<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 April 29, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from __________ to __________
Commission file number: 000-25601
___________________
BROCADE COMMUNICATIONS SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0409517
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification no.)
___________________
1901 GUADALUPE PARKWAY
SAN JOSE, CA 95131
(408) 487-8000
(Address, including zip code, of Registrant's
principal executive offices and telephone
number, including area code)
___________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock on May 31,
2000 was 109,204,787 shares.
Page 1 of 23 pages.
<PAGE> 2
BROCADE COMMUNICATIONS SYSTEMS, INC.
FORM 10-Q
QUARTER ENDED APRIL 29, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of April 29, 2000 and October 31, 1999 3
Condensed Statements of Operations for the Three Months and Six Months
Ended April 29, 2000 and April 30, 1999 4
Condensed Statements of Cash Flows for the Six Months
Ended April 29, 2000 and April 30, 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 23
</TABLE>
--------------------------------------------------------------------------------
This Form 10-Q contains forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995), including but not limited to
statements regarding Brocade's expectations, hopes or intentions regarding the
future. Actual results and trends could differ materially from those discussed
in the forward-looking statements. In addition, past trends should not be
perceived as indicators of future performance. Among the factors that could
cause actual results to differ from the forward-looking statements are those
detailed elsewhere in this Report in Management's Discussion and Analysis of
Financial Condition and Results of Operations and in Brocade's Securities and
Exchange Commission reports.
--------------------------------------------------------------------------------
-2-
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 29, OCTOBER 31,
2000 1999
--------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 27,859 $ 25,536
Short-term investments 83,670 63,769
--------- ---------
Total cash, cash equivalents and
short-term investments 111,529 89,305
Accounts receivable, net of allowances of
$5,605 and $2,447, respectively 34,892 17,139
Inventories, net 3,182 3,686
Prepaid expenses and other current assets 2,495 2,197
--------- ---------
Total current assets 152,098 112,327
Property and equipment, net 10,346 4,947
Other assets 5,005 6
--------- ---------
Total assets $ 167,449 $ 117,280
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,683 $ 10,664
Payroll related liabilities 9,194 4,414
Other accrued liabilities 19,615 9,830
Deferred revenue 8,522 7,688
Current portion of capital lease obligations 232 478
--------- ---------
Total current liabilities 59,246 33,074
--------- ---------
Stockholders' equity:
Common stock, $.001 par value, 400,000,000
shares authorized:
Issued and outstanding: 109,281,438 and
107,040,080, April 29, 2000 and October 31,
1999, respectively 109 53
Additional paid-in capital 121,876 119,598
Deferred stock compensation (2,880) (3,440)
Notes receivable from stockholders (5,181) (5,660)
Accumulated deficit (5,721) (26,345)
--------- ---------
Total stockholders' equity 108,203 84,206
--------- ---------
Total liabilities and stockholders' equity $ 167,449 $ 117,280
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-3-
<PAGE> 4
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
APRIL 29, APRIL 30, APRIL 29, APRIL 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 62,053 $ 10,540 $104,793 $ 18,547
Cost of revenues 26,053 5,437 46,137 8,758
-------- -------- -------- --------
Gross margin 36,000 5,103 58,656 9,789
-------- -------- -------- --------
Operating expenses:
Research and development 9,666 2,729 15,694 5,634
Sales and marketing 8,311 2,357 14,558 4,086
General and administrative 2,080 674 4,116 1,415
Amortization of deferred stock
compensation 280 220 560 1,377
-------- -------- -------- --------
Total operating expenses 20,337 5,980 34,928 12,512
-------- -------- -------- --------
Income (loss) from operations 15,663 (877) 23,728 (2,723)
Interest income, net 1,193 29 2,378 36
-------- -------- -------- --------
Income (loss) before income taxes 16,856 (848) 26,106 (2,687)
Provision for income taxes 3,540 -- 5,482 --
-------- -------- -------- --------
Net income (loss) $ 13,316 $ (848) $ 20,624 $ (2,687)
======== ======== ======== ========
Basic net income (loss) per share $ 0.13 $ (0.04) $ 0.20 $ (0.14)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.11 $ (0.04) $ 0.17 $ (0.14)
======== ======== ======== ========
Shares used in the calculation of
basic net income (loss) per share 102,991 20,660 102,016 19,028
======== ======== ======== ========
Shares used in the calculation of
diluted net income (loss) per share 120,930 20,660 119,349 19,028
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-4-
<PAGE> 5
BROCADE COMMUNICATIONS SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
APRIL 29, APRIL 30,
2000 1999
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,624 $ (2,687)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,740 919
Provision for doubtful accounts receivable 3,158 --
Noncash compensation expense 560 1,457
Write down of non-marketable investments 4,001 --
Changes in assets and liabilities:
Accounts receivable (20,911) (5,024)
Inventories 504 (1,014)
Prepaid expenses and other assets (298) (1,734)
Accounts payable 11,019 2,989
Payroll related liabilities 4,780 468
Other accrued liabilities 9,785 --
Deferred revenue 834 3,358
-------- --------
Net cash provided by (used in) operating activities 36,796 (1,268)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (8,139) (1,048)
Purchases of short-term investments (39,394) --
Proceeds from dispositions of short-term investments 19,493 --
Other investing activities (9,000) --
-------- --------
Net cash used in investing activities (37,040) (1,048)
-------- --------
Cash flows from financing activities:
Net proceeds from the issuance of common stock 2,813 284
Net proceeds from issuance of reedemable preferred
stock and warrants -- 1,512
Payments on capital lease obligations (246) (405)
Proceeds from notes payable -- 247
Repayments of notes payable -- (1,074)
-------- --------
Net cash provided by financing activities 2,567 564
-------- --------
Net increase (decrease) in cash and cash equivalents 2,323 (1,752)
Cash and cash equivalents at beginning of period 25,536 10,420
-------- --------
Cash and cash equivalents at end of period $ 27,859 $ 8,668
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
-5-
<PAGE> 6
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Information for the three and six months ended April 29, 2000 and
April 30, 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 six months ended
April 29, 2000 are not necessarily indicative of the results that may be
expected for future quarters or the year ending October 28, 2000.
2. CHANGE IN FISCAL YEAR END
Brocade changed its fiscal year end to the last Saturday in October,
beginning with the fiscal year ended October 28, 2000. This change did not have
a material impact on Brocade's financial statements for the three and six month
periods ended April 29, 2000.
3. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earning Per Share,"
("SFAS No. 128") for all periods presented. Pursuant to Statement of the
Securities and Exchange Commission Staff Accounting Bulletin No. 98, common
stock and convertible preferred stock issued or granted for nominal
consideration prior to the anticipated effective date of an initial public
offering must be included in the calculation of basic and diluted net income
(loss) per share as if such stock had been outstanding for all periods
presented. 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.
-6-
<PAGE> 7
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three and six months ended April 29, 2000 and
April 30, 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 SIX MONTHS ENDED
------------------------- -------------------------
APRIL 29, APRIL 30, APRIL 29, APRIL 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic and diluted net income
(loss) per share:
Net income (loss) $ 13,316 $ (848) $ 20,624 $ (2,687)
========= ========= ========= =========
Weighted-average shares of
common stock outstanding 108,757 29,852 108,160 27,304
Less: weighted-average shares
subject to repurchase (5,766) (9,192) (6,144) (8,276)
--------- --------- --------- ---------
Weighted-average shares used in
computing basic net income
(loss) per share 102,991 20,660 102,016 19,028
Plus: weighted-average shares
subject to repurchase 5,766 -- 6,144 --
Dilutive effect of common share
equivalents 12,173 -- 11,189 --
--------- --------- --------- ---------
Weighted-average shares used in
computing diluted net income
(loss) per share 120,930 20,660 119,349 19,028
========= ========= ========= =========
Basic net income (loss) per share $ 0.13 $ (0.04) $ 0.20 $ (0.14)
========= ========= ========= =========
Diluted net income (loss) per share $ 0.11 $ (0.04) $ 0.17 $ (0.14)
========= ========= ========= =========
</TABLE>
4. CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS
All highly liquid investment securities with original maturities of three
months or less are considered cash equivalents, while investment securities with
original maturities of more than three months but less than one year are
considered short-term investments.
As of April 29, 2000 all short-term investments are classified as
available-for-sale and the fair market value of such investments approximated
cost. As such, unrealized holding gains and losses were insignificant.
5. COMPREHENSIVE INCOME (LOSS)
Brocade adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", ("SFAS No. 130") on November 1, 1997. SFAS No.
130 defines comprehensive income as the changes in equity of an enterprise
except those resulting from stockholder transactions. Accordingly, comprehensive
income (loss) includes certain changes in equity that are excluded from net
income (loss). Specifically, SFAS No. 130 requires unrealized holding gains and
losses on available-for-sale securities to be included in accumulated other
comprehensive income (loss). Unrealized holding gains (losses) for all periods
presented are not significant and accordingly, comprehensive income (loss) for
all periods presented approximated net income (loss).
6. CONCENTRATION OF RISK AND SIGNIFICANT CUSTOMERS
Brocade is organized and operates as one business segment, the design,
development, manufacture, marketing and selling of switching solutions for
Storage Area Networks ("SANs").
For the six months ended April 29, 2000, revenues from eight customers
accounted for 76% 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-
<PAGE> 8
BROCADE COMMUNICATIONS SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(Information for the three and six months ended April 29, 2000 and
April 30, 1999 is unaudited)
7. COMMITMENTS AND CONTINGENCIES
In December 1999, Brocade entered into an agreement to lease approximately
210,000 square feet of general office, laboratory, and administrative space in
San Jose, California. The term of the lease agreement is September 1, 2000
through August 31, 2010, and represents a lease commitment of $6.2 million per
year to Brocade. Brocade intends to occupy the space in September 2000. In
conjunction with entering into the lease agreement, Brocade signed an
unconditional, irrevocable letter of credit for $6.2 million as security for the
lease.
In February 2000, the lease agreement was amended to add an additional
39,043 square feet of general office space, which represents an additional lease
commitment of $1.3 million per year. In conjunction with the lease amendment,
Brocade signed an additional irrevocable letter or credit for $1.3 million as
security for the lease.
On April 25, 2000, Adaptec, Inc. filed a lawsuit against Brocade asserting
unfair competition, intentional interface with contractual relations and
misappropriation of trade secrets related to our hiring of former Adaptec
employees. 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.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following, (in thousands):
<TABLE>
<CAPTION>
APRIL 29, OCTOBER 31,
2000 1999
-------- ----------
<S> <C> <C>
Accrued warranty $ 2,457 $ 1,856
Purchase commitments reserve 3,960 3,629
Income taxes payable 5,632 --
Other 7,566 4,345
------- -------
$19,615 9,830
======= =======
</TABLE>
9. 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 1, 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 or 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 the 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 effect on the
financial position or results of the 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 six month period ended April 29, 2000, eight customers
contributed 76% of total revenue. The level of sales to any customer may vary
from quarter to quarter. However, we expect that significant customer
concentration will continue in the foreseeable future. The loss of any one of
these customers, or a decrease in the level of sales to any one of these
customers, could have a material adverse impact on Brocade's financial condition
or results of operations. To date, substantially all of our sales have been in
the United States. However, we have recently launched sales and marketing
efforts in Western Europe and Japan.
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
April 29, 2000, deferred revenue is comprised principally of shipments in the
second quarter of fiscal year 2000 to one new customer related to a new product
program. It is expected that this deferred revenue will be recognized in the
third quarter of fiscal year 2000 as the customer begins volume shipments of
solutions that incorporate Brocade products. We believe that, as the SAN market
matures, this revenue deferral method for new customers may not be necessary.
Our average unit-selling price has decreased over the last several
quarters. We expect continued declines in our average unit selling price due to
anticipated increases in per customer sales volume, the impact of competitive
pricing pressures and new product introductions. However, in the near future, we
do not anticipate that our gross margins will be affected by declines in average
unit selling prices due to anticipated product cost reductions.
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
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with promotional and
travel expenses. We believe that continued investment in sales and marketing is
critical to the success of our strategy to expand our relationships with leading
original equipment manufacturers, to expand our presence in the system
integration channel, and to maintaining our leadership position in the SAN
market. As a result, we expect these expenses to increase in absolute dollars in
the future.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance and human resources personnel,
recruiting expenses, professional fees and other corporate expenses. We expect
general and administrative expenses to increase in absolute dollars as we add
personnel and the related infrastructure necessary to support the growth of our
business.
In connection with the grant of certain stock options to employees, we
recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998
and 1999, respectively, representing the difference between the deemed value of
our common stock for accounting purposes and the option exercise price of these
options at the date of grant. Deferred compensation is presented as a reduction
of stockholders' equity and amortized ratably over the vesting period of the
applicable options. We amortized $280,000 and $560,000, respectively of deferred
compensation for the three and six months ended April 29, 2000.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
PERCENTAGE OF PERCENTAGE OF
TOTAL REVENUE TOTAL REVENUE
--------------------------- --------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 29, APRIL 30, APRIL 29, APRIL 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 42 52 44 47
---- ---- ---- ----
Gross margin 58 48 56 53
---- ---- ---- ----
Operating expenses:
Research and development 16 26 15 30
Sales and marketing 13 22 14 22
General and administrative 3 6 4 8
Amortization of deferred stock
compensation 1 2 1 8
---- ---- ---- ----
Total operating expenses 33 56 34 68
---- ---- ---- ----
Income (loss) from operations 25 (8) 23 (15)
Interest income, net 2 - 2 -
---- ---- ---- ----
Income (loss) before income taxes 27 (8) 25 (15)
Provision for income taxes 6 - 5 -
---- ---- ---- ----
Net income (loss) 21% (8)% 20% (15)%
==== ==== ==== ====
</TABLE>
Revenues. Net revenues increased from $10.5 million for the second quarter
of fiscal year 1999 to $62.1 million for the second quarter of fiscal year 2000,
and from $18.5 million for the six months ended April 30, 1999 to $104.8 million
for the six months ended April 39, 2000. The increases were due primarily to
increased unit sales of our products through an increased customer base and
reflects the ramp-up of sales to significant original equipment manufacture
customers and system integrator customers in conjunction with a growing demand
for Storage Area Network switching products.
For the six months ended April 29, 2000, revenues from eight customers
accounted for 76% of total revenues. The level of sales to any customer may vary
from quarter to quarter. However, we expect that significant customer
concentration will continue for the foreseeable future. Loss of any one of these
customers could have a material adverse effect on Brocade's financial condition
or results of operations.
Gross margin. Gross margin as a percentage of revenues increased from 48%
for the second quarter of fiscal year 1999 to 58% for the second quarter of
fiscal year 2000 and from 53% for the six months ended April 30, 1999 to 56% for
the six months ended April 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 OEM's to System
Integrators.
Research and development expenses. Research and development expenses
increased from $2.7 million for the second quarter of fiscal year 1999 to $9.7
million for the second quarter of fiscal year 2000, and from $5.6 million for
the six months ended April 30, 1999 to $15.7 million for the six months ended
April 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
$2.4 million for the second quarter of fiscal year 1999 to $8.3 million for the
second quarter of fiscal year 2000, and from $4.1 million for the six months
ended April 30, 1999 to $14.6 million for the six months ended April 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.
-11-
<PAGE> 12
General and administrative expenses. General and administrative expenses
increased from $0.7 million for the second quarter of fiscal year 1999 to $2.1
million for the second quarter of fiscal year 2000, and from $1.4 million for
the six months ended April 30, 1999 to $4.1 million for the six months ended
April 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 second quarter of fiscal year 2000 was virtually the same in
the second quarter of fiscal year 1999. Amortization of deferred compensation
decreased from $1.4 million for the six months ended April 30, 1999 to $0.6
million for the six months ended April 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 $1.2 million in the
second quarter of fiscal year 2000 compared to the second 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 second quarter of fiscal
2000 compared to the second quarter of fiscal year 1999, resulting from 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 approximately $66 million in our initial public offering. Our principal
sources of liquidity as of April 29, 2000 consisted of $111.5 million in cash,
cash equivalents and short-term investments.
Net cash provided by operating activities was $36.8 million for the first
six months of fiscal 2000 compared to net cash used in operating activities of
$1.3 million for the first six months of fiscal 1999. The change from period to
period was due primarily to increased profitability during the first six months
of fiscal 2000.
Net cash used in investing activities for the first six months of fiscal
2000 was $37.0 million compared to net cash used in investing activities for the
first six months of fiscal 1999 of $1.0 million. The period to period change was
due mainly to increased purchases of property and equipment, the purchase of
short-term investments, and other investing activities during the first six
months of fiscal 2000.
Net cash provided by financing activities was $2.6 million for the first
six months of fiscal 2000 compared to net cash used in financing activities of
$0.6 million for the first six months of fiscal 1999. This increase is primarily
related to proceeds generated from the sale of common stock.
We believe that our existing cash, cash equivalents and short-term
investment balances and cash flow expected to be generated from future
operations, will be sufficient to meet our capital requirements at least through
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. Our future capital requirements will
depend on many factors, including the rate of revenue growth, the timing and
extent of spending to support product development efforts and expansion of sales
and marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of our products. There can be no
assurances that additional equity or debt financing, if required, will be
available on acceptable terms or at all.
In December 1999, Brocade entered into an agreement to lease approximately
210,000 square feet of office, laboratory, and administrative space in San Jose,
California. The term of the lease agreement is September 1, 2000 through August
31, 2010, and represents a lease commitment of $6.2 million per year to Brocade.
Brocade intends to occupy the space in September 2000. In conjunction with
entering into the lease agreement, Brocade signed an unconditional, irrevocable
letter of credit for $6.2 million as security for the lease. In connection with
our occupation of this building, Brocade intends to make significant tenant
improvements. Brocade intends to finance these tenant improvements and the lease
commitment with internally generated funds. In February 2000, the lease
agreement was amended to add an additional 39,043 square feet of general office
space, which represents an additional lease commitment of $1.3 million per year.
-12-
<PAGE> 13
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 1, 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 or 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 the 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 effect on the
financial position or results of the operations of the Company.
-13-
<PAGE> 14
RISK FACTORS
WE HAVE AN ACCUMULATED DEFICIT OF $5.7 MILLION AND MAY NOT MAINTAIN
PROFITABILITY
We have incurred significant losses since our inception. As a result, as
of April 29, 2000, we had an accumulated deficit of $5.7 million. Although our
revenues have grown in recent quarters, and we have remained profitable since
the third quarter of fiscal 1999, we cannot be certain that we will be able to
sustain these growth rates or that we will realize sufficient revenues to
maintain profitability. We expect to incur significant product development,
sales and marketing and administrative expenses and, as a result, we will need
to generate significant revenues to maintain profitability.
In addition, we have a limited operating history. Therefore, we cannot
forecast future operating results based on our historical results. We plan our
operating expenses based in part on future revenue projections. Our ability to
accurately forecast our quarterly revenue is limited for the reasons discussed
below in "-- We Expect Our Quarterly Revenues and Operating Results to Fluctuate
for a Number of Reasons Which Could Cause Our Stock Price to Fluctuate."
Moreover, most of our expenses are fixed in the short-term or incurred in
advance of receipt of corresponding revenue. As a result, we may not be able to
decrease our spending to offset any unexpected shortfall in our revenues. If
this were to occur, we would expect to incur significant losses.
WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER
OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE
Our quarterly revenues and operating results have varied significantly in
the past and are likely to vary significantly in the future due to a number of
factors, any of which may cause our stock price to fluctuate. The primary
factors that may affect us include the following:
- fluctuations in demand for our SilkWorm family of products and
services;
- the timing of customer orders and product implementations, particularly
large orders from and product implementations of our original equipment
manufacturer customers;
- our ability to develop, introduce, ship and support new products and
product enhancements;
- announcements and new product introductions by our competitors;
- the expected decline in the average prices at which we can sell our
SilkWorm family of products to our customers;
- our ability to obtain sufficient supplies of sole or limited sourced
components, including application specific integrated circuits, or
ASICs, gigabit interface converters, or GBICs, and power supplies, for
our SilkWorm family of products;
- increases in the prices of the components we purchase;
- our ability to attain and maintain production volumes and quality
levels for our SilkWorm family of products;
- the mix of our SilkWorm switches sold and the mix of distribution
channels through which they are sold;
- increased expenses, particularly in connection with our strategy to
continue to expand our relationships with key original equipment
manufacturers and system integrators;
- widespread adoption of SANs as an alternative to existing data storage
and management systems;
- decisions by end-users to reallocate their information resources to
other purposes, and
- deferrals of customer orders in anticipation of new products, services
or product enhancements introduced by us or our competitors.
Accordingly, you should not rely on the results of any past periods as an
indication of our future performance. It is likely that in some future period,
our operating results may be below expectations of public market analysts or
investors. If this occurs, our stock price may drop.
-14-
<PAGE> 15
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS
AND SAN SWITCHING PRODUCTS
Our SilkWorm family of Fibre Channel switching products is used
exclusively in storage area networks, or SANs. Accordingly, widespread adoption
of SANs as an integral part of data-intensive enterprise computing environments
is critical to our future success. In addition, our success depends upon market
acceptance of our SAN switching solutions as an alternative to the use of hubs
or other interconnect devices in SANs. The markets for SANs and SAN switching
products have only recently begun to develop and are rapidly evolving. Because
these markets are new, it is difficult to predict their potential size or future
growth rate. In addition, SANs are often implemented in connection with
deployment of new storage systems and servers and we are therefore dependent to
some extent on this market. Potential end-user customers who have invested
substantial resources in their existing data storage and management systems may
be reluctant or slow to adopt a new approach, like SANs. Our success in
generating revenue in these emerging markets will depend, among other things, on
our ability to educate potential original equipment manufacturers and system
integrator customers, as well as potential end-users, about the benefits of SANs
and SAN switching technology and our ability to maintain and enhance our
relationships with leading original equipment manufacturers and system
integrators. In addition, our products are designed to conform to the Fibre
Channel interconnect protocol and certain other industry standards. Some of
these standards may not be widely adopted, and competing standards may emerge
that will be preferred by original equipment manufacturers or end-users.
WE CURRENTLY ONLY OFFER OUR SILKWORM PRODUCT FAMILY AND MUST DEVELOP NEW AND
ENHANCED PRODUCTS THAT ACHIEVE WIDESPREAD MARKET ACCEPTANCE
We currently derive substantially all of our revenues from sales of our
SilkWorm family of products. We expect that revenue from this product family
will continue to account for a substantial portion of our revenues for the
foreseeable future. Therefore, widespread market acceptance of these products is
critical to our future success. Some of our products have been only recently
introduced and therefore, the demand and market acceptance of our products is
uncertain. Factors that may affect the market acceptance of our products include
market acceptance of SAN switching products, the performance, price and total
cost of ownership of our products, the availability and price of competing
products and technologies, and the success and development of our original
equipment manufacturers and system integrators. Many of these factors are beyond
our control.
Our future success depends upon our ability to address the rapidly
changing needs of our customers by developing and introducing high-quality,
cost-effective products, product enhancements and services on a timely basis and
by keeping pace with technological developments and emerging industry standards.
We have new product launches and upgrades to our existing products planned for
fiscal year 2000. Our future revenue growth will be dependent on the success of
these new product launches. We have in the past experienced delays in product
development and such delays may occur in the future. In addition, as we
introduce new or enhanced products, we will have to manage successfully the
transition from older products in order to minimize disruption in our customers'
ordering patterns, avoid excessive levels of older product inventories and
ensure that enough supplies of new products can be delivered to meet our
customers' demands. Our failure to develop and introduce successfully new
products and product enhancements, which are not broadly accepted, would reduce
our revenues.
WE DEPEND ON A FEW KEY CUSTOMERS AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY
REDUCE OUR REVENUES
We depend on a few key customers. For example, in the first six months of
fiscal 2000, sales to eight customers accounted for 76% 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.
-15-
<PAGE> 16
FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES
Our success will depend on our continuing ability to develop and manage
relationships with significant original equipment manufacturers and system
integrators, as well as on the sales efforts and success of these customers. Our
customers may evaluate our products for up to a year before they begin to market
and sell them and assisting these customers through the evaluation process may
require significant sales and marketing and management efforts on our part,
particularly if we have to qualify our products with multiple customers at the
same time. In addition, once our products have been qualified, our agreements
with our customers have no minimum purchase commitments. We cannot assure you
that we will be able to expand our distribution channels, manage our
distribution relationships successfully or that our customers will market our
products effectively. Our failure to manage successfully our distribution
relationships or the failure of our customers to sell our products could reduce
our revenues.
THE LOSS OF SOLECTRON CORPORATION, OUR SOLE MANUFACTURER, OR THE FAILURE TO
FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR MANAGE SUCCESSFULLY OUR
RELATIONSHIP WITH SOLECTRON, WOULD NEGATIVELY IMPACT OUR ABILITY TO MANUFACTURE
AND SELL OUR PRODUCTS
Solectron, a third party manufacturer for numerous companies, manufactures
all of our products at its Milpitas, California facility on a purchase order
basis. We have entered into a three-year manufacturing agreement with Solectron
under which we provide to Solectron a twelve-month product forecast and place
purchase orders with Solectron sixty calendar days in advance of the scheduled
delivery of products to our customers. Accordingly, if we inaccurately forecast
demand for our products, we may be unable to obtain adequate manufacturing
capacity from Solectron to meet our customers' delivery requirements or we may
accumulate excess inventories.
We plan to regularly introduce new products and product enhancements,
which will require that we coordinate our efforts with those of our suppliers
and Solectron to rapidly achieve volume production. While we have not, to date,
experienced supply problems with Solectron, we have experienced delays in
product deliveries from one of our former contract manufacturers. If we should
fail to effectively manage our relationships with our suppliers and Solectron,
or if Solectron experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, our ability to ship products
to our customers could be delayed and our competitive position and reputation
could be harmed. Qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, we may lose revenue and damage our customer
relationships.
WE ARE DEPENDENT ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS INCLUDING ASICS AND POWER SUPPLIES
We currently purchase several key components from single or limited
sources. We purchase ASICs and power supplies from single sources, and printed
circuit boards and GBICs from limited sources. In addition, we license certain
software that is incorporated into our Brocade Fabric Operating System from Wind
River Systems, Inc. If we are unable to buy these components on a timely basis,
we will not be able to manufacture our products. We use a rolling six-month
forecast based on anticipated product orders to determine our component
requirements. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing. In addition, lead times for materials and components we order
vary significantly and depend on factors such as the specific supplier, contract
terms and demand for a component at a given time. We also may experience
shortages of certain components from time to time, which also could delay our
manufacturing.
THE COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED SALES OF OUR PRODUCTS,
REDUCED PROFITS AND REDUCED MARKET SHARE
The markets for our SAN switching products are competitive, and are likely
to become even more competitive. Increased competition could result in pricing
pressures, reduced sales, reduced margins, reduced profits, reduced market share
or the failure of our products to achieve or maintain market acceptance. Our
products face competition from multiple sources. Some of our competitors and
potential competitors have longer operating histories, greater name recognition,
access to larger customer bases, or substantially greater resources than we
have. As a result, they may be able to respond more quickly than we can to new
or changing opportunities, technologies, standards or customer requirements. For
all of the foregoing reasons, we may not be able to compete successfully against
our current and future competitors.
-16-
<PAGE> 17
THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND
GROSS MARGINS
The average unit price of our products continued to decrease in the second
quarter of fiscal 2000. We anticipate that the average unit price of our
products may continue to decrease in the future in response to changes in
product mix, competitive pricing pressures, increased sales discounts, new
product introductions by us or our competitors or other factors. If we are
unable to offset these factors by increasing our sales volumes, our revenues
will decline. In addition, to maintain our gross margins, we must develop and
introduce new products and product enhancements, and we must continue to reduce
the manufacturing cost of our products.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUES
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors may be found from time to time in our new or enhanced
products. In addition, our products are combined with products from other
vendors. As a result, when problems occur, it may be difficult to identify the
source of the problem. These problems may cause us to incur significant warranty
and repair costs, divert the attention of our engineering personnel from our
product development efforts and cause significant customer relations problems.
Moreover, the occurrence of hardware and software errors, whether caused by our
or another vendor's SAN products, could delay or prevent the development of the
SAN market.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL
Our success depends to a significant degree upon the continued
contributions of our key management, engineering and sales and marketing
personnel, many of whom would be difficult to replace. In particular, we believe
that our future success is highly dependent on Gregory L. Reyes, our President
and Chief Executive Officer, Kumar Malavalli, our Vice President, Technology and
Paul R. Bonderson, Jr., our Vice President, Engineering. We do not have
employment contracts with, or key person life insurance on, any of our key
personnel. We also believe that our success depends to a significant extent on
the ability of our management to operate effectively, both individually and as a
group.
We believe our future success will also depend in large part upon our
ability to attract and retain highly skilled managerial, engineering, sales and
marketing, and finance and operations personnel. Competition for these personnel
is intense, especially in the San Francisco Bay Area. In particular, we have
experienced difficulty in hiring qualified ASIC, software, system and test, and
customer support engineers and there can be no assurance that we will be
successful in attracting and retaining these individuals. The loss of the
services of any of our key employees, the inability to attract or retain
qualified personnel in the future or delays in hiring required personnel,
particularly engineers and sales personnel, could delay the development and
introduction of and negatively impact our ability to sell our products. In
addition, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors have engaged in unfair
hiring practices. We cannot assure you that we will not receive such claims in
the future as we seek to hire qualified personnel or that such claims will not
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.
WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH
We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places a significant
demand on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS
We plan to expand our international sales activities significantly. During
fiscal 2000, we intend to focus on expanding our international sales activities
in Western Europe and Japan. Our international sales growth in these countries
will be limited if we are unable to establish relationships with international
distributors, establish additional foreign operations, expand international
sales channel management, hire additional personnel and develop relationships
with international service providers. Even if we are able to successfully expand
international operations, we cannot be certain that we will be able to maintain
or increase international market demand for our products. Our international
operations, including our sales activities in Western Europe and Japan, are
subject to a number of risks, including:
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<PAGE> 18
- supporting multiple languages;
- recruiting sales and technical support personnel with the skills to
support our products;
- increased complexity and costs of managing international operations;
- protectionist laws and business practices that favor local competition;
- dependence on local vendors;
- multiple, conflicting and changing governmental laws and regulations;
- longer sales cycles;
- difficulties in collecting accounts receivable;
- reduced or limited protections of intellectual property rights; and
- political and economic instability.
To date, none of our international revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international revenues may be denominated in foreign currencies in the future,
including the Euro, which will subject us to risks associated with fluctuations
in those foreign currencies.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
We also enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our software, documentation and other proprietary information. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Monitoring
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States.
OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING
AND EXPENSIVE TO DEFEND
In recent years, there has been significant litigation in the United
States involving patents and other intellectual property rights. We were
previously the subject of a lawsuit alleging infringement of intellectual
property rights. Although this dispute was resolved and the lawsuit dismissed,
and we are not currently involved in any other intellectual property litigation,
we may be a party to litigation in the future to protect our intellectual
property or as a result of an alleged infringement of others' intellectual
property. These claims and any resulting lawsuit could subject us to significant
liability for damages and invalidation of our proprietary rights. These
lawsuits, regardless of their success, would likely be time-consuming and
expensive to resolve and would divert management time and attention. Any
potential intellectual property litigation also could force us to do one or more
of the following:
- 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.
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<PAGE> 19
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our markets or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:
- issue stock that would dilute our current stockholders' percentage
ownership;
- incur debt; or
- assume liabilities.
These purchases also involve numerous risks, including:
- problems combining the purchased operations, technologies or products;
- unanticipated costs;
- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
We cannot assure that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might purchase in the
future.
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS
The market for SAN products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. All components of the SAN must utilize the
same standards in order to operate together. Our products comprise only a part
of the entire SAN and we depend on the companies that provide other components
of the SAN, many of whom are significantly larger than we are, to support the
industry standards as they evolve. The failure of these providers to support
these industry standards could adversely affect the market acceptance of our
products. In addition, in the United States, our products must comply with
various regulations and standards defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, products that we
develop will also be required to comply with standards established by
authorities in various countries. Failure to comply with existing or evolving
industry standards or to obtain timely domestic or foreign regulatory approvals
or certificates could materially harm our business.
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;
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<PAGE> 20
- requiring super-majority voting to effect certain amendments to our
certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholder actions by written consent.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us. Further, our agreements with certain
of our customers require us to give prior notice of a change of control of
Brocade and grant certain manufacturing rights following the change of control.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT.
The market price of our common stock may fluctuate significantly in
response to the following factors, some of which are beyond our control:
- actual or anticipated fluctuations in our operating results;
- changes in financial estimates by securities analysts;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
- losses of major original equipment manufacturer customers;
- additions or departures of key personnel; and
- sales of common stock in the future.
In addition, the stock market has experienced extreme volatility that
often has been unrelated to the performance of particular companies. These
market fluctuations may cause our stock price to fall regardless of our
performance.
OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE
VOLATILITY
In the past, securities class action litigation often has been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW
We believe that our existing cash, cash equivalent, and short-term
investment balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may need, or could elect, to seek
additional funding prior to that time. In the event we need to raise additional
funds we may not be able to do so on favorable terms, if at all. Further, if we
issue equity securities, stockholders may experience additional dilution or the
new equity securities may have rights, preferences or privileges senior to those
of existing holders of common stock. If we cannot raise funds on acceptable
terms, we may not be able to develop or enhance our products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The majority of Brocade's operations are based in the U.S. and,
accordingly, a majority of our transactions are denominated in U.S. dollars. Our
interest income is sensitive to changes in the general level of U.S. interest
rates, however, due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure.
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<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 25, 2000, Adaptec, Inc. filed a lawsuit against Brocade in Santa
Clara County Superior Court, asserting unfair competition, intentional interface
with contractual relations and misappropriation of trade secrets related to our
hiring of former Adaptec employees, and seeking injunctive relief and damages.
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
The Company's Annual Meeting of Stockholders was held on April 20, 2000 in
San Jose, California. Of the 108,342,098 shares outstanding as of the record
date, 86,337,180 were present or represented by proxy at the meeting. The
results of the voting on the matters submitted to the stockholders are as
follows:
1. To elect two (2) class one directors to serve until the 2003 Annual
Meeting of Stockholders and until their successors are duly elected
and qualified.
<TABLE>
<CAPTION>
Name For Withheld
-------------- ---------- --------
<S> <C> <C>
Seth D. Neiman 86,096,548 240,632
Mark Leslie 86,205,532 131,648
</TABLE>
2. Appointment of Arthur Andersen, LLP as independent auditors of
Brocade Communications Systems, Inc., for the fiscal year ending
October 28, 2000.
<TABLE>
<CAPTION>
<S> <C>
Votes for: 86,305,100
Votes against: 17,504
Votes abstaining: 14,576
</TABLE>
3. Approval of an amendment to The Company's Certificate of
Incorporation to increase the authorized number of shares of Common
Stock from 200,000,000 to 400,000,000.
<TABLE>
<CAPTION>
<S> <C>
Votes for: 83,993,928
Votes against: 2,312,716
Votes abstaining: 30,536
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS.
<TABLE>
<CAPTION>
<S> <C>
27.1 Financial Data Schedule.
</TABLE>
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<PAGE> 22
REPORTS ON FORM 8-K. On February 17, 2000, Brocade filed a report on Form 8-K to
report a change in fiscal year end for fiscal 2000 and subsequent fiscal years
from October 31 to the Saturday nearest October 31.
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<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 13, 2000 BROCADE COMMUNICATIONS SYSTEMS, INC.
(Registrant)
/S/ MICHAEL J. BYRD
-------------------------------------
MICHAEL J. BYRD
Vice President, Finance and
Chief Financial Officer
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<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
