<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended July 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-25601
------------------------------
BROCADE COMMUNICATIONS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0409517
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
</TABLE>
------------------------------
1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
(408) 487-8000
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock on August 31,
2000 was 110,429,310 shares.
Page 1 of 22 pages.
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BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED JULY 29, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Balance Sheets as of July 29, 2000 and October 31, 1999 3
Condensed Statements of Operations for the Three Months and Nine Months Ended
July 29, 2000 and July 31, 1999 4
Condensed Statements of Cash Flows for the Nine Months
Ended July 29, 2000 and July 31, 1999 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risks 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
</TABLE>
This Form 10-Q contains forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995), including but not
limited to statements regarding Brocade's expectations, hopes or
intentions regarding the future. Actual results and trends could differ
materially from those discussed in the forward-looking statements. In
addition, past trends should not be perceived as indicators of future
performance. Among the factors that could cause actual results to differ
from the forward-looking statements are those detailed elsewhere in this
Report in Management's Discussion and Analysis of Financial Condition and
Results of Operations and in Brocade's other Securities and Exchange
Commission reports.
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<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JULY 29, OCTOBER 31,
2000 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,812 $ 25,536
Short-term investments 99,779 63,769
--------- ---------
Total cash, cash equivalents and short-term investments 129,591 89,305
Marketable equity securities 66,565 --
Accounts receivable, net of allowances of $5,614 and $2,447, respectively 53,019 17,139
Inventories, net 1,523 3,686
Prepaid expenses and other current assets 3,257 2,203
--------- ---------
Total current assets 253,955 112,333
Property and equipment, net 21,712 4,947
--------- ---------
Total assets $ 275,667 $ 117,280
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,382 $ 10,664
Payroll related liabilities 19,222 4,414
Other accrued liabilities 9,743 9,830
Deferred revenue 2,223 7,688
Capital lease obligations 121 478
--------- ---------
Total current liabilities 62,691 33,074
--------- ---------
Stockholders' equity:
Common stock, $.001 par value, 400,000,000 shares authorized:
Issued and outstanding: 110,160,891 and 107,040,080 shares at
July 29, 2000 and October 31, 1999, respectively 110 107
Additional paid-in capital 138,846 119,593
Deferred stock compensation (2,600) (3,440)
Notes receivable from stockholders -- (5,660)
Unrealized gain (loss) on marketable equity securities and short-term investments 62,264 (49)
Accumulated earnings (deficit) 14,356 (26,345)
--------- ---------
Total stockholders' equity 212,976 84,206
--------- ---------
Total liabilities and stockholders' equity $ 275,667 $ 117,280
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE> 4
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 92,138 $ 20,051 $196,931 $ 38,598
Cost of revenues 38,159 9,921 84,296 18,679
-------- -------- -------- --------
Gross margin 53,979 10,130 112,635 19,919
-------- -------- -------- --------
Operating expenses:
Research and development 14,029 4,148 29,723 9,782
Sales and marketing 12,984 3,691 27,542 7,777
General and administrative 2,642 1,000 6,758 2,415
Amortization of deferred stock compensation 280 280 840 1,657
-------- -------- -------- --------
Total operating expenses 29,935 9,119 64,863 21,631
-------- -------- -------- --------
Income (loss) from operations 24,044 1,011 47,772 (1,712)
Interest income, net 1,370 633 3,748 669
-------- -------- -------- --------
Income (loss) before income taxes 25,414 1,644 51,520 (1,043)
Provision for income taxes 5,337 33 10,819 33
-------- -------- -------- --------
Net income (loss) $ 20,077 $ 1,611 $ 40,701 $ (1,076)
======== ======== ======== ========
Basic net income (loss) per share $ 0.19 $ 0.02 $ 0.40 $ (0.03)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.16 $ 0.01 $ 0.34 $ (0.03)
======== ======== ======== ========
Shares used in the calculation of basic net
income (loss) per share 104,604 71,344 102,878 36,468
======== ======== ======== ========
Shares used in the calculation of diluted net
income (loss) per share 122,212 110,028 120,303 36,468
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE> 5
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
JULY 29, JULY 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 40,701 $ (1,076)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 3,474 1,476
Loss on disposition of equipment 789 248
Noncash compensation expense 840 1,738
Write down of non-marketable investments 4,001 --
Changes in assets and liabilities:
Accounts receivable (35,880) (8,586)
Inventories 2,163 (884)
Prepaid expenses and other current assets (1,054) (607)
Accounts payable 20,718 3,703
Payroll related liabilities 14,808 3,556
Other accrued liabilities 10,850 --
Deferred revenue (5,465) 6,048
-------- --------
Net cash provided by operating activities 55,945 5,616
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (21,028) (1,855)
Purchases of short-term investments (59,543) (65,976)
Proceeds from dispositions of short-term investments 23,533 --
Other investing activities (9,000) --
-------- --------
Net cash used in investing activities (66,038) (67,831)
-------- --------
Cash flows from financing activities:
Net proceeds from the issuance of common stock 9,066 65,878
Net proceeds from the issuance of redeemable preferred stock and stock warrants -- 1,512
Proceeds from notes receivable from stockholders 5,660 --
Payments on capital lease obligations (357) (601)
Proceeds from notes payable -- 247
Repayment of notes payable and line of credit -- (4,881)
-------- --------
Net cash provided by financing activities 14,369 62,155
-------- --------
Net increase (decrease) in cash and cash equivalents 4,276 (60)
Cash and cash equivalents at beginning of period 25,536 10,420
-------- --------
Cash and cash equivalents at end of period $ 29,812 $ 10,360
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
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<PAGE> 6
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Information for the three and nine months ended July 29, 2000 and
July 31, 1999 is unaudited)
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Brocade Communications Systems, Inc. ("Brocade"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion of
management, the disclosures are adequate to make the information not misleading.
The condensed balance sheet as of October 31, 1999 has been derived from the
audited financial statements as of that date, but does not include all
disclosures required by generally accepted accounting principles. These
financial statements and notes should be read in conjunction with the audited
financial statements and notes thereto, included in Brocade's Annual Report
filed on Form 10-K with the Securities and Exchange Commission.
The unaudited condensed financial statements reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods indicated. The results of operations for the three and nine months ended
July 29, 2000 are not necessarily indicative of the results that may be expected
for future quarters or the year ending October 28, 2000.
2. STOCK SPLITS
On November 8, 1999 and January 21, 2000, Brocade's board of directors
approved two-for-one splits of Brocade's Common Stock. The stock began trading
on a split-adjusted basis on December 3, 1999 and March 14, 2000, respectively.
All references in the accompanying financial statements and notes thereto to
earnings per share and the number of common shares have been retroactively
restated to reflect the common stock splits.
3. CHANGE IN FISCAL YEAR END
Brocade changed its fiscal year end to the last Saturday in October,
beginning with the fiscal year ended October 28, 2000. This change did not have
a material impact on Brocade's financial statements for the three and nine month
periods ended July 29, 2000.
4. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earning Per Share,"
("SFAS No. 128") for all periods presented. Pursuant to the Securities and
Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior to
the anticipated effective date of an initial public offering must be included in
the calculation of basic and diluted net income (loss) per share as if such
stock had been outstanding for all periods presented. Brocade has not had any
issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net income (loss) per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Diluted net
income (loss) per share is computed using the weighted average number of common
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.
-6-
<PAGE> 7
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three and nine months
ended July 29, 2000 and July 31, 1999 is unaudited)
The following table presents the calculation of basic and diluted net
income (loss) per common share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Basic and diluted net income (loss) per share:
Net income (loss) $ 20,077 $ 1,611 $ 40,701 $ (1,076)
========= ========= ========= =========
Weighted-average shares of common stock outstanding 109,695 80,840 108,671 45,148
Less: weighted-average shares subject to repurchase (5,091) (9,496) (5,793) (8,680)
--------- --------- --------- ---------
Weighted-average shares used in computing basic net
income (loss) per share 104,604 71,344 102,878 36,468
Plus: Weighted-average shares subject to repurchase 5,091 9,496 5,793 --
Dilutive effect of common shares equivalents 12,517 29,188 11,632 --
--------- --------- --------- ---------
Weighted-average shares used in computing diluted net
income (loss) per share 122,212 110,028 120,303 36,468
========= ========= ========= =========
Basic net income (loss) per share $ 0.19 $ 0.02 $ 0.40 $ (0.03)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.16 $ 0.01 $ 0.34 $ (0.03)
========= ========= ========= =========
</TABLE>
5. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
All highly liquid investment securities with original maturities of three
months or less are considered cash equivalents, while investment securities with
original maturities of more than three months but less than one year are
considered short-term investments.
As of July 29, 2000 and October 31, 1999 all short-term investments are
classified as available-for-sale.
6. CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS
Brocade is organized and operates as one business segment; the design,
development, manufacturing, marketing and selling of switching solutions for
Storage Area Networks ("SANs").
For the nine months ended July 29, 2000, revenues from eight customers
accounted for 82% of total net revenues. The level of sales to any customer may
vary from quarter to quarter, however, we expect that significant customer
concentration will continue for the foreseeable future. Loss of any one of these
customers could have a material adverse impact on Brocade's financial condition
or results of operations.
7. COMMITMENTS AND CONTINGENCIES
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 affect on the financial position of Brocade.
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<PAGE> 8
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three and nine months ended
July 29, 2000 and July 31, 1999 is unaudited)
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
JULY 29, OCTOBER 31,
2000 1999
-------- -----------
<S> <C> <C>
Accrued warranty $3,445 $1,856
Purchase commitments reserve 1,370 3,629
Other 4,928 4,345
------ ------
$9,743 $9,830
====== ======
</TABLE>
9. COMPREHENSIVE INCOME
For both the three and nine month periods ended July 29, 2000, net
unrealized holding gains on marketable equity securities and short-term
investments amounted to $62.3 million. Accordingly, total comprehensive income
for the three and nine month periods ended July 29, 2000 amounted to $82.4
million and $103.0 million, respectively. Unrealized holding gains (losses) for
all other periods presented are not significant and accordingly, comprehensive
income (loss) for such periods approximated net income (loss).
10. RECENT ACCOUNTING PRONOUNCEMENTS
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.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain
Transactions Involving Stock Compensation - an interpretation of APB Opinion
25." Interpretation No. 44 is effective July 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. Management does not
anticipate that the adoption of Interpretation No. 44 will have a material
impact on financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
does not expect the adoption of SAB 101 to have a material impact on financial
position or results of operations of the Company.
-8-
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
condensed interim financial statements and the notes thereto included in Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in Brocade's Annual
Report filed on Form 10-K with the Securities and Exchange Commission on January
31, 2000.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
This Quarterly Report contains "forward-looking" statements that relate
to future events or future financial performance. While we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. Brocade's actual results could differ materially from those
anticipated and discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below under "Risk
Factors", and to other risk factors detailed in Brocade's Annual Report filed on
Form 10-K with the Securities and Exchange Commission. All forward-looking
statements included in this document are based on information available to
Brocade on the date hereof. Brocade assumes no obligation to update any such
forward-looking statements.
OVERVIEW
Brocade is a leading provider of switching solutions for Storage Area
Networks ("SANs"). We sell our SAN switching solutions through leading storage
systems and server original equipment manufacturers, and through system
integrators. These original equipment manufacturers and our system integrator
customers combine our switching solutions with other system elements and
services for enterprise data centers.
Our revenue is derived primarily from sales of our SilkWorm family of
products. In fiscal 1999, four customers accounted for a combined total of 70%
of total revenue. In the nine month period ended July 29, 2000, eight customers
contributed 82% of total revenue. The level of sales to any customer may vary
from quarter to quarter. However, we expect that significant customer
concentration will continue in the foreseeable future. The loss of any one of
these customers, or a decrease in the level of sales to any one of these
customers, could have a material adverse impact on Brocade's financial condition
or results of operations.
Product revenue is generally recognized when products are shipped to
customers. Revenue recognition is deferred for shipments to new customers if, 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 July
29, 2000, deferred revenue is comprised principally of shipments in the third
quarter of fiscal year 2000 to customers with new product programs.
Our average unit-selling price has generally decreased since the
beginning of fiscal 2000 but remained steady in the third quarter of fiscal 2000
compared to the second quarter of fiscal 2000. We expect 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.
We outsource 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.
-9-
<PAGE> 10
Sales and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
travel expenses. We believe that continued investment in sales and marketing is
critical to the success of our strategy to expand our relationships with leading
original equipment manufacturers, to expand our presence in the system
integration channel, and to maintaining our leadership position in the SAN
market. As a result, we expect these expenses to increase in absolute dollars in
the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and human resources personnel,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and the related infrastructure necessary to support the growth of our
business.
In connection with the grant of certain stock options to employees, we
recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998
and 1999, respectively, representing the difference between the deemed value of
our common stock for accounting purposes and the option exercise price of these
options at the date of grant. Deferred compensation is presented as a reduction
of stockholders' equity and amortized ratably over the vesting period of the
applicable options. We amortized $280,000 and $840,000, respectively, of
deferred compensation for the three and nine months ended July 29, 2000.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUES TOTAL REVENUES
------------------ ------------------
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 29, JULY 31, JULY 29, JULY 31,
2000 1999 2000 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 41 49 43 48
---- ---- ---- ----
Gross margin 59 51 57 52
---- ---- ---- ----
Operating expenses:
Research and development 15 21 15 25
Sales and marketing 14 18 14 20
General and administrative 3 5 3 6
Amoritization of deferred stock
compensation 1 1 1 4
---- ---- ---- ----
Total operating expenses 33 45 33 56
---- ---- ---- ----
Income (loss) from operations 26 5 24 (4)
Interest income, net 2 3 2 2
---- ---- ---- ----
Income (loss) before income taxes 28 8 26 (3)
Provision for income taxes 6 -- 5 --
---- ---- ---- ----
Net income (loss) 22% 8% 21% (3)%
==== ==== ==== ====
</TABLE>
Revenues. Net revenues increased from $20.1 million for the third quarter
of fiscal year 1999 to $92.1 million for the third quarter of fiscal year 2000,
and from $38.6 million for the nine months ended July 31, 1999 to $196.9 million
for the nine months ended July 29, 2000. The increases were due to increased
unit sales of our products through an increased customer base and reflects the
ramp-up of sales to significant original equipment manufacture customers and
system integrator customers in conjunction with a growing demand for Storage
Area Network switching products.
-10-
<PAGE> 11
Gross margin. Gross margin as a percentage of revenues increased from
50.5% for the third quarter of fiscal year 1999 to 58.6% for the third quarter
of fiscal year 2000 and from 51.6% for the nine months ended July 31,1999 to
57.2% for the nine months ended July 29, 2000. These increases were due
principally to lower component and manufacturing costs, the allocation of fixed
overhead over a much larger revenue base and a shift in our channel mix from
Original Equipment Manufacturers to System Integrators.
Research and development expenses. Research and development expenses
increased from $4.1 million for the third quarter of fiscal year 1999 to $14.0
million for the third quarter of fiscal year 2000, and from $9.8 million for the
nine months ended July 31, 1999 to $29.7 million for the nine months ended July
29, 2000. These increases were due to increased costs associated with a
significant increase in personnel and personnel-related expenses and increases
in prototype and design and development expenses reflecting efforts associated
with new product development and enhancements to existing products.
Sales and marketing expenses. Sales and marketing expenses increased from
$3.7 million for the third quarter of fiscal year 1999 to $13.0 million for the
third quarter of fiscal year 2000, and from $7.8 million for the nine months
ended July 31, 1999 to $27.5 million for the nine months ended July 29, 2000.
These increases were due to increases in direct selling costs associated with
the increases in revenue, to the hiring of additional sales and marketing
personnel, and marketing program costs.
General and administrative expenses. General and administrative expenses
increased from $1.0 million for the third quarter of fiscal year 1999 to $2.6
million for the third quarter of fiscal year 2000, and from $2.4 million for the
nine months ended July 31, 1999 to $6.8 million for the nine months ended July
29, 2000. These increases were related to increased staffing, outside
professional services and other expenses necessary to manage and support an
increased scale of operations.
Amortization of deferred compensation. Amortization of deferred
compensation in the third quarter of fiscal year 2000 was the same as in the
third quarter of fiscal year 1999. Amortization of deferred compensation
decreased from $1.7 million for the nine months ended July 31, 1999 to $0.8
million for the nine months ended July 29, 2000.
All operating expenses decreased as a percentage of net revenues for all
periods presented due principally to the significant increases in net revenues.
Interest income, net. Net interest income increased $0.7 million in the
third quarter of fiscal year 2000 compared to the third quarter of fiscal year
1999. This increase was due primarily to an increased balance of cash, cash
equivalents, and short-term investments held during the third quarter of fiscal
2000 compared to the third quarter of fiscal year 1999, resulting from our
initial public offering in May 1999 and cash generated from operations and
financing activities.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, capital equipment lease lines, bank debt, cash provided by
operating activities and, in May 1999, we raised approximately $66 million in
our initial public offering. Our principal sources of liquidity as of July 29,
2000 consisted of $129.6 million in cash, cash equivalents and short-term
investments.
Net cash provided by operating activities was $55.9 million for the first
nine months of fiscal 2000 compared to $5.6 million for the first nine months of
fiscal 1999. The change from period to period was due primarily to increased
profitability during the first nine months of fiscal 2000.
Net cash used in investing activities for the first nine months of fiscal
2000 was $66.0 million compared to net cash used in investing activities for the
first nine months of fiscal 1999 of $67.8 million. The period-to-period change
was due mainly to higher purchases of short-term investments in the first nine
months of fiscal 1999, offset partially by increased investments in property and
equipment and other investing activities in the first nine months of fiscal
2000.
Net cash provided by financing activities was $14.4 million for the first
nine months of fiscal 2000 compared to $62.2 million for the first nine months
of fiscal 1999. The decrease is primarily related to proceeds generated from the
sale of common stock in our initial public offering in May 1999.
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<PAGE> 12
We believe that our existing cash, cash equivalents and short-term
investment balances and cash flows 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 the expansion of
sales and marketing, the timing of introductions of new products and
enhancements to existing products, and market acceptance of our products. There
can be no assurances that additional equity or debt financing, if required, will
be available on acceptable terms or at all.
In December 1999, Brocade entered into an agreement to lease
approximately 210,000 square feet of office, laboratory, and administrative
space in San Jose, California. The term of the lease agreement is September 1,
2000 through August 31, 2010, and represents a lease commitment of $6.2 million
per year to Brocade. Brocade intends to occupy the space in September 2000. In
conjunction with entering into the lease agreement, Brocade signed an
unconditional, irrevocable letter of credit for $6.2 million as security for the
lease. In connection with our occupation of this building, Brocade has made and
intends to make further significant tenant improvements. Brocade intends to
finance these tenant improvements and the lease commitment with internally
generated funds. In February and July 2000 the lease agreement was amended to
add an additional 70,000 square feet of general office space, which represents
an additional lease commitment of $3.0 million per year.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain
Transactions Involving Stock Compensation - an interpretations of APB Opinion
25." Interpretation No. 44 is effective July 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option award, and (d) the accounting for an exchange of
stock compensation awards in a business combination. Management does not
anticipate that the adoption of Interpretation No. 44 will have a material
impact on financial position or results of operations of the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
does not expect the adoption of SAB 101 to have a material impact on financial
position or results of operations.
RISK FACTORS
WE MAY NOT MAINTAIN PROFITABILITY
Although our revenues have grown in recent quarters, and we have remained
profitable since the third quarter of fiscal 1999, we cannot be certain that we
will be able to sustain these growth rates or that we will realize sufficient
revenues to maintain profitability. We expect to incur significant product
development, sales and marketing and administrative expenses and, as a result,
we will need to generate significant revenues to maintain profitability.
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<PAGE> 13
In addition, we have a limited operating history. Therefore, we cannot
forecast future operating results based on our historical results. We plan our
operating expenses based in part on future revenue projections. Our ability to
accurately forecast our quarterly revenue is limited for the reasons discussed
below in "-- We Expect Our Quarterly Revenues and Operating Results to Fluctuate
for a Number of Reasons Which Could Cause Our Stock Price to Fluctuate."
Moreover, most of our expenses are fixed in the short-term or incurred in
advance of receipt of corresponding revenue. As a result, we may not be able to
decrease our spending to offset any unexpected shortfall in our revenues. If
this were to occur, we would expect to incur significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
- fluctuations in demand for our SilkWorm family of products and
services;
- the timing of customer orders and product implementations,
particularly large orders from and product implementations of our
original equipment manufacturer customers;
- our ability to develop, introduce, ship and support new products
and product enhancements;
- announcements and new product introductions by our competitors;
- the expected decline in the average prices at which we can sell
our SilkWorm family of products to our customers;
- our ability to obtain sufficient supplies of sole or limited
sourced components, including application specific integrated
circuits, or ASICs, gigabit interface converters, or GBICs, and
power supplies, for our SilkWorm family of products;
- increases in the prices of the components we purchase;
- our ability to attain and maintain production volumes and quality
levels for our SilkWorm family of products;
- the mix of our SilkWorm switches sold and the mix of distribution
channels through which they are sold;
- increased expenses, particularly in connection with our strategy
to continue to expand our relationships with key original
equipment manufacturers and system integrators;
- continued adoption of SANs as an alternative to existing data
storage and management systems;
- decisions by end-users to reallocate their information technology
resources to other purposes, and
- deferrals of customer orders in anticipation of new products,
services or product enhancements introduced by us or our
competitors.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
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<PAGE> 14
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS
Our SilkWorm family of Fibre Channel switching products is used
exclusively in storage area networks, or SANs. Accordingly, widespread adoption
of SANs as an integral part of data-intensive enterprise computing environments
is critical to our future success. In addition, our success depends upon market
acceptance of our SAN switching solutions as an alternative to the use of hubs
or other interconnect devices in SANs. The markets for SANs and SAN switching
products have only recently begun to develop and are rapidly evolving. Because
these markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow to adopt a new approach, like SANs. Our success in
generating revenue in these emerging markets will depend, among other things, on
our ability to educate potential original equipment manufacturers and system
integrator customers, as well as potential end-users, about the benefits of SANs
and SAN switching technology and our ability to maintain and enhance our
relationships with leading original equipment manufacturers and system
integrators. In addition, our products are designed to conform to the Fibre
Channel interconnect protocol and certain other industry standards. Some of
these standards may not be widely adopted, and competing standards may emerge
that will be preferred by original equipment manufacturers or end-users.
WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE
We currently derive substantially all of our revenues from sales of our
SilkWorm family of products. We expect that revenue from this product family
will continue to account for a substantial portion of our revenues for the
foreseeable future. Therefore, widespread market acceptance of these products is
critical to our future success. Some of our products have been only recently
introduced and therefore, the demand and market acceptance of our products is
uncertain. Factors that may affect the market acceptance of our products include
market acceptance of SAN switching products, the performance, price and total
cost of ownership of our products, the availability and price of competing
products and technologies, and the success and development of our original
equipment manufacturers and system integrators. Many of these factors are beyond
our control.
Our future success depends upon our ability to address the rapidly
changing needs of our customers by developing and introducing high-quality,
cost-effective products, product enhancements and services on a timely basis and
by keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
fiscal year 2000 and 2001. Our future revenue growth will be dependent on the
success of these new product launches. We have in the past experienced delays in
product development and such delays may occur in the future. In addition, as we
introduce new or enhanced products, we will have to manage successfully the
transition from older products in order to minimize disruption in our customers'
ordering patterns, avoid excessive levels of older product inventories and
ensure that enough supplies of new products can be delivered to meet our
customers' demands. Our failure to develop and introduce successfully new
products and product enhancements, which are not broadly accepted, would reduce
our revenues.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY
REDUCE OUR REVENUES
We depend on a few key customers. For example, in the first nine months
of fiscal 2000, sales to eight customers accounted for 82% of our total
revenues. We anticipate that our operating results will continue to depend on
sales to a relatively small number of customers. Therefore, the loss of any of
our key customers, or a significant reduction in sales to these customers could
significantly reduce our revenues.
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<PAGE> 15
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES
Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
THE LOSS OF SOLECTRON CORPORATION, OUR SOLE MANUFACTURER, OR THE FAILURE TO
FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR MANAGE SUCCESSFULLY OUR
RELATIONSHIP WITH SOLECTRON, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS
Solectron, a third party manufacturer for numerous companies,
manufactures all of our products at its Milpitas, California facility on a
purchase order basis. We have entered into a three-year manufacturing agreement
with Solectron under which we provide to Solectron a twelve-month product
forecast and place purchase orders with Solectron sixty calendar days in advance
of the scheduled delivery of products to our customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from Solectron to meet our customers' delivery
requirements or we may accumulate excess inventories.
We plan to regularly introduce new products and product enhancements,
which will require that we coordinate our efforts with those of our suppliers
and Solectron to rapidly achieve volume production. While we have not, to date,
experienced significant 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 from a single source, and power supplies, 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.
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<PAGE> 16
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
While the average unit price of our products remained relatively constant
in the third quarter of fiscal 2000, we anticipate that the average unit price
of our products will decrease in the future in response to changes in product
mix, competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors or other factors. If we are unable to
offset these factors by increasing our unit sales volumes, our revenues will
decline. In addition, to maintain our gross margins, we must develop and
introduce new products and product enhancements, and we must continue to reduce
the manufacturing cost of our products.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUES
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our new or enhanced
products. In addition, our products are combined with products from other
vendors. As a result, when problems occur, it may be difficult to identify the
source of the problem. These problems may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
Moreover, the occurrence of hardware and software errors, whether caused by our
or another vendor's SAN products, could delay or prevent the development of the
SAN market.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL
Our success depends to a significant degree upon the continued
contributions of our key management, engineering, and sales and marketing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Gregory L. Reyes, our President
and Chief Executive Officer, Kumar Malavalli, our Vice President, Technology and
Paul R. Bonderson, Jr., our Vice President, Engineering. We do not have
employment contracts with, or key person life insurance on, any of our key
personnel. We also believe that our success depends to a significant extent on
the ability of our management to operate effectively, both individually and as a
group.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, 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.
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<PAGE> 17
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.
During fiscal 2000, we have begun to expand our international sales activities
in Europe and the Asia-Pacific region. Our international sales growth in these
countries will be limited if we are unable to establish relationships with
international distributors, establish additional foreign operations, expand
international sales channel management, hire additional personnel and develop
relationships with international service providers. Even if we are able to
successfully expand international operations, we cannot be certain that we will
be able to maintain or increase international market demand for our products.
Our international operations, including our sales activities in Europe and the
Asia-Pacific region, 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.
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<PAGE> 18
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;
- obtain from the owner of the infringed intellectual property right
a license to make, use, sell, import and/or export the relevant
technology, which license may not be available on reasonable
terms, or at all; and
- redesign those products or services that use such technology.
If we are forced to take any of the foregoing actions, we may be unable
to manufacture, use, sell, import and/or export our products, which would reduce
our revenues.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt; or
- assume liabilities.
These purchases also involve numerous risks, including:
- problems combining the purchased operations, technologies or
products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers
and customers;
- risks associated with entering markets in which we have no or
limited prior experience; and
- potential loss of key employees of purchased organizations.
We cannot assure that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
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<PAGE> 19
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS
The market for SAN products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. All components of the SAN must utilize the
same standards in order to operate together. Our products comprise only a part
of the entire SAN and we depend on the companies that provide other components
of the SAN, many of whom are significantly larger than we are, to support the
industry standards as they evolve. The failure of these providers to support
these industry standards could adversely affect the market acceptance of our
products. In addition, in the United States, our products must comply with
various regulations and standards defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, products that we
develop will also be required to comply with standards established by
authorities in various countries. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.
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.
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<PAGE> 20
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW
We believe that our existing cash, cash equivalent, and short-term
investment balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The majority of Brocade's operations are based in the U.S. and,
accordingly, a majority of our transactions are denominated in U.S. dollars. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, however, due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Brocade is subject to various claims that arise in the normal course of
business. In the opinion of management, the ultimate disposition of these claims
will not have a material adverse effect on the financial position of Brocade.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
27.1 Financial Data Schedule.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 12, 2000 BROCADE COMMUNICATIONS SYSTEMS, INC.
(Registrant)
/S/ MICHAEL J. BYRD
----------------------------------------
MICHAEL J. BYRD
Vice President, Finance and
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Item Number Description
----------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
