULATIVE. All of Landlord's rights, privileges and elections or
remedies are cumulative and not alternative, to the extent permitted by law and
except as otherwise provided herein.
G. REPLACEMENT OF STATUTORY NOTICE REQUIREMENTS. When this Lease requires
service of a notice, that notice shall replace rather than supplement any
equivalent or similar statutory notice, including any notice required by
California Code of Civil Procedure Section 1161 or any similar or successor
statute. When a statute requires service of a notice in a particular manner,
service of that notice (or a similar notice required by this Lease) in the
manner required by this Paragraph 26 shall replace and satisfy the statutory
service-of-notice procedures, including those required by California Code of
Civil Procedure Section 1162 or any similar or successor statute.
27. LIENS
Tenant shall at all times keep the Premises and the Project free from liens
arising out of or related to work or services performed, materials or supplies
furnished or obligations incurred by or on behalf of Tenant or in connection
with work made, suffered or done by or on behalf of Tenant in or on the Premises
or Project. If Tenant shall not, within ten (10) days following the imposition
of any such lien, cause the same to be released of record by payment or posting
of a proper bond, Landlord shall have, in addition to all other remedies
provided herein and by law, the right, but not the obligation, to cause the same
to be released by such means as Landlord shall deem proper, including payment of
the claim giving rise to such lien. All sums paid by Landlord on behalf of
Tenant and all expenses incurred by Landlord in connection therefor shall be
payable to Landlord by Tenant on demand with interest at the Applicable Interest
Rate as Additional Rent. Landlord shall have the right at all times to post and
keep posted on the Premises any notices permitted or required by law, or which
Landlord shall deem proper, for the protection of Landlord, the Premises, the
Project and any other party having an interest therein, from mechanics' and
materialmen's liens, and Tenant shall give Landlord not less than ten (10)
business days prior written notice of the commencement of any work in the
Premises or Project which could lawfully give rise to a claim for mechanics' or
materialmen's liens to permit Landlord to post and record a timely notice of
non-responsibility, as Landlord may elect to proceed or as the law may from time
to time provide, for which purpose, if Landlord shall so determine, Landlord may
enter the Premises. Tenant shall not remove any such notice posted by Landlord
without Landlord's consent, and in any event not before completion of the work
which could lawfully give rise to a claim for mechanics' or materialmen's liens.
28. INTENTIONALLY OMITTED
29. TRANSFERS BY LANDLORD
In the event of a sale or conveyance by Landlord of the Building or a
foreclosure by any creditor of Landlord, the same shall operate to release
Landlord from any liability upon any of the covenants or conditions, express or
implied, herein contained in favor of Tenant, to the extent required to be
performed after the passing of title to Landlord's successor-in-interest. In
such event, Tenant agrees to look solely to the responsibility of the
successor-in-interest of Landlord under this Lease with respect to the
performance of the covenants and duties of "Landlord" to be performed after the
passing of title to Landlord's successor-in-interest. This Lease shall not be
affected by any such sale and Tenant agrees to attorn to the purchaser or
assignee. Landlord's successor(s)-in-interest shall not have liability to Tenant
with respect to the failure to perform any of the obligations of "Landlord," to
the extent required to be performed prior to the date such
successor(s)-in-interest became the owner of the Building.
30. RIGHT OF LANDLORD TO PERFORM TENANT'S COVENANTS
All covenants and agreements to be performed by Tenant under any of the terms of
this Lease shall be performed by Tenant at Tenant's sole cost and expense and
without any abatement of Rent. If Tenant shall fail to pay any sum of money,
other than Base Rent, required to be paid by Tenant hereunder or shall fail to
perform any other act on Tenant's part to be performed hereunder, including
Tenant's obligations under Paragraph 11 hereof, and such failure shall continue
for fifteen (15) days after notice thereof by Landlord, in addition to the other
rights and remedies of Landlord, Landlord may make any such payment and perform
any such act on Tenant's part. In the case of an emergency, no prior
notification by Landlord shall be required. Landlord may take such actions
without any obligation and without releasing Tenant from any of Tenant's
obligations. All sums so paid by Landlord and all incidental costs incurred by
Landlord and interest thereon at the Applicable Interest Rate, from the date of
payment by Landlord, shall be paid to Landlord on demand as Additional Rent.
31. WAIVER
If either Landlord or Tenant waives the performance of any term, covenant or
condition contained in this Lease, such waiver shall not be deemed to be a
waiver of any subsequent breach of the same or any other term, covenant or
condition contained herein, or constitute a course of dealing contrary to the
expressed terms of this Lease. The acceptance of Rent by Landlord (including,
without limitation, through any "lockbox") shall not constitute a waiver of any
preceding breach by Tenant of any term, covenant or condition of this Lease,
regardless of Landlord's knowledge of such preceding breach at the time Landlord
accepted such Rent. Failure by Landlord to enforce any of the terms, covenants
or conditions of this Lease for any length of time shall not be deemed to waive
or decrease the right of Landlord to insist thereafter upon strict performance
by Tenant. Waiver by Landlord of any term, covenant or condition contained in
this Lease may only be made by a written document signed by Landlord, based upon
full knowledge of the circumstances.
32. NOTICES
Each provision of this Lease or of any applicable governmental laws, ordinances,
regulations and other requirements with reference to sending, mailing, or
delivery of any notice or the making of any payment by Landlord or Tenant to the
other shall be deemed to be complied with when and if the following steps are
taken:
A. RENT. All Rent and other payments required to be made by Tenant to Landlord
hereunder shall be payable to Landlord at Landlord's Remittance Address set
forth in the Basic Lease Information, or at such other address as Landlord may
specify from time to time by written notice delivered in accordance herewith.
Tenant's obligation to pay Rent and any other amounts to Landlord under the
terms of this Lease shall not be deemed satisfied until such Rent and other
amounts have been actually received by Landlord.
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B. OTHER. All notices, demands, consents and approvals which may or are required
to be given by either party to the other hereunder shall be in writing and
either personally delivered, sent by commercial overnight courier, mailed,
certified or registered, postage prepaid or sent by facsimile with confirmed
receipt (and with an original sent by commercial overnight courier), and in each
case addressed to the party to be notified at the Notice Address for such party
as specified in the Basic Lease Information or to such other place as the party
to be notified may from time to time designate by at least fifteen (15) days
notice to the notifying party. Notices shall be deemed served upon receipt or
refusal to accept delivery. Tenant appoints as its agent to receive the service
of all default notices and notice of commencement of unlawful detainer
proceedings the person in charge of or apparently in charge of occupying the
Premises at the time, and, if there is no such person, then such service may be
made by attaching the same on the main entrance of the Premises.
C. REQUIRED NOTICES. Upon learning of the following circumstances, Tenant shall
promptly notify Landlord in writing of any notice of a violation or a potential
or alleged violation of any Regulation that relates to the Premises or the
Project, or of any inquiry, investigation, enforcement or other action that is
instituted or threatened by any governmental or regulatory agency against Tenant
or any other occupant of the Premises, or any claim that is instituted or
threatened by any third party that relates to the Premises or the Project.
33. ATTORNEYS' FEES
If Landlord places the enforcement of this Lease, or any part thereof, or the
collection of any Rent due, or to become due hereunder, or recovery of
possession of the Premises in the hands of an attorney, Tenant shall pay to
Landlord, upon demand, Landlord's reasonable attorneys' fees and court costs,
whether incurred without trial, at trial, appeal or review. In any action which
Landlord or Tenant brings to enforce its respective rights hereunder, the
unsuccessful party shall pay all costs incurred by the prevailing party
including reasonable attorneys' fees, to be fixed by the court, and said costs
and attorneys' fees shall be a part of the judgment in said action.
34. SUCCESSORS AND ASSIGNS
This Lease shall be binding upon and inure to the benefit of Landlord, its
successors and assigns, and shall be binding upon and inure to the benefit of
Tenant, its successors, and to the extent assignment is approved by Landlord as
provided hereunder, Tenant's assigns.
35. FORCE MAJEURE
If performance by a party of any portion of this Lease is made impossible by any
prevention, delay, or stoppage caused by strikes, lockouts, labor disputes, acts
of God, inability to obtain services, labor, or materials or reasonable
substitutes for those items, government actions, civil commotions, fire or other
casualty, or other causes beyond the reasonable control of the party obligated
to perform, performance by that party for a period equal to the period of that
prevention, delay, or stoppage is excused. Tenant's obligation to pay Rent,
however, is not excused by this Paragraph 35.
36. SURRENDER OF PREMISES
Tenant shall, upon expiration or sooner termination of this Lease, surrender the
Premises to Landlord in the same condition as existed on the date Tenant
originally took possession thereof, reasonable wear and tear excepted,
including, but not limited to, all interior walls cleaned, all holes in walls
repaired and all floors cleaned, waxed, and free of any Tenant-introduced
marking or painting, all to the reasonable satisfaction of Landlord. Tenant
shall remove all of its debris from the Project. At or before the time of
surrender, Tenant shall comply with the terms of Paragraph 12.A. hereof with
respect to Alterations to the Premises and all other matters addressed in such
Paragraph. If the Premises are not so surrendered at the expiration or sooner
termination of this Lease, the provisions of Paragraph 25 hereof shall apply.
All keys to the Premises or any part thereof shall be surrendered to Landlord
upon expiration or sooner termination of the Term. Tenant shall give written
notice to Landlord at least thirty (30) days prior to vacating the Premises and
shall meet with Landlord for a joint inspection of the Premises at the time of
vacating at a mutually agreeable time, but nothing contained herein shall be
construed as an extension of the Term or as a consent by Landlord to any holding
over by Tenant. In the event of Tenant's failure to participate in such joint
inspection, Landlord's inspection at or after Tenant's vacating the Premises
shall conclusively be deemed correct for purposes of determining Tenant's
responsibility for repairs and restoration. Any delay caused by Tenant's failure
to carry out its obligations under this Paragraph 36 beyond the term hereof,
shall constitute unlawful and illegal possession of Premises under Paragraph 25
hereof.
37. PARKING
So long as Tenant is occupying the Premises, Tenant and Tenant's Parties
shall have the right to use up to the number of parking spaces specified in the
Basic Lease Information on an unreserved, nonexclusive, first come, first served
basis, for passenger-size automobiles, in the parking areas in the Project
designated from time to time by Landlord for use in common by tenants of the
Building. The parking rights granted under this Paragraph 37 are personal to
Tenant and are not transferable except: (i) pursuant to the terms of a sublease
or assignment which expressly transfers such parking rights and which has been
approved in writing by Landlord in accordance with the terms of this Lease, (ii)
a Permitted Transfer, provided that Tenant notify Landlord in writing of such
transfer of parking privileges, or (iii) with the express written consent of
Landlord which consent shall be granted in Landlord's sole discretion.
Tenant may request additional parking spaces from time to time and if
Landlord in its sole discretion agrees to make such additional spaces available
for use by Tenant, such spaces shall be provided on a month-to-month unreserved
and nonexclusive basis (unless otherwise agreed in writing by Landlord), and
subject to such parking charges as Landlord shall determine, and shall otherwise
be subject to such terms and conditions as Landlord may require.
Tenant shall at all times comply and shall cause all Tenant's Parties and
visitors to comply with all Regulations and any rules and regulations
established from time to time by Landlord relating to parking at the Project,
including any keycard, sticker or other identification or entrance system, and
hours of operation, as applicable.
Landlord shall have no liability for any damage to property or other items
located in the parking areas of the Project, nor for any personal injuries or
death arising out of the use of parking areas in the Project by Tenant or any
Tenant's Parties. Without limiting the foregoing, if Landlord arranges for the
parking areas to be operated by an independent contractor not affiliated with
Landlord, Tenant acknowledges that Landlord shall have no liability for claims
arising through acts or omissions of such independent contractor. In all events,
Tenant agrees to look first to its insurance carrier and to require that
Tenant's Parties look first to their respective insurance carriers for payment
of any losses sustained in connection with any use of the parking areas.
Landlord reserves the right to assign specific spaces, and to reserve spaces
for visitors, small cars, disabled persons or for other tenants or guests, and
Tenant shall not park and shall not allow Tenant's Parties to park in any such
assigned or reserved spaces. Tenant may validate visitor parking by such method
as Landlord may approve, at the validation rate from time to time generally
applicable to visitor parking. Landlord also reserves the right to alter,
modify, relocate or close all or any portion of the parking areas in order to
make repairs or perform maintenance service, or to restripe or renovate the
parking areas, or if required by casualty, condemnation (subject to Tenant's
right of termination provided in Paragraph 23 hereof), act of God, Regulations
or for any other reason deemed reasonable by Landlord.
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After the initial Term hereof, Tenant shall pay to Landlord (or Landlord's
parking contractor, if so directed in writing by Landlord), as Additional Rent
hereunder, the monthly charges established from time to time by Landlord for
parking in such parking areas (which shall initially be the charge specified in
the Basic Lease Information, as applicable). Tenant shall pay to Landlord as
Additional Rent hereunder, the monthly charge established by Landlord then in
effect for any reserved parking spaces requested by Tenant and granted by
Landlord, if any. Landlord shall have no obligation to provide such reserved
parking to Tenant during the Term hereof or any extension hereto. Such parking
charges shall be payable in advance with Tenant's payment of Basic Rent. No
deductions from the monthly parking charge shall be made for days on which the
Tenant does not use any of the parking spaces entitled to be used by Tenant.
38. MISCELLANEOUS
A. GENERAL. The term "Tenant" or any pronoun used in place thereof shall
indicate and include the masculine or feminine, the singular or plural number,
individuals, firms or corporations, and their respective successors, executors,
administrators and permitted assigns, according to the context hereof.
B. TIME. Time is of the essence regarding this Lease and all of its provisions.
C. CHOICE OF LAW. This Lease shall in all respects be governed by the laws of
the State of California.
D. ENTIRE AGREEMENT. This Lease, together with its Exhibits, addenda and
attachments and the Basic Lease Information, contains all the agreements of the
parties hereto and supersedes any previous negotiations. There have been no
representations made by the Landlord or understandings made between the parties
other than those set forth in this Lease and its Exhibits, addenda and
attachments and the Basic Lease Information.
E. MODIFICATION. This Lease may not be modified except by a written instrument
signed by the parties hereto. Tenant accepts the area of the Premises as
specified in the Basic Lease Information as the approximate area of the Premises
for all purposes under this Lease, and acknowledges and agrees that no other
definition of the area (rentable, usable or otherwise) of the Premises shall
apply. Tenant shall in no event be entitled to a recalculation of the square
footage of the Premises, rentable, usable or otherwise, and no recalculation, if
made, irrespective of its purpose, shall reduce Tenant's obligations under this
Lease in any manner, including without limitation the amount of Base Rent
payable by Tenant or Tenant's Proportionate Share of the Building and of the
Project.
F. SEVERABILITY. If, for any reason whatsoever, any of the provisions hereof
shall be unenforceable or ineffective, all of the other provisions shall be and
remain in full force and effect.
G. RECORDATION. Tenant shall not record this Lease or a short form memorandum
hereof.
H. EXAMINATION OF LEASE. Submission of this Lease to Tenant does not constitute
an option or offer to lease and this Lease is not effective otherwise until
execution and delivery by both Landlord and Tenant.
I. ACCORD AND SATISFACTION. No payment by Tenant of a lesser amount than the
total Rent due nor any endorsement on any check or letter accompanying any check
or payment of Rent shall be deemed an accord and satisfaction of full payment of
Rent, and Landlord may accept such payment without prejudice to Landlord's right
to recover the balance of such Rent or to pursue other remedies. All offers by
or on behalf of Tenant of accord and satisfaction are hereby rejected in
advance.
J. EASEMENTS. Landlord may grant easements on the Project and dedicate for
public use portions of the Project without Tenant's consent; provided that no
such grant or dedication shall materially interfere with Tenant's Permitted Use
of the Premises. Upon Landlord's request, Tenant shall execute, acknowledge and
deliver to Landlord documents, instruments, maps and plats necessary to
effectuate Tenant's covenants hereunder.
K. DRAFTING AND DETERMINATION PRESUMPTION. The parties acknowledge that this
Lease has been agreed to by both the parties, that both Landlord and Tenant have
consulted with attorneys with respect to the terms of this Lease and that no
presumption shall be created against Landlord because Landlord drafted this
Lease. Except as otherwise specifically set forth in this Lease, with respect to
any consent, determination or estimation of Landlord required or allowed in this
Lease or requested of Landlord, Landlord's consent, determination or estimation
shall be given or made solely by Landlord in Landlord's good faith opinion,
whether or not objectively reasonable. If Landlord fails to respond to any
request for its consent within the time period, if any, specified in this Lease,
Landlord shall be deemed to have disapproved such request, except as otherwise
expressly provided in this Lease.
L. EXHIBITS. The Basic Lease Information, and the Exhibits, addenda and
attachments attached hereto are hereby incorporated herein by this reference and
made a part of this Lease as though fully set forth herein.
M. NO LIGHT, AIR OR VIEW EASEMENT. Any diminution or shutting off of light, air
or view by any structure which may be erected on lands adjacent to or in the
vicinity of the Building shall in no way affect this Lease or impose any
liability on Landlord.
N. NO THIRD PARTY BENEFIT. This Lease is a contract between Landlord and Tenant
and nothing herein is intended to create any third party benefit.
O. QUIET ENJOYMENT. Upon payment by Tenant of the Rent, and upon the observance
and performance of all of the other covenants, terms and conditions on Tenant's
part to be observed and performed, Tenant shall peaceably and quietly hold and
enjoy the Premises for the term hereby demised without hindrance or interruption
by Landlord or any other person or persons lawfully or equitably claiming by,
through or under Landlord, subject, nevertheless, to all of the other terms and
conditions of this Lease. Landlord shall not be liable for any hindrance,
interruption, interference or disturbance by other tenants or third persons, nor
shall Tenant be released from any obligations under this Lease because of such
hindrance, interruption, interference or disturbance.
P. COUNTERPARTS. This Lease may be executed in any number of counterparts, each
of which shall be deemed an original.
Q. MULTIPLE PARTIES. If more than one person or entity is named herein as
Tenant, such multiple parties shall have joint and several responsibility to
comply with the terms of this Lease.
R. PRORATIONS. Any Rent or other amounts payable to Landlord by Tenant hereunder
for any fractional month shall be prorated based on a month of 30 days. As used
herein, the term "fiscal year" shall mean the calendar year or such other fiscal
year as Landlord may deem appropriate.
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39. ADDITIONAL PROVISIONS
A. RENT.
Subject to the provisions of Paragraphs 2.B, Base Rent, net of Operating
Expenses per Paragraph 7 of this Lease, for the Premises shall be as follows:
<TABLE>
<S> <C>
From the Term Commencement Date through $516,159.00 per month plus operating expenses per Paragraph 7 of
the end of the twelfth (12th) month this Lease. Operating Expenses for calendar year 2000 are
following the Term Commencement Date: estimated to be $183,289.00 per month.
Month 13 following the Term $531,643.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 24: this Lease
Month 25 following the Term $547,593.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 36: this Lease.
Month 37 following the Term $564,020.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 48: this Lease.
Month 49 following the Term $580,941.00 per month plus operating expenses per Paragraph 7
of Commencement Date through Month 60: this Lease.
Month 61 following the Term $598,369.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 72: this Lease.
Month 73 following the Term $616,320.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 84: this Lease.
Month 84 following the Term $634,810.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 96: this Lease.
Month 97 following the Term $653,854.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 108: this Lease
Month 109 following the Term $673,470.00 per month plus operating expenses per Paragraph 7 of
Commencement Date through Month 120: this Lease.
</TABLE>
B. EARLY ACCESS. Provided that Tenant does not interfere whatsoever with the
construction of the Base Building Work (each as described in EXHIBIT C hereto),
Landlord shall provide access to Tenant to the Premises on March 15, 2000,
during normal business hours after reasonable prior notice to Landlord for
purposes of installing furniture, fixtures and equipment (including network
cabling and telecommunications equipment to the extent such installation is
approved by Landlord in writing) and to commence construction of the Tenant
Improvements therein in the Premises, with all terms and conditions of this
Lease in full force and effect, excluding payment of Rent and Operating
Expenses. Any interference by Tenant or any of Tenant's Parties with the
construction of the Base Building Work shall constitute a Tenant Delay as
defined in EXHIBIT C and shall constitute a delay by Tenant for purposes of
Paragraph 3 hereof. Landlord and Tenant shall each reasonably cooperate with the
other to attempt to reasonably coordinate their respective construction
schedules to accommodate the early access by Tenant contemplated by this
Paragraph 39.B.
C. OPTION TO RENEW. Tenant shall, provided this Lease is in full force and
effect and Tenant is not and has not been in default under any of the terms and
conditions of this Lease, have two (2) successive options to renew this Lease
for a term of five (5) years each, for the Premises in "as is" condition and on
the same terms and conditions set forth in this Lease, except as modified by the
terms, covenants and conditions set forth below:
(1) If Tenant elects to exercise such option, then Tenant shall
provide Landlord with written notice no earlier than the date
which is Two Hundred Seventy (270) days prior to the expiration
of the then current term of this Lease, but no later than 5:00
p.m. (Pacific Standard Time) on the date which is one hundred
eighty (180) days prior to the expiration of the then current
term of this Lease. If Tenant fails to provide such notice,
Tenant shall have no further or additional right to extend or
renew the term of this Lease.
(2) The Base Rent in effect at the expiration of the then current
term of this Lease shall be increased to reflect the current fair
market rental for comparable space in the Building or Project and
in other similar buildings in the same rental market as of the
date the renewal term is to commence, taking into account the
specific provisions of this Lease which will remain constant, and
the Building amenities, location, identity, quality, age,
conditions, term of lease, tenant improvements, services
provided, and other pertinent items.
(3) Landlord shall advise Tenant of the new Base Rent for the
Premises for the applicable renewal term which will be based on
Landlord's determination of fair market rental value no later
than fifteen (15) days after receipt of notice of Tenant's
exercise of its option to renew. Tenant shall have forty-five
(45) days after receipt of such notification from Landlord to
accept the new Base Rent. If Tenant does not accept Landlord's
determination of the new Base Rent within such forty-five (45)
day period, this option shall be null and void, and Landlord
shall have no further obligation to Tenant and may enter into a
lease for the Premises with a third party on such terms and
conditions as Landlord may determine in its sole discretion.
(4) Notwithstanding anything to the contrary contained in this
Paragraph, in no event shall the Base Rent for any renewal term
be less than the Base Rent in effect at the expiration of the
previous term. In addition, Landlord shall have no obligation to
provide or pay for any tenant improvements or brokerage
commissions during any renewal term.
(5) Tenant's right to exercise any options to renew under this
Paragraph shall be conditioned upon Tenant occupying the entire
Premises and the same not being occupied by any assignee,
subtenant or licensee other than Tenant or its affiliate at the
time of exercise of any option and commencement of the renewal
term. Tenant's exercise of any option to renew shall constitute a
representation by Tenant to Landlord that as of the date of
exercise of the option and the
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commencement of the applicable renewal term, Tenant does not
intend to seek to assign this Lease in whole or in part, or
sublet all or any portion of the Premises.
(6) Any exercise by Tenant of any option to renew under this
Paragraph shall be irrevocable. If requested by Landlord, Tenant
agrees to execute a lease amendment or, at Landlord's option, a
new lease agreement on Landlord's then standard lease form for
the Building reflecting the foregoing terms and conditions (which
new lease form shall be reasonably acceptable to Tenant and shall
provide to Tenant the benefit of its bargain contained herein),
prior to the commencement of the renewal term. The options to
renew granted under this Paragraph are not transferable; the
parties hereto acknowledge and agree that they intend that each
option to renew this Lease under this Paragraph shall be
"personal" to the specific Tenant named in this Lease and that in
no event will any assignee or sublessee have any rights to
exercise such options to renew.
(7) If more than one renewal option is provided above, the exercise
of each renewal option shall be contingent upon Tenant exercising
the prior renewal option. Only one renewal option may be
exercised at a time. As each renewal option provided for above is
exercised, the number of renewal options remaining to be
exercised is reduced by one and upon exercise of the last
remaining renewal option Tenant shall have no further right to
extend the term of this Lease.
D. TEMPORARY PREMISES.
(1) PHASE I TEMPORARY PREMISES. Prior to delivery by Landlord to
Tenant of the Phase II Temporary Premises and the Premises,
Landlord shall deliver to Tenant possession of the premises
depicted on EXHIBIT D, attached hereto (the "PHASE I TEMPORARY
PREMISES"), which Phase I Temporary Premises comprise
approximately seven thousand eight hundred sixty-four (7,864)
rentable square feet. The terms and conditions of this Lease
shall apply to Tenant's possession and use of the Phase I
Temporary Premises; provided, however, that Rent due and payable
commencing on the Phase I Temporary Premises Term Commencement
Date (as defined herein) through the date Tenant surrenders
possession of the Phase I Temporary Premises to Landlord as
provided herein shall be an amount equal to Twenty-Three Thousand
Five Hundred Ninety-two and No/100 ($23,592.00) per month. If the
obligation for payment of Base Rent for the Phase I Temporary
Premises commences on a day other than the first day of a month,
then such Base Rent shall be prorated and the prorated
installment shall be paid on the first day of the calendar month
next succeeding the Phase I Temporary Premises Term Commencement
Date (as defined herein). The term commencement date ("PHASE I
TEMPORARY PREMISES TERM COMMENCEMENT DATE") with respect to the
Phase I Temporary Premises shall be the date Landlord delivers
possession of the Phase I Temporary Premises to Tenant. Landlord
hereby agrees to install Phase I Temporary Premises Building
standard carpeting in the Phase I Temporary Premises prior to
January 1, 2000. By taking possession of the Phase I Temporary
Premises, Tenant accepts them "as is," as being in good order,
condition and repair and the condition in which Landlord is
obligated to deliver them and suitable for the Permitted Use
(with respect to the Phase I Temporary Premises) and Tenant's
intended operations in the Phase I Temporary Premises, whether or
not any notice of acceptance is given. Landlord shall make
commercially reasonable efforts to deliver possession of the
Phase I Temporary Premises to Tenant on or before January 1,
2000. Tenant's taking of possession of the Phase I Temporary
Premises or any part thereof shall constitute Tenant's
confirmation of substantial completion thereof for all purposes
hereof. If for any reason Landlord cannot deliver possession of
the Phase I Temporary Premises to Tenant on the scheduled Phase I
Temporary Premises Term Commencement Date, Landlord shall not be
subject to any liability therefor, nor shall Landlord be in
default hereunder nor shall such failure affect the validity of
this Lease, and unless the Premises have been delivered to
Tenant, Tenant agrees to accept possession of the Phase I
Temporary Premises at such time as such improvements have been
substantially completed, which date shall then be deemed the
Phase I Temporary Premises Term Commencement Date. Within thirty
(30) days following substantial completion of the Tenant
Improvements (as defined in EXHIBIT C hereto), Tenant shall
surrender possession of the Temporary Premises in accordance with
Paragraph 36 hereof.
(2) PHASE II TEMPORARY PREMISES. Prior to delivery by Landlord to
Tenant of the Premises, Landlord shall deliver to Tenant
possession of the premises depicted on EXHIBIT E, attached hereto
(the "PHASE II TEMPORARY PREMISES"), which Phase II Temporary
Premises comprise approximately thirty-nine thousand forty-three
(39,043) rentable square feet. The terms and conditions of this
Lease shall apply to Tenant's possession and use of the Phase II
Temporary Premises; provided, however, that Base Rent due and
payable commencing on the Phase II Temporary Premises Term
Commencement Date (as defined herein) through the date Tenant
surrenders possession of the Phase II Temporary Premises to
Landlord as provided herein shall be an amount equal to
Ninety-Five Thousand Six Hundred Fifty-Five and 35/100
($95,655.35) per month. If the obligation for payment of Base
Rent for the Phase II Temporary Premises commences on a day other
than the first day of a month, then such Base Rent shall be
prorated and the prorated installment shall be paid on the first
day of the calendar month next succeeding the Phase II Temporary
Premises Term Commencement Date (as defined herein). The term
commencement date ("PHASE II TEMPORARY PREMISES TERM COMMENCEMENT
DATE") with respect to the Phase II Temporary Premises shall be
the date Landlord delivers possession of the Phase II Temporary
Premises. On or about January 31, 2000, Landlord shall provide to
Tenant a written description of the tenant improvements to be
constructed by Landlord in the Phase II Temporary Premises. By
taking possession of the Phase II Temporary Premises, Tenant
accepts them "as is," as being in good order, condition and
repair and the condition in which Landlord is obligated to
deliver them and suitable for the Permitted Use (with respect to
the Phase II Temporary Premises) and Tenant's intended operations
in the Phase II Temporary Premises, whether or not any notice of
acceptance is given. Landlord shall make commercially reasonable
efforts to deliver possession of the Phase II Temporary Premises
to Tenant on or before April 1, 2000. Tenant's taking of
possession of the Phase II Temporary Premises or any part thereof
shall constitute Tenant's confirmation of substantial completion
thereof for all purposes hereof, whether or not substantial
completion of the Phase II Temporary Premises Building or Project
shall have occurred. If for any reason Landlord cannot deliver
possession of the Phase II Temporary Premises to Tenant on the
scheduled Phase II Temporary Premises Term Commencement Date,
Landlord shall not be subject to any liability therefor, nor
shall Landlord be in default hereunder nor shall such failure
affect the validity of this Lease, and unless the Phase II
Temporary Premises have been delivered to Tenant, Tenant agrees
to accept possession of the Phase II Temporary Premises at such
time as such improvements have been substantially completed,
which date shall then be deemed the Phase II Temporary Premises
Term Commencement Date. Tenant shall not be liable for any Rent
for any period prior to the Phase II Temporary Premises Term
Commencement Date (but without affecting any obligations of
Tenant under any improvement agreement appended to this Lease).
In the event of any dispute as to substantial completion of work
performed or required to be performed by Landlord with respect to
the Phase II Temporary Premises, the certificate of Landlord's
architect or general contractor shall be conclusive. Within
thirty (30) days following substantial completion of the Tenant
Improvements (as defined in EXHIBIT C hereto), Tenant shall
surrender possession of the Phase II Temporary Premises in
accordance with Paragraph 36 hereof.
E. LETTER OF CREDIT.
(1) DELIVERY OF LETTER OF CREDIT. In lieu of depositing a security
deposit with Landlord, Tenant shall, on execution of this Lease,
deliver to Landlord and cause to be in effect during the Lease
Term an unconditional, irrevocable letter of credit
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<PAGE> 23
("LOC") in the amount specified for the Security Deposit in the
Basic Lease Information, as it may be increased as provided in
this Lease (the "LOC AMOUNT") for an initial term of the LOC of
three (3) years and thereafter shall renew automatically from
year to year through 30 days beyond the expiration date of this
Lease or any extension thereto. The LOC shall be in a form
acceptable to Landlord and shall be issued by an LOC bank
selected by Tenant and acceptable to Landlord. The text of the
LOC shall expressly state that the LOC shall survive the
termination of this Lease. An LOC bank is a bank that accepts
deposits, maintains accounts, has a local office that will
negotiate a letter of credit, and the deposits of which are
insured by the Federal Deposit Insurance Corporation. Tenant
shall pay all expenses, points, or fees incurred by Tenant in
obtaining the LOC. The LOC shall not be mortgaged, assigned or
encumbered in any manner whatsoever by Tenant without the prior
written consent of Landlord. Tenant acknowledges that Landlord
has the right to transfer or mortgage its interest in the
Project, the Building and in this Lease and Tenant agrees that in
the event of any such transfer or mortgage, Landlord shall have
the right to transfer or assign the LOC and/or the LOC Security
Deposit (as defined below) to the transferee or mortgagee, and in
the event of such transfer, Tenant shall look solely to such
transferee or mortgagee for the return of the LOC and/or the LOC
Security Deposit. The maximum amount of any transfer fee
associated with such transfer shall not be in excess of
reasonable transfer fees customarily required by issuing banks,
which about shall be expressly stated in the terms of the LOC,
and shall be payable by Landlord.
(2) REPLACEMENT OF LETTER OF CREDIT. Tenant may, from time to time,
replace any existing LOC with a new LOC if the new LOC (a)
becomes effective at least thirty (30) days before expiration of
the LOC that it replaces; (b) is in the required LOC amount; (c)
is issued by an LOC bank acceptable to Landlord; and (d)
otherwise complies with the requirements of this Paragraph 39.E.
(3) LANDLORD'S RIGHT TO DRAW ON LETTER OF CREDIT. Landlord shall hold
the LOC as security for the performance of Tenant's obligations
under this Lease. If, after notice and failure to cure within any
applicable period provided in this Lease, Tenant is in default
pursuant to this Lease, Landlord may, without prejudice to any
other remedy it has, draw on that portion of the LOC necessary to
(a) pay Rent or other sum in default; (b) pay or reimburse
Landlord for any amount that Landlord may spend or become
obligated to spend in exercising Landlord's rights under
Paragraph 30 (Right of Landlord to Perform Tenant's Covenant);
and/or (c) compensate Landlord for any expense, loss, or damage
that Landlord may suffer because of Tenant's default. If Tenant
fails to renew or replace the LOC at least thirty (30) days
before its expiration, Landlord may, without prejudice to any
other remedy it has, draw on the entire amount of the LOC.
(4) LOC SECURITY DEPOSIT. Any amount of the LOC that is drawn on by
Landlord but not applied by Landlord shall be held by Landlord as
a security deposit (the "LOC SECURITY DEPOSIT") in accordance
with Paragraph 19 of this Lease.
(5) RESTORATION OF LETTER OF CREDIT AND LOC SECURITY DEPOSIT. If
Landlord draws on any portion of the LOC and/or applies all or
any portion of such draw, Tenant shall, within five (5) business
days after demand by Landlord, either (a) deposit cash with
Landlord in an amount that, when added to the amount remaining
under the LOC and the amount of any LOC Security Deposit, shall
equal the LOC Amount then required under this Paragraph 39.E; or
(b) reinstate the LOC to the full LOC Amount.
(6) REDUCTION OF LETTER OF CREDIT. At least fifteen (15) business
days prior to the dates specified in each of clauses a. through
d. below, Tenant shall deliver to Landlord for review Tenant's
financial statements prepared in accordance with generally
accepted accounting principles and audited by a nationally
recognized public accounting firm acceptable to Landlord, and any
other financial information requested by Landlord ("TENANT'S
FINANCIAL INFORMATION") If: (i) Tenant has a tangible net worth,
which "tangible net worth" shall be determined by Landlord in its
sole discretion and shall mean assets less intangible assets and
total liabilities, with intangible asserts including nonmaterial
benefits such as goodwill, patents, copyrights, and trademarks,
in excess of One Hundred Seventy five Million and No/100 Dollars
($175,000,000.00) as reflected in Tenant's Financial Information,
which amount shall be determined by Landlord to its satisfaction
prior to any reduction in the LOC Amount; and (ii) Tenant's
Financial Information reflects four (4) consecutive calendar
quarters of profitability, as determined by Landlord, during the
time period immediately preceding Tenant's request for reduction
in the LOC Amount described in this subparagraph during the time
period immediately preceding Tenant's request for reduction in
the LOC Amount, as such profitability is determined by Landlord,
then the following reductions in the LOC Amount may be made in
accordance with the terms of this Paragraph 39.E(6):
a. At any time after the end of the thirty-sixth
(36th) month following the Term Commencement Date,
the LOC Amount may be reduced to an amount equal to
Four Million Six Hundred Forty-Five Thousand Four
Hundred Twenty Eight and No/100 Dollars
($4,645,428.00);
b. At any time after the end of the forty-eighth
(48th) month following the Term Commencement Date,
the LOC Amount may be reduced to an amount equal to
Three Million Ninety-Six Thousand Nine Hundred
Fifty-Two and No/100 Dollars ($3,960,952.00);
c. At any time after the end of the sixtieth (60th)
month following the Term Commencement Date, the LOC
Amount may be reduced to an amount equal to One
Million Five Hundred Forty-Eight Thousand Four
Hundred Seventy-Six and No/100 Dollars
($1,548,476.00);
d. At any time after the end of the seventy-second
(72nd) month following the Term Commencement Date,
the LOC may be returned by Landlord to the issuing
bank for cancellation provided that Tenant has,
prior to such delivery by Landlord, delivered a
cash security Deposit (to be held by Landlord in
accordance with the terms of Paragraph 19 of this
Lease) an amount equal to Eight Hundred Fifty-Six
Thousand Seven Hundred Fifty-Nine and No/100
Dollars ($856,759.00).
In the event that any of the above described reductions to the
LOC Amount is made and, subsequently, Tenant fails to meet the
corresponding profitability and tangible net worth condition
precedent for a period of thirty (30) days following delivery by
Landlord of written notice of any such failure, Tenant shall
within two (2) business days, increase the face amount of the LOC
to an amount equal to the LOC Amount existing prior to such
reduction (including the reduction described in clause d. above).
If Tenant fails to increase the LOC Amount as provided above,
such failure shall constitute a default hereunder (which default
shall not be subject to any cure rights afforded anywhere in this
Lease and Landlord shall be entitled to draw on the LOC for the
full LOC Amount and hold such
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LOC Amount as a Security Deposit in accordance with the terms of
this Lease, and enforce all other rights available to Landlord
pursuant to the terms of this Lease or under applicable law.
40. JURY TRIAL WAIVER
EACH PARTY HERETO (WHICH INCLUDES ANY ASSIGNEE, SUCCESSOR HEIR OR PERSONAL
REPRESENTATIVE OF A PARTY) SHALL NOT SEEK A JURY TRIAL, HEREBY WAIVES TRIAL BY
JURY, AND HEREBY FURTHER WAIVES ANY OBJECTION TO VENUE IN THE COUNTY IN WHICH
THE BUILDING IS LOCATED, AND AGREES AND CONSENTS TO PERSONAL JURISDICTION OF THE
COURTS OF THE STATE IN WHICH THE PROPERTY IS LOCATED, IN ANY ACTION OR
PROCEEDING OR COUNTERCLAIM BROUGHT BY ANY PARTY HERETO AGAINST THE OTHER ON ANY
MATTER WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, THE
RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES,
OR ANY CLAIM OF INJURY OR DAMAGE, OR THE ENFORCEMENT OF ANY REMEDY UNDER ANY
STATUTE, EMERGENCY OR OTHERWISE, WHETHER ANY OF THE FOREGOING IS BASED ON THIS
LEASE OR ON TORT LAW. EACH PARTY REPRESENTS THAT IT HAS HAD THE OPPORTUNITY TO
CONSULT WITH LEGAL COUNSEL CONCERNING THE EFFECT OF THIS PARAGRAPH 40. THE
PROVISIONS OF THIS PARAGRAPH 40 SHALL SURVIVE THE EXPIRATION OR EARLIER
TERMINATION OF THIS LEASE.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day
and the year first above written.
LANDLORD
Spieker Properties, L.P.,
a California limited partnership
By: Spieker Properties, Inc.,
a Maryland corporation,
its general partner
By:____________________________________________
John W. Petersen
Its: Vice President
Date: December 17, 1999
TENANT
Brocade Communications Systems, Inc.,
a Delaware corporation
By: _______________________________________________
Michael J. Byrd
Its: Vice President, Finance, and
Chief Financial Officer
Date: December 17, 1999
By: _______________________________________________
Mr. Victor Rinkle,
Its: Vice President, Operations
Date: December 17, 1999
24
<PAGE> 25
EXHIBIT A
RULES AND REGULATIONS
1. Driveways, sidewalks, halls, passages, exits, entrances, elevators,
escalators and stairways shall not be obstructed by tenants or used by
tenants for any purpose other than for ingress to and egress from their
respective premises. The driveways, sidewalks, halls, passages, exits,
entrances, elevators and stairways are not for the use of the general public
and Landlord shall in all cases retain the right to control and prevent
access thereto by all persons whose presence, in the judgment of Landlord,
shall be prejudicial to the safety, character, reputation and interests of
the Building, the Project and its tenants, provided that nothing herein
contained shall be construed to prevent such access to persons with whom any
tenant normally deals in the ordinary course of such tenant's business
unless such persons are engaged in illegal activities. No tenant, and no
employees or invitees of any tenant, shall go upon the roof of any Building,
except as authorized by Landlord. No tenant, and no employees or invitees of
any tenant shall move any common area furniture without Landlord's consent.
2. No sign, placard, banner, picture, name, advertisement or notice, visible
from the exterior of the Premises or the Building or the common areas of the
Building shall be inscribed, painted, affixed, installed or otherwise
displayed by Tenant either on its Premises or any part of the Building or
Project without the prior written consent of Landlord in Landlord's sole and
absolute discretion. Landlord shall have the right to remove any such sign,
placard, banner, picture, name, advertisement, or notice without notice to
and at the expense of Tenant, which were installed or displayed in violation
of this rule. If Landlord shall have given such consent to Tenant at any
time, whether before or after the execution of Tenant's Lease, such consent
shall in no way operate as a waiver or release of any of the provisions
hereof or of the Lease, and shall be deemed to relate only to the particular
sign, placard, banner, picture, name, advertisement or notice so consented
to by Landlord and shall not be construed as dispensing with the necessity
of obtaining the specific written consent of Landlord with respect to any
other such sign, placard, banner, picture, name, advertisement or notice.
All approved signs or lettering on doors and walls shall be printed, painted,
affixed or inscribed at the expense of Tenant by a person or vendor approved
by Landlord and shall be removed by Tenant at the time of vacancy at
Tenant's expense.
3. The directory of the Building or Project will be provided exclusively for
the display of the name and location of tenants only and Landlord reserves
the right to charge for the use thereof and to exclude any other names
therefrom.
4. No curtains, draperies, blinds, shutters, shades, screens or other
coverings, awnings, hangings or decorations shall be attached to, hung or
placed in, or used in connection with, any window or door on the Premises
without the prior written consent of Landlord. In any event with the prior
written consent of Landlord, all such items shall be installed inboard of
Landlord's standard window covering and shall in no way be visible from the
exterior of the Building. All electrical ceiling fixtures hung in offices or
spaces along the perimeter of the Building must be fluorescent or of a
quality, type, design, and bulb color approved by Landlord. No articles
shall be placed or kept on the window sills so as to be visible from the
exterior of the Building. No articles shall be placed against glass
partitions or doors which Landlord considers unsightly from outside Tenant's
Premises.
5. Landlord reserves the right to exclude from the Building and the Project,
between the hours of 6 p.m. and 8 a.m. and at all hours on Saturdays,
Sundays and legal holidays, all persons who are not tenants or their
accompanied guests in the Building. Each tenant shall be responsible for all
persons for whom it allows to enter the Building or the Project and shall be
liable to Landlord for all acts of such persons.
Landlord and its agents shall not be liable for damages for any error concerning
the admission to, or exclusion from, the Building or the Project of any
person.
During the continuance of any invasion, mob, riot, public excitement or other
circumstance rendering such action advisable in Landlord's opinion, Landlord
reserves the right (but shall not be obligated) to prevent access to the
Building and the Project during the continuance of that event by any means
it considers appropriate for the safety of tenants and protection of the
Building, property in the Building and the Project.
6. All cleaning and janitorial services for the Building and the Premises shall
be provided exclusively through Landlord. Except with the written consent of
Landlord, no person or persons other than those approved by Landlord shall
be permitted to enter the Building for the purpose of cleaning the same.
Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness of its Premises. Landlord shall in no way be responsible to
Tenant for any loss of property on the Premises, however occurring, or for
any damage done to Tenant's property by the janitor or any other employee or
any other person.
7. Tenant shall see that all doors of its Premises are closed and securely
locked and must observe strict care and caution that all water faucets or
water apparatus, coffee pots or other heat-generating devices are entirely
shut off before Tenant or its employees leave the Premises, and that all
utilities shall likewise be carefully shut off, so as to prevent waste or
damage. Tenant shall be responsible for any damage or injuries sustained by
other tenants or occupants of the Building or Project or by Landlord for
noncompliance with this rule. On multiple-tenancy floors, all tenants shall
keep the door or doors to the Building corridors closed at all times except
for ingress and egress.
8. Tenant shall not use any method of heating or air-conditioning other than
that supplied by Landlord. As more specifically provided in Tenant's lease
of the Premises, Tenant shall not waste electricity, water or
air-conditioning and agrees to cooperate fully with Landlord to assure the
most effective operation of the Building's heating and air-conditioning, and
shall refrain from attempting to adjust any controls other than room
thermostats installed for Tenant's use.
9. Landlord will furnish Tenant free of charge with two keys to each door in
the Premises. Landlord may make a reasonable charge for any additional keys,
and Tenant shall not make or have made additional keys. Tenant shall not
alter any lock or access device or install a new or additional lock or
access device or bolt on any door of its Premises, without the prior written
consent of Landlord. If Landlord shall give its consent, Tenant shall in
each case furnish Landlord with a key for any such lock. Tenant, upon the
termination of its tenancy, shall deliver to Landlord the keys for all doors
which have been furnished to Tenant, and in the event of loss of any keys so
furnished, shall pay Landlord therefor.
10. The restrooms, toilets, urinals, wash bowls and other apparatus shall not be
used for any purpose other than that for which they were constructed and no
foreign substance of any kind whatsoever shall be thrown into them. The
expense of any breakage, stoppage, or damage resulting from violation of
this rule shall be borne by the tenant who, or whose employees or invitees,
shall have caused the breakage, stoppage, or damage.
11. Tenant shall not use or keep in or on the Premises, the Building or the
Project any kerosene, gasoline, or inflammable or combustible fluid or
material.
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<PAGE> 26
12. Tenant shall not use, keep or permit to be used or kept in its Premises any
foul or noxious gas or substance. Tenant shall not allow the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations or
interfere in any way with other tenants or those having business therein,
nor shall any animals or birds be brought or kept in or about the Premises,
the Building, or the Project.
13. No cooking shall be done or permitted by any tenant on the Premises, except
that use by the tenant of Underwriters' Laboratory (UL) approved equipment,
refrigerators and microwave ovens may be used in the Premises for the
preparation of coffee, tea, hot chocolate and similar beverages, storing and
heating food for tenants and their employees shall be permitted. All uses
must be in accordance with all applicable federal, state and city laws,
codes, ordinances, rules and regulations and the Lease.
14. Except with the prior written consent of Landlord, Tenant shall not sell, or
permit the sale, at retail, of newspapers, magazines, periodicals, theater
tickets or any other goods or merchandise in or on the Premises, nor shall
Tenant carry on, or permit or allow any employee or other person to carry
on, the business of stenography, typewriting or any similar business in or
from the Premises for the service or accommodation of occupants of any other
portion of the Building, nor shall the Premises be used for the storage of
merchandise or for manufacturing of any kind, or the business of a public
barber shop, beauty parlor, nor shall the Premises be used for any illegal,
improper, immoral or objectionable purpose, or any business or activity
other than that specifically provided for in such Tenant's Lease. Tenant
shall not accept hairstyling, barbering, shoeshine, nail, massage or similar
services in the Premises or common areas except as authorized by Landlord.
15. If Tenant requires telegraphic, telephonic, telecommunications, data
processing, burglar alarm or similar services, it shall first obtain, and
comply with, Landlord's instructions in their installation. The cost of
purchasing, installation and maintenance of such services shall be borne
solely by Tenant.
16. Landlord will direct electricians as to where and how telephone, telegraph
and electrical wires are to be introduced or installed. No boring or cutting
for wires will be allowed without the prior written consent of Landlord. The
location of burglar alarms, telephones, call boxes and other office
equipment affixed to the Premises shall be subject to the prior written
approval of Landlord.
17. Tenant shall not install any radio or television antenna, satellite dish,
loudspeaker or any other device on the exterior walls or the roof of the
Building, without Landlord's consent. Tenant shall not interfere with radio
or television broadcasting or reception from or in the Building, the Project
or elsewhere.
18. Tenant shall not mark, or drive nails, screws or drill into the partitions,
woodwork or drywall or in any way deface the Premises or any part thereof
without Landlord's consent. Tenant may install nails and screws in areas of
the Premises that have been identified for those purposes to Landlord by
Tenant at the time those walls or partitions were installed in the Premises.
Tenant shall not lay linoleum, tile, carpet or any other floor covering so
that the same shall be affixed to the floor of its Premises in any manner
except as approved in writing by Landlord. The expense of repairing any
damage resulting from a violation of this rule or the removal of any floor
covering shall be borne by the tenant by whom, or by whose contractors,
employees or invitees, the damage shall have been caused.
19. No furniture, freight, equipment, materials, supplies, packages, merchandise
or other property will be received in the Building or carried up or down the
elevators except between such hours and in such elevators as shall be
designated by Landlord.
Tenant shall not place a load upon any floor of its Premises which exceeds the
load per square foot which such floor was designed to carry or which is
allowed by law. Landlord shall have the right to prescribe the weight, size
and position of all safes, furniture or other heavy equipment brought into
the Building. Safes or other heavy objects shall, if considered necessary by
Landlord, stand on wood strips of such thickness as determined by Landlord
to be necessary to properly distribute the weight thereof. Landlord will not
be responsible for loss of or damage to any such safe, equipment or property
from any cause, and all damage done to the Building by moving or maintaining
any such safe, equipment or other property shall be repaired at the expense
of Tenant.
Business machines and mechanical equipment belonging to Tenant which cause noise
or vibration that may be transmitted to the structure of the Building or to
any space therein to such a degree as to be objectionable to Landlord or to
any tenants in the Building shall be placed and maintained by Tenant, at
Tenant's expense, on vibration eliminators or other devices sufficient to
eliminate noise or vibration. The persons employed to move such equipment in
or out of the Building must be acceptable to Landlord.
20. Tenant shall not install, maintain or operate upon its Premises any vending
machine without the written consent of Landlord.
21. There shall not be used in any space, or in the public areas of the Project
either by Tenant or others, any hand trucks except those equipped with
rubber tires and side guards or such other material handling equipment as
Landlord may approve. Tenants using hand trucks shall be required to use the
freight elevator, or such elevator as Landlord shall designate. No other
vehicles of any kind shall be brought by Tenant into or kept in or about its
Premises.
22. Each tenant shall store all its trash and garbage within the interior of the
Premises. Tenant shall not place in the trash boxes or receptacles any
personal trash or any material that may not or cannot be disposed of in the
ordinary and customary manner of removing and disposing of trash and garbage
in the city, without violation of any law or ordinance governing such
disposal. All trash, garbage and refuse disposal shall be made only through
entry-ways and elevators provided for such purposes and at such times as
Landlord shall designate. If the Building has implemented a building-wide
recycling program for tenants, Tenant shall use good faith efforts to
participate in said program.
23. Canvassing, soliciting, distribution of handbills or any other written
material and peddling in the Building and the Project are prohibited and
each tenant shall cooperate to prevent the same. No tenant shall make
room-to-room solicitation of business from other tenants in the Building or
the Project, without the written consent of Landlord.
24. Landlord shall have the right, exercisable without notice and without
liability to any tenant, to change the name and address of the Building and
the Project.
25. Landlord reserves the right to exclude or expel from the Project any person
who, in Landlord's judgment, is under the influence of alcohol or drugs or
who commits any act in violation of any of these Rules and Regulations.
26. Without the prior written consent of Landlord, Tenant shall not use the name
of the Building or the Project or any photograph or other likeness of the
Building or the Project in connection with, or in promoting or advertising,
Tenant's business except that Tenant may include the Building's or Project's
name in Tenant's address.
27. Tenant shall comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental
agency.
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28. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
29. The requirements of Tenant will be attended to only upon appropriate
application at the office of the Building by an authorized individual.
Employees of Landlord shall not perform any work or do anything outside of
their regular duties unless under special instructions from Landlord, and no
employees of Landlord will admit any person (tenant or otherwise) to any
office without specific instructions from Landlord.
30. Landlord reserves the right to designate the use of the parking spaces on
the Project. Tenant or Tenant's guests shall park between designated parking
lines only, and shall not occupy two parking spaces with one car. Parking
spaces shall be for passenger vehicles only; no boats, trucks, trailers,
recreational vehicles or other types of vehicles may be parked in the
parking areas (except that trucks may be loaded and unloaded in designated
loading areas). Vehicles in violation of the above shall be subject to
tow-away, at vehicle owner's expense. Vehicles parked on the Project
overnight without prior written consent of the Landlord shall be deemed
abandoned and shall be subject to tow-away at vehicle owner's expense. No
tenant of the Building shall park in visitor or reserved parking areas. Any
tenant found parking in such designated visitor or reserved parking areas or
unauthorized areas shall be subject to tow-away at vehicle owner's expense.
The parking areas shall not be used to provide car wash, oil changes,
detailing, automotive repair or other services unless otherwise approved or
furnished by Landlord. Tenant will from time to time, upon the request of
Landlord, supply Landlord with a list of license plate numbers of vehicles
owned or operated by its employees or agents.
31. No smoking of any kind shall be permitted anywhere within the Building,
including, without limitation, the Premises and those areas immediately
adjacent to the entrances and exits to the Building, or any other area as
Landlord elects. Smoking in the Project is only permitted in smoking areas
identified by Landlord, which may be relocated from time to time.
32. If the Building furnishes common area conferences rooms for tenant usage,
Landlord shall have the right to control each tenant's usage of the
conference rooms, including limiting tenant usage so that the rooms are
equally available to all tenants in the Building. Any common area amenities
or facilities shall be provided from time to time at Landlord's discretion.
33. Tenant shall not swap or exchange building keys or cardkeys with other
employees or tenants in the Building or the Project.
34. Tenant shall be responsible for the observance of all of the foregoing Rules
and Regulations by Tenant's employees, agents, clients, customers, invitees
and guests.
35. These Rules and Regulations are in addition to, and shall not be construed
to in any way modify, alter or amend, in whole or in part, the terms,
covenants, agreements and conditions of any lease of any premises in the
Project.
36. Landlord may waive any one or more of these Rules and Regulations for the
benefit of any particular tenant or tenants, but no such waiver by Landlord
shall be construed as a waiver of such Rules and Regulations in favor of any
other tenant or tenants, nor prevent Landlord from thereafter enforcing any
such Rules and Regulations against any or all tenants of the Building.
37. Landlord reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for safety
and security, for care and cleanliness of the Building and the Project and
for the preservation of good order therein. Tenant agrees to abide by all
such Rules and Regulations herein stated and any additional rules and
regulations which are adopted.
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EXHIBIT B
(TO BE ATTACHED)
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EXHIBIT C
LEASE IMPROVEMENT AGREEMENT
This Lease Improvement Agreement ("IMPROVEMENT AGREEMENT") sets
forth the terms and conditions relating to construction of the initial tenant
improvements described in the Plans to be prepared and approved as provided
below (the "TENANT IMPROVEMENTS") in the Premises. Capitalized terms used but
not otherwise defined herein shall have the meanings set forth in the Lease (the
"LEASE") to which this Improvement Agreement is attached and forms a part.
1. Base Building Work. The "Base Building Work" described on SCHEDULE 1 to this
EXHIBIT C, IF ANY, has been or will be performed by Landlord at Landlord's
sole cost and expense and shall be constructed in a good and workman-like
manner and the Premises shall be delivered to Tenant in compliance with
Regulations as expressly stated in Paragraph 4.C. hereof.
2. Plans and Specifications.
2.1 Tenant shall retain the services of Devcon (the "SPACE PLANNER")
to prepare a detailed space plan (the "SPACE PLAN") mutually satisfactory to
Landlord and Tenant for the construction of the Tenant Improvements in the
Premises. Tenant shall submit the Space Plan and any proposed revisions
thereto to Landlord for Landlord's approval. In the event that Tenant fails
to deliver an approved Space Plan on or before February 7, 2000, such
failure shall constitute a Tenant Delay hereunder.
2.2 Based on the approved Space Plan, Tenant shall cause the Space
Planner to prepare detailed plans, specifications and working drawings
mutually satisfactory to Landlord and Tenant for the construction of the
Tenant Improvements (the "PLANS"). Landlord and Tenant shall diligently
pursue the preparation of the Plans. Tenant shall submit the Plans and any
proposed revisions thereto, including the estimated cost of the Tenant
Improvements. All necessary revisions to the Space Plan and the Plans shall
be made within two (2) business days after Landlord's response thereto. This
procedure shall be repeated until Landlord ultimately approves the Space
Plan and Plans. Landlord shall approve or disapprove the Plans and any
proposed revisions thereto, including the estimated cost of the Tenant
Improvements, in writing within three (3) business days after receipt
thereof. If Landlord fails to approve or disapprove the Space Plan or the
Plans or any revisions thereto within the time limits specified herein,
Landlord shall be deemed to have disapproved the same. Tenant shall cause
the final Plans and the cost estimate to be prepared and approved no later
than March 30, 2000. In the event Tenant fails to prepare and approve the
final Plans and the cost estimate on or before March 30, 2000, such failure
shall constitute a Tenant Delay hereunder.
2.3 Intentionally Omitted.
2.4 Notwithstanding the foregoing, Tenant shall cause the Space
Planner to deliver to Landlord on or before March 30, 2000 plans,
specifications and working drawings for the construction of the Tenant
Improvements which are sufficiently complete to enable the City of San Jose
to issue any required permits.
2.5 Tenant shall be responsible for ensuring that the Plans are
compatible with the design, construction and equipment of the Building,
comply with applicable Regulations and the Standards (defined below), and
contain all such information as may be required to show locations, types and
requirements for all heat loads, people loads, floor loads, power and
plumbing, regular and special HVAC needs, telephone communications,
telephone and electrical outlets, lighting, light fixtures and related
power, and electrical and telephone switches, B.T.U. calculations,
electrical requirements and special receptacle requirements. The Plans shall
also include mechanical, electrical, plumbing, structural and engineering
drawings mutually satisfactory to Landlord and Tenant which shall be
prepared by Approved Design Engineers. Notwithstanding Landlord's
preparation, review and approval of the Space Plan and the Plans and any
revisions thereto, Landlord shall have no responsibility or liability
whatsoever for any errors or omissions contained in the Space Plan or Plans
or any revisions thereto, or to verify dimensions or conditions, or for the
quality, design or compliance with applicable Regulations of any
improvements described therein or constructed in accordance therewith.
Tenant hereby waives all claims against Landlord relating to, or arising out
of the design or construction of, the Tenant Improvements.
2.6 Landlord may approve or disapprove the Space Plan or Plans or any
proposed revision thereto submitted to Landlord in Landlord's sole
discretion. Landlord shall not be deemed to have approved the Space Plan,
the Plans, or any proposed revisions thereto, unless approved by Landlord in
writing. Landlord shall approve or disapprove any Space Plan, Plans or
proposed revisions thereto submitted to Landlord for Landlord's approval
within three (3) business days after Landlord's receipt thereof. If Landlord
has not approved in writing any Space Plan, Plans, or proposed revisions
thereto submitted to Landlord within three (3) business days after
Landlord's receipt thereof, Landlord shall be deemed to have disapproved the
same.
3. Specifications for Standard Tenant Improvements.
3.1 Specifications and quantities of standard building components
which will comprise and be used in the construction of the Tenant
Improvements ("STANDARDS") are set forth in SCHEDULE 2 to this EXHIBIT C. As
used herein, "STANDARDS" or "BUILDING Standards" shall mean the standards
for a particular item selected from time to time by Landlord for the
Building, including those set forth on SCHEDULE 2 of this EXHIBIT C, or such
other standards of equal or better quality as may be mutually agreed between
Landlord and Tenant in writing.
3.2 No deviations from the Standards are permitted.
4. Tenant Improvement Cost.
4.1 The cost of the Tenant Improvements shall be paid for by Tenant,
including, without limitation, the cost of: Standards; space plans and
studies; architectural and engineering fees; permits, approvals and other
governmental fees; labor, material, equipment and supplies; construction
fees and other amounts payable to contractors or subcontractors; taxes;
off-site improvements; remediation and preparation of the Premises for
construction of the Tenant Improvements; taxes; filing and recording fees;
premiums for insurance and bonds; attorneys' fees; financing costs; and all
other costs expended or to be expended in the construction of the Tenant
Improvements, including those costs incurred for construction of elements of
the Tenant Improvements in the Premises, which construction was performed by
Landlord prior to the execution of the Lease or for materials comprising the
Tenant Improvements which were purchased by Landlord prior to the execution
of the Lease; and an administration fee of One Hundred Eighty-Five Thousand
and No/100 Dollars ($185,000.00); provided, however, that in the event that
the Lease is modified to provide for an increase in the rentable square feet
of the Premises which results in an increase in the total cost of the Tenant
Improvements, the aforementioned administration fee shall be increased by an
amount equal to three percent (3%) of the amount of such increase.
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4.2 Provided Tenant is not in default under the Lease, including this
Improvement Agreement, Landlord shall contribute a one-time tenant
improvement allowance not to exceed Thirty-One and 19/100 Dollars ($31.19)
per rentable square foot of the Premises ("TENANT IMPROVEMENT ALLOWANCE")
toward the cost of the initial Tenant Improvements. Provided Tenant is not
then in default under the Lease, including this Improvement Agreement,
during the construction of the Tenant Improvements, Landlord shall make
monthly disbursements of the Tenant Improvement Allowance for the benefit of
Tenant shall authorize the release of monies for the benefit of Tenant as
follows:
(a) Monthly Disbursements. On or before the twenty-first (21st)
day of the calendar month, during the construction of the
Tenant Improvements (or such other date as Landlord may
designate in writing), Tenant shall deliver to Landlord: (i)
a request for payment of Tenant's contractor, which request
shall be approved by Tenant, showing the schedule, by trade,
of percentage of completion of the Tenant Improvements,
detailing the portion of the work completed and the portion
not completed; (ii) invoices from any subcontractor, laborer,
materialmen, supplier and any other party which performed
work on Tenant's behalf pursuant to this Improvement
Agreement, including, but not limited to, labor rendered and
materials delivered to the Premises; (iii) executed
conditional mechanic's lien releases from all of the parties
submitting invoices with respect to the work performed and
for which payment is requested to be made, which releases
shall comply with the appropriate provisions of California
Civil Code 3262(d); (iv) executed unconditional mechanic's
lien releases from all of the parties with respect to work
performed and included on prior pay requests, which releases
shall comply with the appropriate provisions of California
Civil Code; and (v) all other information reasonably
requested by Landlord. Tenant's request for payment shall be
deemed Tenant's acceptance and approval of the specific work
furnished and or the materials actually supplied as set forth
in Tenant's payment request. Within ten (10) business days
thereafter, Landlord shall deliver a check (or transfer funds
electronically) to Tenant made jointly payable to Tenant's
contractor and Tenant in payment of the lesser of (A)
Landlord's proportionate share of the amount of such request
for payment by Tenant's contractor, as set forth in this
paragraph, less a ten percent (10%) retention (the aggregate
amount of such retentions to be known as the "FINAL
RETENTION"), and (B) the balance of any remaining available
portion of the Tenant Improvement Allowance (not including
the Final Retention), provided Landlord does not dispute any
request for payment based upon noncompliance with the Plans
and or Standards, or due to any substandard work, or for any
other reasonable cause. For purposes of this Improvement
Agreement, Landlord's proportionate share shall be the
product of the following: (X) the amount of the Tenant
Improvement Allowance over total cost of the Tenant
Improvements, as such total cost may from time to time
increase as provided herein, multiplied by (Y) the total
amount approved by Landlord in Tenant's written request for
payment as described above. Landlord's payment of such
amounts shall not be deemed Landlord's approval or acceptance
of the work furnished or materials supplied as set forth in
Tenant's payment request.
(b) Final Retention. Subject to the provisions of this
Improvement Agreement, a check for the Final Retention
payable jointly to Tenant's contractor and Tenant shall be
delivered by Landlord to Tenant following the completion of
the construction of the Tenant Improvements and expiration of
the time for filing of any mechanics' liens claimed or which
might be filed on account of any work ordered by Tenant or
its contractor or any subcontractor; provided that (A) Tenant
delivers to Landlord properly executed and unconditional
mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and with Section 3262(d)(3) or
Section 3262(d)(4) (which mechanics' lien releases shall be
executed by the subcontractors, labor suppliers and
materialmen in addition to Tenant's contractor), and all
appropriate bills and supporting documentation for the work
ordered by Tenant or its contractor or any subcontractor, (B)
Landlord has determined that no substantial work exists which
adversely affects the mechanical, electrical, plumbing,
heating, ventilating and air conditioning, life-safety or
other systems of the Building or Project, the structure or
exterior appearance of the Building or Project, and (C) Space
Planner and Tenant's contractor deliver to Landlord a
certificate of completion, in a form reasonably acceptable to
Landlord certifying that the construction of the Tenant
Improvements has been substantially completed.
(c) Other Terms. Landlord shall only be obligated to make
disbursements from the Tenant Improvement Allowance in
accordance with the terms of this Agreement.
4.3 In the event the estimated cost of the design and construction of
the Tenant Improvements exceeds the Tenant Improvement Allowance, Landlord's
proportionate share pursuant to Paragraph 4.2.(a) above shall be adjusted
accordingly. No credit shall be given to Tenant if the cost of the Tenant
Improvements is less than the Tenant Improvement Allowance.
4.4 If the cost of the Tenant Improvements increases after the
Tenant's approval of the Plans due to the requirements of any governmental
agency or applicable Regulation, Landlord's proportionate share pursuant to
Paragraph 4.2.(a) above shall be adjusted accordingly.
4.5 If Tenant requests any change(s) in the Plans after approval of
the estimate of the cost of the Tenant Improvements and any such requested
changes are approved by Landlord in writing in Landlord's sole discretion,
and the cost of the Tenant Improvements increases as a result of such
approved change(s). Landlord's proportionate share pursuant to Paragraph
4.2.(a) above shall be adjusted accordingly.
4.6 Notwithstanding anything to the contrary in this Improvement
Agreement, in the event that the cost of the Tenant Improvements exceeds the
Tenant Improvement Allowance, upon Tenant's written request, Landlord shall
provide an additional amount not to exceed Four Dollars ($4.00) per rentable
square foot (the "BASE RENT INCREASE FACTOR") toward the excess cost of the
Tenant Improvements, which Base Rent Increase Factor shall be disbursed in
accordance with the terms of this Paragraph 4. Tenant must provide such
written request to Landlord prior to the Term Commencement Date defined in
the Lease. In the event Tenant fails to so provide such written notice to
Landlord, Tenant shall be deemed to waive its right to receive the Base Rent
Increase Factor. The Base Rent Increase Factor shall be amortized over the
initial Term of the Lease commencing upon disbursement of monies, at an
interest rate of ten percent (10%) per annum, payable in monthly
installments as Base Rent, in accordance with the terms of the Lease. If the
costs of the Tenant Improvements does exceed the Tenant Improvement
Allowance, and Tenant elects to receive the Base Increase Rent Factor
pursuant to this Paragraph 4.6, Landlord and Tenant shall each execute a
written amendment to the Lease, prepared by Landlord, to reflect the
appropriate increase in the amount of Base Rent.
5. Construction of Tenant Improvements.
5.1 Within ten (10) days after Tenant's and Landlord's approval of
the Plans including the estimate of the cost of the Tenant Improvements and
Landlord's receipt of payment of any such estimated cost exceeding the
amount of the Tenant Improvement Allowance, Tenant shall cause the
contractor to proceed to secure a building permit and commence construction
of the Tenant Improvements provided that the Building has in Landlord's
discretion reached the stage of construction where it is appropriate to
commence construction of the Tenant Improvements in the Premises.
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5.2 Tenant shall be responsible for obtaining all governmental
approvals to the full extent necessary for the construction and installation
of the Tenant Improvements and for Tenant's occupancy of the Premises, in
compliance with all applicable Regulations. Tenant shall employ Devcon as
the contractor or such other contractor or contractors as shall be approved
by Landlord in writing to construct the Tenant Improvements in conformance
with the approved Space Plan and Plans. The construction contracts between
Tenant and the approved contractor shall be subject to Landlord's prior
reasonable approval and shall provide for progress payments. The
contractor(s) shall be duly licensed and Landlord's approval of the
contractor(s) shall be conditioned, among other things, upon the
contractor's reputation for quality of work, timeliness of performance,
integrity and Landlord's prior experience with such contractor.
5.3 Without limiting the provisions of Paragraph 35 of the Lease,
Landlord shall not be liable for any direct or indirect damages suffered by
Tenant as a result of delays in construction beyond Landlord's reasonable
control, including, but not limited to, delays due to strikes or
unavailability of materials or labor, or delays caused by Tenant (including
delays by the Space Planner, the contractor or anyone else performing
services on behalf of Landlord or Tenant).
5.4 All work to be performed on the Premises by Tenant or Tenant's
contractor or agents shall be subject to the following conditions:
(a) Such work shall proceed upon Landlord's written approval
of Tenant's contractor, and public liability and property damage insurance
carried by Tenant's contractor, and shall further be subject to the
provisions of Paragraphs 12 and 27 of the Lease.
(b) All work shall be done in conformity with a valid building
permit when required, a copy of which shall be furnished to Landlord before
such work is commenced, and in any case, all such work shall be performed in
a good and workmanlike and first-class manner, and in accordance with all
applicable Regulations and the requirements and standards of any insurance
underwriting board, inspection bureau or insurance carrier insuring the
Premises pursuant to the Lease. Notwithstanding any failure by Landlord to
object to any such work, Landlord shall have no responsibility for Tenant's
failure to comply with all applicable Regulations. Tenant shall be
responsible for ensuring that construction and installation of the Tenant
Improvements will not affect the structural integrity of the Building.
(c) If required by Landlord or any lender of Landlord, all
work by Tenant or Tenant's contractor shall be done with union labor in
accordance with all union labor agreements applicable to the trades being
employed.
(d) Landlord or Landlord's agents shall have the right to
inspect the construction of the Tenant Improvements by Tenant during the
progress thereof. If Landlord shall give notice of faulty construction or
any other deviation from the approved Space Plan or Plans, Tenant shall
cause its contractor to make corrections promptly. However, neither the
privilege herein granted to Landlord to make such inspections, nor the
making of such inspections by Landlord, shall operate as a waiver of any
right of Landlord to require good and workmanlike construction and
improvements erected in accordance with the approved Space Plan or Plans.
(e) Tenant shall cause its contractor to complete the Tenant
Improvements as soon as reasonably possible but in any event on or before
the Scheduled Term Commencement Date.
(f) Tenant's construction of the Tenant Improvements shall
comply with the following: (i) the Tenant Improvements shall be constructed
in strict accordance with the approved Space Plan or Plans; (ii) Tenant's
and its contractor shall submit schedules of all work relating to the Tenant
Improvements to Landlord for Landlord's approval within two (2) business
days following the selection of the contractor and the approval of the
Plans. Landlord shall within five (5) business days after receipt thereof
inform Tenant of any changes which are necessary and Tenant's contractor
shall adhere to such corrected schedule; and (iii) Tenant shall abide by all
rules made by Landlord with respect to the use of freight, loading dock, and
service elevators, storage of materials, coordination of work with the
contractors of other tenants, and any other matter in connection with this
Improvement Agreement, including, without limitation, the construction of
the Tenant Improvements.
(g) Tenant or Tenant's contractor or agents shall arrange for
necessary utility, hoisting and elevator service with Landlord's contractor
and shall pay such reasonable charges for such services as may be charged by
Tenant's or Landlord's contractor.
(h) Tenant's entry to the Premises for any purpose, including,
without limitation, inspection or performance of Tenant construction by
Tenant's agents, prior to the date Tenant's obligation to pay rent commences
shall be subject to all the terms and conditions of the Lease except the
payment of Rent. Tenant's entry shall mean entry by Tenant, its officers,
contractors, licensees, agents, servants, employees, guests, invitees, or
visitors.
(i) Tenant shall promptly reimburse Landlord upon demand for
any reasonable expense actually incurred by the Landlord by reason of faulty
work done by Tenant or its contractors or by reason of any delays caused by
such work, or by reason of inadequate clean-up.
(j) Tenant hereby indemnifies and holds Landlord harmless with
respect to any and all costs, losses, damages, injuries and liabilities
relating in any way to any act or omission of Tenant or Tenant's contractor
or agents, or anyone directly or indirectly employed by any of them, in
connection with the Tenant Improvements and any breach of Tenant's
obligations under this Improvement Agreement, or in connection with Tenant's
non-payment of any amount arising out of the Tenant Improvements. Such
indemnity by Tenant, as set forth above, shall also apply with respect to
any and all costs, losses, damages, injuries, and liabilities related in any
way to Landlord's performance or any ministerial acts reasonably necessary
(i) to permit Tenant to complete the Tenant Improvements, and (ii) to enable
Tenant to obtain any building permit or certificate of occupancy for the
Premises.
(k) Tenant's contractor and the subcontractors utilized by
Tenant's contractor shall guarantee to Tenant and for the benefit of
Landlord that the portion of the Tenant Improvements for which it is
responsible shall be free from any defects in workmanship and materials for
a period of not less than one (1) year from the date of completion thereof.
Each of Tenant's contractor and the subcontractors utilized by Tenant's
contractor shall be responsible for the replacement or repair, without
additional charge, of all work done or furnished in accordance with its
contract that shall become defective within one (1) year after the later to
occur of (i) completion of the work performed by such contractor of
subcontractors and (ii) the Term Commencement Date. The correction of such
work shall include, without additional charge, all additional expenses and
damages incurred in connection with such removal or replacement of all or
any part of the Tenant Improvements, and/or the Building and/or common areas
that may be damaged or disturbed thereby. All such warranties or guarantees
as to materials or workmanship of or with respect to the Tenant Improvements
shall be contained in the construction contract or subcontract and shall be
written such that such guarantees or warranties shall inure
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to the benefit of both Landlord and Tenant, as their respective interests
may appear, and can be directly enforced by either. Tenant covenants to give
to Landlord any assignment or other assurances which may be necessary to
effect such rights of direct enforcement.
(l) Commencing upon the execution of the Lease, Tenant shall
hold weekly meetings at a reasonable time with the Space Planner and the
contractor regarding the progress of the preparation of the Plans and the
construction of the Tenant Improvements, which meetings shall be held at a
location designated by Tenant, and Landlord and/or its agents shall receive
prior notice of, and shall have the right to attend, all such meetings, and
upon Landlord's request, certain of Tenant's contractors shall attend such
meetings. One such meeting each month shall include the review of
contractor's current request for payment.
(m) Tenant and Tenant's contractors and all other parties
performing work on the Premises on Tenant's behalf shall comply with the
each of the Building rules and regulations as described in the Lease and
with the contractor rules and regulations, attached hereto as SCHEDULE 3.
Tenant shall be liable for any violation of the Building or the contractor
rules and regulations by Tenant's contractors or any other party performing
work on the Premises on Tenant's behalf.
6. Insurance Requirements.
6.1 All of Tenant's contractors shall carry worker's compensation
insurance covering all of their respective employees, and shall also carry
public liability insurance, including property damage, all with limits, in
form and with companies as are required to be carried by Tenant as set forth
in Paragraph 8 of the Lease.
6.2 Tenant shall carry "Builder's All Risk" insurance in an amount
approved by Landlord covering the construction of the Tenant Improvements,
and such other insurance as Landlord may require, it being understood and
agreed that the Tenant Improvements shall be insured by Tenant pursuant to
Paragraph 8 of the Lease immediately upon completion thereof. Such insurance
shall be in amounts and shall include such extended coverage endorsements as
may be reasonably required by Landlord including, but not limited to, the
requirement that all of Tenant's contractors shall carry excess liability
and Products and Completed Operation coverage insurance, each in amounts not
less than $500,000 per incident, $1,000,000 in aggregate, and in form and
with companies as are required to be carried by Tenant as set forth in
Paragraph 8 of the Lease.
6.3 Certificates for all insurance carried pursuant to this
Improvement Agreement must comply with the requirements of Paragraph 8 of
the Lease and shall be delivered to Landlord before the commencement of
construction of the Tenant Improvements and before the contractor's
equipment is moved onto the site. In the event the Tenant Improvements are
damaged by any cause during the course of the construction thereof, Tenant
shall immediately repair the same at Tenant's sole cost and expense.
Tenant's contractors shall maintain all of the foregoing insurance coverage
in force until the Tenant Improvements are fully completed and accepted by
Landlord, except for any Product and Completed Operation Coverage insurance
required by Landlord, which is to be maintained for five (5) years following
completion of the work and acceptance by Landlord and Tenant. All policies
carried under this Paragraph 6 shall insure Landlord and Tenant, as their
interests may appear, as well as the contractors. All insurance maintained
by Tenant's contractors shall preclude subrogation claims by the insurer
against anyone insured thereunder. Such insurance shall provide that it is
primary insurance as respects the owner and that any other insurance
maintained by owner is excess and noncontributing with the insurance
required hereunder. Landlord may, in its discretion, require Tenant to
obtain a lien and completion bond or some alternate form of security
satisfactory to Landlord in an amount sufficient to ensure the lien-free
completion of the Tenant Improvements and naming Landlord as a co-obligee.
7. Completion and Rental Commencement Date.
7.1 Tenant's obligation to pay Rent under the Lease shall commence on
the Scheduled Term Commencement Date and the Scheduled Term Commencement
Date shall be the Term Commencement Date notwithstanding anything to the
contrary contained in Paragraph 2 of the Lease. However, except as otherwise
provided herein, Landlord Delays (as defined below) shall extend the Term
Commencement Date, but only in the event that substantial completion of the
Tenant Improvements is actually delayed beyond September 1, 2000, despite
Tenant's best efforts to adapt and compensate for such delays. In addition,
no Landlord Delays shall be deemed to have occurred unless Tenant has
provided notice, in compliance with the Lease, to Landlord specifying that a
delay shall be deemed to have occurred because of actions, inactions or
circumstances specified in the notice in reasonable detail. If such actions,
inactions or circumstances are not cured by Landlord within one (1) business
day after receipt of such notice ("COUNT DATE"), and if such actions,
inaction or circumstances otherwise qualify as a Landlord Delay, then a
Landlord Delay shall be deemed to have occurred commencing as of the Count
Date. The Term Commencement Date shall be extended by one day for each day
from the Count Date that a Landlord Delay has occurred, as calculated as
provided above. The term "Landlord Delays," as such term may be used in this
Improvement Agreement, shall mean any actual delays in the completion of the
Tenant Improvements which are due to any act or omission of Landlord, its
agents or contractors. Landlord Delays shall include but not be limited to:
(i) delays in the giving of authorizations or approvals by Landlord beyond
the periods provided in this Improvement Agreement, (ii) delays due to the
acts or failures to act, of Landlord, its agents or contractors, where such
acts or failures to act are required by the terms of this Improvement
Agreement and actually result in a delay of the completion of the Tenant
Improvements beyond September 1, 2000, provided that Tenant acts in a
commercially reasonable manner to mitigate any such delay, and (iii) delays
due to the unreasonable interference of Landlord, its agents or contractors
with the completion of the Tenant Improvements. Notwithstanding anything to
the contrary contained in this Improvement Agreement or in the Lease, if a
Landlord Delay does occur but the Premises is substantially complete on or
before September 1, 2000, then the Term Commencement Date shall not be
extended and shall be the date described in Paragraph 2.B of the Lease. In
the event a Landlord Delay shall not occur, then the Term Commencement Date
shall be the date described in Paragraph 2.B of the Lease.
7.2 Within ten (10) days after completion of construction of the
Tenant Improvements, Tenant shall cause a Notice of Completion to be
recorded in the office of the Recorder of the county in which the Building
is located in accordance with Section 3093 of the Civil Code of the State of
California or any successor statute, and shall furnish a copy thereof to
Landlord upon such recordation. If Tenant fails to do so, Landlord may
execute and file the same on behalf of Tenant as Tenant's agent for such
purpose, at Tenant's sole cost and expense. At the conclusion of
construction, (i) Tenant shall cause the Space Planner and the contractor
(i) to update the approved working drawings as necessary to reflect all
changes made to the approved working drawings during the course of
construction, (ii) to certify to the best of their knowledge that the
"record-set" of as-built drawings are true and correct, which certification
shall survive the expiration or termination of the Lease, and (c) to deliver
to Landlord two (2) sets of copies of such record set of drawings within
ninety (90) days following issuance of a certificate of occupancy for the
Premises, and (iii) Tenant shall deliver to Landlord a copy of all
warranties, guarantees, and operating manuals and information relating to
the improvements, equipment, and systems in the Premises.
7.3 A default under this Improvement Agreement shall constitute a
default under the Lease, and the parties shall be entitled to all rights and
remedies under the Lease in the event of a default hereunder by the other
party (notwithstanding that the Term thereof has not commenced).
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7.4 Without limiting the "as-is" provisions of the Lease, except for
the Base Building Work to be constructed by Landlord pursuant to this
Improvement Agreement, Tenant accepts the Premises in its "as-is" condition
and acknowledges that it has had an opportunity to inspect the Premises
prior to signing the Lease.
7.5 For purposes of the Lease and this Improvement Agreement,
"SUBSTANTIAL COMPLETION" shall have occurred when (i) Landlord's architect
and Tenant's architect each state in writing that the Tenant Improvements
are substantially complete in accordance with the terms of the Lease and
this Improvement Agreement, and (ii) services and utilities are made
available to the Building.
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SCHEDULE 1
TO EXHIBIT C
BASE BUILDING WORK - 1745 Technology Drive, San Jose, CA
I. PROJECT DESCRIPTION
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GENERAL: The Project Site is a parcel of land located on Technology Drive,
between Skyport Road and Airport Parkway in San Jose, California.
SITE: 15.45 Acres (parcel includes 1731, 1733, 1735, 1737, and
1745 Technology Drive)
BUILDING AREAS: Net Rentable Area 210,677 RSF
Parking 3.6 spaces / 1000 useable square feet
FLOORS: The total number of floors from Lobby Level to the top
floor of office space will be eight. The typical office
floor size for floors three through eight will be approximately
26,268 RSF. A single core will serve each building floor.
In addition, there will be a mechanical penthouse.
PRIMARY INTERIOR PLANNING CRITERIA: Structural floor slab to structural floor slab dimensions will
be set so as to allow the following floor-to-ceiling heights:
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LEVEL HEIGHT HEIGHT SLAB TO SLAB CEILING
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Ground Floor 16'0" 11'6"
2 through 8 13'6" 9'0"
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II. ARCHITECTURAL DESCRIPTION
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EXTERIOR WALLS: The exterior wall material will include glass, aluminum, polished
stone and pre-cast concrete.
ACOUSTICAL: The air shaft walls at each level will contain acoustical insulation.
The main trunk ductwork at each level will be wrapped with acoustical
insulation. Major equipment components will be mounted on sound and
vibration isolating devices.
ELEVATORS: There will be four passenger elevators in the core, one of which
will have a swing door for freight.
INTERIOR FINISHES: The Main Lobby floor will be mostly stone and the walls will be a
combination of stone, wood panels, and/or other materials.
Typical floors will include drywall on all core walls. Exterior walls
will receive stud framing but no drywall.
Tenant elevator lobbies will include finishes of equal or better
quality than the lobby on floors two through five of 1741 Technology
Drive, San Jose, California.
Toilet Room wall and floor finished will be ceramic tile and paint.
Toilet partitions will be ceiling-mounted, painted metal. The
lavatory tops will be polished stone.
Elevator cabs will have wood veneer walls with stone base and
carpeted floors.
ADA COMPLIANCE: The Project will be designed and constructed in compliance with the
current Title 24 and American With Disabilities Act (ADA)
requirements at the time of building permit issuance.
III. STRUCTURAL DESCRIPTION
FOUNDATION: Precast driven piles supporting caps and grade beams with a
concrete slab on grade.
OFFICE BUILDING STRUCTURE: Concrete fill over metal deck supported by wide flange steel beams
and columns.
LIVE LOADS: The general live load capacity of office area floor slabs will be
100 lbs per sf.
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IV. MECHANICAL, PLUMBING, ELECTRICAL AND FIRE/SAFETY SYSTEMS DESCRIPTION
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MECHANICAL SYSTEM: The air conditioning system will consist of a variable
air volume system with one factory furnished water-cooled VAV unit
per floor. These will be supplied with condenser water from two
closed circuit coolers and circulating pumps located in the
penthouse.
The heating system will be limited to a hot water loop with valves to
each floor.
The control system will include an electronic Direct Digital
Temperature Control System. The sensing accuracy and component
reliability of the Direct Digital Temperature Control System will
allow heating and cooling systems to maintain consistently
comfortable conditions throughout the tenant space.
The mechanical systems are designed to deliver HVAC interior
conditioning based on the following loads and outdoor conditions:
Load: Occupancy: 1 person/150 sf of useable
area
Electrical Consumption:
Lighting - 1.5 watts/usf
Tenant Power - 1.0 watts/usf
Ventilation - 0.15 cfm/usf
Winter: Indoor 72~F dry bulb
Outdoor 34~F dry bulb
Summer: Indoor 75~F dry bulb
Relative Humidity not to exceed 50%
Outdoor 84~F dry bulb
Outdoor 64~F wet bulb
POWER SYSTEM: The electrical service will be supplied through primary underground
circuits from Pacific Gas & Electric Company. The incoming electric
service will be 480/277 volt, three phase, four wire running to the
main switchboard area. The main switchgear will include 480/277 volt
electric service to the typical floor will be fed from the main
building bus risers. Dry-type transformers will reduce 480/277 volt
service to 120/208 volt, three-phase, four wire service for special
lighting and receptacle loads on all tenant floors. Transformer
capacity will be designed to accommodate a connected load of 4.0
watts per square foot of usable area.
PLUMBING SYSTEM: The plumbing system will consist of domestic hot and cold water
supply, sanitary sewer and storm sewer piping systems. The system
design will be in accordance with the City of San Jose Building Code
and assures sufficient capacity to handle the occupancy of the
Building. Plumbing fixtures, fittings and trim shall be high quality
commercial type and will be coordinated with the architectural
features of the Building.
TELEPHONE SYSTEM: Telephone closets for riser use shall be provided on each floor with
pathways to main the telephone room.
FIRE PROTECTION SYSTEM: Automatic sprinklers will be provided throughout the Building in
accordance with NFPA #13, for light hazard occupancy design criteria.
Sprinkler head drops, sprinkler head relocations and additional heads
will be completed as part of tenant work. Firehose connections will
be located in stairwells in accordance with code requirements.
STAIR/ELEVATOR The emergency egress stairwells and elevator shafts in the Building
SHAFT PRESSURIZATION: will be served by pressurization systems. These systems will, in the
event of an emergency condition, pressurize egress stairwells and
elevator shafts to reduce the possibility of smoke entering the
egress stairwell or elevator shaft.
EMERGENCY POWER SYSTEM: Emergency power shall be provided by a permanently installed
diesel-powered electrical generator set and, as required by code,
power will automatically be supplied to support all stairwell and
elevator shaft pressurization equipment, emergency lighting, fire
alarm and communications systems, emergency use of elevators, fire
pumps and ancillary emergency fire/safety equipment in the unlikely
event of normal power source loss. In addition, after written request
by Tenant, Landlord will provide additional emergency power equal to
250 kW to the Building. Tenant shall pay any additional costs
associated with the additional emergency power increase upon written
request by Landlord.
FIRE ALARM AND The fire alarm and communication systems will be an addressable alarm
COMMUNICATION SYSTEMS system with Title 24 ADA provisions. Annunciation, control and
communication equipment will be located in the Fire Control Center to
the
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Building with additional indicators located at the Security Desk and
the Building Engineer's Office. The fire alarm system will have
battery back-up and be UL listed as a system.
ACCESS CONTROL: All building entrances will be locked after hours. After hours
access will be via proximity card reader. The elevators shall have
card key access system to each floor.
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SCHEDULE 2
TO EXHIBIT C
BUILDING STANDARDS
1745 TECHNOLOGY DRIVE, SAN JOSE, CALIFORNIA 95110
The following constitutes the Building Standard tenant
improvements ("Standards") in the quantities specified:
PARTITIONS
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INTERIOR: 3 5/8" metal studs with 5/8" gypsum board on each side. Taped smooth
and ready for finish.
DEMISING: 3 5/8" metal studs with 5/8" gypsum board with sound batt
insulation. Taped smooth and ready for finish.
PERIMETER WAINSCOT: 5/8" layer of gypsum board. Taped smooth ready for finish.
Extruded bronze finish aluminum sill to match exterior mullions.
PAINT: 1 of coat primer, 2 coats of interior latex paint in eggshell finish,
on each side of partitions.
DOOR ASSEMBLIES
DOORS: Doors will be 3'-0" x 8'- 10" x 1-3/4" solid core construction
with maple veneer faces and edge.
Interior Doors: 3'-0" x 8'- 10" 1-3/4" solid core door with clear plain sliced maple.
DOOR FRAMES: Door frames will be clear anodized aluminum.
DOOR HARDWARE: Tenant entry doors shall receive a lockset, surface mounted closer,
butt hinges, and door stop.
Tenant interior doors shall receive a latchset, butt hinges and door stop.
Door hardware to be Schlage "L" series Mortise locks, finish: 626.
Hager 3 knuckle hinges, finish: 626.
LCN#1460 Slimline series door closer.
Quality #432 door stop.
CEILING SYSTEM
ACOUSTIC CEILINGS AND
SUSPENDED SYSTEMS: Acoustical suspended ceilings will be Armstrong Dune, Armstrong
Silhouette XL 9/16" grid.
LIGHT FIXTURES: Light fixtures will be Daylite or equal, lay-in mounted 2' x 4'
(2)-lamp parabolic with reflector, Motorola rapid start electronic
ballast or equal, 277 volt fixture with ready connect soft wire
system. SP35 Super Saver II T-8 Fluorescent lamps.
LIGHT SWITCH ASSEMBLY: Switches will be paired in double gang box to meet Title 24
requirements. Bryant #4901, white finish.
ELECTRICAL AND TELEPHONE
RECEPTACLES: Receptacles will be duplex 20 ampere, 125 volt AC with Bryant wall
plate, smooth line, white finish.
TELEPHONE OUTLETS: Outlets will be a standard telephone plate in manufacturer's
standard colors, mounted vertically level with electrical receptacles,
white color.
EXIT SIGNAGE: Exit signs to be Lerrt/Lergt recessed ceiling edgelit LED exit light.
3/16" thick clear acrylic double panels with opaque separator with
green engraved lettering.
HEATING AND AIR CONDITIONING SYSTEM
HVAC SYSTEM: Energy efficient high velocity variable air volume system with
conditioned space zoned on the average of 1 zone per every 800
square feet. Perimeter zones will have heating, interior zones have
cooling only. Interior grills and registers painted to match acoustic
ceiling tile.
FIRE PROTECTION
FIRE SPRINKLER HEADS: Sprinkler head to be Viking Model B1 and B2 concealed automatic and
quick response sprinklers.
Color: Off White.
FLOOR COVERING
CARPET: 38 oz weight cut pile, Designweave, Sabre Classic, installed over pad.
All standard colors available.
TILE: Armstrong, Standard Excelon vinyl composition tile. All standard
colors available.
BASE: Burke, 4" rubber base, topset over VCT and straight cut over carpet.
All standard colors available.
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WINDOW COVERING
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BLINDS: 1" aluminum Levelor Mark 1 Dustguard 1" blinds.
Color: aluminum. Sized to fit within aluminum mullion module.
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SCHEDULE 3
TO EXHIBIT C
CONTRACTOR RULES AND REGULATIONS
GENERAL REQUIREMENTS FOR BUILDING CONSTRUCTION WORK
- --------------------------------------------------------------------------------
INTENT
The intent of these General Requirements is to communicate Spieker Properties
general performance expectations and requirements of contractors performing work
in our projects. While these requirements may not cover all specific project
requirements, or may not apply to all projects, they are intended to communicate
a basic overall methodology for doing construction work in Spieker Properties
projects.
Preliminary
1. All work performed shall be performed by union signatory general contractor
utilizing all union labor and must comply with all applicable rules,
regulations, and codes of the building, city, state, and federal
governmental agencies having jurisdiction. The General Contractor will file
drawings and secure all required permits prior to beginning work, unless
circumstances require earlier construction commencement, as directed by the
Owner's architect. All construction within the leased premises shall conform
to applicable sections of California Title 24 Standards and the American
with Disabilities Act (ADA).
2. All work shall be performed during regular business hours (7:00 A.M. - 6:00
P.M.), Monday through Friday, with the exception of work types listed below.
All building system operations will be maintained in normal operation, and
will not be adversely impacted by construction work, unless specifically
authorized by a Project Management representative. The contractor shall
communicate requests to the Management Office 24 hours in advance of any
required interruption of any building services.
EXCEPTIONS - The following work is required to be performed on an
overtime or off-hours basis: core drilling, nailing of tackless carpet
stripping, spray painting of any lacquer or other volatile or odor
creating substances, and any type of concrete chipping. Any scheduling
requests for these types of off-hours work must be approved and
authorized by the Management Office prior to performance any of work.
3. All contractors must supply Certificate(s) of Insurance naming Spieker
Properties, L.P. as additionally insured prior to the start of any
construction. Insurance certificates and copies of permits, as required,
must be provided to Project Management prior to the commencement of any
work.
4. Contractors representative will meet with Project Management representative
prior to beginning contracted work, to review the scope of construction
work, construction methods, these general requirements, any additional
project specific requirements, and any potential impact to the satisfactory
on-going operation of building services.
5. The contractor will coordinate proper parking locations for construction
personnel with Project Management prior to starting construction, to avoid
impacting our tenants parking availability.
PROJECT AREA ACCESS
1. Access to project buildings, parking structures, suites, etc. will be
coordinated in advance with Project Office. No installed access control or
security system will be over ridden or bypassed for any reason, or at any
time. All construction personnel will be limited to those areas for which
they have been given specific access.
2. Access to all electrical closets, telephone closets, mechanical rooms, and
suites must be coordinated in advance through the Project Office.
Electrical, telephone, and other equipment rooms will be kept closed and
locked when they are not physically occupied.
DURING WORK PERFORMANCE
1. Upon the start of construction, the contractor will provide walk-off mats at
all entrances to the construction area(s) from stairwells (if used) and
entrances to all elevators.
2. Contractors shall maintain cleanliness throughout; do not clutter or block
hallways, exits, elevator lobby, electrical or telephone rooms. Building
fire rated doors will not be propped open, removed, or their door closures
disconnected. Nor will elevator doors be propped or jammed open to prevent
the automatic function of it's timed door actuators. CONTRACTORS ARE
REQUIRED TO UTILIZE THE FREIGHT ELEVATOR ONLY! Where a freight elevator is
not available, Project Management will designate the appropriate elevator
for contractor use. Where available, elevator protective pads will be used
whenever moving materials or equipment in the elevator. Contractors are
responsible for all damage they cause and clean-up.
3. Building electrical closets will not, at any time, or for any reason, be
utilized for the storage of any construction project materials or trash, as
such storage constitutes a violation of prevailing fire codes.
4. All material deliveries, and debris removal, must be made as expeditiously
as possible so as to not have these vehicles blocking accesses to / from the
building. The contractor, at contractor expense must remove all construction
debris from the building. Building trash dumpsters are not to be utilized
for the disposal of construction project debris, as these are provided for
tenant use. As may be required, Contractor will make arrangements for
delivery of a debris box for his use. The Project Office will approve an
appropriate location for the debris box while it is on the project. Delivery
or removal of large amounts of material is to be done after normal business
hours with 24-hr. prior approval of the Project Manager.
5. The contractor is responsible for taking the following precautions / steps
to protect the satisfactory on-going operation of all building systems and
tenant operations :
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o Covering HVAC supply and return duct openings to protect from
construction dirt / dust being spread to other areas of the building
or into the HVAC equipment / system. This can be accomplished by
sealing off, covering with filtering media, or other Project
Management approved method.
o Coordinate with Project Manager prior to construction to have fire
sprinkler systems isolated, smoke detectors disabled, or alarm
systems de-activated for periods as may be necessary. Contractor will
protect those smoke detectors or fire sprinkler heads left installed
in the area, after disabling, by covering them with plastic bags
during construction.
o Where electrical components or circuits are removed, contractor will
ensure full compliance with OSHA required lockout / tagout procedures
to prevent personal injuries or system outages.
o Develop the best isolation possible of the construction area to
contain any dirt, dust, noise or other potential tenant impact which
may be generated by demo, construction work and clean-up.
6. Any damage to any project area including but not limited to, parking areas,
doors, freight elevators, and carpets will be reported to the Project Office
and repaired by the contractor immediately. Spieker Properties reserves the
right to remedy any damage at the Contractors expense if the damage is not
repaired in a timely manner.
7. No powder-actuated guns are to be used without the specific prior
authorization of the Project Management Office.
8. No foreign substances are to be poured down any restroom floor drains, or
into other restroom fixtures.
9. All firewall and floor penetrations shall be sleeved and sealed in
accordance with applicable fire code, using only approved, UL listed, fire
stop materials. All firestop installations must be reviewed and approved by
the Project Manager prior to closing the associated area of work.
10. All electrical panel and circuit breaker labeling will be performed in
accordance with acceptable industry methods, or as may be directed by
Project Management.
11. Contractor will notify the Management Office at least 48 hours in advance of
construction completion. A walk-through and punch list will be developed for
each job.
12. Smoking is prohibited in all buildings, and parking garages, at all times.
13. The Contractor is responsible for ensuring, on an on-going basis, that
common areas, work space, and construction use restrooms are thoroughly
cleaned upon completion of work, including trash and material disposal,
removal of all noise and dust shielding materials installed at beginning of
project, windows cleaned, etc.
14. THE PROJECT OFFICE IS TO BE NOTIFIED IMMEDIATELY SHOULD ANY EMERGENCY
DEVELOP, ANY BUILDING SYSTEM OR OPERATION BE IMPACTED, OR ANY ASPECT OF THE
CONSTRUCTION EFFORT IMPACT ANY TENANT.
SAFETY / COMPLIANCE
1. General Contractor is responsible for ensuring jobsite safety compliance.
This includes the work force as well as anyone entering the construction
area. Protective barricades will be placed as required to ensure general
area safety. Material Safety Data Sheets (MSDS) for all materials to be used
on the jobsite must be provided to the Project Manager for review prior to
bringing the materials into the project. The contractor will further ensure
that a copy of each MSDS is available at the jobsite whenever a specific
material is in use.
2. No welding, burning, or cutting with an open flame will be performed without
prior notification to the Project Office so that appropriate actions may be
taken with fire alarm systems and fire sprinkler systems. Appropriate fire
extinguishers will be immediately available at all times.
3. The contractor is responsible for ensuring that all of their sub-contractors
are aware, and in compliance, with these general requirements.
MATERIALS
1. The contractor shall contact the Management Office at the start of
construction for instructions on building keying, specific hardware and
other standards, as may be applicable, unless this coordination is
accomplished through hardware submittals. All permanent keying will be
provided through the Management Office.
2. All HVAC, electrical, plumbing, fire alarm system, fire sprinkler, building
control and lighting components installed will be of Building Standard
manufacture, unless noted as otherwise on the approved plans and
specifications. This includes but is not limited to thermostats, controls,
diffusers, lighting fixtures, switches, lamps, relays, smoke detectors, fire
sprinkler heads, sprinkler flow switches, manual pull stations, indicator
horns / strobes, etc.
Project Completion
1. Upon completion of project, contractor will perform a full air balance of
any installed or modified HVAC systems, providing one copy of each air
balance report to the Management Office.
2. Upon completion of project, a completed test report (witnessed by a Fire
Department representative as required) will be provided to the Project
Management Office for all fire sprinkler or fire alarm systems having been
impacted by any aspect of the construction work.
3. Upon completion of construction, one (1) set of as-built prints, and one (1)
set of as-built sepias, are to be provided to the Management Office.
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4. Contractor will ensure that specific submittals, manufacturers operation and
maintenance manuals, and applicable manufacturers cut sheets are delivered
to the Project Office for all equipment or components installed in the
course of their work. This includes, but is not limited to, mechanical
equipment, fire alarm system components, fire sprinkler system components,
HVAC system equipment or components, lighting system components, electrical
distribution or control components, and any sensing or monitoring
components.
5. Upon completion of construction clean inside of all perimeter windows and
the interior of all lighting fixtures and louvers. Thoroughly clean all work
areas, common areas where impacted, construction use restrooms, and freight
elevators. Coordinate construction clean-up schedule with Management Office.
Building Contact List
Any questions or concerns should be directed to:
PROJECT DIRECTOR - CHEQUITA MCCULLOUGH
BUILDING MANAGERS - CHEQUITA MCCULLOUGH
CUSTOMER SERV. REP. - ______ N/A_______
BUILDING ENGINEER - DON DEL BONO
MANAGEMENT OFFICE - (408) 467-7150
MANAGEMENT OFFICE FAX - (408) 467-7160
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report dated November 24, 1999 included in the form 10-K/A, into the
Company's previously filed Registration Statements (Files No's. 333-85187 and
333-95653) on Form S-8.
/s/ Arthur Andersen LLP
San Jose, California
January 28, 2000
<TABLE> <S> <C>
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0
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