-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JHyEivVSb4p/dJEDNvEK9+DIM0jPSwd43UBrEz3rM0cf3mCUAI+a75GA4Edmxx2h tdXqw/+Kc3pVjkdWFeL6jQ== 0000891618-99-002392.txt : 19990524 0000891618-99-002392.hdr.sgml : 19990524 ACCESSION NUMBER: 0000891618-99-002392 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19990521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROCADE COMMUNICATIONS SYSTEMS INC CENTRAL INDEX KEY: 0001009626 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770409517 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-74711 FILM NUMBER: 99631711 BUSINESS ADDRESS: STREET 1: 1901 GUADALUPE PARKWAY STREET 2: SUITE E CITY: SAN JOSE STATE: CA ZIP: 95131 MAIL ADDRESS: STREET 1: 1901 GUADALUPE PARKWAY CITY: SAN JOSE STATE: CA ZIP: 95131 S-1/A 1 AMENDMENT NO. 5 TO FORM S-1/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1999 REGISTRATION NO. 333-74711 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ BROCADE COMMUNICATIONS SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3577 77-0409517 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
1901 GUADALUPE PARKWAY SAN JOSE, CALIFORNIA 95131 (408) 487-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ GREGORY L. REYES PRESIDENT AND CHIEF EXECUTIVE OFFICER BROCADE COMMUNICATIONS SYSTEMS, INC. 1901 GUADALUPE PARKWAY SAN JOSE, CALIFORNIA 95131 (408) 487-8000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: LARRY W. SONSINI GREGORY M. GALLO JOHN T. SHERIDAN DENNIS C. SULLIVAN ALISANDE M. ROZYNKO JULIE F. HANIGER WILSON SONSINI GOODRICH & ROSATI GRAY CARY WARE & FREIDENRICH LLP PROFESSIONAL CORPORATION 400 HAMILTON AVENUE 650 PAGE MILL ROAD PALO ALTO, CALIFORNIA 94301-1825 PALO ALTO, CALIFORNIA 94304-1050 (650) 328-6561 (650) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ---------------------------------------------------------------------------------------------------------------- Common Stock ($.001 par value).............................. $63,537,500 $17,664 - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). (2) Includes $11,510 previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued May 20, 1999 3,250,000 Shares [BROCADE LOGO] COMMON STOCK ------------------------ BROCADE COMMUNICATIONS SYSTEMS, INC. IS OFFERING 3,250,000 SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR COMMON STOCK. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $15 AND $17 PER SHARE. ------------------------ WE HAVE APPLIED TO LIST THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "BRCD." ------------------------ INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS PUBLIC COMMISSIONS TO BROCADE -------- ------------- ---------- Per Share................................ $ $ $ Total.................................... $ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Brocade has granted the underwriters the right to purchase up to 487,500 additional shares to cover over-allotments. Morgan Stanley & Co. Incorporated expects to deliver the shares of common stock to purchasers on , 1999. ------------------------ MORGAN STANLEY DEAN WITTER BT ALEXS BROWN DAIN RAUSCHER WESSELS a division of Dain Rauscher Incorporated , 1999 3 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................. 3 Risk Factors........................ 5 Special Note Regarding Forward-Looking Statements........ 15 Use of Proceeds..................... 16 Dividend Policy..................... 16 Capitalization...................... 17 Dilution............................ 18 Selected Financial Data............. 19 Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 20 Business............................ 29
PAGE ---- Management.......................... 41 Certain Transactions................ 53 Principal Stockholders.............. 57 Description of Capital Stock........ 60 Shares Eligible for Future Sale..... 63 Underwriters........................ 65 Legal Matters....................... 67 Experts............................. 67 Change in Independent Accountants and Fiscal Year End............... 67 Where You May Find Additional Information....................... 68 Index to Financial Statements....... F-1
------------------------- You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in those jurisdictions where offers and sales are permitted. Unless otherwise specifically stated, the information in this prospectus has been adjusted to reflect the assumed exercise of warrants to purchase 73,699 shares of preferred stock prior to this offering and the subsequent conversion of all outstanding shares of preferred stock into common stock on the completion of this offering, but does not take into account the possible issuance of additional shares of common stock to the underwriters pursuant to their right to purchase additional shares to cover over-allotments. UNTIL , 1999, 25 DAYS AFTER COMMENCEMENT OF THIS OFFERING, ALL DEALERS EFFECTING TRANSACTIONS IN OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 2 4 PROSPECTUS SUMMARY You should read this summary together with the more detailed information and our financial statements and notes to the financial statements appearing elsewhere in this prospectus. BROCADE COMMUNICATIONS SYSTEMS, INC. We are the leading provider, based on revenue and number of ports shipped, of products, commonly called switches, that are connected to computers and storage devices, which are devices such as disk drives and tape drives, that computers use to save information. Our products allow simultaneous communication on demand between these devices. Our products, connected to computers and storage devices, create what is commonly referred to as a storage area network or SAN. Our products utilize the Fibre Channel protocol, which is a standard for the transfer of information between computers and storage devices defined by the American National Standards Institute or ANSI. Our family of SilkWorm switches enables a company to: - easily increase the size and scope of its SAN thereby enabling it to cost-effectively manage the growth of its storage systems; - improve the data transfer speed between the computers that run a company's critical software programs and its storage systems; and - run simultaneous applications such as duplicating or backing up important business data on the SAN without affecting other applications the computer network is running. We sell our products to companies that integrate our products with products of other manufacturers and sell the combined products to their own customers, called system integrators. We also sell our products to companies that combine our products with their own products and sell the combined product under their own brand, called original equipment manufacturers. Our customers include Compaq Computer, Dell Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. Over the past decade, the number of users and the volume of critical business data that is being captured, processed, stored and manipulated on computer networks have exploded. The congestion caused by users trying to access large amounts of data has created a bottleneck between the computer and its storage systems. The Fibre Channel interconnect protocol was developed in the early 1990s to address the need to increase the speed and performance of communications between computers and between computers and their storage devices. Fibre Channel has earned broad support from leaders in the computer and storage industries. Our SilkWorm family of products includes our Brocade Fabric Operating System, SAN management tools, fabric services and ready-to-deploy switch configurations. Our products offer the following benefits: Address the input/output bottleneck. Our products are designed to allow simultaneous communication between computers and between computers and storage devices on the SAN at gigabit speeds. Provide scalability to SAN. By adding additional switches to a SAN, our products can be used to increase the size and scope of the SAN, enabling companies to cost-effectively manage the growth of their storage systems. In addition, our products can be used to connect separate SANs into a single large SAN to enable companies to share distributed data. Provide high levels of resiliency and availability. We have designed our products to meet the needs of companies that desire continuous computer availability by minimizing maintenance down-time and maximizing the availability of the system to its users. Enable SAN applications. Our products allow our customers to run simultaneous applications such as duplicating or backing up important business data on the SAN without affecting other applications the computer network is running. Enhance SAN management. Our Brocade Fabric Operating Systems is designed for ease of use and implementation to reduce the overall costs and improve the efficiency of managing the SAN. We intend to capitalize on our market leadership in SAN switching solutions and our Fibre Channel technical expertise to leverage our core technologies and products to address the evolving SAN market. In addition to focusing on our distribution relationships with leading computer and storage systems original equipment manufacturers, we have recently launched our system integrator program. Furthermore, we intend to continue building relationships with leading technology partners. 3 5 THE OFFERING Common stock offered................ 3,250,000 shares Common stock to be outstanding after this offering....................... 25,685,291 shares Use of proceeds..................... We intend to use the net proceeds for general corporate purposes, including repayment of outstanding indebtedness, capital expenditures and working capital. Proposed Nasdaq National Market symbol.............................. BRCD The foregoing information is as of April 30, 1999 and excludes 2,427,397 shares of common stock issuable upon exercise of options outstanding as of April 30, 1999 with a weighted average exercise price of $2.65 per share, 287,788 shares of common stock issuable upon exercise of warrants outstanding as of April 30, 1999 with a weighted average exercise price of $1.37 per share, and 348,080 shares of common stock reserved for additional option grants under our stock plans as of April 30, 1999, and assumes no exercise of the underwriters' over-allotment option. We are a Delaware corporation. Our principal executive offices are located at 1901 Guadalupe Parkway, San Jose, California 95131, and our telephone number is (408) 487-8000. SUMMARY FINANCIAL DATA (in thousands, except per share data)
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ------------------------------------- ----------------- 1995 1996 1997 1998 1998 1999 ----- ------- -------- -------- ------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Total revenues............................. $ -- $ -- $ 8,482 $ 24,246 $14,270 $18,547 Gross profit............................... -- -- 1,800 8,487 5,901 9,789 Loss from operations....................... (176) (3,818) (9,442) (15,231) (4,033) (2,723) Net loss................................... (166) (3,934) (9,619) (15,111) (3,870) (2,687) Pro forma basic net loss per share......... $ (.84) $ (.14) Shares used in per share calculations...... 17,915 19,193
The following table presents summary balance sheet data as of April 30, 1999, which has been adjusted to reflect the assumed exercise of warrants to purchase 73,699 shares of preferred stock at an exercise price of $6.78 per share prior to this offering and the subsequent conversion of our preferred stock into 14,623,614 shares of common stock upon completion of this offering, our sale of 3,250,000 shares of our common stock in this offering at an assumed initial public offering price of $16.00 per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses, and the application of the estimated net proceeds. See "Use of Proceeds" and "Capitalization."
AS OF APRIL 30, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 8,668 $52,846 Working capital............................................. 5,061 51,753 Total assets................................................ 27,450 71,628 Long-term portion of debt and capital lease obligations..... 1,525 232 Redeemable convertible preferred stock...................... 37,016 -- Total stockholders' equity (deficit)........................ (28,301) 56,700
4 6 RISK FACTORS This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the following risk factors and the other information in this prospectus before investing in our common stock. Our business, financial condition and results of operations could be seriously harmed by any of the following risks. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment. WE HAVE AN ACCUMULATED DEFICIT OF $31.5 MILLION AND MAY NOT ACHIEVE PROFITABILITY We have incurred significant losses since inception and expect to incur losses in the future. As of April 30, 1999, we had an accumulated deficit of $31.5 million. Although our revenues have grown in recent quarters, we cannot be certain that we will be able to sustain these growth rates or that we will realize sufficient revenues to achieve profitability. We also expect to incur significant product development, sales and marketing and administrative expenses and, as a result, we will need to generate significant revenues to achieve and maintain profitability. Moreover, even if we do achieve profitability, we may not be able to sustain or increase profitability. See "Selected Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." We also may incur additional losses as a result of our limited operating history. Specifically, Brocade has been operating less than four years. Therefore, we cannot forecast future operating results based on our historical results. We plan our operating expenses based in part on future revenue projections. Our ability to accurately forecast our quarterly revenue is limited for the reasons discussed below in "-- We Expect Our Quarterly Revenues and Operating Results to Fluctuate for a Number of Reasons Which Could Cause Our Stock Price to Fluctuate." Moreover, most of our expenses are fixed in the short-term or incurred in advance of receipt of corresponding revenue. As a result, we may not be able to decrease our spending to offset any unexpected shortfall in our revenues. If this were to occur, we would expect to incur significant losses. WE EXPECT OUR QUARTERLY REVENUES AND OPERATING RESULTS TO FLUCTUATE FOR A NUMBER OF REASONS WHICH COULD CAUSE OUR STOCK PRICE TO FLUCTUATE Our quarterly revenues and operating results have varied significantly in the past and are likely to vary significantly in the future due to a number of factors, any of which may cause our stock price to fluctuate. The primary factors that may affect us include the following: -- fluctuations in demand for our SilkWorm family of products and services; -- the timing of customer orders and product implementations, particularly large orders from and product implementations of our original equipment manufacturer customers; -- our ability to develop, introduce, ship and support new products and product enhancements; -- announcements and new product introductions by our competitors; -- the expected decline in the prices at which we can sell our SilkWorm family of products to our customers; -- our ability to obtain sufficient supplies of sole or limited sourced components, including application specific integrated circuits, or ASICs, gigabit interface converters, or GBICs, and power supplies, for our SilkWorm family of products; -- increases in the prices of the components we purchase; 5 7 -- our ability to attain and maintain production volumes and quality levels for our SilkWorm family of products; -- the mix of our SilkWorm and SilkWorm Express switches sold and the mix of distribution channels through which they are sold; -- increased expenses, particularly in connection with our strategy to continue to expand our relationships with key original equipment manufacturers and system integrators; -- widespread adoption of SANs as an alternative to existing data storage and management systems; -- decisions by end-users to reallocate their information resources to other purposes, including year 2000 preparedness; and -- deferrals of customer orders in anticipation of new products, services or product enhancements introduced by us or our competitors. Accordingly, you should not rely on the results of any past periods as an indication of our future performance. It is likely that in some future period, our operating results may be below expectations of public market analysts or investors. If this occurs, our stock price may drop. OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING MARKET FOR SANS AND SAN SWITCHING PRODUCTS Our SilkWorm family of Fibre Channel switching products is used exclusively in storage area networks, or SANs. Accordingly, widespread adoption of SANs as an integral part of data-intensive enterprise computing environments is critical to our future success. In addition, our success depends upon market acceptance of our SAN switching solutions as an alternative to the use of hubs or other interconnect devices in SANs. The markets for SANs and SAN switching products have only recently begun to develop and are rapidly evolving. Because these markets are new, it is difficult to predict their potential size or future growth rate. In addition, SANs are often implemented in connection with deployment of new storage systems and servers and we are therefore dependent to some extent on this market. Potential end-user customers who have invested substantial resources in their existing data storage and management systems may be reluctant or slow 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 In fiscal 1998 and the six months ended April 30, 1999, we derived 92% of our revenues from sales of our SilkWorm family of products and the remainder from a technology license. 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 6 8 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 1999. Our future revenue growth will be dependent on the success of these new product launches. We have in the past experienced delays in product development and such delays may occur in the future. In addition, as we introduce new or enhanced products, we will have to manage successfully the transition from older products in order to minimize disruption in our customers' ordering patterns, avoid excessive levels of older product inventories and ensure that enough supplies of new products can be delivered to meet our customers' demands. Our failure to develop and introduce successfully new products and product enhancements, which are not broadly accepted, would reduce our revenues. WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND THE LOSS OF ANY OF THEM COULD SIGNIFICANTLY REDUCE OUR REVENUES We depend on a few key original equipment manufacturer customers. For example, in the six months ended April 30, 1999, sales to Sequent, McDATA and Data General accounted for 31%, 25% and 15% of our total revenues, respectively. We anticipate that our operating results will continue to depend on sales to a relatively small number of original equipment manufacturers. Therefore, the loss of any of our key original equipment manufacturers, or a significant reduction in sales to these original equipment manufacturers could significantly reduce our revenues. FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION RELATIONSHIPS COULD SIGNIFICANTLY REDUCE OUR REVENUES Our success will depend on our continuing ability to develop and manage relationships with significant original equipment manufacturers and system integrators, as well as on the sales efforts and success of these customers. Our customers may evaluate our products for up to a year before they begin to market and sell them and assisting these customers through the evaluation process may require significant sales and marketing and management efforts on our part, particularly if we have to qualify our products with multiple customers at the same time. In addition, once our products have been qualified, our agreements with our customers have no minimum purchase commitments. We cannot assure you that we will be able to expand our distribution channels, manage our distribution relationships successfully or that our customers will market our products effectively. Our failure to manage successfully our distribution relationships or the failure of our customers to sell our products could reduce our revenues. 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 currently do not have a long-term supply contract with Solectron. Therefore, Solectron is not obligated to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order. We generally place orders with Solectron up to four months prior to scheduled delivery of products to our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate 7 9 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. See "Business -- Competition." THE PRICES OF OUR PRODUCTS ARE DECLINING WHICH COULD REDUCE OUR REVENUES AND GROSS MARGINS The average unit price of our products decreased 26% in fiscal 1998. We anticipate that the average unit price of our products may continue to decrease in the future in response to changes in product mix, competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. If we are unable to offset these factors by increasing our sales volumes, our revenues will decline. In addition, to maintain our gross margins, we must develop and introduce new products and product enhancements, and we must continue to reduce the manufacturing cost of our products. 8 10 UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE OUR REVENUES Networking products frequently contain undetected software or hardware errors when first introduced or as new versions are released. Our products are complex and errors may be found from time to time in our new or enhanced products. In addition, our products are combined with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. Moreover, the occurrence of hardware and software errors, whether caused by our or another vendor's SAN products, could delay or prevent the development of the SAN market. IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT BE SUCCESSFUL Our success depends to a significant degree upon the continued contributions of our key management, engineering and sales and marketing personnel, many of whom would be difficult to replace. In particular, we believe that our future success is highly dependent on Gregory L. Reyes, our President and Chief Executive Officer, Kumar Malavalli, our Vice President, Technology and Paul R. Bonderson, Jr., our Vice President, Engineering. We do not have employment contracts with, or key person life insurance on, any of our key personnel. We also believe that our success depends to a significant extent on the ability of our management to operate effectively, both individually and as a group. In April 1999, we hired a new Chief Financial Officer, and certain other members of our management team, including Mr. Reyes, have only recently joined us. We believe our future success will also depend in large part upon our ability to attract and retain highly skilled managerial, engineering, sales and marketing, and finance and operations personnel. Competition for these personnel is intense, especially in the San Francisco Bay Area. In particular, we have experienced difficulty in hiring qualified ASIC, software, system and test, and customer support engineers and there can be no assurance that we will be successful in attracting and retaining these individuals. The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel, particularly engineers and sales personnel, could delay the development and introduction of and negatively impact our ability to sell our products. In addition, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We cannot assure you that we will not receive such claims in the future as we seek to hire qualified personnel or that such claims will not result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. WE MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE FUTURE GROWTH We plan to continue to expand our operations significantly to pursue existing and potential market opportunities. This growth places a significant demand on our management and our operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS We plan to expand our international sales activities significantly. In fiscal 1999 and 2000, we intend to focus on expanding our international sales activities in Western Europe. Our international sales growth 9 11 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, are subject to a number of risks, including: -- supporting multiple languages; -- recruiting sales and technical support personnel with the skills to support our products; -- increased complexity and costs of managing international operations; -- protectionist laws and business practices that favor local competition; -- dependence on local vendors; -- multiple, conflicting and changing governmental laws and regulations; -- longer sales cycles; -- difficulties in collecting accounts receivable; -- reduced or limited protections of intellectual property rights; and -- political and economic instability. To date, none of our international revenues and costs have been denominated in foreign currencies. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and thus less competitive in foreign markets. A portion of our international revenues may be denominated in foreign currencies in the future, including the Euro, which will subject us to risks associated with fluctuations in those foreign currencies. WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY WHICH WOULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE We rely on a combination of patent, copyright, trademark and trade secret laws and restrictions on disclosure to protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. See "Business -- Intellectual Property." OTHERS MAY BRING INFRINGEMENT CLAIMS AGAINST US WHICH COULD BE TIME-CONSUMING AND EXPENSIVE TO DEFEND In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We were previously the subject of a lawsuit alleging infringement of intellectual property rights. Although this dispute was resolved and the lawsuit dismissed, and we are not currently involved in any other intellectual property litigation, we may be a party to litigation in the future to protect our intellectual property or as a result of an alleged infringement of others' intellectual 10 12 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 sell or use the relevant technology, which license may not be available on reasonable terms, or at all; and -- redesign those products or services that use such technology. If we are forced to take any of the foregoing actions, we may be unable to manufacture and sell our products, which would reduce our revenues. WE ARE THE SUBJECT OF A PENDING LEGAL PROCEEDING We have been sued by one of our former contract manufacturers in the Santa Clara County, California Superior Court. We believe that we have strong defenses against the claims alleged in the lawsuit. Accordingly, we intend to defend this suit vigorously. However, the litigation process is inherently uncertain and we may not prevail. Our defense of this litigation, regardless of its eventual outcome, has been, and will likely continue to be, time-consuming, costly and a diversion for our personnel. A failure to prevail could result in us having to pay monetary damages of up to $2.9 million and reimburse the plaintiff for some or all of its attorneys' fees. See "Business -- Pending Legal Proceeding." WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES As part of our strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may buy businesses, products or technologies in the future. In the event of any future purchases, we could: -- issue stock that would dilute our current stockholders' percentage ownership; -- incur debt; or -- assume liabilities. These purchases also involve numerous risks, including: -- problems combining the purchased operations, technologies or products; -- unanticipated costs; -- diversion of management's attention from our core business; -- adverse effects on existing business relationships with suppliers and customers; -- risks associated with entering markets in which we have no or limited prior experience; and -- potential loss of key employees of purchased organizations. 11 13 We cannot assure you that we will be able to successfully integrate any businesses, products, technologies or personnel that we might purchase in the future. OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS The year 2000 computer issue creates risks for us. Failure of our products to recognize correctly date information when the year changes to 2000 could result in significant decreases in market acceptance of our products, increases in warranty claims and legal liability for defective software. We have not tested our products in every possible computer environment, and therefore such products may not be fully year 2000 compliant. Year 2000 preparations by our customers could also slow down purchases of our products. Our internal year 2000 compliance review is focused on reviewing our internal computer information and security systems for year 2000 compliance, and developing and implementing remedial programs to resolve year 2000 issues in a timely manner. Additionally, we are contacting our third party suppliers and requesting their written assurances that their systems are year 2000 compliant. To date our year 2000 costs have been primarily driven by the cost of our personnel conducting the year 2000 compliance review. We estimate such costs to date are $50,000. If our suppliers, vendors, major distributors and partners fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which vendor's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether any year 2000 failures will harm us. We believe our year 2000 worst case scenario would be the failure of a sole or limited source supplier to be year 2000 compliant. The failure of one of these suppliers to be year 2000 compliant could seriously interrupt our manufacturing process, which could substantially reduce our revenues. Our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems. This situation may reduce funds available to purchase our products. Therefore, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Year 2000 Compliance." OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS The market for SAN products is characterized by the need to support industry standards as they emerge, evolve and achieve acceptance. To remain competitive, we must continue to introduce new products and product enhancements that meet these industry standards. All components of the SAN must utilize the same standards in order to operate together. Our products comprise only a part of the entire SAN and we depend on the companies that provide other components of the SAN, many of whom are significantly larger than we are, to support the industry standards as they evolve. The failure of these providers to support these industry standards could adversely affect the market acceptance of our products. In addition, in the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop will also be required to comply with standards established by authorities in various countries. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business. 12 14 MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH THE STOCKHOLDERS MAY NOT AGREE Our management can spend the net proceeds from this offering in ways with which the stockholders may not agree. We cannot assure you that our investments and use of the net proceeds of this offering will yield favorable returns or results. See "Use of Proceeds." OUR OFFICERS AND DIRECTORS AND THEIR AFFILIATES WILL EXERCISE SIGNIFICANT CONTROL OVER BROCADE Upon completion of this offering, our executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately 50.1% of our outstanding common stock. As a result, these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. See "Principal Stockholders." PROVISIONS IN OUR CHARTER DOCUMENTS, CUSTOMER AGREEMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF BROCADE AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: -- authorizing the issuance of preferred stock without stockholder approval; -- providing for a classified board of directors with staggered, three-year terms; -- prohibiting cumulative voting in the election of directors; -- requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws; -- limiting the persons who may call special meetings of stockholders; 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. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Law and Certain Provisions of Our Certificate of Incorporation and Bylaws." OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. This initial public offering price may vary from the market price of our common stock after the offering. If you purchase shares of common stock, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: -- actual or anticipated fluctuations in our operating results; -- changes in financial estimates by securities analysts; 13 15 -- 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. You should read the "Underwriters" section for a more complete discussion of the factors to be considered in determining the initial public offering price of our common stock. OUR BUSINESS MAY BE HARMED BY CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources. WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR ABILITY TO GROW We believe that the net proceeds of this offering, together with our existing cash balances, credit facilities and cash flow expected to be generated from future operations, will be sufficient to meet our capital requirements at least through the next 12 months. However, we may 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. See "Use of Proceeds," "Dilution" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. All of the 3,250,000 shares sold in this offering will be freely tradeable, with the 22,435,291 other shares outstanding, based on the number of shares outstanding as of April 30, 1999, being restricted securities as defined in Rule 144 of the Securities Act of 1933, approximately 10,949,935 shares of which will be freely tradeable beginning 180 days after the effective date of this offering, and the remainder of which will become freely tradeable at various times thereafter. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. See "Shares Eligible for Future Sale." 14 16 YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION The initial public offering price is expected to be substantially higher than the book value per share of our outstanding common stock immediately after the offering. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $13.79 in the book value per share of our common stock from the price you pay for our common stock. This calculation assumes that you purchase our common stock for $16.00 per share. See "Dilution." SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intend," "potential" or "continue" or the negative of such terms or other comparable terminology. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks outlined under "Risk Factors" and elsewhere in this prospectus. 15 17 USE OF PROCEEDS We estimate that our net proceeds from the sale of the 3,250,000 shares of common stock we are offering will be approximately $47,485,000, or $54,739,000 if the underwriters exercise their over-allotment option in full, at an assumed initial public offering price of $16.00 per share and after deducting estimated underwriting discounts and commissions and our estimated offering expenses. We expect to use the net proceeds of this offering as follows: -- to repay outstanding indebtedness under our bank credit facility and our equipment loan agreement; and -- for general corporate purposes, including capital expenditures and working capital. In addition, we may use a portion of the net proceeds for the acquisition of businesses, products and technologies that are complementary to ours. However, we have no current plans, agreements or commitments and are not currently engaged in any negotiations with respect to any acquisition. Pending such uses, we will invest the net proceeds of this offering in investment grade, interest-bearing securities. Borrowings under our credit facility bear interest at the bank's prime rate, which was 8.5% per annum as of April 30, 1999, and indebtedness under our equipment loan agreement bears interest at the bank's prime rate plus 1%. At April 30, 1999, the principal amount of outstanding indebtedness under our credit facility and our equipment loan agreement was approximately $1.2 million and $2.6 million, respectively. DIVIDEND POLICY We have not paid any cash dividends since our inception, and we do not intend to pay any cash dividends in the foreseeable future. In addition, the terms of our credit agreements prohibit the payment of dividends on our capital stock. 16 18 CAPITALIZATION The following table sets forth our short-term debt and capitalization as of April 30, 1999: -- on an actual basis; -- on a pro forma basis to reflect the assumed exercise of warrants to purchase 73,699 shares of preferred stock at an exercise price of $6.78 per share prior to this offering, the subsequent conversion of all outstanding shares of preferred stock into 14,623,614 shares of common stock and our reincorporation in Delaware; and -- on a pro forma as adjusted basis to reflect the sale of the common stock in this offering at an assumed initial public offering price of $16.00 per share and the application of the net proceeds, after deducting estimated underwriting discounts and commissions and our estimated offering expenses. The outstanding share information excludes 2,427,397 shares of common stock issuable upon exercise of options outstanding as of April 30, 1999 with a weighted average exercise price of $2.65 per share, 287,788 shares of common stock issuable upon exercise of warrants outstanding as of April 30, 1999 with a weighted average exercise price of $1.37 per share, and 348,080 shares of common stock reserved for additional option grants under our stock plans as of April 30, 1999. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes to the financial statements. See "Use of Proceeds" and "Management -- Employee Benefit Plans."
AS OF APRIL 30, 1999 ------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED --------- ---------- ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Short-term portion of debt and capital lease obligations............................................. $ 3,139 $ 3,139 $ 625 ======== ======== ======== Long-term portion of debt and capital lease obligations... $ 1,525 $ 1,525 $ 232 Redeemable convertible preferred stock, no par value, 9,791,280 shares authorized, 9,458,665 issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted........ 37,016 -- -- Warrants to purchase redeemable convertible preferred stock................................................... 405 405 405 Stockholders' equity (deficit): Preferred stock, $.001 par value, no shares authorized, issued or outstanding, actual; 5,000,000 shares authorized, no shares issued or outstanding, pro forma and pro forma as adjusted...................... -- -- -- Common stock, $.001 par value, 30,000,000 shares authorized, 7,811,677 shares issued and outstanding, actual; 50,000,000 shares authorized, 22,435,291 shares issued and outstanding, pro forma; 50,000,000 shares authorized, 25,685,291 issued and outstanding, pro forma as adjusted................................ 13,765 22 26 Additional paid-in capital.............................. -- 51,259 98,740 Notes receivable from stockholders...................... (6,549) (6,549) (6,549) Deferred stock compensation............................. (4,000) (4,000) (4,000) Accumulated deficit..................................... (31,517) (31,517) (31,517) -------- -------- -------- Total stockholders' equity (deficit)................. (28,301) 9,215 56,700 -------- -------- -------- Total capitalization............................ $ 10,645 $ 11,145 $ 57,337 ======== ======== ========
17 19 DILUTION The pro forma net tangible book value of our common stock as of April 30, 1999, was approximately $9.2 million, or $.41 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities, divided by 22,435,291 shares of common stock outstanding after giving effect to the assumed exercise of warrants to purchase 73,699 shares of preferred stock at an exercise price of $6.78 per share prior to this offering and the subsequent conversion of all outstanding shares of preferred stock into shares of common stock upon completion of this offering. After giving effect to our sale of 3,250,000 shares of common stock in this offering at an assumed initial offering price of $16.00 per share and after deducting the estimated underwriting discounts and commissions and our estimated offering expenses, our net tangible book value as of April 30, 1999, would have been $56.7 million or $2.21 per share. This represents an immediate increase in net tangible book value of $1.80 per share to existing stockholders and an immediate dilution in net tangible book value of $13,79 per share to purchasers of common stock in this offering, as illustrated in the following table: Assumed initial public offering price per share............. $16.00 Pro forma net tangible book value per share as of April 30, 1999............................................... $ .41 Increase per share attributable to new investors.......... 1.80 ----- Pro forma net tangible book value per share after this offering.................................................. 2.21 ------ Dilution per share to new investors......................... $13.79 ======
The following table sets forth on a pro forma basis as of April 30, 1999, after giving effect to the assumed exercise of warrants to purchase 73,699 shares of preferred stock at an exercise price of $6.78 per share prior to this offering, the subsequent conversion of all outstanding shares of preferred stock into common stock upon completion of this offering, the differences between the existing stockholders and the purchasers of shares in this offering, at the assumed initial public offering price of $16.00 per share, with respect to the number of shares purchased from us, the total consideration paid and the average price paid per share:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ------------------- ---------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- --------- Existing stockholders............. 22,435,291 87% $46,243,000 47% $2.06 New stockholders.................. 3,250,000 13 52,000,000 53 16.00 ---------- ----- ----------- ----- Total................... 25,685,291 100% $98,243,000 100% ========== ===== =========== =====
As of April 30, 1999, there were options outstanding to purchase a total of 2,427,397 shares of common stock at a weighted average exercise price of $2.65 per share. In addition, as of April 30, 1999, there were warrants outstanding to purchase 287,788 shares of common stock on an as converted basis at a weighted average exercise price of approximately $1.37 per share, which we have assumed will not be exercised prior to this offering. To the extent outstanding options or warrants are exercised, there will be further dilution to new investors. See "Management -- Employee Benefit Plans" and notes 6 and 7 to our financial statements. 18 20 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other financial information appearing elsewhere in this prospectus. The statement of operations data set forth below for each of the years in the three-year period ended October 31, 1998 and the balance sheet data as of October 31, 1997 and 1998 are derived from, and qualified by reference to, our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the period from inception on August 24, 1995 to October 31,1995 and the balance sheet data as of October 31, 1995 and 1996 are derived from audited financial statements not included herein. The statement of operations data for the six months ended April 30, 1998 and 1999 and the balance sheet data as of April 30, 1999 are derived from unaudited financial statements appearing elsewhere in this prospectus which, in the opinion of our management, reflect all normal recurring adjustments that we consider necessary for a fair presentation of such information in accordance with generally accepted accounting principles. Operating results for the six months ended April 30, 1999 are not necessarily indicative of the results that may be expected for the full fiscal year.
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, -------------------------------------------- -------------------------- 1995 1996 1997 1998 1998 1999 ------ ------- -------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues: Product revenue......................... $ -- $ -- $ 8,482 $ 22,414 $ 12,958 $16,969 License revenue......................... -- -- -- 1,832 1,312 1,578 ------ ------- -------- -------- -------- ------- Total revenues................... -- -- 8,482 24,246 14,270 18,547 Cost of revenues.......................... -- -- 6,682 15,759 8,369 8,758 ------ ------- -------- -------- -------- ------- Gross profit.............................. -- -- 1,800 8,487 5,901 9,789 ------ ------- -------- -------- -------- ------- Operating expenses: General and administrative.............. 52 575 1,464 3,813 1,263 1,415 Sales and marketing..................... -- 152 2,112 5,154 2,376 4,086 Research and development................ 124 3,091 7,666 14,744 6,295 5,634 Amortization of deferred compensation... -- -- -- 7 -- 1,377 ------ ------- -------- -------- -------- ------- Total operating expenses......... 176 3,818 11,242 23,718 9,934 12,512 ------ ------- -------- -------- -------- ------- Loss from operations...................... (176) (3,818) (9,442) (15,231) (4,033) (2,723) Other income (expense).................... 10 (116) (177) 120 163 36 ------ ------- -------- -------- -------- ------- Net loss.................................. $ (166) $(3,934) $ (9,619) $(15,111) $ (3,870) $(2,687) ====== ======= ======== ======== ======== ======= Basic net loss per share.................. $ -- $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56) ====== ======= ======== ======== ======== ======= Shares used in computing basic net loss per share............................... -- 414 1,997 3,400 2,857 4,757 ====== ======= ======== ======== ======== ======= Pro forma basic net loss per share (unaudited)............................. $ (.84) $ (.14) ======== ======= Shares used in computing pro forma basic net loss per share (unaudited).......... 17,915 19,193 ======== =======
AS OF OCTOBER 31, AS OF -------------------------------------- APRIL 30, 1995 1996 1997 1998 1999 ------ ------- -------- -------- ----------- (IN THOUSANDS) (UNAUDITED) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments....... $1,168 $ 700 $ 2,552 $ 10,420 $ 8,668 Working capital......................................... 922 104 15,334 5,276 5,061 Total assets............................................ 1,549 2,605 26,100 21,301 27,450 Long-term portion of debt and capital lease obligations........................................... -- 874 1,954 2,209 1,525 Redeemable convertible preferred stock.................. 1,411 4,613 30,359 35,261 37,016 Total stockholders' deficit............................. (166) (3,957) (13,458) (27,355) (28,301)
19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus. OVERVIEW We are a provider of switching solutions for SANs. We sell our SAN switching solutions through leading storage systems and server original equipment manufacturers, including Compaq Computer, Dell Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. These original equipment manufacturers and our system integrator customers combine our switching solutions with other system elements and services for enterprise data centers. From our inception in August 1995 through April 1997, our operating activities related primarily to developing our research and development capabilities, building an ASIC design infrastructure, developing, prototyping and testing our SilkWorm products, staffing our administrative, marketing and sales organizations and establishing relationships with original equipment manufacturers. In the three months ended July 31, 1997, we commenced volume shipments of our SilkWorm switch. Since our inception we have incurred significant losses and as of April 30, 1999, we had an accumulated deficit of $31.5 million. Our revenue is derived primarily from sales of our SilkWorm family of products. Additionally, we have recognized licensing revenue in connection with the licensing of certain technology rights to a customer. In fiscal 1998, sales to Sequent and McDATA accounted for 72% and 11% of our total revenues, respectively, and in the six months ended April 30, 1999, Sequent, McDATA and Data General accounted for 31%, 25% and 15% of our total revenues, respectively. These percentages exclude deferred revenue, which is discussed further below. The level of sales to any customer may vary from quarter to quarter. However, we expect that significant customer concentration will continue for the foreseeable future. We currently sell substantially all of our products through several major original equipment manufacturers. The initial evaluation and product qualification cycle with original equipment manufacturers typically takes six to twelve months and includes technical evaluation, integration, testing, product launch planning and execution. Our sales strategy also includes recruiting system integrators with a Fortune 500 data center presence and the technical resources to design, implement and support SANs. To date, substantially all of our sales have been in the United States. However, we have launched sales and marketing efforts in Western Europe and have a distributor in Japan. Product revenue is recognized when products are shipped to customers, unless at the time of shipment product returns cannot be estimated or significant support services are required to successfully launch the customer's products. In the six months ended April 30, 1999, several of our customers were implementing SAN solutions, including our product, for their end-users for the first time. Given the recent adoption of the SAN model and Brocade's solution by these original equipment manufacturers and because substantial Brocade services were required to support these original equipment manufacturers' product launches, the revenue related to shipments to these original equipment manufacturers customers has been deferred. The deferred revenue will be recognized on a customer-by-customer basis as each customer successfully completes its product launch. Similarly, revenue is deferred for new products that have not completed the beta test phase. As of April 30, 1999, $3.9 million of revenue was deferred. It is expected that this deferred revenue will be recognized in the second half of fiscal 1999. We believe that, as the SAN market matures, this revenue deferral method for new customers may not be necessary. We do not provide our customers with product return programs. We provide a reserve for warranty returns based on our warranty history. License revenue is related only to technology associated with certain ASICs and is recognized when designs and specifications are delivered and collection is reasonably assured. We do not anticipate significant technology licensing revenues in the future. 20 22 From fiscal 1997 to fiscal 1998 our average unit selling price decreased 26.0% primarily due to the introduction of the SilkWorm Express, a lower port count product. We expect continued declines in our average unit selling price due to anticipated increases in per customer sales volume, the impact of competitive pricing pressures and new product introductions. Our gross margins may be affected by declines in average unit selling prices, fluctuations in manufacturing volumes and component costs, the mix of products sold and the introduction of new products. Additionally, our gross margins may be impacted by the mix of distribution channels through which our products are sold. In July 1998, we outsourced our manufacturing and the majority of our supply chain management operations. Accordingly, a significant portion of our cost of revenues consists of payments to our contract manufacturer, Solectron. We conduct quality assurance, manufacturing engineering, documentation control and repairs at our facility in San Jose, California. General and administrative expenses consist primarily of salaries and related expenses for executive, finance and human resources personnel, recruiting expenses, professional fees and other corporate expenses. We expect general and administrative expenses to increase in absolute dollars as we add personnel and incur additional costs related to the growth of our business and our operation as a public company. Selling and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer engineering support functions, as well as costs associated with promotional and travel expenses. We believe that continued investment in sales and marketing is critical to the success of our strategy to expand our relationships with leading original equipment manufacturers and to maintaining our leadership position in the SAN market. As a result, we expect these expenses to increase in absolute dollars in the future. Research and development expenses consist primarily of salaries and related personnel expenses, fees paid to consultants and outside service providers, prototyping expenses related to the design, development, testing and enhancements of our ASICs and software and the costs of computer support services. We believe that continued investment in research and development is critical to our strategic product and cost-reduction objectives. As a result, we expect these expenses to increase in absolute dollars in the future. In fiscal 1998, we initiated a plan to reduce our operating expenses by restructuring our operations. In connection with this plan, we recorded a $3.2 million restructuring charge allocated among various expense categories. In connection with the grant of certain stock options to employees, we recorded deferred compensation of $307,000 and $5.1 million during fiscal 1998 and the six months ended April 30, 1999, respectively, representing the difference between the deemed value of our common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred compensation is presented as a reduction of stockholders' equity and amortized ratably over the vesting period of the applicable options. We amortized $1.4 million of deferred compensation during the six months ended April 30, 1999. We will expense the balance ratably over the remainder of the vesting period of the options. See note 6 to our financial statements. As of October 31, 1998, we had operating loss carryforwards of approximately $22.1 million for federal purposes and $10.0 million for state purposes. The federal net operating loss carryforwards expire on various dates between 2010 and 2018, and the state net operating loss carryforwards will begin to expire in 2003. We have provided a full valuation allowance against our deferred tax assets, consisting primarily of net operating loss carryforwards, because of the uncertainty regarding their realization. 21 23 RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated as a percentage of total revenues.
SIX MONTHS YEAR ENDED ENDED OCTOBER 31, APRIL 30, --------------- -------------- 1997 1998 1998 1999 ------ ----- ----- ----- (UNAUDITED) Revenues: Product revenue..................................... 100.0% 92.4% 90.8% 91.5% License revenue..................................... -- 7.6 9.2 8.5 ------ ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 100.0 Cost of revenues...................................... 78.7 65.0 58.6 47.2 ------ ----- ----- ----- Gross margin.......................................... 21.3 35.0 41.4 52.8 ------ ----- ----- ----- Operating expenses: General and administrative.......................... 17.3 15.7 8.9 7.6 Sales and marketing................................. 24.9 21.3 16.7 22.0 Research and development............................ 90.4 60.8 44.1 30.4 Amortization of deferred compensation............... -- -- -- 7.4 ------ ----- ----- ----- Total operating expenses....................... 132.6 97.8 69.7 67.4 ------ ----- ----- ----- Loss from operations.................................. (111.3) (62.8) (28.3) (14.6) Other income (expense)................................ (2.0) .5 1.1 .1 ------ ----- ----- ----- Net loss.............................................. (113.3)% (62.3)% (27.2)% (14.5)% ====== ===== ===== =====
SIX MONTHS ENDED APRIL 30, 1998 AND 1999 Revenues. Total revenues increased by 30.0% from $14.3 million for the six months ended April 30, 1998 to $18.5 million for the six months ended April 30, 1999. The increase was due primarily to increased unit sales of our products through an increased customer base. In the six months ended April 30, 1998, one customer, Sequent, accounted for 83% of our total revenues. In the six months ended April 30, 1999, three customers, Sequent, McDATA and Data General accounted for 31%, 25% and 15%, respectively, of our total revenues. Total revenues for the six months ended April 30, 1999 excludes $3.9 million in deferred revenue in connection with shipments to new customers. Gross profit. Gross profit increased from $5.9 million for the six months ended April 30, 1998 to $9.8 million for the six months ended April 30, 1999. Gross margin increased from 41.3% for the six months ended April 30, 1998 to 52.7% for the six months ended April 30, 1999. The increases were due to lower component and manufacturing costs, the allocation of fixed manufacturing costs over a greater revenue base and software revenue. In addition, during the six months ended April 30, 1998, our gross margin was adversely affected by a write-off of obsolete inventory. General and administrative expenses. General and administrative expenses increased by 12.0% from $1.3 million for the six months ended April 30, 1998 to $1.4 million for the six months ended April 30, 1999. This increase was due to higher employment costs in the six months ended April 30, 1999. Sales and marketing expenses. Sales and marketing expenses increased by 71.9% from $2.4 million for the six months ended April 30, 1998 to $4.1 million for the six months ended April 30, 1999. This increase was due primarily to an increase in personnel. 22 24 Research and development expenses. Research and development expenses decreased by 11.7% from $6.3 million for the six months ended April 30, 1998 to $5.6 million for the six months ended April 30, 1999. The decrease primarily resulted from lower outside engineering and prototyping costs. In addition, research and development costs for the six months ended April 30, 1998 included costs associated with a development project which was subsequently abandoned in connection with the restructuring of our business in July 1998. Amortization of deferred compensation. During fiscal 1998 and the six months ended April 30, 1999, we recorded total deferred compensation of $5.4 million in connection with stock option grants. We are amortizing this amount over the vesting periods of the applicable options, resulting in amortization expense of $1.4 million for the six months ended April 30, 1999. YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998 Revenues. We shipped our first commercial product in the second quarter of fiscal 1997, generating revenues of $8.5 million for the year. Total revenues increased by 185.0% to $24.2 million in fiscal 1998 reflecting the ramp-up of sales to a significant original equipment manufacturer customer, the introduction of the SilkWorm Express product and the recognition of $1.8 million in license revenue. Unit shipments of SilkWorm increased by 242.0% from fiscal 1997 to fiscal 1998. However, average unit selling prices decreased by 26.0% in fiscal 1998, due primarily to the introduction of SilkWorm Express, a lower port count product. Gross Profit. Gross profit increased from $1.8 million in fiscal 1997 to $8.5 million in fiscal 1998. Gross margin increased from 21.3% in fiscal 1997 to 35.0% in fiscal 1998. Fiscal 1997 cost of revenues included higher component and manufacturing costs associated with the lower initial production volumes, as well as overhead costs which were applied to a relatively low number of units produced. In fiscal 1998, cost of revenues was also reduced as a result of the decision to outsource all manufacturing activities during the year. In addition, there were no significant costs associated with $1.8 million of license revenue in fiscal 1998, resulting in an overall gross margin increase. However, this increase was somewhat offset by a $1.3 million restructuring charge resulting from the write-off of certain inventory and equipment related to a change in contract manufacturers. General and administrative expenses. General and administrative expenses increased from $575,000 for fiscal 1996 to $1.5 million for fiscal 1997 and to $3.8 million for fiscal 1998. These increases were primarily due to increased staffing and associated expenses necessary to manage and support our increased scale of operations. Fiscal 1998 expenses were also affected by costs related to a business restructuring which totaled $1.2 million, primarily related to the termination of 20 employees, including severance arrangements for our former Chief Executive Officer. Sales and marketing expenses. Sales and marketing expenses increased from $152,000 in fiscal 1996 to $2.1 million in fiscal 1997 and to $5.2 million in fiscal 1998. The increases reflect the hiring of additional sales and marketing personnel. Research and development expenses. Research and development expenses increased from $3.1 million in fiscal 1996 to $7.7 million in fiscal 1997 and to $14.7 million in fiscal 1998. These increases reflect significant research and development efforts required to bring the SilkWorm and SilkWorm Express products to market and to begin development of second generation products. The increase in fiscal 1998 expenses also reflects restructuring costs associated with the cancellation of new product development and simulation projects. Amortization of deferred compensation. During fiscal 1998, we recorded deferred compensation of $307,000 in connection with stock options grants. We are amortizing this amount over the vesting periods of the applicable options, resulting in amortization expense of $7,000 in fiscal 1998. 23 25 QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited statement of operations data for each of the eight quarters ended April 30, 1999, as well as such data expressed as a percentage of our total revenues for the quarters presented. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and, in the opinion of our management, reflects all normal recurring adjustments that we consider necessary for a fair presentation of the information for the periods presented. Operating results for any quarter are not necessarily indicative of results for any future period.
THREE MONTHS ENDED ----------------------------------------------------------------------------------------------------- JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, 1997 1997 1998 1998 1998 1998 1999 1999 -------- ----------- ----------- --------- -------- ----------- ----------- ----------- (IN THOUSANDS) Revenues: Product revenue......... $ 1,534 $ 6,347 $ 7,824 $ 5,134 $ 4,056 $ 5,400 $ 6,429 $10,540 License revenue......... -- -- 26 1,286 513 7 1,578 -- ------- ------- ------- ------- ------- ------- ------- ------- Total revenues........ 1,534 6,347 7,850 6,420 4,569 5,407 8,007 10,540 Cost of revenues.......... 1,212 4,435 4,697 3,672 4,351 3,039 3,321 5,437 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit.............. 322 1,912 3,153 2,748 218 2,368 4,686 5,103 ------- ------- ------- ------- ------- ------- ------- ------- Operating expenses: General and administrative........ 378 462 639 624 1,979 571 741 674 Sales and marketing..... 616 839 1,074 1,302 1,444 1,334 1,729 2,357 Research and development........... 2,046 2,847 2,838 3,457 5,016 3,433 2,905 2,729 Amortization of deferred compensation.......... -- -- -- -- -- 7 1,157 220 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............ 3,040 4,148 4,551 5,383 8,439 5,345 6,532 5,980 ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations...... (2,718) (2,236) (1,398) (2,635) (8,221) (2,977) (1,846) (877) Other income (expense).... (50) (119) 43 120 114 (157) 7 29 ------- ------- ------- ------- ------- ------- ------- ------- Net loss.................. $(2,768) $(2,355) $(1,355) $(2,515) $(8,107) $(3,134) $(1,839) $ (848) ======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL REVENUES ----------------------------------------------------------------------------------------------------- JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, 1997 1997 1998 1998 1998 1998 1999 1999 -------- ----------- ----------- --------- -------- ----------- ----------- ----------- Revenues: Product revenue......... 100.0% 100.0% 99.7% 80.0% 88.8% 99.9% 80.3% 100% License revenue......... -- -- .3 20.0 11.2 .1 19.7 -- ------- ------- ------- ------- ------- ------- ------- ------ Total revenues........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenues.......... 79.0 69.9 59.8 57.2 95.2 56.2 41.5 51.6 ------- ------- ------- ------- ------- ------- ------- ------ Gross margin.............. 21.0 30.1 40.2 42.8 4.8 43.8 58.5 48.4 ------- ------- ------- ------- ------- ------- ------- ------ Operating expenses: General and administrative........ 24.6 7.3 8.1 9.7 43.3 10.6 9.2 6.4 Sales and marketing..... 40.2 13.2 13.7 20.3 31.6 24.7 21.6 22.4 Research and development........... 133.4 44.8 36.2 53.8 109.8 63.5 36.3 25.9 Amortization of deferred compensation.......... -- -- -- -- -- .1 14.4 2.1 ------- ------- ------- ------- ------- ------- ------- ------ Total operating expenses............ 198.2 65.3 58.0 83.8 184.7 98.9 81.5 56.8 ------- ------- ------- ------- ------- ------- ------- ------ Loss from operations...... (177.2) (35.2) (17.8) (41.0) (179.9) (55.1) (23.0) (8.4) Other income (expense).... (3.2) (1.9) .5 1.8 2.5 (2.9) -- .3 ------- ------- ------- ------- ------- ------- ------- ------ Net loss.................. (180.4)% (37.1)% (17.3)% (39.2)% (177.4)% (58.0)% (23.0)% (8.1)% ======= ======= ======= ======= ======= ======= ======= ======
24 26 Revenues. Our total revenues increased each quarter from our initial product introduction during the three months ended April 30, 1997 through the three months ended January 31, 1998 when total revenues reached $7.9 million. The substantial increase in total revenues for the three-month periods ended October 31, 1997 and January 31, 1998 primarily resulted from purchases by an original equipment manufacturer customer in connection with the customer's product launch and hub replacement program. Total revenues decreased to $6.4 million and $4.6 million for the three-month periods ended April 30 and July 31, 1998 due to reduced purchases by the same customer because of its inventory position. Since July 31, 1998, total revenues have increased each quarter, primarily as a result of an expanded customer base. Gross margin. Gross margin has generally increased each quarter since we commenced volume shipments in the three months ended July 31, 1997. Gross margin increased from 21.0% in the three months ended July 31, 1997 to 58.5% in the three months ended January 31, 1999. These increases have been due to reduced production costs on a per unit basis as manufacturing volumes increased, a reduction in manufacturing costs due to increased use of outsourcing and nonrecurring license revenue in the three months ended January 31, 1999. The only exceptions to this trend were in the third quarter of fiscal 1998 when gross margin decreased to 4.8% and in the second quarter of fiscal 1999 when gross margin decreased to 48.4%. The decrease in gross margin in the three months ended July 31, 1998 was due primarily to a corporate restructuring charge of $1.3 million associated with the outsourcing of manufacturing, which resulted in a reduction of internal manufacturing personnel and the write-off of excess and obsolete inventory. The decrease in gross margin from 58.5% in the three months ended January 31, 1999 to 48.4% in the three months ended April 30, 1999 was primarily the result of no technology licensing revenue in the three months ended April 30, 1999. Operating expenses. Operating expenses increased each quarter until our restructuring in the three months ended July 31, 1998. In connection with this restructuring plan, we recorded a $1.9 million charge to operating expenses, which included a $700,000 charge to research and development expenses and a $1.2 million charge to general and administrative expenses. The restructuring charge included costs associated with a reduction of personnel in these areas, the write-off of excess equipment and the write-off of other tangible and intangible assets related to the cancellation of certain development and simulation projects. Subsequent to the restructuring, total operating expenses, excluding amortization of deferred compensation, were $5.3 million and $5.4 million in the three-month periods ended October 31, 1998 and January 31, 1999, respectively. These quarterly operating expense levels were consistent with the operating expense levels in the three months ended April 30, 1998. Operating expenses, excluding amortization of deferred compensation increased to $5.8 million in the three months ended April 30, 1999 primarily due to an increase in sales and marketing personnel. LIQUIDITY AND CAPITAL RESOURCES We have funded our operations to date primarily through the sale of preferred stock, for net proceeds of approximately $37.0 million, capital equipment lease lines and bank debt. During fiscal 1996, cash utilized by operating activities was $3.4 million, compared to $7.3 million in fiscal 1997, $11.6 million in fiscal 1998 and $1.3 million in the six months ended April 30, 1999. The increases in cash utilized reflect the increased working capital required to fund expanding operations and increases in inventories and accounts receivable. Capital expenditures were $1.5 million in fiscal 1996, $3.4 million in 1997, $3.8 million in 1998 and $1.0 million in the six months ended April 30, 1999. These expenditures reflect our investments in computer equipment, software development tools and facilities, which were required to support our business expansion. Our principal sources of liquidity as of April 30, 1999 consisted of $8.7 million in cash and cash equivalents and our bank credit facility. The credit facility includes a revolving line of credit providing borrowings up to the lesser of $4.0 million or 80% of eligible accounts receivable and an equipment loan 25 27 agreement providing for financing up to $5.0 million. Borrowings under the revolving line of credit bear interest at the bank's prime rate, which was 8.5% at April 30, 1999, are secured by our accounts receivable and inventories, and are payable in August 1999. Borrowings under the equipment loan agreement bear interest at the bank's prime rate plus 1.0%, are secured by the related capital equipment and are payable through June 30, 2002. The line of credit and equipment loan contain provisions that prohibit the payment of cash dividends and require the maintenance of specified levels of tangible net worth and certain financial ratios measured on a monthly basis. As of April 30, 1999, there were borrowings under the revolving line of credit of $1.2 million and under the equipment financing of $2.6 million. We intend to pay off our existing line of credit and equipment loan with a portion of the net proceeds of this offering. We believe the net proceeds of this offering, together with our existing cash balances and credit facilities and cash flow expected to be generated from future operations, will be sufficient to meet our capital requirements at least through the next 12 months, although we could be required, or could elect, to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including the rate of revenue growth, the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of our products. There can be no assurances that additional equity or debt financing, if required, will be available on acceptable terms or at all. YEAR 2000 COMPLIANCE Impact of the year 2000 computer problem. The year 2000 computer problem refers to the potential for system and processing failures of date-related data as a result of computer-controlled systems using two digits rather than four to define the applicable year. For example, computer programs that have time-sensitive software may recognize a date represented as "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. To date, we have experienced no year 2000 issues with any of our internal systems or our products, and we do not expect to experience any. Our year 2000 program. We have based our year 2000 compliance program on the program adopted by the U.S. Government Accounting Office. Our program is divided into six phases: awareness, assessment, renovation, validation, implementation and monitoring. The program covers our information technology systems, non-information technology systems and embedded technology. We have completed the awareness phase, substantially completed the assessment phase and are starting the renovation phase. We expect to be completed with the implementation phase by the end of the summer of 1999. State of readiness of our products. We have been testing our existing products for use in the year 2000 and beyond, and believe that using our products as documented should not cause any year 2000 related issues. While we believe our products are year 2000 compliant, it is impractical for us to test our products in every computer environment or with all available combinations of our products with components supplied by our customers or other third party suppliers. As a result, there may be situations where the combination of our products working with components supplied by other third parties could result in year 2000 issues. State of readiness of our internal systems. Our business may be affected by year 2000 issues related to non-compliant internal systems developed by us or by third-party vendors. We are requesting written assurances from our third-party vendors for all of our material systems that such systems are year 2000 compliant. To date, we have identified one internal system that will require an upgrade to be year 2000 26 28 compliant and one of our enterprise systems that utilizes a database system that will require an upgrade to be year 2000 compliant. These upgrades are currently available. In addition, several of our administrative and engineering systems rely on an operating system that will require an upgrade to be year 2000 compliant, which is currently available. Most of our productivity systems and personal computers utilize Microsoft Windows 95 and 98 operating systems and Microsoft NT 4.0. While the Microsoft Windows 95 and 98 environments have available year 2000 upgrades, to date Microsoft has not provided what we consider a usable year 2000 upgrade for the NT 4.0 environment. We believe that Microsoft will provide this upgrade in a timely manner to avoid any year 2000 problems. We believe we will be able implement all available upgrades by the end of the summer in 1999. No projects have been deferred due to the year 2000 issue. State of readiness of our facilities. The operation of our facilities also depends upon the computer-controlled systems of third parties such as suppliers and service providers. We believe that absent a systemic failure outside our control, such as a prolonged loss of electrical or telephone service, year 2000 problems of these third parties will not have a material impact on our operations. Our facilities use limited embedded technology and the failure of that technology is not expected to have a material impact on our operations. State of readiness of key third parties. Our third party suppliers are sensitive to the need to be year 2000 compliant. As part of the assessment phase of our year 2000 program we are requesting written assurances from our third party suppliers that they are year 2000 compliant. Some of our third party suppliers have indicated that they are year 2000 compliant. However, others are in a year 2000 compliance review process. Therefore, at this time they are not in a position to provide us with year 2000 compliance assurance. If we identify a material year 2000 compliance issue with a third party supplier, we will work with that supplier to resolve the issue or source the parts or services from a supplier that is year 2000 compliant. Use of independent verification. We have not used external agencies or partners to verify or validate year 2000 readiness. We do not feel that the scope of our program warrants this time and expense. Cost. Based on our assessment to date, we do not anticipate that costs associated with remediating our internal systems will exceed $250,000. Worst case year 2000 scenario. While it is impossible to evaluate every aspect of year 2000 compliance, we believe the worst case scenario related to year 2000 compliance issues would be the failure of a sole or limited source supplier to be year 2000 compliant. The failure of one of these suppliers to be year 2000 compliant could seriously interrupt the flow of materials into the manufacturing process and therefore delay the manufacture and sale of our products. However, due to the general uncertainty inherent in the year 2000 computer problem resulting from the uncertainty of the year 2000 readiness of third-party suppliers and vendors, we are unable to determine at this time whether the consequences of year 2000 failures will have a material impact on our business. Additional risks. Any failure by us to make our products year 2000 compliant could result in a decrease in sales of our products, an increase in allocation of resources to address year 2000 problems of our customers without additional revenue commensurate with such dedication of resources, or an increase in litigation costs relating to losses suffered by our customers due to such year 2000 problems. Failures of our internal systems could temporarily prevent us from processing orders, issuing invoices, and developing products, and could require us to devote significant resources to correcting such problems. RECENT ACCOUNTING PRONOUNCEMENTS In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by 27 29 extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. We have not had significant software sales to date and do not expect the adoption of SOP 98-9 to have a significant effect on our financial condition or results of operations. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material market risk exposure. Therefore, no quantitative tabular disclosures are required. 28 30 BUSINESS OVERVIEW We are the leading provider, based on revenue and the number of ports shipped, of Fibre Channel switching solutions for SANs, which apply the benefits of a networked approach to the connection of computer storage systems and servers. Our family of SilkWorm switches enables companies to cost-effectively manage growth in their storage capacity requirements, improve the performance between their servers and storage systems and increase the size and scope of their SAN, while allowing them to operate data-intensive applications, such as data backup and restore, and disaster recovery, on the SAN. We sell our SAN switching solutions through leading storage systems and server original equipment manufacturers, including Compaq Computer, Dell Computer, McDATA Corporation, Sequent Computer Systems and StorageTek. These original equipment manufacturers and our system integrator customers combine our switching solutions with other system elements and services for companies' data processing centers. INDUSTRY BACKGROUND BUSINESS-CRITICAL DATA STORAGE REQUIREMENTS The last decade has seen an explosion in the volume of business-critical data that is being captured, processed, stored and manipulated in business environments. This has fueled an increase in demand for data storage capacity. According to International Data Corporation, an independent industry research company, from 1994 to 2002, shipments of direct access storage capacity, which excludes tape and optical storage, are expected to increase more than a hundredfold. Efficient data storage and management is becoming one of the most important aspects of business-critical decision making. Increased reliance on applications ranging from business intelligence and decision support, data warehousing and data mining of large databases, disaster tolerance and recovery, enterprise software, and imaging and graphics have all contributed to this trend. In addition, the development of Web-based business operations and e-commerce in particular, has intensified the demand placed on data centers. Customer interactions over the Web have increased operational focus on the performance, scalability, management and flexibility of systems that use business-critical data. This dependence on data for fundamental business processes by employees, customers and suppliers has greatly increased the number of input and output transactions, or I/Os, required of computer storage systems and servers. In addition, the complexity of enterprise computing and storage is further compounded by the use of multiple incompatible server operating systems, such as the proliferation of Windows NT in traditional UNIX environments. As a result, organizations are being forced to dedicate substantial financial and personnel resources to manage and maintain the distributed storage capabilities of their networks. BOTTLENECK IN STORAGE AND SERVER CONNECTIONS Despite the increased attention and resources which have been devoted to data storage requirements, the technical capabilities of data storage systems have not kept pace with increasing data management demands and with the advancements in other networking technologies. In the 1980s, the near ubiquity of PCs, workstations and servers required broader connectivity, resulting in the development of local and wide area networks to support messaging between computer systems. The data used by computers and servers connected to local and wide area networks are typically located on computer storage systems and servers, which store, process and manipulate data. The adoption of high speed messaging technologies such as gigabit Ethernet and asynchronous transfer mode, or ATM, increased local and wide area network transmission speeds by more than 1,000 times during the 1990s. However, storage-to-server data transmission speeds increased by less than ten times during this period, creating a bottleneck between the local or wide area network and business-critical storage systems and servers. 29 31 Traditionally, distributed systems have linked a single server with a limited number of storage systems in close proximity. The Small Computer Systems Interface, or SCSI, standard was adopted as the I/O interface standard for storage-to-server and server-to-server connections in the 1980s. SCSI is a parallel interface that permits throughput of 20 to 40 megabytes per second. SCSI's throughput limitations have become much more pronounced as local and wide area network transmission technologies have migrated from Ethernet, which transfers data at 10 megabits per second, to gigabit Ethernet, which transfers data at 1,000 megabits per second. In addition, SCSI allows a maximum transmission distance of only 12 meters and supports just 32 devices on a single bus. As a result, SCSI does not adequately support the increasing requirements for speed, scalability and flexibility of today's data-intensive enterprises. INTRODUCTION AND STANDARDIZATION OF FIBRE CHANNEL In response to the demand for high-speed and high-performance storage-to-server and server-to-server connectivity, the Fibre Channel interconnect protocol, an industry networking standard, was developed in the early 1990s. The Fibre Channel interconnect standard received American National Standards Institute, or ANSI, approval in 1994 and has subsequently earned broad support from industry and independent testing laboratories. Fibre Channel supports large data block transfers at gigabit speeds and is therefore well suited for data transfers between storage systems and servers. It also supports multiple protocols such as SCSI and Internet Protocol, or IP. Furthermore, it provides transmission reliability with guaranteed delivery and transmission distances of up to 10 kilometers. Fibre Channel complements and supports advancements in local and wide area network technologies, such as gigabit Ethernet and ATM, which are not effective for large block data-intensive transfers. ADVENT OF THE STORAGE AREA NETWORK Fibre Channel has enabled the development of a storage area network, or SAN, to meet the requirements of data centers and other data-intensive, distributed computing environments. Similar to local and wide area networks, the SAN applies the distributed computing model to computer storage systems and servers and takes advantage of the inherent benefits of a networked approach. These benefits include the decoupling of computer storage systems and servers, increasing scalability and providing a higher level of connectivity than currently exists in the SCSI environment. Additionally, the SAN provides high-speed connectivity for data-intensive applications across multiple operating systems, including UNIX and Windows NT. By bringing networking technology into the data processing center, a SAN also provides increased flexibility, fault tolerance, ease of management and lower total cost of ownership. The SAN market is expected to grow substantially as organizations embrace this emerging solution. According to the Gartner Group, an independent industry research company, more than 70% of shared storage in networked environments is projected to be reorganized into SANs by the year 2002. The simplest SAN configuration is a loop topology, which is similar to traditional SCSI-based distributed systems and interconnects multiple nodes over a shared Fibre Channel networking device, such as a hub. A Fibre Channel hub can support up to 126 devices, but the available bandwidth is shared among all the devices, resulting in signal and performance degradation as the number of devices in the loop increases. In addition, loop topologies suffer from limited network management and fault isolation capabilities. For example, when a single device is added to the loop, it will cause the loop to reset, resulting in application disruption. The limitations of shared networks have been addressed in local and wide area network environments by the development of switching technologies that have yielded advancements in performance, scalability, flexibility and management at competitive costs. In order for the SAN model to become more widely adopted in data centers, today's enterprises must be able to connect any device on the network to any other device on the network, or any-to-any connectivity, without performance degradation in order to effectively leverage distributed computer storage systems, 30 32 servers, workstations and other resources. Guaranteed reliability and availability are vital to the storage, processing and manipulation of business-critical data. Networks require dedicated connections operating at high performance levels to support large data transfer demands. Finally, data processing centers are characterized by a high degree of change that must be supported by a flexible network infrastructure. THE BROCADE SOLUTION We are the leading provider of Fibre Channel SAN switching solutions. We combine advanced switching technologies with our Fibre Channel technology leadership and systems expertise to provide the Brocade Fabric, comprised of Fibre Channel switches, a proprietary switch operating system, management tools, management services and ready-to-deploy configurations. Our products provide an infrastructure backbone that allows our customers to concurrently run multiple applications across the SAN, reducing congestion of local and wide area networks. Our Brocade Fabric helps enterprises cost-effectively manage the growth in storage capacity, improve server-to-storage and server-to-server performance, and increase the size and scope of their SANs, while enabling data-intensive applications, such as reliable backup and restore and disaster recovery. Our solutions have the following key benefits: Address the input/output bottleneck. Deployment of SANs based on our Brocade Fabric not only enhances point-to-point bandwidth with Fibre Channel connections, but helps solve the I/O bottleneck between data storage systems and servers. Our SilkWorm family of Fibre Channel switches delivers full-duplex 1 gigabit per second performance at every port. In addition, unlike hubs or other shared devices, our switches are designed to provide any-to-any connectivity and to maintain 1 gigabit per second performance per port as additional devices are added to the SAN. Our superior frame-forwarding capability provides end-users with rapid data retrieval and allows a greater number of user transactions. Provide SAN scalability. Our modular Fibre Channel switches, supporting from two to 16 ports per switch, enable incremental growth by interconnecting or cascading multiple switches for hundreds of connections in a fully meshed configuration. Our Brocade Fabric enables companies to grow clusters of high performance servers or provide multiple servers with high bandwidth connections to multiple storage systems. Additionally, Fibre Channel allows connections up to 10 kilometers, enabling companies to interconnect separate SAN clusters or islands into a single SAN. Enable SAN applications. The Brocade Fabric creates a SAN backbone for data-intensive applications, enabling organizations to solve complex problems in data processing centers. Our products allow all departments within an organization to share data storage resources despite operating within a computing environment that includes incompatible operating systems sharing storage resources. The Brocade Fabric allows highly flexible configurations and supports a wide range of data traffic, including high throughput and low latency processing. For example, high throughput applications, such as data backup and restore, and disaster recovery can be performed on the SAN, freeing up valuable bandwidth on the local and wide area network and eliminating the need for expensive backup servers. Additionally, companies utilizing the Brocade Fabric for their e-commerce and other low latency transaction processing applications can leverage hundreds of computer storage devices and servers. Support a mission-critical data processing center. We have designed our solutions to provide high levels of resiliency and availability with maximum up-time for business-critical, data-intensive applications. Our switches have auto-configuration and reconfiguration capabilities that incorporate redundant and alternate data paths for frame forwarding, which enable our Brocade Fabric to be self-healing. They also support up to eight parallel links to other switches. As a result, any cable, port, switch or link failure can be isolated, providing a resilient solution. This increases the availability and up-time of the data processing center. 31 33 Enhance SAN management. Our Brocade Fabric Operating System and our network management tools enable our customers to centrally manage storage systems and servers handling business-critical data. Our products deliver a rich set of SAN management information that can be accessed both locally and remotely. Data-intensive connections in the organization can be centrally managed to share resources with other points on the network. All of these factors combine to help organizations reduce the overall costs and increase the efficiency of their data network. THE BROCADE STRATEGY Our objective is to maintain our position as the leading provider of SAN switching solutions. The key elements of our strategy include the following: Leverage our SAN switching market leadership. We believe we were the first company to provide a comprehensive Fibre Channel fabric solution and that we are the market leader based upon the number of switch ports shipped. We intend to capitalize on our first mover advantage and in-depth customer and product knowledge. We believe we are well positioned to anticipate the future requirements of the SAN marketplace. Capitalize on leadership in Fibre Channel technologies and standards. We have been a leader in the development of Fibre Channel technologies and the implementation of ANSI Fibre Channel standards. Our technology efforts are led by some of the most widely recognized members of the Fibre Channel industry. In addition, our technical personnel have substantial expertise in storage, file system, routing algorithms and network management technologies. We have also provided major contributions to many of the ANSI Fibre Channel standards that have been developed to date. We believe that taking a continued proactive role in this expanding market will enable us to extend our leading market position. Leverage core architecture. We are leveraging our core switching expertise, ASIC architectures, Brocade Fabric Operating System and Fibre Channel technology to expand our family of SilkWorm products to address the expanding SAN market. While to date we have focused on the workgroup and midrange segments of the SAN market, we intend to leverage our leadership position in these segments to broaden our reach into other segments of the SAN switch market as they emerge. We expect that the demand for SAN switching solutions in entry level applications will increase, particularly as Windows NT-based servers are increasingly used in data processing centers. We are developing products designed to address the specific needs of organizations that use Windows NT-based servers in anticipation of this growth. Continue to expand network of original equipment manufacturers and system integrators. We intend to continue to expand our relationships with key computer storage system and server original equipment manufacturers and system integrators, both domestically and abroad. Currently, our major original equipment manufacturers customers include Compaq Computer, Dell Computer, McDATA, Sequent Computer Systems and StorageTek. These relationships allow us to leverage the systems and services capabilities of these industry-leading original equipment manufacturers. We have also recently entered into relationships with system integrators including Cranel, Polaris, RAID Power, Tokyo Electron Ltd. and TranSoft Networks. We expect that our relationships with leading system integrators will allow us to penetrate the market opportunities by leveraging the reach of these distribution channels. Develop strategic partnerships. We are building strategic relationships with Fibre Channel component and device vendors and storage management software companies. By partnering with these organizations, we believe we can enhance SAN applications and interoperability, thereby accelerating the time to market and overall deployment and functionality of our products. 32 34 CUSTOMERS Our primary customers are original equipment manufacturers. The following is a representative list of our original equipment manufacturer customers who have purchased more than $500,000 worth of products since the beginning of fiscal 1998: Compaq Computer Sequent Computer Systems Dell Computer StorageTek McDATA
Sequent and McDATA accounted for approximately 72% and 11%, respectively, of our total revenues in the fiscal year ended October 31, 1998. Sequent, McDATA and Data General accounted for approximately 31%, 25% and 15%, respectively, of our total revenues for the six months ended April 30, 1999. Our total revenues do not include deferred revenue. In the third quarter of fiscal 1998, we launched our system integrators program. To date, we have entered into relationships with Cranel, Polaris, RAID Power, Tokyo Electron Ltd. and TranSoft Networks. CUSTOMER SERVICE AND SUPPORT Our customer service and support organization provides technical support to our original equipment manufacturers and system integrators, enabling them to provide technical support to their end-users. We prepare our original equipment manufacturer and system integrator customers for product launch through a comprehensive training program. In addition, we employ systems engineers for pre- and post-sales support and technical support engineers for field support. Our original equipment manufacturers and system integrator customers provide primary technical support. We have developed an extensive training course for our original equipment manufacturer and system integrator customers. The curriculum includes Fibre Channel architecture, SAN implementation and Brocade product training. SALES AND MARKETING Our sales and marketing strategy is focused on an indirect sales model executed through original equipment manufacturers and system integrators. Our distribution channels are supported by a sales and marketing organization comprised of managers, sales representatives and technical and administrative support personnel. We have entered into a relationship with a distributor in Japan, and we expect to expand our international sales activities. Our marketing effort is focused on developing strategic partnerships and relationships with industry analysts, providing customer sales support, managing new product planning and supporting industry standard initiatives. Original equipment manufacturers. We have established key relationships with several storage systems and server original equipment manufacturers. Each original equipment manufacturer provides installation, service and technical support to its customers while we focus on high-level back-up support. In addition to maintaining and enhancing our relationships with our existing original equipment manufacturer customers, we intend to pursue relationships with additional original equipment manufacturers that may offer products or distribution channels that complement ours. We believe that these relationships allow us to leverage the systems and services capabilities of our original equipment manufacturers. System integrators. We have recently launched our system integrator program and have established several relationships within this channel. Although we have not experienced significant volume from this 33 35 channel to date, we believe revenues from this channel may increase significantly in the future. Each system integrator provides installation, service and technical support to its customers, while we focus on integration and technical back-up support. We intend to continue to develop relationships with system integrators who may offer products or distribution channels that complement ours. PRODUCTS Brocade provides the SilkWorm family of Fibre Channel switches, which creates a switch interconnect, enabling any-to-any connectivity between storage devices and servers. SilkWorm switches can be used individually for server clustering or storage consolidation, or cascaded with other switches to form a powerful networking infrastructure, the Brocade Fabric. Brocade's software solutions provide network administrators with tools to manage the switches and the SAN. Brocade also provides extensive Fabric services, in order to optimize the Brocade Fabric for an enterprise's particular needs. Moreover, Brocade SOLUTIONware provides instructions to enterprises on implementing SANs. SILKWORM FAMILY OF SWITCHES Our SilkWorm switches are a key element of a SAN. SilkWorm, introduced in March 1997, is a configurable 16-port switch used to connect servers to storage devices to create a SAN. File servers and storage devices can then access information anywhere on the SAN. In April 1998, Brocade introduced SilkWorm Express, an eight-port Fibre Channel switch. The SilkWorm family of switches share a common platform designed to provide the following features and benefits: -- High throughput. Each port delivers a 1 gigabit per second, full-duplex data rate regardless of network connectivity. -- Hardware-based data path. SilkWorm reduces latency by eliminating software processing from the path of data frames. -- Management. SilkWorm supports customers' existing management solutions, such as local and wide area networks, SCSI tools and web tools. -- In-order delivery of data frames. SilkWorm guarantees that frames are delivered to a destination in the same order as received by the switch from the originator. -- Cut-through frame routing. Frames are sent without waiting for the entire frame or for a response back from its destination, thereby improving bandwidth utilization and minimizing transmission delays. -- Cascading. SilkWorm may be connected to as many other SilkWorm switches as there are available ports creating in a meshed topology, enabling hundreds of connections and large SANs. -- Flexible switch buffering. If the destination is busy, data frames are stored by a SilkWorm switch for only as long as is necessary, thereby moving data faster through the switch. -- Path selection. SilkWorm identifies failures automatically and immediately, and reroutes data to alternate paths, creating a highly resilient network. -- Registered state change notification. SilkWorm automatically detects changes in configuration and port status to enable quick corrective action. 34 36 -- Media independent. SilkWorm enables the SAN to support diverse media, including fiberoptic connections up to 10 kilometers and copper connections. -- Auto-configuration. SilkWorm enhances scalability by automatically expanding the SAN as new devices are added or removed without interrupting the operation of the rest of the network. SilkWorm seamlessly incorporates more Brocade switches into the network, thereby increasing aggregate bandwidth as connectivity increases; network services automatically expand without additional system resources. BROCADE FABRIC OPERATING SYSTEM The SilkWorm family of switches is supported by the Brocade Fabric Operating System. The Brocade Fabric Operating System provides the intelligence for the Brocade Fabric, provides services for the switch hardware, runs the value-added Brocade Fabric services such as name service, which is used to assist discovery of connected devices, monitors the status of the hardware and fabric and notifies the host operating system as devices are added to or removed from the Brocade Fabric. The Brocade Fabric Operating System provides a common platform upon which system services can be built. The Brocade Fabric Operating System is layered with well-defined application interfaces, or APIs, that allow third parties, such as data storage and data backup software vendors, to write applications that leverage Brocade's Fabric Operating System. By incorporating API technology, these third party vendors can develop applications, thereby increasing the capabilities of the overall switch fabric solution. FABRIC SERVICES Fabric services are product features that increase the functionality of the SAN. Our current Brocade Fabric Services include zoning and multicasting. Brocade Zoning is an add-on software product that allows the creation of multiple logical connectivity groups within a single SAN. By creating a zone, the SAN provides the network with benefits that would otherwise only be possible using multiple SANs. Through zoning, systems that have different operating environments, such as UNIX and Window NT, can be isolated from each other allowing both operating systems to co-exist on a single SAN. Zoning can be used to create functional areas in the fabric and designate closed user groups for greater security and control. Also, zoning facilitates time-sensitive functions, such as creating a temporary zone used to backup storage devices that are members of other zones. Brocade Zoning offers dynamic configuration and an unlimited number of zones. Finally, Brocade Zoning allows devices to be a member of more than one zone thereby increasing flexibility. Brocade Multicasting enables up to 32 groups of devices to replicate data in a one-to-one method or in a one-to-many method. By accomplishing this replication through hardware, Brocade is able to maintain high throughput. SOLUTIONWARE Brocade's SOLUTIONware is a set of application notes that facilitates the implementation of SAN solutions incorporating products and applications from multiple vendors, including Brocade. These applications notes include specific details including equipment requirements, software specifics, detailed installation instructions and tested application software. This enables original equipment manufacturers and system integrators to replicate high performance solutions. Our first SOLUTIONware release, Brocade Tape Backup and Restore, provides customers with a detailed road map to address their data backup needs using Brocade's products. 35 37 MANAGEMENT TOOLS Brocade Web Tools is an add-on software product that helps to remotely manage a SAN of our SilkWorm family of switches via the Internet or intranet. The information technology administrator can log onto a switch from a host with a java-based Web browser. From that switch, the administrator can monitor the status and performance of any switch in the SAN. TECHNOLOGY FIBRE CHANNEL Fibre Channel is an industry-standard, open protocol for server-to-storage and server-to-server connectivity and data-intensive transfers. Fibre Channel combines the high-speed I/O capabilities of a channel technology with the increased functionality of a networking technology to seamlessly connect and transfer data from one device to another. Fibre Channel, which was designed for storage systems and is well suited for SANs. It offers a single network for both server clustering and shared storage. It accommodates both high throughput and low latency dependent traffic required for large block data transfers and inter-processor communication messages. We believe the following characteristics of Fibre Channel make it more suitable for data-intensive and storage related applications than either gigabit Ethernet or ATM, two widely used networking protocols: -- Fibre Channel has an industry standard interconnect rate of 1 gigabit per second per port that is expected to increase to 2 gigabits per second in 1999 as compared to gigabit Ethernet's, 1 gigabit per second and ATM's 622 megabits per second speeds; -- Fibre Channel is designed to transmit large packets of information and is therefore well-suited for data-intensive applications as compared to gigabit Ethernet and ATM, which use smaller packets and are designed for smaller but more frequent data transfers; -- Fibre Channel relies more on hardware than software during data transfers and therefore, is better suited to handle the higher speeds and low latency required during data transfers; -- In addition to supporting networking protocols including IP, Fibre Channel also supports I/O storage protocols like SCSI; -- Unlike gigabit Ethernet and ATM, which can lose or drop packets due to congestion, Fibre Channel manages packet flow to ensure delivery; and -- Fibre Channel relieves each port from the responsibility of station management and instead delegates that responsibility to the interconnect device. Therefore, each Fibre Channel port only has to manage a single point-to-point connection between itself and an interconnect device. SILKWORM ARCHITECTURE Brocade is focused on implementing Fibre Channel standards in the Brocade Fabric. We utilize a layered architecture to provide a high performance, flexible, and extensible solution. This architecture is comprised of media interfaces, a switching platform, the Brocade Fabric Operating System and value- added services. -- Media interfaces. Media interfaces comprise the lowest layer of our architecture. Fibre Channel standards specify numerous media interfaces. The SilkWorm architecture supports removable gigabit copper interfaces up to 13 meters, short wavelength laser interfaces up to 500 meters and 36 38 long wavelength laser interfaces up to 10 kilometers. Removable media interfaces provide flexible product configurations and simple product maintenance. -- Switching platform. Our SilkWorm products are based on a central memory time multiplexed switching architecture. The architecture is implemented through the use of highly integrated ASICs. The use of ASIC technology is required to provide the high bandwidth and low latency necessary for Fibre Channel switching to cater to both high throughput and low latency data transfer. The switching architecture is non-blocking and utilizes cut through routing techniques to achieve low latency. The data path of the architecture is completely implemented in hardware and the CPU and operating system are not in the data path. -- Brocade Fabric Operating System. The architecture of the Brocade Fabric Operating System is highly structured, modular, hardware independent and layered with well-defined interfaces. This extensible architecture is easy to maintain and upgrade with new features. The base operating system is a UNIX-like realtime operating system with extensive libraries and services. The layers of the Brocade Fabric Operating System include hardware drivers, a board level support package, a Fibre Channel layer, services and application program interfaces. -- Value added services. Value-added services comprise the top layer of our architecture. Brocade value-added services include Brocade Zoning, and multicasting. The Brocade value-added services run on top of the Brocade Fabric Operating System through well-defined application program interfaces. MANUFACTURING We currently use a third-party contract manufacturer, Solectron, to manufacture our products. Solectron invoices Brocade based on prices and payment terms agreed to by both parties and set forth in purchase orders issued by Brocade. The pricing takes into account component costs, Solectron's manufacturing costs and margin requirements. Although we use Solectron for final turnkey product assembly, we maintain key component expertise internally. We design and develop the key components of our products, including ASICs and software, as well as certain details in the fabrication and enclosure of our products. In addition, we determine the components that are incorporated in our products and select the appropriate suppliers of the components. Although we use standard parts and components for our products where possible, we currently purchase several key components used in the manufacture of our products from single or limited sources. Our principal single source components include ASICs, power supplies and chassis, and our principal limited source components include printed circuit boards and GBICs. In addition, we license certain software from Wind River Systems, Inc. that is incorporated into our Brocade Fabric Operating System. See "Risk Factors -- We Are Dependent on Sole Source and Limited Source Suppliers for Certain Key Components Including ASICs and Power Supplies." RESEARCH AND DEVELOPMENT In fiscal 1998, and the six months ended April 30, 1999, our research and development expenses were $14.7 million and $5.6 million, respectively. We believe that our future success depends on our ability to continue to enhance our existing products and to develop new products that maintain technological competitiveness. We focus our product development activities on solving the needs of SAN users. We work closely with our original equipment manufacturers and system integrators to monitor changes in the market place. We design our products around current industry standards and will continue to support emerging standards that are consistent with our product strategy. 37 39 Our products have been designed around a core system architecture, which facilitates a relatively short product design and development cycle and reduce the time to market for new products and features. We intend to continue to leverage our architecture to develop and introduce additional products and enhancements in the future. There can be no assurance that our product development efforts will result in commercially successful products or that our products will not be rendered obsolete by changing technology or new product announcements by other companies. See "Risk Factors -- We Currently Only Offer Our SilkWorm Product Family and Must Develop New and Enhanced Products that Achieve Widespread Market Acceptance." COMPETITION Although the competitive environment in the Fibre Channel switching market has yet to develop fully, we anticipate that the current and potential market for our products will be highly competitive, continually evolving and subject to rapid technological change. New SAN products are being introduced by major server and storage providers, and existing products will be continually enhanced. We currently face competition from other manufacturers of SAN switches, including Ancor Communications, Inc. We also face competition from manufacturers of hubs, including Gadzoox Networks, Inc. and Vixel Corporation. In addition, as the market for SAN products grows, we may face competition from traditional networking companies and other manufacturers of networking equipment who may enter the SAN market with their own switching products. It is also possible that customers could develop and introduce products competitive with our product offerings. We believe the competitive factors in this market segment include product performance and features, product reliability, price, ability to meet delivery schedules, customer service and technical support. Some of our current and potential competitors have longer operating histories, significantly greater resources and name recognition, and a larger installed base of customers than we have. As a result, these competitors may have greater credibility with our existing and potential customers. They also may be able to adopt more aggressive pricing policies and devote greater resources to the development, promotion and sale of their products than we can to ours, which would allow them to respond more quickly than we can to new or emerging technologies and changes in customer requirements. In addition, some of our current and potential competitors have already established supplier or joint development relationships with divisions of our current or potential customers. These competitors may be able to leverage their existing relationships to discourage these customers from purchasing additional Brocade products or persuade them to replace our products with their products. Such increased competition may result in price reductions, lower gross margins and loss of our market share. There can be no assurance that we will have the financial resources, technical expertise or marketing, manufacturing, distribution and support capabilities to compete successfully in the future. There can also be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures will not materially harm our business. INTELLECTUAL PROPERTY We rely on a combination of patents, trademarks, and trade secrets, as well as confidentiality agreements and other contractual restrictions with employees and third parties, to establish and protect our proprietary rights. Despite these precautions, there can be no assurance that the measures we undertake will be adequate to protect our proprietary technology, or that they will preclude competitors from independently developing products with functionality or features similar to our products. There can be no assurance that the precautions we take will prevent misappropriation or infringement of our technology. We currently have 2 design patents and 8 pending patent applications in the United States, 38 40 4 utility applications and 4 provisional applications with respect to our technology. However, it is possible that patents may not be issued for these applications. Our issued patents may not adequately protect our technology from infringement or prevent others from claiming that our technology infringes that of third parties. Failure to protect our intellectual property could materially harm our business. In addition, our competitors may independently develop similar or superior technology. It is possible that litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of our resources and could materially harm our business. We have received, and may receive in the future, notice of claims of infringement of other parties' proprietary rights. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that past or future assertions or prosecutions could harm our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause delays in the development and release of our products, or require us to develop non-infringing technology or enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, or at all. For these reasons, infringement claims could materially harm our business. PENDING LEGAL PROCEEDING In October 1998, we were sued by one of our former contract manufacturers, Manufacturers' Services Central U.S. Operations, Inc. and Manufacturers' Services Western U.S. Operations, Inc., collectively referred to as MSL, in the Santa Clara County, California Superior Court. The suit involves claims by MSL for approximately $900,000 for amounts allegedly owed by us for circuit boards manufactured by MSL and previously shipped to us, approximately $500,000 for circuit boards manufactured for us and held by MSL and approximately $1.5 million for raw material purchased by MSL for inclusion in circuit boards to be manufactured for us. We do not dispute that we owe MSL for the circuit boards previously shipped to us, but we contend that the amount owed should be offset by approximately $600,000 for amounts due to us for circuit boards purchased by us from MSL under warranty, by approximately $200,000 for the value of equipment and raw electronic components consigned by us to MSL and by approximately $150,000 for other damages sustained by us related to MSL's performance during our manufacturing relationship. We deny any liability for the circuit boards manufactured by MSL but not shipped to us and for raw material inventory purchased by MSL. In December 1998, MSL obtained a writ of attachment against us related to the circuit boards manufactured by MSL for approximately $1.4 million. We responded by posting a bond for this amount. The parties have exchanged documents and conducted preliminary discovery. MSL and Brocade participated in non-binding mediation on March 10, 1999; however, the parties did not settle this dispute. Following the mediation, the parties agreed that Brocade would make a payment of $392,000 to MSL for circuit boards previously shipped to Brocade and that MSL would sell to Brocade circuit boards previously manufactured but not shipped to Brocade. The parties also agreed that upon this payment by Brocade, the bond of $1.4 million would be reduced by the amount paid by Brocade to MSL. At this time, the parties are finalizing a stipulation related to Brocade's payment. No trial date has been set. A case management conference is scheduled for June 15, 1999 and the court should set a trial date at the case management conference. We believe that we have strong defenses against MSL's lawsuit. Accordingly, we intend to defend this suit vigorously. However, we may not prevail in this litigation. The litigation process is inherently uncertain. Our defense of this litigation, regardless of its eventual outcome, has been, and will likely 39 41 continue to be, time-consuming, costly and a diversion for our personnel. A failure to prevail could result in us having to pay monetary damages to MSL, which could materially harm our business. EMPLOYEES As of April 30, 1999, we had 123 full-time employees engaged in research and development, sales and marketing and finance, administration and operations. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. FACILITIES Our principal administrative, sales and marketing, education, customer support and research and development facilities are located in a single office building in San Jose, California. We currently occupy approximately 35,000 square feet of office space in the San Jose facility under the terms of a lease that expires in November 2000. We believe our current facilities will be adequate to meet our needs for the next 12 months. If our growth continues, we will need larger facilities after that time. We cannot assure you that suitable additional facilities will be available as needed on commercially reasonable terms. We also lease office space for sales and marketing in Nashua, New Hampshire and Irvine, California. 40 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information regarding our executive officers and directors as of April 30, 1999:
NAME AGE POSITION ---- --- -------- Gregory L. Reyes................. 36 President, Chief Executive Officer and Director Paul R. Bonderson, Jr............ 46 Vice President, Engineering Michael J. Byrd.................. 38 Vice President, Finance and Chief Financial Officer Kumar Malavalli.................. 56 Vice President, Technology Victor M. Rinkle................. 46 Vice President, Operations Charles W. Smith................. 37 Vice President, Worldwide Sales Peter J. Tarrant................. 39 Vice President, Marketing and Business Development Seth D. Neiman(1)................ 44 Chairman of the Board Neal Dempsey(1)(2)............... 58 Director Mark Leslie(2)................... 53 Director Larry W. Sonsini................. 58 Director
- --------------- (1) Member of audit committee. (2) Member of compensation committee. Gregory L. Reyes has served as our President and Chief Executive Officer and a member of our board of directors since July 1998. From January 1995 to November 1997, Mr. Reyes served as Chairman of the board of directors, and from January 1995 to June 1998, served as President and Chief Executive Officer of Wireless Access, Inc., a wireless data communications products company. From January 1991 to January 1995, Mr. Reyes served as Divisional Vice President and general manager of Norand Data Systems, a data collection company. Mr. Reyes also serves as a director of Proxim, Inc., a wireless networking company. Mr. Reyes received a B.S. in Economics and Business Administration from Saint Mary's College in Moraga, California. Paul R. Bonderson, Jr. co-founded Brocade in August 1995 and has served as Vice President, Engineering since August 1995. From March 1986 to August 1995, Mr. Bonderson held several engineering positions at Sun Microsystems, Inc., most recently as Director of Engineering. Mr. Bonderson received a B.S. in Electrical Engineering from California Polytechnic State University, San Luis Obispo. Michael J. Byrd joined Brocade in April 1999 and became our Vice President, Finance and Chief Financial Officer effective May 3, 1999. From February 1994 to April 1999, Mr. Byrd served as Vice President, Finance and Chief Financial Officer of Maxim Integrated Products, Inc., a designer, developer and manufacturer of linear and mixed-signal integrated circuits. From 1982 to 1994, Mr. Byrd held various positions at Ernst & Young, most recently as Partner. Mr. Byrd received a B.S. in Business Administration from California Polytechnic State University, San Luis Obispo. Kumar Malavalli co-founded Brocade in August 1995 and has served as our Vice President, Technology since October 1995. From July 1993 to October 1995, Mr. Malavalli served as Manager of Architecture and Standards in the Canadian Network Operation at Hewlett-Packard Company. Mr. Malavalli was a member of the industry team that originated the Fibre Channel architecture, has helped guide the technology through the industry standards committees and currently chairs the ANSI T11 Technical Committee, which oversees all standards related to the development of Fibre Channel. 41 43 From 1993 to 1999, Mr. Malavalli was the chairman of the Fibre Channel Association Technical Committee. Mr. Malavalli received both a B.S. in Physics and Mathematics and a B.S. in Electrical Engineering from the University of Mysore, India. Victor M. Rinkle has served as our Vice President, Operations since January 1998. From April 1989 to December 1997, Mr. Rinkle held several managerial positions at Apple Computer, Inc., most recently as Vice President, Global Supply Base Management. Mr. Rinkle received a B.B.A. in Marketing and Production Logistics from the University of Houston. Charles W. Smith has served as our Vice President, Worldwide Sales since February 1997. From June 1996 to February 1997, Mr. Smith served as Director, Corporate Account Sales at IBM. From July 1990 to February 1996, Mr. Smith held various senior sales management positions at Conner Peripherals, Inc., a storage solutions company, most recently as Vice President, US Sales, Western Region. Mr. Smith received an A.S. in Aeronautics and Business from the College of San Mateo and a B.S. in Business Management from San Jose State University. Peter J. Tarrant has served as our Vice President, Marketing and Business Development since December 1997. From October 1994 to December 1997, Mr. Tarrant served as Vice President, Product Management and Vice President, Business Development at Bay Networks, Inc., a computer networking company. From April 1990 to October 1994, Mr. Tarrant held several product management positions at SynOptics, a predecessor of Bay Networks, Inc. most recently as Director, Product Management. Mr. Tarrant received a B.Sc. in Electronic Engineering from the University of Southampton, United Kingdom. Seth D. Neiman has served as Chairman of the board of directors of Brocade since August 1995. Mr. Neiman formerly served as our Chief Executive Officer from August 1995 to June 1996. Since August 1994, Mr. Neiman has held various positions at Crosspoint Venture Partners, a venture capital firm, and has been a partner of Crosspoint since January 1996. From September 1991 to July 1994, Mr. Neiman was Vice President of Engineering at Coactive Networks, a local area networks company. Mr. Neiman also serves on the boards of directors and compensation committees of numerous private companies. Mr. Neiman received a B.A. in Philosophy from Ohio State University. Neal Dempsey has served as a director of Brocade since December 1996. Since May 1989, Mr. Dempsey has been a General Partner of Bay Partners, a venture capital firm. Mr. Dempsey also serves on the boards of directors and compensation committees of numerous private companies. Mr. Dempsey received a B.A. in Business from the University of Washington. Mark Leslie has served as a director of Brocade since January 1999. Mr. Leslie has served as the Chief Executive Officer and a member of the board of directors of VERITAS Software Corporation, a storage management software company, since February 1990. Mr. Leslie also serves on the board of directors of Versant Object Technology, as well as on the board of directors of a private company. Mr. Leslie received a B.A. in Physics and Mathematics from New York University. Larry W. Sonsini has served as a director of Brocade since January 1999. Mr. Sonsini has been a partner of the law firm of Wilson Sonsini Goodrich & Rosati, P.C., since 1973 and is currently the Chairman of the Executive Committee of the firm. Mr. Sonsini serves on numerous advisory boards and committees, including the SEC's Advisory Committee on Capital Formation and Regulatory Processes, the ABA Committee on Federal Regulation of Securities and the Legal Advisory Committee to the Board of Governors, New York Stock Exchange. Mr. Sonsini serves on the boards of directors of Novell, Inc., Lattice Semiconductor Corporation and Pixar Animation Studios, as well as on the boards of directors of several private companies. Mr. Sonsini received an A.B. from the University of California, Berkeley and an L.L.B. from Boalt Hall School of Law, University of California, Berkeley. 42 44 BOARD OF DIRECTORS Our board of directors currently consists of six authorized members. Upon the completion of this offering, the terms of office of the board of directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2000; Class II, whose term will expire at the annual meeting of stockholders to be held in 2001; and Class III, whose term will expire at the annual meeting of the stockholders to be held in 2002. At each annual meeting of stockholders after the initial classification, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election. This classification of the board of directors may have the effect of delaying or preventing a change of control or management of Brocade. See "Risk Factors -- Provisions in Our Charter Documents, Customer Agreements and Delaware Law Could Prevent or Delay a Change in Control of Brocade and May Reduce the Market Price of Our Common Stock." Each officer serves at the discretion of the board of directors. There are no family relationships among any of our directors or officers. Board Committees. Our board of directors currently has two committees: an audit committee and a compensation committee. The audit committee consists of Mr. Neiman and Mr. Dempsey. The audit committee makes recommendations to our board of directors regarding the selection of independent auditors, reviews the results and scope of audit and other services provided by our independent auditors and reviews the accounting principles and auditing practices and procedures to be used for the financial statements of Brocade. The compensation committee consists of Mr. Leslie and Mr. Dempsey. The compensation committee makes recommendations to our board of directors regarding our stock plans and the compensation of officers and other managerial employees. Director Compensation. Directors currently do not receive any cash compensation from Brocade for their services as members of our board of directors, although we are authorized to pay members for attendance at meetings or a salary in addition to reimbursement for expenses in connection with attendance at meetings. Certain non-employee directors have received grants of options to purchase shares of our common stock. See "Principal Stockholders" and "Certain Transactions -- Stock Option Grants and Loan to Certain Directors." Upon and following this offering, certain non-employee directors will receive automatic option grants under our 1999 Director Option Plan. See "-- Employee Benefit Plans -- 1999 Director Option Plan." COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the compensation committee is currently or has been, at any time since the formation of Brocade, an officer or employee of Brocade. No member of the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. LIMITATION OF LIABILITY AND INDEMNIFICATION Pursuant to the Delaware General Corporation Law, we have adopted provisions in our certificate of incorporation and bylaws that limit or eliminate the personal liability of our directors for a breach of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation, directors exercise an informed business judgment based on all material information 43 45 reasonably available to them. Consequently, a director will not be personally liable to us or our stockholders for monetary damages or breach of fiduciary duty as a director, except for liability for: -- any breach of the director's duty of loyalty to us or our stockholders; -- acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; -- unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; or -- any transaction from which the director derived an improper personal benefit. Our certificate of incorporation also allows us to indemnify our officers, directors and other agents to the full extent permitted by Delaware law. We intend to enter into indemnification agreements with each of our directors and officers that will give them additional contractual reassurances regarding the scope of indemnification and that may provide additional procedural protection. The indemnification agreements require actions such as: -- indemnifying officers and directors against certain liabilities that may arise because of their status as officers or directors; -- advancing expenses, as incurred, to officers and directors in connection with a legal proceeding, subject to certain limited exceptions; or -- obtaining directors' and officers' insurance. The limited liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty and may reduce the likelihood of derivative litigation against our directors and officers, even though a derivative action, if successful, might otherwise benefit us and our stockholders. Moreover, a stockholder's investment in Brocade may be adversely affected to the extent we pay the costs of settlement or damage awards against our directors and officers under these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees in which indemnification is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. 44 46 EXECUTIVE COMPENSATION The following table sets forth information for fiscal 1998, concerning the compensation paid to our Chief Executive Officer, our former Chief Executive Officer and our four other most highly compensated executive officers whose total salary and bonus for such fiscal year exceeded $100,000, collectively referred to below as the Named Executive Officers. The entries under the column heading "Other Compensation" in the table represent the cost of term life insurance for each Named Executive Officer. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------ ANNUAL COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) OPTIONS(#) COMPENSATION($) --------------------------- ---------- --------- ------------ --------------- Gregory L. Reyes President and Chief Executive Officer(1)........... $ 60,606 $ -- 1,535,662 $ 480 Bruce L. Bergman President and Chief Executive Officer(1)........... 225,000 -- -- 1,620 Kumar Malavalli Vice President, Technology......................... 162,840 13,027 -- 1,188 Paul R. Bonderson, Jr. Vice President, Engineering........................ 161,927 12,375 -- 1,188 Victor M. Rinkle Vice President, Operations......................... 115,340 39,375 200,000 990 Charles W. Smith Vice President, Worldwide Sales.................... 118,500 -- 35,000 87,306(2)
- ------------------------- (1) Mr. Bergman served as our President and Chief Executive Officer until June 1998. Mr. Reyes became our President and Chief Executive Officer effective July 1998 at an annual salary of $200,000. (2) Also includes amounts earned by Mr. Smith as commissions. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth certain information for each grant of stock options during fiscal 1998, to each of the Named Executive Officers. All of these options granted by us were granted under the 1995 Equity Incentive Plan, the 1998 Equity Incentive Plan or the 1998 Executive Equity Incentive Plan and have a term of 10 years, subject to earlier termination in the event the optionee's services to Brocade cease. See "-- Employee Benefit Plans" for descriptions of the material terms of these options. Each of these options has been exercised in conjunction with a promissory note and a stock pledge agreement. See "Certain Transactions" for descriptions of these exercises. During fiscal 1998, we granted options to purchase a total of 3,154,912 shares of common stock under the 1995 Equity Incentive Plan, the 1998 Equity Incentive Plan and the 1998 Executive Equity Incentive Plan. Options were granted at an exercise price equal to the fair market value of our common stock, as determined in good faith by our board of directors. Our board of directors determined the fair market value based on: -- our financial results and prospects; -- the share price derived for arms-length transactions; and -- evaluations conducted by valuation experts. 45 47 Potential realizable values for the following table are: -- net of exercise price before taxes; -- based on the assumption that our common stock appreciates at the annual rate shown, compounded annually, from the date of grant until the expiration of the ten-year term; and -- based on the assumption that the option is exercised at the exercise price and sold on the last day of its term at the appreciated price. These numbers are calculated based on Securities and Exchange Commission requirements and do not reflect our projection or estimate of future stock price growth. No stock appreciation rights were granted during the fiscal year. Each of the options listed in the table below has been exercised, but the shares purchased under those options are subject to repurchase by us at the original exercise price paid per share upon the optionee's cessation of service with us prior to vesting of the shares. The repurchase right lapses and the optionee vests as to 25% of the option shares upon completion of one year of service from the date of grant and the balance in a series of equal monthly installments over the next three years of service. In the event of a termination without cause or constructive termination other than for cause at any time during the first year following a change of control, these options will fully vest. See "-- Change of Control and Severance Arrangements."
INDIVIDUAL GRANTS ------------------------------------------------ POTENTIAL REALIZABLE PERCENT OF VALUE AT ASSUMED NUMBER TOTAL ANNUAL RATES OF OF OPTIONS STOCK PRICE SECURITIES GRANTED TO EXERCISE APPRECIATION FOR UNDERLYING EMPLOYEES PRICE PER OPTION TERM OPTIONS IN FISCAL SHARE EXPIRATION ----------------------- NAME GRANTED 1998 ($/SHARE) DATE 5% 10% ---- ---------- ---------- --------- ---------- ---------- ---------- Gregory L. Reyes........................ 1,535,662 48.7% $2.25 10/08/08 $2,172,982 $5,506,762 Bruce L. Bergman........................ -- -- -- -- -- -- Kumar Malavalli......................... -- -- -- -- -- -- Paul R. Bonderson, Jr................... -- -- -- -- -- -- Victor M. Rinkle........................ 200,000 6.3 2.25 02/25/08 283,003 717,184 Charles W. Smith........................ 35,000 1.1 2.25 10/08/08 49,525 125,507
46 48 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth information with respect to the Named Executive Officers concerning exercisable and unexercisable options held as of October 31, 1998. Each of the options listed in the table below has been exercised, but any shares purchased under those options will be subject to repurchase by us at the original exercise price paid per share upon the optionee's cessation of service with us prior to the vesting of the shares. The heading "Vested" refers to shares no longer subject to repurchase; the heading "Unvested" refers to shares subject to repurchase as of October 31, 1998. The value of in-the-money options is based on an assumed offering price of $16.00 per share and net of the option exercise price.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT OCTOBER 31, 1998 OPTIONS AT OCTOBER 31, 1998 ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE (#) REALIZED ($) VESTED UNVESTED VESTED UNVESTED ---- ------------ ------------ --------- ------------ ---------- ------------- Gregory L. Reyes............. -- $ -- -- 1,535,662 $ -- $21,115,353 Bruce L. Bergman............. -- -- -- -- -- -- Kumar Malavalli.............. -- -- -- -- -- -- Paul R. Bonderson, Jr. ...... -- -- -- -- -- -- Victor M. Rinkle............. -- -- -- 200,000 -- 2,750,000 Charles W. Smith............. 25,000 30,000(1) 47,917 112,083 750,422 1,685,828
- ------------------------- (1) Based on a price of $1.80 per share, the fair market value of our common stock at January 13, 1998, as determined by our board of directors, and net of the option exercise price. CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS Options granted to certain of our officers and directors under our 1995 Equity Incentive Plan, 1998 Equity Incentive Plan and 1998 Executive Equity Incentive Plan will vest fully in the event that these individuals are terminated without cause or are constructively terminated at any time during the first year following a change of control of Brocade. Mr. Reyes's option agreement under the 1998 Equity Incentive Plan provides that if, during the first year of his employment, he is terminated other than: -- constructively or without cause during the first year following a change of control; or -- for cause, Mr. Reyes will vest as to 191,958 shares plus a number of shares equal to 31,993 multiplied by the number of full months of his service to us. If Mr. Reyes is terminated any time after the first year of his employment, other than: -- constructively or without cause during the first year following a change of control; or -- for cause, Mr. Reyes will vest as to 191,958 shares in addition to any shares that have vested under the normal four-year vesting schedule contemplated by the agreement. Moreover, upon a change of control, one-half of Mr. Reyes's unvested shares vest in addition to any shares that have vested under the normal four-year vesting schedule contemplated by the agreement, and if Mr. Reyes is constructively terminated or terminated without cause during the first year following the change of control, then all of his unvested shares subject to this option will vest. Mr. Reyes's option agreement under the 1998 Executive Equity Incentive Plan provides that if he is terminated at any time on or after May 13, 2001, other than: 47 49 -- constructively or without cause during the first year following a change of control; or -- for cause, then, in addition to any shares that have vested under the normal four-year vesting schedule contemplated by the agreement, 191,958 additional shares will vest, less the number of shares that may vest as a result of his termination under the 1998 Equity Incentive Plan as described above. In addition, upon a change of control, one-half of Mr. Reyes's unvested shares vest in addition to any shares that have vested under the normal four-year vesting schedule contemplated by the agreement, and if Mr. Reyes is constructively terminated or terminated without cause during the first year following the change of control, then, all of his unvested shares subject to this option will vest. In addition, pursuant to a letter agreement, if Mr. Reyes is constructively terminated or terminated without cause upon a change of control, he will receive a severance payment of one year of his base salary plus his expected bonus for the then current fiscal year under the 1999 Key Employee Incentive Program, as described below. We have entered into a Confidential Agreement and General Release of Claims with Mr. Bergman, effective as of September 23, 1998. This agreement outlines the terms governing Mr. Bergman's termination as our President and Chief Executive Officer, as a member of our board of directors and as a consultant to Brocade. In exchange for and pursuant to the agreement, we agreed to provide Mr. Bergman with the following severance benefits for one year following his termination date: -- base salary at his then current rate; -- existing employee health benefits insurance; and -- continued vesting of 16,115 shares per month of Mr. Bergman's unvested shares of our common stock, until the complete vesting of his 773,528 total shares occurs. The agreement also includes a release of claims relating to or arising from Mr. Bergman's relationship with Brocade and the continued obligation of confidentiality with regard to our proprietary information. EMPLOYEE BENEFIT PLANS Upon the completion of this offering, our 1995 Equity Incentive Plan, our 1998 Equity Incentive Plan and our 1998 Executive Equity Incentive Plan will be combined and continue as our 1999 Stock Plan. No additional options will be granted under the 1995 Equity Incentive Plan, the 1998 Equity Incentive Plan or the 1998 Executive Equity Incentive Plan after the completion of this offering. However, the terms and conditions of the options granted previously under these plans will continue to govern those outstanding options. Therefore, descriptions of these plans, in addition to a description of the 1999 Stock Plan, are provided below. AMENDED 1995 EQUITY INCENTIVE PLAN Our Amended 1995 Equity Incentive Plan was adopted by our board of directors in August 1995, was subsequently approved by our stockholders, and has been amended from time to time. The 1995 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code of 1986, to employees and for the grant of nonstatutory stock options to employees, non-employee directors and consultants. A total of 3,807,000 shares of common stock has been reserved for issuance under the 1995 Plan. 48 50 The 1995 Plan is administered by our board of directors or a committee of the board. Subject to the provisions of the 1995 Plan, our board of directors or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: -- the number of shares of common stock covered by the option; -- when the option becomes exercisable; -- the per share option exercise price which, in the case of incentive stock options, must be at least 100% of the fair market value of a share of common stock as of the date of grant; in the case of options granted to persons who own 10% or more of the total combined voting power of Brocade or any parent or subsidiary of Brocade, must be at least 110% of the fair market value of a share of common stock as of the date of grant; and, in the case of nonstatutory stock options, must be at least 85% of the fair market value of a share of common stock as of the date of the grant; and -- the duration of the option, which may not exceed 10 years, or five years for incentive stock options granted to 10% stockholders. Generally, options granted under the 1995 Plan vest over four years and are non-transferable other than by will or the laws of descent and distribution. In the event of certain changes in control of Brocade, the acquiring or successor corporation may assume or substitute for options outstanding under the 1995 Plan, or such options shall terminate. Certain options granted to certain of our officers provide for partial acceleration upon a change of control of Brocade. See "-- Change of Control and Severance Arrangements." 1998 EQUITY INCENTIVE PLAN Our 1998 Equity Incentive Plan was adopted by our board of directors in February 1998 and subsequently approved by the stockholders. The 1998 Plan provides for the grant of incentive stock options, within the meaning of Section 422, of the Code to employees and for the grant of nonstatutory stock options to employees, non-employee directors and consultants. A total of 3,200,000 shares of common stock has been reserved for issuance under the 1998 Plan. The 1998 Plan is administered by our board of directors or a committee of the board. Subject to the provisions of the 1998 Plan, our board of directors or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: -- the number of shares of common stock covered by the option; -- when the option becomes exercisable; -- the per share option exercise price which, in the case of incentive stock options, must be at least 100% of the fair market value of a share of common stock as of the date of grant; in the case of options granted to 10% stockholders, must be at least 110% of the fair market value of a share of common stock as of the date of grant; and, in the case of nonstatutory stock options, must be at least 85% of the fair market value of a share of common stock as of the date of the grant; and -- the duration of the option, which may not exceed 10 years, or five years for incentive stock options granted to 10% stockholders. Generally, options granted under the 1998 Plan vest over four years and are non-transferable other than by will or the laws of descent and distribution. In the event of certain changes in control of Brocade, the acquiring or successor corporation may assume or substitute for options outstanding under the 1998 Plan, or 49 51 such options shall terminate. Certain options granted to certain of our officers provide for partial acceleration upon a change of control of Brocade. See "-- Change of Control and Severance Arrangements." 1998 EXECUTIVE EQUITY INCENTIVE PLAN Our 1998 Executive Equity Incentive Plan was adopted by our board of directors in October 1998. The 1998 Executive Plan provides for the grant of nonqualified stock options to executives. A total of 300,000 shares of common stock has been reserved for issuance under the 1998 Executive Plan. The 1998 Executive Plan is administered by the board of directors or a committee of the board. Subject to the provisions of the 1998 Executive Plan, the board or committee has the authority to select the persons to whom options are granted and determine the terms of each option, including: -- the number of shares of common stock covered by the option; -- when the option becomes exercisable; -- the per share option exercise price, which must be at least 85% of the fair market value of a share of common stock as of the date of grant; and -- the duration of the option, which may not exceed 10 years from the date an option is granted. In the event of certain changes in control of Brocade, the acquiring or successor corporation may assume or substitute for options outstanding under the 1998 Executive Plan, or such options shall terminate. Certain options granted to officers of Brocade provide for partial acceleration upon a change in control of Brocade. To date, there has been only one option grant under the 1998 Executive Plan, to Mr. Reyes, for all of the options currently outstanding under the 1998 Executive Plan. Such option vests as to 31,993 shares on November 13, 2001, and as to 31,993 shares upon the expiration of each full month elapsed thereafter. Mr. Reyes's option under the 1998 Executive Plan also provides for partial or full acceleration under certain circumstances. See "-- Change of Control and Severance Arrangements." 1999 STOCK PLAN Our 1999 Stock Plan was adopted by our board of directors in March 1999 and was approved by our stockholders in April 1999, and will be effective upon the completion of this offering. The 1999 Plan provides for the grant of incentive stock options, within the meaning of Section 422 of the Code, to employees. The 1999 Plan has provisions for compliance with the $1,000,000 limit set by the Internal Revenue Service. Initially, 7,607,000 shares of common stock will be reserved for issuance under the 1999 Plan. These shares consist of the total number of shares currently reserved under the 1995 Plan, the 1998 Plan, the 1998 Executive Plan and 300,000 newly reserved shares. An annual increase will be added on the first day of our fiscal year beginning in 1999 equal to the lesser of: -- 5,000,000 shares; -- 5% of the outstanding shares on that date; or -- a lesser amount determined by the board of directors. 50 52 The 1999 Plan will be administered by our board of directors or a committee of the board. Subject to the provisions of the 1999 Plan, the board or committee will have the authority to select the persons to whom options are granted and determine the terms of each option, including: -- the number of shares of common stock covered by the option; -- when the option becomes exercisable; -- the per share option exercise price which must be at least 100% of the fair market value of a share of common stock as of the date of grant, and which, in the case of options granted to 10% stockholders, must be at least 110% of the fair market value of a share of common stock as of the date of grant; and -- the duration of the option, which may not exceed 10 years, or five years for options granted to 10% stockholders. Generally, options granted under the 1999 Plan will vest over four years, and will be non-transferable other than by will or the laws of descent and distribution. In the event of certain changes in control of Brocade, the acquiring or successor corporation may assume or substitute for options outstanding under the 1999 Plan, or such options shall terminate. 1999 EMPLOYEE STOCK PURCHASE PLAN Our 1999 Employee Stock Purchase Plan was adopted in March 1999 and was approved by our stockholders in April 1999, and will be effective upon the completion of this offering. Initially, 200,000 shares of common stock will be reserved for issuance under the Purchase Plan. An annual increase will be added on the first day of our fiscal year beginning in 2000 equal to the lesser of: -- 2,500,000 shares; -- 2.5% of the outstanding shares on that date; or -- a lesser amount determined by the board of directors. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be administered by the board of directors or by a committee of the board. Our employees, including officers and directors of Brocade who are also employees, or any subsidiary designated by the board of directors for participation in the Purchase Plan are eligible to participate in the Purchase Plan if they are customarily employed for more than 20 hours per week and more than five months per year. The Purchase Plan will be implemented by consecutive offering periods generally six months in duration. However, the first offering period under the Purchase Plan will commence on the effective date of this offering and terminate on or before November 30. The board of directors may change the dates or duration of one or more offering periods. The Purchase Plan permits our eligible employees to purchase shares of common stock through payroll deductions at 85% of the lower of the fair market value of the common stock on the first day of the offering period or a specified exercise date. Participants generally may not purchase shares on any exercise date or stock, to the extent that, immediately after the grant, the participant would own stock or options to purchase stock totaling 5% or more of the total combined voting power of all stock of Brocade, or greater than $25,000 worth of our stock in any calendar year. In addition, no more than 3,000 shares may be purchased by any participant during any offering period. In the event of a sale or merger of Brocade, the board may accelerate the exercise date of the current purchase period to a date prior to the change of control, or the acquiring corporation may assume or replace the outstanding purchase rights under the Purchase Plan. 51 53 1999 DIRECTOR OPTION PLAN Our 1999 Director Option Plan was adopted in March 1999 and was approved by our stockholders in April 1999, and will be effective upon the completion of this offering. Initially, a total of 200,000 shares of common stock will be reserved for issuance under the Director Plan. Non-employee directors are entitled to participate in the 1999 Director Option Plan. However, Mr. Leslie and Mr. Sonsini will be excluded from receiving option grants under the Director Plan for three years. The Director Plan provides for the automatic grant of 2,500 shares of common stock to each non-employee director on the date on which such person first becomes a non-employee director. After the first 2,500 share option is granted to the non-employee director, he or she shall automatically be granted an option to purchase 2,500 shares each quarter of each year, provided that he or she shall have served on the board for at least the preceding month. Each option shall have a term of 10 years. Each option granted under the Director Plan will be fully vested and 100% exercisable on the date of grant. The exercise price of all options shall be 100% of the fair market value per share of the common stock, generally determined with reference to the closing price of the common stock as reported on the Nasdaq National Market on the date of grant. In the event of a merger, or the sale of substantially all of the assets of Brocade and if the option is not assumed or substituted, the option will terminate unless exercised. Options granted under the Director Plan must be exercised within three months of the end of the optionee's tenure as a director of Brocade, or within 12 months after such director's termination by death or disability, but not later than the expiration of the option's ten-year term. 1999 KEY EMPLOYEE INCENTIVE PROGRAM We have adopted the 1999 Key Employee Incentive Program, an executive bonus program, pursuant to which selected key employees of Brocade are eligible for quarterly and annual cash bonuses based upon achieving specified individual and company-wide objectives, including revenue targets. For Mr. Smith, bonuses are not based on the 1999 Key Employee Incentive Program, but rather on the achievement of sales revenue and other specified sales objectives. 401(K) PLAN Brocade provides a tax-qualified employee savings and retirement plan which covers our eligible employees. Pursuant to the 401(k) Plan, employees may elect to reduce their current annual compensation up to the lesser of 20% or the statutorily prescribed limit, which was $10,000 in calendar year 1999, and have the amount of such reduction contributed to the 401(k) Plan. The 401(k) Plan is intended to qualify under Sections 401(a) and 401(k) of the Code, so that contributions by us or our employees to the 401(k) Plan, and income earned on Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions will be deductible by Brocade when made. The trustee of the 401(k) Plan invests the assets of the 401(k) Plan in the various investment options as directed by the participants. 52 54 CERTAIN TRANSACTIONS Since Brocade's inception in August 1995, there has not been nor is there currently proposed any transaction or series of similar transactions to which Brocade was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, holder of more than 5% of the common stock of Brocade or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest other than (1) compensation agreements and other arrangements, which are described where required in "Management," and (2) the transactions described below. TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS Common Stock. On August 25, 1995, we issued the following shares of common stock at a price of $0.10 per share to our founders, all of which were purchased with promissory notes subsequently forgiven and ratified by our board of directors on April 24, 1997.
PURCHASER SHARES OF COMMON STOCK --------- ---------------------- Kumar Malavalli................................... 182,000 Paul R. Bonderson, Jr............................. 227,500 Seth D. Neiman.................................... 113,750
Series A Preferred Stock. On August 28, 1995, Brocade sold 1,425,000 shares of its Series A Preferred Stock for $1.00 per share. The purchasers of the Series A Preferred Stock were:
PURCHASER SHARES OF SERIES A STOCK --------- ------------------------ Crosspoint 1993 Entrepreneurs Fund................. 43,094 Crosspoint Venture Partners 1993................... 1,381,906
Crosspoint 1993 Entrepreneurs Fund and Crosspoint Venture Partners 1993 are affiliated entities and together are considered a greater than 5% stockholder of Brocade. Mr. Neiman, a director of Brocade, is a partner of Crosspoint 1993 Entrepreneurs Fund and Crosspoint Venture Partners 1993. Mr. Neiman disclaims beneficial ownership of the securities held by such entities, except for his proportional interest in the entities. Series B Preferred Stock. On June 17, 1996, Brocade sold 816,250 shares of its Series B Preferred Stock for $4.00 per share. The purchasers of the Series B Preferred Stock included, among others:
PURCHASER SHARES OF SERIES B STOCK --------- ------------------------ Crosspoint Venture Partners 1993................... 56,250 MDV IV Entrepreneurs' Network Fund, L.P. .......... 25,000 Mohr, Davidow Ventures IV.......................... 600,000 TPK Unitrust....................................... 25,000
MDV IV Entrepreneurs' Network Fund, L.P. and Mohr, Davidow Ventures IV are affiliated entities and together are considered a greater than 5% stockholder of Brocade. Andreas V. Bechtolsheim, a greater than 5% stockholder of Brocade, is the trustee of TPK Unitrust. 53 55 Series C Preferred Stock. On December 6, 1996, Brocade sold 3,333,333 shares of its Series C Preferred Stock for $3.00 per share. The purchasers of the Series C Preferred Stock included, among others:
PURCHASER SHARES OF SERIES C STOCK --------- ------------------------ Bay Partners SBIC, L.P. ................................... 666,667 Andreas V. Bechtolsheim.................................... 1,000,000 Crosspoint 1993 Entrepreneurs' Fund........................ 8,854 Crosspoint Venture Partners 1993........................... 283,932 MDV IV Entrepreneurs' Network Fund, L.P. .................. 13,164 Mohr, Davidow Ventures IV, L.P............................. 315,959 TPK Unitrust............................................... 13,164
Mr. Dempsey, a director of Brocade, is a general partner of Bay Partners SBIC, L.P. Mr. Dempsey disclaims beneficial ownership of the securities held by such entity, except for his proportional interest in the entities. Series D Preferred Stock. On September 29, 1997, November 17, 1997 and December 3, 1997, Brocade sold 3,660,900 shares of its Series D Preferred Stock for $5.78 per share. The holders of the Series D Preferred Stock include, among others:
PURCHASER SHARES OF SERIES D STOCK --------- ------------------------ Bay Partners SBIC, L.P. ................................... 129,758 Andreas V. Bechtolsheim.................................... 105,650 Crosspoint Venture Partners LS Fund 1997................... 570,821 Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America Trust & Banking Corporation (Cayman) Limited..... 77,509 Weiss, Peck & Greer Venture Associates IV, L.P. ........... 596,453 WPG Information Sciences Entrepreneur Fund, L.P. .......... 20,762 WPG Enterprise Fund III, L.P. ............................. 537,111
Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America Trust & Banking Corporation (Cayman) Limited, Weiss, Peck & Greer Venture Associates IV, L.P., WPG Information Sciences Entrepreneur Fund, L.P. and WPG Enterprise Fund III, L.P. are affiliated entities and together are considered a greater than 5% stockholder of Brocade. Also on September 29, 1997, in connection with our Series D Preferred Stock financing, we issued the following warrants to purchase our Series D Preferred Stock at an exercise price of $6.78 per share:
WARRANTS TO PURCHASE PURCHASER SERIES D STOCK --------- -------------------- Bay Partners SBIC, L.P. ................................... 11,418 Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America Trust & Banking Corporation (Cayman) Limited..... 7,750 Weiss, Peck & Greer Venture Associates IV, L.P. ........... 59,645 WPG Information Sciences Entrepreneur Fund, L.P. .......... 2,076 WPG Enterprise Fund III, L.P. ............................. 53,711
LOANS TO CERTAIN EXECUTIVE OFFICERS On April 11, 1997, we loaned $30,000 to Charles W. Smith, our Vice President, Worldwide Sales, secured by a stock pledge agreement, in connection with his purchase of 100,000 shares of our common 54 56 stock for $.30 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on February 27, 2001. On January 13, 1998, we loaned $15,000 to Mr. Smith, secured by a stock pledge agreement, in connection with his purchase of 25,000 shares of our common stock for $.60 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on January 13, 2003. On December 26, 1998, we loaned $78,750 to Mr. Smith, secured by a stock pledge agreement, in connection with his purchase of 35,000 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 5% per annum, compounded semi-annually, and is due on January 15, 2003. On January 25, 1999, we loaned $78,750 to Mr. Smith, secured by a stock pledge agreement, in connection with his purchase of 35,000 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 5% per annum, compounded semi-annually, and is due on December 31, 2003. The principal amounts and accrued interest on all notes remain outstanding. On April 11, 1997, we loaned $45,000 to B. Carl Lee, our former Vice President, Finance and Chief Financial Officer, secured by a stock pledge agreement, in connection with his purchase of 150,000 shares of our common stock for $0.30 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on December 2, 2001. On December 31, 1998, we loaned $112,500 to Mr. Lee, secured by a stock pledge agreement, in connection with his purchase of 50,000 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on December 31, 2003. The principal amounts and accrued interest on both notes remain outstanding. On January 26, 1998, we loaned $360,000 to Peter J. Tarrant, our Vice President, Marketing and Business Development, secured by a stock pledge agreement, in connection with his purchase of 200,000 shares of our common stock for $1.80 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on January 26, 2003. The principal amount and accrued interest on this note remain outstanding. On December 8, 1998, we loaned $647,853.75 to Gregory L. Reyes, our President and Chief Executive Officer, secured by a stock pledge agreement, in connection with his purchase of 287,935 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 4.47% per annum, compounded semi-annually, and is due one year after the date of this offering. Also on December 8, 1998, we loaned $2,807,385.75 to Mr. Reyes, secured by a stock pledge agreement, in connection with his purchase of 1,247,727 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 4.47% per annum, compounded semi-annually, and is due one year after the date of this offering. The principal amounts and accrued interest on both notes remain outstanding. On December 24, 1998, we loaned $450,000 to Victor M. Rinkle, our Vice President, Operations, secured by a stock pledge agreement, in connection with his purchase of 200,000 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 6.5% per annum, compounded semi-annually, and is due on December 24, 2004. The principal amount and accrued interest on this note remain outstanding. On April 1, 1999, we loaned $1,650,000 to Michael J. Byrd, our new Vice President, Finance and Chief Financial Officer. The loan is secured by a stock pledge agreement, in connection with his purchase of 330,000 shares of our common stock pursuant to a nonqualified stock option for $5.00 per share. The note accrues interest at the rate of 5.21% per annum, compounded semi-annually, and is due on April 1, 2006. On April 21, 1999, we loaned $100,000 to Paul R. Bonderson, Jr., our Vice President, Engineering. The loan is secured by a stock pledge agreement. This note accrues interest at the rate of 5.21% per annum, compounded semi-annually, and is due on April 21, 2004. 55 57 STOCK OPTION GRANTS AND LOAN TO CERTAIN DIRECTORS On January 6, 1999, we granted to Mark Leslie, a director of Brocade, a fully vested stock option to purchase 121,856 shares of our common stock at $2.25 per share. On January 28, 1999, we loaned $274,176 to Mr. Leslie, secured by a stock pledge agreement, in connection with his purchase of 121,856 shares of our common stock for $2.25 per share. This note accrues interest at the rate of 4.59% per annum, compounded semi-annually, and is due on January 28, 2000. The principal amount and accrued interest on this note remain outstanding. On January 29, 1999, we granted to Larry W. Sonsini, a director of Brocade, a fully vested stock option to purchase 121,856 shares of our common stock at $5.00 per share. Mr. Sonsini is also a partner of Wilson Sonsini Goodrich & Rosati, P.C., a law firm, to whom we have paid legal fees in connection with this offering. INDEMNIFICATION We intend to enter into indemnification agreements with each of our directors and officers. Such indemnification agreements will require us to indemnify our directors and officers to the fullest extent permitted by Delaware law. See "-- Limitation of Liability and Indemnification." CONFLICT OF INTEREST POLICY Brocade believes that all transactions with affiliates described above were made on terms no less favorable to Brocade than could have been obtained from unaffiliated third parties. Brocade's policy is to require that a majority of the independent and disinterested outside directors on our board of directors approve all future transactions between Brocade and its officers, directors, principal stockholders and their affiliates. Such transactions will continue to be on terms no less favorable to Brocade than it could obtain from unaffiliated third parties. 56 58 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning the beneficial ownership of our common stock as of April 30, 1999, and as adjusted to reflect the sale of the shares of common stock in this offering by: -- each person who is known by Brocade to beneficially own more then 5% of our common stock; -- each of the Named Executive Officers; -- each of our directors; and -- all officers and directors as a group. Unless otherwise indicated, the address of each listed stockholder is c/o Brocade Communications Systems, Inc., 1901 Guadalupe Parkway, San Jose, CA 95131. The number and percentage of shares beneficially owned are based on 22,361,592 shares of common stock outstanding as of April 30, 1999, assuming conversion of all outstanding shares of preferred stock into common stock, and 25,685,291 shares of common stock outstanding after the completion of this offering, assuming the Underwriters' over-allotment option to purchase 487,500 shares of common stock is not exercised. Beneficial ownership is determined under the rules and regulations of the Securities and Exchange Commission. Shares of common stock subject to options or warrants that are currently exercisable or exercisable within 60 days of April 30, 1999 are deemed to be outstanding and beneficially owned by the person holding the options or warrants for the purpose of computing the number of shares beneficially owned and the percentage ownership of that person. The shares subject to options or warrants held by a person are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Except as indicated in the footnotes to this table, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of Brocade's common stock shown as beneficially owned by them. Percentage ownership figures after the offering do not include shares that may be purchased by each person in the offering. Entries denoted by an asterisk represent an amount less than 1%.
PERCENT OF SHARES BENEFICIALLY OWNED ---------------------- NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING ------------------------------------ ----------------------------- ---------- --------- NAMED EXECUTIVE OFFICERS AND DIRECTORS Gregory L. Reyes(1)............................... 1,535,662 6.9% 6.0% Bruce L. Bergman(2)............................... 773,528 3.5 3.0 Kumar Malavalli(3)................................ 606,000 2.7 2.4 Paul R. Bonderson, Jr.(4)......................... 900,000 4.0 3.5 Victor M. Rinkle(5)............................... 200,000 * * Charles W. Smith(6)............................... 192,000 * * Neal Dempsey(7)................................... 807,843 3.6 3.1 c/o Bay Partners Inc. 10600 N. De Anza Blvd., Suite 100 Cupertino, CA 95054 Mark Leslie(8).................................... 121,856 * * Seth D. Neiman(9)................................. 7,131,107 31.9 27.8 Larry W. Sonsini(10).............................. 121,856 * * Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304
57 59
PERCENT OF SHARES BENEFICIALLY OWNED ---------------------- NUMBER OF SHARES BENEFICIALLY BEFORE THE AFTER THE NAME AND ADDRESS OF BENEFICIAL OWNER OWNED BEFORE THE OFFERING OFFERING OFFERING ------------------------------------ ----------------------------- ---------- --------- 5% STOCKHOLDERS Crosspoint Venture Partners(11)................... 6,676,107 29.9 26.0 2925 Woodside Road Woodside, CA 94062 Mohr, Davidow Ventures IV(12)..................... 1,579,123 7.1 6.1 2774 Sand Hill Road Building 1, Suite 240 Menlo Park, CA 94028 Weiss, Peck & Greer(13)........................... 1,355,017 6.1 5.3 555 California Street, Suite 3130 San Francisco, CA 94104 Attn: Christopher J. Schaepe Andreas V. Bechtolsheim(14)....................... 1,168,814 5.2 4.6 1140 Hamilton Avenue Palo Alto, CA 94301 ALL EXECUTIVE OFFICERS AND DIRECTORS as a group (12 persons)(15)..................... 12,919,852 57.4 50.1
- ------------------------- (1) Includes 1,500,110 shares held by Gregory Reyes and Penny Reyes as community property, all of which are subject to a right of repurchase in favor of Brocade which lapses over time. Also includes 17,776 shares held by Gregorio Reyes, Trustee of the Rebecca Mary Reyes 1997 Trust UTA Dated August 15, 1997 and 17,776 shares held by Gregorio Reyes, Trustee of the Gregory Louis Reyes, Jr. 1996 Trust UTA Dated April 30, 1996. (2) All shares listed are held by The Bergman Family Trust. Includes 32,230 shares subject to a right of repurchase in favor of Brocade which lapses over time. (3) Includes 60,666 shares subject to a right of repurchase in favor of Brocade which lapses over time. (4) All shares listed are held by The Bonderson Family Living Trust Dated June 28, 1994. Includes 75,833 shares subject to a right of repurchase in favor of Brocade which lapses over time. (5) Includes 137,500 shares subject to a right of repurchase in favor of Brocade which lapses over time. (6) Includes 131,458 shares subject to a right of repurchase in favor of Brocade which lapses over time. Also includes 10,000 shares held by Charles Whitney Smith and Helen Clute Smith Irrevocable Trust for the benefit of Chelsea Marcelle Smith and Alexander Joseph Smith Dated April 30, 1999, of which Mr. Smith is a trustee. (7) Mr. Dempsey is a general partner of Bay Partners SBIC, L.P. and is a director of Brocade. Includes 796,425 shares held by Bay Partners SBIC, L.P. and 11,418 shares subject to warrants held by Bay Partners SBIC, L.P. which are exercisable within 60 days of April 30, 1999. Mr. Dempsey disclaims beneficial ownership of shares held by this entity, except to the extent of his proportional interest arising from his partnership interest in Bay Partners SBIC, L.P. (8) Includes 8,888 shares held directly by Seth Leslie and 8,888 shares held directly by Joshua Leslie, of which Mr. Leslie disclaims beneficial ownership. 58 60 (9) Mr. Neiman is a partner of Crosspoint Venture Partners and the Chairman of the board of directors of Brocade. Includes 14,368 shares subject to a right of repurchase in favor of Brocade which lapses over time. Includes 20,000 shares held by The Alexandra Grace Speeth Neiman 1996 Trust and 20,000 shares held by The Morgan Olivia Speeth Neiman 1996 Trust, of which Mr. Neiman disclaims beneficial ownership. Also includes 5,811,556 shares held by Crosspoint Venture Partners 1993, 570,821 shares held by Crosspoint Venture Partners LS Fund 1997 and 293,730 shares held by Crosspoint 1993 Entrepreneurs Fund. Mr. Neiman disclaims beneficial ownership of shares held by these entities, except for his proportional interest arising from his partnership interest in Crosspoint Venture Partners. (10) Represents 121,856 shares issuable upon exercise of an option held by Mr. Sonsini exercisable within 60 days of April 30, 1999. (11) Represents 5,811,556 shares held by Crosspoint Venture Partners 1993, 570,821 shares held by Crosspoint Venture Partners LS Fund 1997 and 293,730 shares held by Crosspoint 1993 Entrepreneurs Fund. Mr. Neiman is a partner of Crosspoint Venture Partners and has dispositive and voting power for these shares. (12) Represents 1,515,959 shares held by Mohr, Davidow Ventures IV and 63,164 shares held by MDV IV Entrepreneurs' Network Fund, L.P. Jonathan D. Feiber is a member of Mohr Davidow Ventures IV and has dispositive and voting power for these shares. (13) Includes 656,098 shares held by Weiss, Peck & Greer Venture Associates IV, L.P., 590,822 shares held by WPG Enterprise Fund III, L.P., 85,259 shares held by Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Bank America Trust & Banking Corporation (Cayman) Limited and 22,838 shares held by WPG Information Sciences Entrepreneur Fund, L.P. Christopher J. Schaepe is a Managing Member of Weiss, Peck & Greer and has dispositive and voting power for these shares. (14) Includes 63,164 shares held by TPK Unitrust, of which Mr. Bechtolsheim is the trustee. (15) Includes 2,415,498 shares subject to a right of repurchase in favor of Brocade which lapses over time. Also includes 11,418 shares subject to a warrant and 121,856 shares subject to options, each of which is exercisable within 60 days of April 30, 1999. 59 61 DESCRIPTION OF CAPITAL STOCK Upon consummation of this offering, our authorized capital stock will consist of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock. The following is a summary of the material provisions of the common stock and the preferred stock contained in Brocade's certificate of incorporation and bylaws. COMMON STOCK As of April 30, 1999, there were 7,811,677 shares of common stock outstanding held of record by 165 stockholders. Subject to preferences that may be applicable to any preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to the following rights: -- to receive dividends out of assets legally available therefor at such times and in such amounts as the board of directors from time to time may determine; -- one vote for each share held on all matters submitted to a vote of stockholders; and -- upon liquidation, dissolution or winding-up of Brocade, to share ratably in all assets remaining after payment of liabilities and the liquidation of any preferred stock. Cumulative voting for the election of directors is not authorized by our certificate of incorporation, which means that the holders of a majority of the shares voted can elect all of the directors then standing for election. The common stock is not entitled to preemptive rights and is not subject to conversion or redemption. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, upon payment therefor, duly and validly issued, fully paid and nonassessable. PREFERRED STOCK The board of directors is authorized, without action by the stockholders, to designate and issue preferred stock in one or more series. The board of directors can fix the rights, preferences and privileges of the shares of each series and any qualifications, limitations or restrictions thereon. The board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes could, among other things, under certain circumstances, have the effect of delaying, deferring or preventing a change in control of Brocade. We have no current plans to issue any shares of preferred stock. WARRANTS In December 1995, we issued a warrant to an equipment lease financing company to purchase 35,444 shares of our Series A Preferred Stock with an exercise price of $1.00 per share, in consideration for equipment leases and a loan. In October 1996, we issued a warrant to the same equipment lease financing company to purchase 15,753 shares of our Series A Preferred Stock with an exercise price of $4.50 per share, also in consideration for equipment leases and a loan. In September 1996, we issued a warrant to the same equipment lease financing company to purchase 17,500 shares of our Series B Preferred Stock at an exercise price of $4.00 per share. These warrants will remain outstanding after the completion of this offering and will become exercisable for 239,788 shares of our common stock. 60 62 In August 1996, we issued a warrant to a real property lessor to purchase 3,000 shares of our Series C Preferred Stock with an exercise price of $3.00 per share. This warrant will remain outstanding after the completion of this offering and will become exercisable for 3,000 shares of our common stock. In May 1997, we issued a warrant to a sublessor of real property to purchase 20,000 shares of our Series C Preferred Stock with an exercise price of $3.00 per share. This warrant will remain outstanding after the completion of this offering and will become exercisable for 20,000 shares of our common stock. In June 1997, we issued a warrant to a bank to purchase 25,000 shares of our Series C Preferred Stock with an exercise price of $3.00 per share. This warrant will remain outstanding after the completion of this offering and will become exercisable for 25,000 shares of our common stock. In September 1997, we issued warrants to certain investors in our Series D Preferred Stock financing to purchase that number of shares equal to 10% of the number of shares purchased by each respective investor in the financing, for a total of 296,881 shares, at an exercise price of $6.78 per share. These warrants terminate upon our initial public offering, and as of April 30, 1999, warrants for 223,182 shares have been exercised and we have assumed that the remaining warrants for 73,699 shares will be exercised prior to the closing of our initial public offering. REGISTRATION RIGHTS OF CERTAIN HOLDERS After this offering, the holders of approximately 14,623,614 shares of common stock and warrants to acquire 264,788 shares of common stock will be entitled to rights with respect to the registration of such shares under the Securities Act. Under the terms of the agreements between us and the holders of such registrable securities, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include shares of such common stock therein. Additionally, certain of such holders are also entitled to certain demand registration rights pursuant to which they may require us on up to two occasions to file a registration statement under the Securities Act at our expense with respect to our shares of common stock, and we are required to use our best efforts to effect such registration. Moreover, holders may require us to file an unlimited number of additional registration statements on Form S-3 at our expense. All of these registration rights are subject to certain conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in such registration and our right not to effect a requested registration within six months following an offering of our securities, including the offering made here. In addition, the holders of registration rights have agreed not to exercise such rights for at least 180 days after the offering without the prior written consent of Morgan Stanley & Co. Incorporated. DELAWARE LAW AND CERTAIN PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS Certain provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of Brocade by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of Brocade to first negotiate with us. We believe that the benefits of increased protection of Brocade's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure Brocade outweighs the disadvantages of discouraging such proposals, including proposals that are priced above the then current market value of our common stock, because, among other things, negotiation of such proposals could result in an improvement of their terms. We are subject to section 203 of the Delaware General Corporation Law. This provision generally prohibits a Delaware corporation from engaging in any business combination with any interested 61 63 stockholder for a period of three years following the date such stockholder became an interested stockholder, unless: -- prior to such date the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; -- upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or -- on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: -- any merger or consolidation involving the corporation and the interested stockholder; -- any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; -- subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; -- any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or -- the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. Our certificate of incorporation and bylaws require that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of the stockholders and may not be effected by a consent in writing. In addition, special meetings of our stockholders may be called only by the board of directors, certain of our officers or stockholders holding a majority of our outstanding voting securities. Our certificate of incorporation and bylaws also provide that, beginning upon the closing of the offering, our board of directors will be divided into three classes, with each class serving staggered three-year terms and that certain amendments of the certificate of incorporation and of the bylaws require the approval of holders of at least 66 2/3% of the voting power of all outstanding stock. These provisions may have the effect of deferring hostile takeovers or delaying changes in control or management of Brocade. TRANSFER AGENT AND REGISTRAR The Transfer Agent and Registrar for our common stock is Norwest Bank Minnesota, N.A. Its address is 161 North Concord Exchange, South St. Paul, Minnesota 55075-0738, and its telephone number at this location is (651) 450-4189. 62 64 SHARES ELIGIBLE FOR FUTURE SALE Immediately prior to this offering, there was no public market for our common stock. Future sales of substantial amounts of common stock in the public market could adversely affect the market price of the common stock. Upon completion of this offering, we will have outstanding 25,685,291 shares of common stock, assuming the issuance of 3,250,000 shares of common stock offered hereby and no exercise of options after April 30, 1999. Of these shares, the 3,250,000 shares sold in the offering will be freely tradable without restriction or further registration under the Securities Act, provided, however, that if shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act, their sales of shares would be subject to certain limitations and restrictions that are described below. The remaining 22,435,291 shares of common stock held by existing stockholders were issued and sold by us in reliance on exemptions from the registration requirements of the Securities Act. All of these shares will be subject to "lock-up" agreements described below on the effective date of the offering. Upon expiration of the lock-up agreements 180 days after the effective date of the offering, 10,949,935 shares will become eligible for sale, subject in most cases to the limitations of Rule 144. In addition, holders of stock options could exercise such options and sell certain of the shares issued upon exercise as described below.
DAYS AFTER DATE OF APPROXIMATE SHARES THIS PROSPECTUS ELIGIBLE FOR FUTURE SALE COMMENT - ------------------ ------------------------ ---------------------------------------------------- On Effectiveness 3,250,000 Shares sold in the offering 90 Days 0 Shares salable under Rule 144 180 Days 10,949,935 Lock-up released; shares salable under Rules 144 and 701
As of April 30, 1999, there were a total of 902,525 shares of common stock subject to outstanding options under our 1995 Equity Incentive Plan, 141,737 of which were vested. As of April 30, 1999, there were a total of 1,524,872 shares of common stock subject to outstanding options under our 1998 Equity Incentive Plan, 156,361 of which were vested. As of April 30, 1999, no shares of common stock were subject to outstanding options under our 1998 Executive Equity Incentive Plan. However, all of these shares are subject to lock-up agreements. Immediately after the completion of the offering, Brocade intends to file registration statements on Form S-8 under the Securities Act to register all of the shares of common stock issued or reserved for future issuance under our 1999 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock Purchase Plan. On the date 180 days after the effective date of the offering, a total of 586,621 shares of common stock subject to outstanding options will be vested. After the effective dates of the registration statements on Form S-8, shares purchased upon exercise of options granted pursuant to the 1999 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock Purchase Plan generally would be available for resale in the public market. Our officers, directors and substantially all other stockholders have agreed with Morgan Stanley & Co. Incorporated not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of the offering. Morgan Stanley & Co. Incorporated, however, may in its sole discretion, at any time without notice, release all or any portion of the shares subject to these lock-up agreements. All of our stockholders have also agreed with Brocade not to sell or otherwise dispose of any of their shares for a period of 180 days after the effective date of the offering. 63 65 RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: -- 1% of the number of shares of common stock then outstanding, which will equal approximately 256,853 shares immediately after this offering; or -- the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain other requirements regarding the manner of sale, notice filing and the availability of current public information about us. RULE 144(k) Under Rule 144(k), a person who is not deemed to have been one of Brocade's "affiliates" at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an "affiliate," is entitled to sell such shares without complying with the manner of sale, notice filing, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701, any Brocade employee, director, officer, consultant or advisor who purchases shares from us in connection with a compensatory stock or option plan or other written agreement before the effective date of the offering is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144, without having to comply with certain restrictions, including the holding period, contained in Rule 144. The Securities and Exchange Commission has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Securities Exchange Act of 1934, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the contractual restrictions described above, beginning 90 days after the date of this prospectus, may be sold by persons other than "affiliates," as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by "affiliates" under Rule 144 without compliance with its one year minimum holding period requirement. 64 66 UNDERWRITERS Under the terms and subject to the conditions contained in the underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, BT Alex. Brown Incorporated and Dain Rauscher Wessels, a division of Dain Rauscher Incorporated, are acting as representatives, have severally agreed to purchase, and Brocade has agreed to sell to them, severally, the respective number of shares of common stock set forth opposite the names of the underwriters below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... BT Alex. Brown Incorporated................................. Dain Rauscher Wessels, a division of Dain Rauscher Incorporated.............................................. --------- Total............................................. 3,250,000 =========
The underwriters are offering the shares subject to their acceptance of the shares from Brocade and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered hereby are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus, other than those covered by the over-allotment option described below, if any such shares are taken. The underwriters initially propose to offer part of the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriter may allow, and the dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain other dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. Brocade has granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to 487,500 additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by the prospectus. To the extent this option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of additional shares of common stock as the number set forth next to each underwriter's name in the preceding table bears to the total number of shares of common stock set forth next to the names of all underwriters in the preceding table. At the request of Brocade, the underwriters have reserved up to 9.9% of the shares of common stock to be issued by Brocade and offered hereby for sale, at the initial public offering price, to various business associates and related persons of Brocade. No officer, director or employee of Brocade will receive any of these shares. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. 65 67 Each of Brocade and the officers, directors and stockholders of Brocade has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, or otherwise during the period ending 180 days after the date of this prospectus, it will not: -- offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or -- enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of the common stock, whether any such transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The foregoing restrictions shall not apply to: -- the sale of any shares to the underwriters pursuant to the underwriting agreement; or -- transactions relating to shares of common stock or other securities acquired in open market transactions after the date of this prospectus. The underwriters have informed Brocade that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. Approval of the common stock has been sought for quotation on the Nasdaq National Market under the symbol "BRCD." In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. Brocade and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. PRICING OF THE OFFERING Prior to this offering, there has been no public market for the shares of common stock. Consequently, the initial public offering price for the shares of common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be our record of operations, our current financial position and future prospects, the experience of our management, the economics of the SAN industry in general, the general condition of the equity securities markets, sales, earnings and certain other financial and operating information of Brocade in recent periods, the price-earnings ratios, price-sales ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of Brocade. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. 66 68 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation. Larry W. Sonsini, a director of Brocade and a partner of Wilson Sonsini Goodrich & Rosati, beneficially owns 121,856 shares of our common stock. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP. EXPERTS The financial statements and schedule included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. CHANGE IN INDEPENDENT ACCOUNTANTS AND FISCAL YEAR END Effective October 1997, Arthur Andersen LLP was engaged as our independent accountants and replaced PricewaterhouseCoopers LLP who was dismissed as our independent accountants. Also at that time, we changed our fiscal year from December 31 to October 31. The decision to change independent accountants was approved by our board of directors. Prior to October 1997, PricewaterhouseCoopers LLP issued a report on the periods from inception through December 31, 1996. This report contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. In connection with the audit for the periods ended December 31, 1996, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such periods. PricewaterhouseCoopers LLP has not audited or reported on any of the financial statements or information included in this prospectus. Prior to October 1997, we had not consulted with Arthur Andersen LLP on items that involved our accounting principles or the form of audit opinion to be issued on our financial statements. 67 69 WHERE YOU MAY FIND ADDITIONAL INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act for the shares of common stock in this offering. This prospectus does not contain all of the information in the registration statement and the exhibits and schedule that were filed with the registration statement. For further information with respect to Brocade and our common stock, we refer you to the registration statement and the exhibits and schedule that were filed with the registration statement. Statements contained in this prospectus about the contents of any contract or any other document that is filed as an exhibit to the registration statement are materially complete. A copy of the registration statement and the exhibits and schedule that were filed with the registration statement may be inspected without charge at the public reference facilities maintained by the Securities and Exchange Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from the Securities and Exchange Commission upon payment of the prescribed fee. The Securities and Exchange Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission. The address of the site is http://www.sec.gov. Upon completion of this offering, Brocade will become subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and, in accordance with the requirements of the Securities Exchange Act of 1934, will file periodic reports, proxy statements and other information with the Securities and Exchange Commission. These periodic reports, proxy statements and other information will be available for inspection and copying at the regional offices, public reference facilities and web site of the Securities and Exchange Commission referred to above. Our principal offices are located at 1901 Guadalupe Parkway, San Jose, California 95131 and our telephone number is (408) 487-8000. We maintain a worldwide web site at http://www.brocade.com. The reference to our web address does not constitute incorporation by reference of the information contained in that site. Brocade, SilkWorm, SilkWorm Express and Brocade's logo are trademarks of Brocade, some of which may be registered or are pending registration in certain jurisdictions. All other brand names, logos and trademarks appearing in this prospectus are the property of their respective holders. 68 70 (THIS PAGE INTENTIONALLY LEFT BLANK) 71 BROCADE COMMUNICATIONS SYSTEMS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants.................... F-2 Balance Sheets.............................................. F-3 Statements of Operations.................................... F-4 Statements of Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit)............................ F-5 Statements of Cash Flows.................................... F-6 Notes to Financial Statements............................... F-7
F-1 72 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Brocade Communications Systems, Inc.: We have audited the accompanying balance sheets of Brocade Communications Systems, Inc. (a California corporation) as of October 31, 1998 and 1997 and the related statements of operations, redeemable convertible preferred stock and shareholders' equity (deficit) and cash flows for each of the three years in the period ended October 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Brocade Communications Systems, Inc. as of October 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended October 31, 1998 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP San Jose, California November 24, 1998 (except with respect to the matters discussed in Note 10, as to which the date is May 14, 1999) F-2 73 BROCADE COMMUNICATIONS SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
APRIL 30, 1999 OCTOBER 31, PRO FORMA ------------------- APRIL 30, SHAREHOLDERS' 1997 1998 1999 EQUITY (NOTE 6) -------- -------- ----------- --------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 2,552 $ 10,420 $ 8,668 Short-term investments.................................... 15,920 -- -- Accounts receivable, net of allowance for doubtful accounts of $100, $285 and $289, respectively........... 2,646 3,430 8,454 Inventories............................................... 471 1,744 2,758 Prepaid expenses and other current assets................. 342 220 1,986 -------- -------- -------- Total current assets........................................ 21,931 15,814 21,866 Property and equipment, net................................. 3,922 5,323 5,452 Other assets................................................ 247 164 132 -------- -------- -------- $ 26,100 $ 21,301 $ 27,450 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Borrowings under line of credit........................... $ 500 $ 1,672 $ 1,200 Current portion of debt................................... 367 1,231 1,314 Current portion of capital lease obligations.............. 679 784 625 Accounts payable.......................................... 3,292 3,247 6,236 Accrued liabilities....................................... 1,225 3,061 3,529 Deferred revenue.......................................... 534 543 3,901 -------- -------- -------- Total current liabilities.......................... 6,597 10,538 16,805 -------- -------- -------- Long-term liabilities: Long-term portion of debt................................. 694 1,731 1,293 Long-term portion of capital lease obligations............ 1,260 478 232 Commitments and contingencies (Note 4) Redeemable convertible preferred stock, no par value, aggregate liquidation preference of $37,362: Authorized -- 9,791,280 shares at April 30, 1999 and pro forma Issued and outstanding (Series A, B, C and D) -- 8,370,431 shares at October 31, 1997; 9,235,483 shares at October 31, 1998; 9,458,665 shares at April 30, 1999; and no shares issued and outstanding pro forma................................................. 30,359 35,261 37,016 Warrants to purchase redeemable convertible preferred stock................................................... 648 648 405 -------- -------- -------- Total long-term liabilities........................ 32,961 38,118 38,946 -------- -------- -------- Shareholders' equity (deficit): Common stock, no par value: Authorized -- 30,000,000 shares at April 30, 1999 and pro forma Issued and outstanding -- 4,913,383 shares at October 31, 1997; 5,194,765 shares at October 31, 1998; 7,811,677 shares at April 30, 1999; and 22,435,291 shares outstanding pro forma.......................... 424 2,225 13,765 $ 51,281 Deferred stock compensation................................. (88) (300) (4,000) (4,000) Notes receivable from shareholders.......................... (75) (450) (6,549) (6,549) Accumulated deficit......................................... (13,719) (28,830) (31,517) (31,517) -------- -------- -------- -------- Total shareholders' equity (deficit)............... (13,458) (27,355) (28,301) $ 9,215 -------- -------- -------- -------- $ 26,100 $ 21,301 $ 27,450 ======== ======== ========
See accompanying notes. F-3 74 BROCADE COMMUNICATIONS SYSTEMS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ---------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- -------- ------- ------- (UNAUDITED) Revenues: Product revenue............................. $ -- $ 8,482 $ 22,414 $12,958 $16,969 License revenue............................. -- -- 1,832 1,312 1,578 ------- ------- -------- ------- ------- Total revenues......................... -- 8,482 24,246 14,270 18,547 Cost of revenues............................ -- 6,682 15,759 8,369 8,758 ------- ------- -------- ------- ------- Gross profit........................... -- 1,800 8,487 5,901 9,789 ------- ------- -------- ------- ------- Operating expenses: General and administrative.................. 575 1,464 3,813 1,263 1,415 Sales and marketing......................... 152 2,112 5,154 2,376 4,086 Research and development.................... 3,091 7,666 14,744 6,295 5,634 Amortization of deferred compensation....... -- -- 7 -- 1,377 ------- ------- -------- ------- ------- Total operating expenses............... 3,818 11,242 23,718 9,934 12,512 ------- ------- -------- ------- ------- Loss from operations........................ (3,818) (9,442) (15,231) (4,033) (2,723) Other income (expense)...................... (116) (177) 120 163 36 ------- ------- -------- ------- ------- Net loss.................................... $(3,934) $(9,619) $(15,111) $(3,870) $(2,687) ======= ======= ======== ======= ======= Basic net loss per share.................... $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56) ======= ======= ======== ======= ======= Shares used in computing basic net loss per share..................................... 414 1,997 3,400 2,857 4,757 ======= ======= ======== ======= ======= Pro forma basic net loss per share (unaudited)............................... $ (.84) $ (.14) ======== ======= Shares used in computing pro forma basic net loss per share (unaudited)................ 17,915 19,193 ======== =======
See accompanying notes. F-4 75 BROCADE COMMUNICATIONS SYSTEMS, INC. STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
REDEEMABLE CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK DEFERRED RECEIVABLE --------------------------- ---------------- STOCK FROM ACCUMULATED SHARES AMOUNT WARRANTS SHARES AMOUNT COMPENSATION SHAREHOLDERS DEFICIT ------ ------- -------- ------ ------- ------------ ------------ ----------- Balances at October 31, 1995........... 1,425 $ 1,411 $ -- 2,093 $ 52 $ -- $ (52) $ (166) Issuance of warrants related to leases............................... -- -- 188 -- -- -- -- -- Exercise of options.................... -- -- -- 1,562 48 -- -- -- Issuance of Series B Redeemable Convertible Preferred Stock, net of issuance costs of $63................ 816 3,202 -- -- -- -- -- -- Forgiveness of notes receivable from founders............................. -- -- -- -- -- -- 52 -- Stock in exchange for services......... -- -- -- 66 13 -- -- -- Issuance of common stock to officer.... -- -- -- 773 151 (132) -- -- Deferred compensation.................. -- -- -- -- -- 11 -- -- Net loss............................... -- -- -- -- -- -- -- (3,934) ----- ------- ----- ----- ------- ------- ------- -------- Balances at October 31, 1996........... 2,241 4,613 188 4,494 264 (121) -- (4,100) Exercise of options.................... -- -- -- 384 90 -- -- -- Issuance of stock for notes receivable from shareholders.................... -- -- -- 250 75 -- (75) -- Repurchase of common stock............. -- -- -- (215) (5) -- -- -- Issuance of Series C Redeemable Convertible Preferred Stock, net of issuance costs of $49................ 3,333 9,952 -- -- -- -- -- -- Issuance of Series D Redeemable Convertible Preferred Stock, net of issuance costs of $42................ 2,796 15,794 -- -- -- -- -- -- Issuance of warrants related to leases and notes payable.................... -- -- 135 -- -- -- -- -- Issuance of warrants................... -- -- 325 -- -- -- -- -- Deferred compensation.................. -- -- -- -- -- 33 -- -- Net loss............................... -- -- -- -- -- -- -- (9,619) ----- ------- ----- ----- ------- ------- ------- -------- Balances at October 31, 1997........... 8,370 30,359 648 4,913 424 (88) (75) (13,719) Exercise of options.................... -- -- -- 201 55 -- -- -- Compensation charges................... -- -- -- -- 1,067 88 -- -- Deferred compensation.................. -- -- -- -- 307 (307) -- -- Amortization of deferred compensation......................... -- -- -- -- -- 7 -- -- Issuance of Series D Redeemable Convertible Preferred Stock, net of issuance costs of $98................ 865 4,902 -- -- -- -- -- -- Issuance of stock for notes receivable from shareholders.................... -- -- -- 225 375 -- (375) -- Stock in exchange for services......... -- -- -- 18 41 -- -- -- Repurchase of common stock............. -- -- -- (162) (44) -- -- -- Net loss............................... -- -- -- -- -- -- -- (15,111) ----- ------- ----- ----- ------- ------- ------- -------- Balances at October 31, 1998........... 9,235 35,261 648 5,195 2,225 (300) (450) (28,830) Exercise of options (unaudited)........ 338 285 Issuance of Series D Redeemable Convertible Preferred Stock (unaudited).......................... 223 1,755 (243) -- -- -- -- -- Issuance of stock for notes receivable from shareholders (unaudited)........ -- -- -- 2,307 6,099 -- (6,099) -- Compensation charges (unaudited)....... -- -- -- -- 80 -- -- -- Deferred compensation (unaudited)...... -- -- -- -- 5,077 (5,077) -- -- Amortization of deferred compensation (unaudited).......................... -- -- -- -- -- 1,377 -- -- Repurchase of common stock (unaudited).......................... -- -- -- (28) (1) -- -- -- Net loss (unaudited)................... -- -- -- -- -- -- -- (2,687) ----- ------- ----- ----- ------- ------- ------- -------- Balances at April 30, 1999 (unaudited).......................... 9,458 $37,016 $ 405 7,812 $13,765 $(4,000) $(6,549) $(31,517) ===== ======= ===== ===== ======= ======= ======= ======== TOTAL SHAREHOLDERS EQUITY (DEFICIT) ------------ Balances at October 31, 1995........... $ (166) Issuance of warrants related to leases............................... -- Exercise of options.................... 48 Issuance of Series B Redeemable Convertible Preferred Stock, net of issuance costs of $63................ -- Forgiveness of notes receivable from founders............................. 52 Stock in exchange for services......... 13 Issuance of common stock to officer.... 19 Deferred compensation.................. 11 Net loss............................... (3,934) -------- Balances at October 31, 1996........... (3,957) Exercise of options.................... 90 Issuance of stock for notes receivable from shareholders.................... -- Repurchase of common stock............. (5) Issuance of Series C Redeemable Convertible Preferred Stock, net of issuance costs of $49................ -- Issuance of Series D Redeemable Convertible Preferred Stock, net of issuance costs of $42................ -- Issuance of warrants related to leases and notes payable.................... -- Issuance of warrants................... -- Deferred compensation.................. 33 Net loss............................... (9,619) -------- Balances at October 31, 1997........... (13,458) Exercise of options.................... 55 Compensation charges................... 1,155 Deferred compensation.................. -- Amortization of deferred compensation......................... 7 Issuance of Series D Redeemable Convertible Preferred Stock, net of issuance costs of $98................ -- Issuance of stock for notes receivable from shareholders.................... -- Stock in exchange for services......... 41 Repurchase of common stock............. (44) Net loss............................... (15,111) -------- Balances at October 31, 1998........... (27,355) Exercise of options (unaudited)........ 285 Issuance of Series D Redeemable Convertible Preferred Stock (unaudited).......................... -- Issuance of stock for notes receivable from shareholders (unaudited)........ -- Compensation charges (unaudited)....... 80 Deferred compensation (unaudited)...... -- Amortization of deferred compensation (unaudited).......................... 1,377 Repurchase of common stock (unaudited).......................... (1) Net loss (unaudited)................... (2,687) -------- Balances at April 30, 1999 (unaudited).......................... $(28,301) ========
See accompanying notes. F-5 76 BROCADE COMMUNICATIONS SYSTEMS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ----------------------------- ----------------- 1996 1997 1998 1998 1999 ------- -------- -------- ------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................... $(3,934) $ (9,619) $(15,111) $(3,870) $(2,687) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................. 246 1,020 2,374 1,101 919 Loss on disposition of equipment.......................... -- 73 -- -- -- Noncash compensation expense.............................. 11 33 1,202 150 1,457 Forgiveness of founders' notes receivable................. 52 -- -- -- -- Changes in assets and liabilities Accounts receivable..................................... -- (2,646) (784) 1,287 (5,024) Inventories............................................. -- (471) (1,273) (4,711) (1,014) Prepaid expenses and other assets....................... (40) (140) 205 2 (1,734) Accounts payable........................................ 12 3,023 (45) 598 2,989 Accrued liabilities..................................... 10 1,167 1,836 1,014 468 Deferred revenue........................................ 250 285 9 (223) 3,358 ------- -------- -------- ------- ------- Net cash used in operating activities................. (3,393) (7,275) (11,587) (4,652) (1,268) ------- -------- -------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (1,518) (3,423) (3,775) (3,206) (1,048) Proceeds from disposition (purchases) of short-term investments............................................. -- (15,920) 15,920 15,920 -- ------- -------- -------- ------- ------- Net cash provided by (used in) investing activities... (1,518) (19,343) 12,145 12,714 (1,048) ------- -------- -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Line of credit borrowings................................. -- 500 1,672 -- -- Line of credit repayments................................. -- -- (500) -- (472) Payments on capital lease obligations..................... (155) (504) (677) (332) (405) Proceeds from capital lease financing..................... 1,340 1,258 -- -- -- Proceeds from notes payable............................... -- 1,091 2,594 1,087 247 Repayments of notes payable............................... -- (30) (693) -- (602) Proceeds from issuance of redeemable convertible preferred stock and warrants...................................... 3,202 26,070 4,902 4,902 1,512 Proceeds from issuance of common stock.................... 56 90 56 12 285 Repurchase of common stock................................ -- (5) (44) -- (1) ------- -------- -------- ------- ------- Net cash provided by financing activities............. 4,443 28,470 7,310 5,669 564 ------- -------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents........ (468) 1,852 7,868 13,731 (1,752) Cash and cash equivalents, beginning of period.............. 1,168 700 2,552 2,552 10,420 ------- -------- -------- ------- ------- Cash and cash equivalents, end of period.................... $ 700 $ 2,552 $ 10,420 $16,283 $ 8,668 ======= ======== ======== ======= ======= Supplemental disclosure of cash flow information Cash paid for interest.................................... $ 109 $ 351 $ 557 $ 261 $ 245 ======= ======== ======== ======= =======
See accompanying notes. F-6 77 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND OPERATIONS OF BROCADE Brocade Communications Systems, Inc. (Brocade) was incorporated on August 24, 1995 and provides network switches for deployment in storage area networks ("SANs"). Brocade's primary product line, SilkWorm, operates at gigabit speeds and is based on the Fibre Channel protocol. A SAN provides a networking environment for connecting a data center's servers and storage systems. Brocade sells its products and services primarily to original equipment manufacturers located in the United States. Brocade is subject to a number of business risks including, but not limited to, ability to obtain adequate financing to support growth, dependence on key individuals, dependence on key suppliers of integral component parts, competition from substitute products and larger companies and the need for the continued successful development, manufacturing, marketing and selling of its SAN switching products. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Unaudited Interim Financial Data The unaudited interim financial statements for the six months ended April 30, 1998 and 1999 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. Use of Estimates in Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash, Cash Equivalents and Short-term Investments For purposes of the statements of cash flows, cash and cash equivalents consist of investments with original maturities of less than three months, primarily commercial paper. During 1997, Brocade classified its short-term investments as held-to-maturity and carried them at amortized cost. At October 31, 1997, the fair value of Brocade's investments approximated amortized cost and, as such, unrealized holding gains and losses were insignificant. The fair value of Brocade's investments was determined based on quoted market prices at the reporting date for those instruments. Concentrations of Credit Risk Financial instruments that potentially subject Brocade to a concentration of credit risk principally consist of accounts receivable. Brocade generally does not require collateral on accounts receivable, as the majority of Brocade's customers are large, well established companies. Brocade provides reserves for F-7 78 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) credit losses and product sales returns. At October 31, 1997 and 1998 and April 30, 1999, approximately 99%, 76% and 58%, respectively, of accounts receivable was concentrated with four customers. Inventories Inventories are stated at the lower of cost or market, using the first in, first out method. Inventory costs include material, labor and overhead. Inventories consisted of the following, (in thousands):
OCTOBER 31, ------------------ APRIL 30, 1997 1998 1999 ------- ------- ----------- (UNAUDITED) Raw materials......................................... $158 $1,203 $1,074 Work-in-process....................................... 75 6 86 Finished goods........................................ 238 535 1,598 ---- ------ ------ $471 $1,744 $2,758 ==== ====== ======
Property and Equipment Property and equipment are stated at cost. Depreciation for all property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to four years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. Property and equipment consisted of the following, (in thousands):
OCTOBER 31, ------------------ APRIL 30, 1997 1998 1999 ------- ------- ----------- (UNAUDITED) Computers and equipment............................. $ 4,617 $ 8,186 $ 9,147 Leasehold improvements.............................. 196 345 363 Furniture and fixtures.............................. 377 434 503 Less: Accumulated depreciation and amortization..... (1,268) (3,642) (4,561) ------- ------- ------- $ 3,922 $ 5,323 $ 5,452 ======= ======= =======
Included in property and equipment are assets acquired under capital lease obligations with a cost and related accumulated amortization of approximately $2.6 million and $1.8 million, respectively, at October 31, 1998. Software Development Costs In accordance with Statement of Financial Accounting Standards (SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," Brocade capitalizes eligible computer software development costs upon the establishment of technological feasibility, which it has defined as completion of designing, coding and testing activities. For the years ended October 31, 1997 and October 31, 1998, and the six months ended April 30, 1998 and 1999, the amount of costs eligible for capitalization, after consideration of factors such as realizable value, were not material and, F-8 79 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) accordingly, all software development costs have been charged to research and development expense in the accompanying statements of operations. Accrued Liabilities Accrued liabilities consisted of the following, (in thousands):
OCTOBER 31, ---------------- APRIL 30, 1997 1998 1999 ------ ------ ----------- (UNAUDITED) Accrued warranty.................................. $ 751 $1,350 $1,323 Payroll, bonus, vacation.......................... 474 628 1,388 Accrued restructuring (see Note 5)................ -- 421 77 Other............................................. -- 662 741 ------ ------ ------ $1,225 $3,061 $3,529 ====== ====== ======
Stock-Based Compensation The Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. This accounting standard permits the use of either a fair value based method or the method defined in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") to account for stock-based compensation arrangements. Companies that elect to employ the valuation method provided in APB 25 are required to disclose the pro forma net income (loss) that would have resulted from the use of the fair value based method. Brocade has elected to continue to determine the value of stock-based compensation arrangements under the provisions of APB 25, and accordingly, it has included the pro forma disclosures required under SFAS No. 123 in Note 7. Revenue Recognition Product revenue is generally recognized when products are shipped. Revenue recognition is deferred for shipments to new customers where product returns cannot be reasonably estimated or significant support services are required to successfully launch the customer's product. These revenues are recognized when the customer has successfully integrated and launched its products and Brocade has met its support obligation. Allowances for warranty costs, credit losses and estimated future returns are provided for upon shipment. License revenue is related only to technology associated with certain application-specific integrated circuits ("ASICs") and is recognized when designs and specifications are delivered and collection is reasonably assured. Deferred revenues as of April 30, 1999 were approximately $3.9 million. F-9 80 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During fiscal 1997 and 1998, and the six months ended April 30, 1999, approximately 100%, 92%, and 92%, respectively, of Brocade's total revenues were derived from sales of its SilkWorm product. The percentage of sales to significant customers was as follows:
YEAR ENDED OCTOBER 31, SIX MONTHS ------------ ENDED 1997 1998 APRIL 30, 1999 ---- ---- -------------- (UNAUDITED) Customer A.................................................. 67% 72% 31% Customer B.................................................. 27% 11% 25% Customer C.................................................. -- 1% 15%
Computation of Basic Net Loss Per Share and Pro Forma Basic Net Loss Per Share Basic net loss per common share and diluted net loss per common share are presented in conformity with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," ("SFAS No. 128") for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net loss per common share as if such stock had been outstanding for all periods presented. To date, Brocade has not had any issuances or grants for nominal consideration. In accordance with SFAS No. 128, basic net loss per common share has been computed using the weighted-average number of shares of common stock outstanding during the period, less shares subject to repurchase. Basic pro forma net loss per common share, as presented in the statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. F-10 81 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SIX MONTHS ENDED YEAR ENDED OCTOBER 31, --------------------- -------------------------------- APRIL 30, APRIL 30, 1996 1997 1998 1998 1999 ------- ----------- -------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) Net loss....................................... $(3,934) $(9,619) $(15,111) $(3,870) $(2,687) ------- ------- -------- ------- ------- Basic and diluted: Weighted average shares of common stock outstanding.................................. 3,169 4,594 5,174 5,095 6,826 Less: Weighted average shares subject to repurchase................................... (2,755) (2,597) (1,774) (2,239) (2,069) ------- ------- -------- ------- ------- Weighted average shares used in computing basic and diluted net loss per common share........ 414 1,997 3,400 2,857 4,757 ======= ======= ======== ======= ======= Basic and diluted net loss per common share.... $ (9.50) $ (4.82) $ (4.44) $ (1.35) $ (.56) ======= ======= ======== ======= ======= Pro forma: Net loss..................................... $(15,111) $(2,687) ======== ======= Shares used above............................ 3,400 4,757 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited)... 14,218 14,362 -------- ------- Pro forma adjustment to reflect assumed exercise and conversion of preferred stock warrants to purchase 296,881 common shares in 1998 and 73,699 common shares in 1999 at an exercise price of $6.78 per share (unaudited)............................... 297 74 -------- ------- Shares used in computing pro forma basic and diluted net loss per common share (unaudited)............................... 17,915 19,193 ======== ======= Pro forma basic and diluted net loss per common share (unaudited).................. $ (.84) $ (.14) ======== =======
Brocade has excluded all convertible preferred stock, warrants for convertible preferred stock, outstanding stock options and shares subject to repurchase from the calculation of diluted net loss per common share because all such securities are antidilutive for all periods presented. The total number of shares excluded from the calculations of diluted net loss per common share were 10,895,629, 17,561,773, 19,506,313, and 20,035,513 for the years ended October 31, 1996, 1997 and 1998 and the six months ended April 30, 1999, respectively. See Notes 6 and 7 for further information on these securities. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"). SFAS No. 130 was adopted by Brocade beginning on November 1, 1997. This standard defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholder transactions. Comprehensive loss for each of the three years ended October 31, 1998 and the six months ended April 30, 1998 and 1999 approximated net loss. F-11 82 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) In June 1997, the Financial Accounting Standards Board also issued SFAS No. 131 "Disclosures About Segments of an Enterprise and Related Information." ("SFAS No. 131"). SFAS No. 131 was adopted by Brocade beginning on November 1, 1997. SFAS No. 131 establishes standards for disclosures about operating segments, products and services, geographic areas and major customers. Brocade is organized and operates as one operating segment, the design, development manufacturing, marketing and selling of SAN security products. Service revenues to date have not been significant. Brocade operates in one geographic area, the United States. Major customers are discussed above. In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," ("SOP No. 98-1"). SOP No. 98-1 requires entities to capitalize certain costs related to internal-use software once certain criteria have been met. Brocade adopted SOP 98-1 beginning on November 1, 1998. The adoption did not have a material impact on Brocade's financial position or results of operations. In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions," ("SOP 98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Brocade has not had significant software sales to date and management does not expect the adoption of SOP 98-9 to have a significant effect on the financial condition or results of operations. 3. LINE OF CREDIT AND DEBT In June 1997, Brocade entered into a revolving line of credit agreement with a bank under which it can borrow up to $4,000,000. The line of credit bears interest at the bank's prime rate (8.5% at April 30, 1999) and expires in August 1999. At April 30, 1999 there were borrowings of $1.2 million outstanding under the line of credit agreement. The line of credit agreement is secured by accounts receivable and inventories and contains certain financial covenants measured on a monthly basis. As of April 30, 1999, Brocade had approximately $2.6 million due to the same bank under an equipment loan agreement. The equipment loan agreement provides for borrowings of up to $5,000,000. Borrowings are secured by the related capital equipment, bear interest at the bank's prime rate plus 1.0% and are payable through June 30, 2002. As of April 30, 1999, principal payments of approximately $520,000, $783,000, $783,000 and $521,000, respectively, were due in fiscal years ending October 31, 1999, 2000, 2001 and 2002. Notes payable as of October 31, 1997 and 1998 and April 30, 1999 consisted of the following, (in thousands):
OCTOBER 31, ----------------- APRIL 30, 1997 1998 1999 ------ ------- ----------- (UNAUDITED) Note payable to bank..................................... $1,061 $ 2,962 $ 2,607 Less: Current portion.................................... (367) (1,231) (1,314) ------ ------- ------- Long-term portion........................................ $ 694 $ 1,731 $ 1,293 ====== ======= =======
F-12 83 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. COMMITMENTS AND CONTINGENCIES Brocade leases its facilities under operating lease agreements expiring through November 2000. The leases require that Brocade pay all costs of maintenance, utilities, insurance and taxes. Rent expense for the years ended October 31, 1996, 1997 and 1998 was $110,509, $495,475 and $804,057 respectively. Brocade leases computers, office equipment and furniture under long-term lease agreements that are classified as capital leases. The leases expire through January 2001 and require a final buyout payment at the end of the lease term. Future minimum lease payments, including the buyout payments, at October 31, 1998 were as follows:
OPERATING CAPITAL YEAR ENDED OCTOBER 31, LEASES LEASES ---------------------- --------- ------- (IN THOUSANDS) 1999........................................................ $ 792 $ 926 2000........................................................ 847 476 2001........................................................ -- 42 ------ ------ Total minimum lease payments................................ $1,639 1,444 ====== ====== Less: Imputed interest (15.27% -- 17.65%)................... (182) Present value of payments under capital leases.............. 1,262 Less: Current portion....................................... (784) ------ Long-term capital lease obligations......................... $ 478 ======
Brocade's former contract manufacturer has filed suit against Brocade, alleging that Brocade is liable for breaching certain contracts with the contract manufacturer. The suit claims damages in excess of $3.0 million plus interest, an unspecified amount of consequential and incidental damages, costs and attorneys' fees. Brocade has filed a cross complaint against the contract manufacturer for various credits Brocade claims on its account with the contract manufacturer. It is management's opinion that any liability on Brocade's account is limited to accrued and unpaid invoices totaling approximately $900,000 and that this $900,000 is subject to the various offsets Brocade claims in its cross-complaint. Brocade is subject to various claims which arise in the normal course of business. In the opinion of management, the ultimate disposition of these claims will not have a material adverse effect on the financial position of Brocade. 5. RESTRUCTURING OF OPERATIONS In the third quarter of 1998, Brocade initiated a plan to restructure its operations to reduce its break even revenue level. The Plan was developed by management and approved by the Board of Directors with the expectation that changes in certain programs and arrangements, with related head count reductions, would immediately reduce operating expenses and improve cash flows. Accordingly, in quarters subsequent to July 31, 1998, costs were more reasonable in relation to current revenue levels. The Plan included the termination of the former Chief Executive Officer for $1.1 million, the cancellation and abandonment of two research and development projects, one to develop a 64-port fibre channel switch and another to develop storage area network simulation for a total of $300,000, a change in contract manufacturer arrangements for $1.2 million, and a reduction in labor force throughout the Company for F-13 84 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RESTRUCTURING OF OPERATIONS (CONTINUED) $550,000. In connection with this plan, Brocade recorded the $3.2 million charge to operating expenses as follows: $1.3 million is included in cost of revenue, $700,000 is included in research and development expense and $1.2 million is included in general and administrative expense in the 1998 statement of operations. The restructuring charge includes $1.7 million of employee related expenses for 20 employee terminations (8 manufacturing employees, 4 research and development employees and 8 employees from other departments in the Company), including severance of Brocade's former Chief Executive Officer, $1.2 million for the write-off of excess or abandoned equipment (specifically tooling and fixtures) and inventories related to discontinued and newly established contract manufacturer arrangements, and $300,000 for write-offs of other abandoned tangible and intangible assets and facilities in Southern California related to cancelled new product development and simulation projects. Employees were formally notified of their termination beginning on July 31, 1998 and continuing through August 4, 1998. The lay-offs of 17 employees were immediate. The remainder of the layoffs occurred through January 31, 1999. As of April 30, 1999, Brocade had incurred costs totaling $3.1 million related to the restructuring. The remaining actions are expected to be completed within one year from the date the restructuring plan was initiated. Accrued liabilities at April 30, 1999 include $77,000 in remaining but unpaid employee related expenses. 6. PREFERRED STOCK Redeemable Convertible Preferred Stock In August 1995, Brocade issued 1,425,000 shares of its Series A Redeemable Convertible Preferred Stock ("Series A"). In June 1996, Brocade issued 816,250 shares of its Series B Redeemable Convertible Preferred Stock ("Series B"). In December 1996, Brocade issued 3,333,333 shares of its Series C Redeemable Convertible Preferred Stock ("Series C"). In fiscal years 1997, 1998 and the six months ended April 30, 1999 Brocade issued 2,795,848 shares, 865,052 shares and 223,182 shares, respectively, of its Series D Redeemable Convertible Preferred Stock ("Series D"). The rights with respect to Series A, Series B, Series C and Series D are as follows: Redemption. At the request of the holders of the majority of voting power of the then outstanding preferred stock any time after August 28, 2002, Brocade shall, to the extent funds are legally available, redeem the preferred stock in increments over a three-year period. In such event, Brocade shall pay $1.00 per share for Series A, $4.00 per share for Series B, $3.00 per share for Series C and $5.78 for Series D plus any declared but unpaid dividends. Voting. Each share of Series A, Series B, Series C and Series D has voting rights equal to an equivalent number of shares of common stock into which it is convertible. Dividends. Holders of Series A, Series B, Series C and Series D are entitled to receive noncumulative dividends when and as declared by the Board of Directors at a rate of $0.08, $0.32, $0.24 and $0.46 per share, respectively, per annum. After payment of such dividends, any additional dividends declared will be paid to the holders of common stock and preferred stock in such amount as they would be entitled to receive if their shares had been converted into shares of common stock. No dividends have been declared. Liquidation. In the event of any liquidation, dissolution or winding up of Brocade, including a merger or sale of all or substantially all of the assets, the holders of Series A, Series B, Series C and F-14 85 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. PREFERRED STOCK (CONTINUED) Series D are entitled to receive pari passu a distribution of $1.00, $4.00, $3.00 and $5.78 per share, respectively, plus any declared but unpaid dividends prior to and in preference to any distribution to the holders of common stock. The remaining assets, if any, shall be distributed ratably among the holders of the common stock, Series A, Series B, Series C and Series D, based on the number of shares held (assuming conversion of the Series A, Series B, Series C and Series D). Conversion. Each share of Series A, Series B, Series C and Series D is convertible into common stock, at the holder's option or upon the consent of the holders of a majority of the then outstanding Series A, Series B, Series C and Series D shares voting as a single class. The Series A, Series B, Series C and Series D shares are initially convertible into common stock at a ratio of four for one, two for one, one for one and one for one, respectively. The conversion rates are protected by certain anti-dilution provisions. No adjustment in the future conversion price of Series A, Series B, Series C or Series D shall be made for the issuance of additional shares of common stock other than for a common stock split, dividend, or distribution unless at the time of issuance of the common stock the price per share for additional shares of common stock issued is less than the conversion price in effect for the Series A, Series B, Series C and Series D, respectively. The Series A, Series B, Series C and Series D shares will automatically convert into common stock upon the closing of a public offering having an aggregate public offering price of at least $10,000,000. Warrants Since inception, Brocade has issued warrants to purchase an aggregate of 51,197, 17,500 and 48,000 shares of Series A, Series B and Series C, respectively. These warrants were issued in connection with equipment and facilities lease agreements. Exercise prices range from $1.00 to $4.50 per share. The warrants are exercisable at various dates through 2002. In connection with the initial sale and issuance of Series D, investors were issued warrants to purchase 10% of the number of Series D shares purchased by each investor at an exercise price of $6.78 per share. The total number of shares of Series D purchasable upon exercise of these warrants was 296,881. During the six months ended April 30, 1999, there were 223,182 of these warrants exercised at an exercise price of $6.78 per share. Pro Forma Shareholders' Deficit In January 1999, the Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its common stock in connection with a proposed initial public offering ("IPO"). If the IPO is consummated under the terms presently anticipated, (1) all of the currently outstanding preferred stock will be converted into 14,549,915 shares of common stock upon the closing of the IPO and (2) warrants to purchase 73,699 shares of Series D with an exercise price of $6.78 per share will be exercised and converted into 73,699 shares of common stock prior to the effective date of the IPO. The effect of the conversion and exercise of warrants has been reflected as unaudited pro forma shareholders' equity in the accompanying balance sheet as of April 30, 1999. F-15 86 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMON STOCK At April 30, 1999, Brocade had reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of outstanding Series A.......................... 5,700,000 Conversion of outstanding Series B.......................... 1,632,500 Conversion of outstanding Series C.......................... 3,333,333 Conversion of outstanding Series D.......................... 3,884,082 Conversion of warrants outstanding.......................... 361,487 Stock option plans.......................................... 2,775,477 ---------- 17,686,879 ==========
Deferred Compensation In connection with the grant of certain stock options to employees during the year ended October 31, 1998 and the six months ended April 30, 1999, Brocade recorded deferred compensation of approximately $307,000 and $5.1 million, respectively, representing the difference between the deemed value of the common stock for accounting purposes and the option exercise price of such options at the date of grant. Such amount is presented as a reduction of stockholders' equity and amortized ratably over the vesting period of the applicable options. Approximately $7,000 and $1.4 million was expensed during the year ended October 31, 1998 and the six months ended April 30, 1999, respectively, and the balance will be expensed ratably over the period the options vest. Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder's services. No compensation expense related to any other periods presented has been recorded. Stock Options Brocade, under various stock option plans (the "Plans"), grants stock options for shares of common stock to employees, directors and consultants of Brocade. In accordance with the Plans, the stated exercise price shall not be less than 85% of the estimated fair market value of common stock on the date of grant. Incentive Stock Options ("ISOs") may not be granted at less than 100% of the estimated fair market value of the common stock and stock options granted to a person owning more than 10% of the combined voting power of all classes of stock of Brocade must be issued at 110% of the fair market value of the stock on the date of grant. The Plans provide that the options shall be exercisable over a period not to exceed ten years, and the options generally vest over a period of four years. The options typically vest 25% one year after the date of grant and the remaining shares vest in equal monthly amounts over the following 36 months. At April 30, 1999, an aggregate of 348,080 shares were available for future option grants under all of the Plans. F-16 87 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMON STOCK (CONTINUED) Brocade accounts for the Plans under APB No. 25 whereby the difference between the exercise price and the fair value at the date of grant is recognized as compensation expense. Had compensation expense for the stock option plans been determined consistent with SFAS No. 123, net losses would have increased to the following pro forma amounts, (in thousands except per share data):
SIX MONTHS YEAR ENDED OCTOBER 31, ENDED ------------------------------ APRIL 30 1996 1997 1998 1999 ------- ------- -------- ----------- (UNAUDITED) Net loss as reported........................ $(3,934) $(9,619) $(15,111) $(2,687) Net loss Pro Forma.......................... $(3,945) $(9,666) $(15,522) $(3,098) Net loss per share as reported.............. $ (4.44) $ (.56) Net loss per share Pro Forma................ $ (4.57) $ (.65)
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1996, 1997, 1998 and the six months ended April 30, 1999, respectively: risk-free interest rate of 5.54 to 6.50, 5.71 to 6.63, 5.58 to 5.86 and 4.38 to 5.00 percent; expected dividend yields of zero percent for all four periods; expected life of .5 years beyond vesting for all four periods; and expected volatility of .0001% percent for all periods except the six months ended April 30, 1999, for which a volatility factor of 60% was used. The following table summarizes stock option plan activity under all of the Plans:
YEAR ENDED YEAR ENDED OCTOBER 31, 1996 OCTOBER 31, 1997 ---------------------------- ---------------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------- -------------- ----------- -------------- Outstanding at beginning of year...... -- -- 584,000 $ .19 Granted............................. 2,149,400 $ .09 1,315,500 $ .34 Exercised........................... (1,565,400) $ .03 (630,666) $ .26 Cancelled........................... -- -- (213,667) $ .22 ----------- ----------- Outstanding at end of year............ 584,000 $ .19 1,055,167 $ .33 =========== =========== Exercisable at end of year............ -- -- 36,234 $ .22 Weighted fair value per share......... $ .0100 $ .0522 =========== ===========
F-17 88 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. COMMON STOCK (CONTINUED)
YEAR ENDED SIX MONTHS ENDED OCTOBER 31, 1998 APRIL 30, 1999 ---------------------------- ---------------------------- (UNAUDITED) WEIGHTED WEIGHTED AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ----------- -------------- ----------- -------------- Outstanding at beginning of period.... 1,055,167 $ .33 3,522,914 $1.85 Granted............................. 3,154,912 $2.19 1,686,612 $3.88 Exercised........................... (425,570) $1.04 (2,645,034) $2.41 Cancelled........................... (261,595) $1.06 (137,095) $1.71 ----------- ----------- Outstanding at end of period.......... 3,522,914 $1.85 2,427,397 $2.65 =========== =========== Exercisable at end of period.......... 465,807 $1.52 298,098 $3.22 Weighted fair value per share......... $ .3023 $ 1.46 =========== ===========
During the six months ended April 30, 1999, the Board of Directors granted options to purchase 330,000 shares at a price of $5.00 per share. These grants were not part of the above plans and are included in the stock option table above.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ------------------------------------------------------------------------------ -------------------- (UNAUDITED) WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE APRIL 30, 1999 REMAINING AVERAGE EXERCISE RANGE OF EXERCISE PRICES NUMBER YEARS EXERCISE PRICE NUMBER PRICE - -------------------------------------- --------- --------- -------------- -------- --------- $0.200 - $1.800....................... 570,077 7.60 $0.73 73,044 $1.01 $2.250 - $7.000....................... 1,857,320 9.49 $3.24 225,054 $3.93 --------- ------- $0.200 - $7.000....................... 2,427,397 9.05 $2.65 298,098 $3.22 ========= =======
At April 30, 1999, 2,545,770 shares issued upon exercise of stock options with a weighted average exercise price of $2.33 and 150,944 shares issued to founders with a weighted average exercise price of $.025 were subject to repurchase by Brocade. F-18 89 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES Brocade accounts for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). A valuation allowance has been recorded for the total deferred tax assets as a result of uncertainties regarding realization of the assets based upon the limited operating history of Brocade, the lack of profitability to date and the uncertainty of future profitability. The components of net deferred tax assets are as follows (in thousands):
OCTOBER 31, ------------------- 1997 1998 ------- -------- Net operating loss carryforwards............................ $ 4,600 $ 8,100 Tax credit carryforwards.................................... 700 1,400 Capitalized startup costs................................... 300 300 Reserves and accruals....................................... 300 2,200 Capitalized research expenditures........................... -- 700 ------- -------- Total deferred tax assets................................. 5,900 12,700 Less: Valuation allowance................................... (5,900) (12,700) ------- -------- Net deferred tax assets................................... $ -- $ -- ======= ========
As of October 31, 1998, Brocade had federal net operating loss carryforwards of approximately $22.1 million and state net operating loss carryforwards of approximately $10.0 million. The federal net operating loss and other tax credit carryforwards expire on various dates beginning on 2010 through 2018. The state net operating loss carryforwards will expire beginning in 2003. Under current tax law, net operating loss and credit carryforwards available to offset future income in any given year may be limited upon the occurrence of certain events, including significant changes in ownership interests. 9. RELATED PARTY TRANSACTIONS During fiscal 1997, fiscal 1998, and the six months ended April 30, 1999, Brocade sold 250,000, 225,000 and 2.3 million shares, respectively, of its common stock to officers and a director of Brocade in consideration for full recourse promissory notes in the aggregate amount of $6.5 million. Should the officers terminate employment, these shares are subject to a right of repurchase by Brocade. The right of repurchase lapses over a four year period. The notes bear interest at various rates ranging from 4.47% to 6.5% per annum and mature at various dates through April 2006. F-19 90 BROCADE COMMUNICATIONS SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. SUBSEQUENT EVENTS Reincorporation, Amendment to the Articles of Incorporation In March 1999, Brocade's Board of Directors authorized the reincorporation of Brocade in the State of Delaware. This reincorporation was effective May 14, 1999. In connection with the reincorporation, Brocade is authorized to issue 50,000,000 shares of common stock, $.001 par value and 5,000,000 shares of undesignated preferred stock, $.001 par value. 1999 Employee Stock Purchase Plan In March 1999, the Board of Directors approved the adoption of Brocade's 1999 Employee Stock Purchase Plan (the "Purchase Plan"), and Brocade's shareholders approved the Purchase Plan in April 1999. A total of 200,000 shares of common stock have been reserved for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase shares of common stock through payroll deductions at 85% of the fair market value of the common stock, as defined in the Purchase Plan. 1999 Stock Plan In March 1999, the Board of Directors approved Brocade's 1999 Stock Plan (the "1999 Plan") and Brocade's shareholders approved the 1999 Plan in April 1999. The 1999 Plan provides for the grant of incentive stock options to employees. A total of 300,000 shares of common stock have been reserved for issuance under the 1999 Plan. 1999 Director Option Plan In March 1999, the Board of Directors approved the 1999 Director Option Plan (the "Director Plan") and Brocade's shareholders approved the Director Plan in April 1999. The Director Plan provides for the grant of common stock to non-employee directors. A total of 200,000 shares of common stock have been reserved for issuance under the Director Plan. F-20 91 (THIS PAGE INTENTIONALLY LEFT BLANK) 92 APPENDIX -- DESCRIPTION OF GRAPHICS GATEFOLD Graphic: Illustration of the Brocade Fabric. Caption: Current problem: Bottleneck in One-to-One Storage and Server Connectivity. Caption: The Brocade Solution: The BROCADE Fibre Channel Switched Fabric enables Any-to-Any Storage and Server Area Networking (SAN) Credits: Logos of the following companies: Compaq, Dell, StorageTek, McDATA, Cravel, Sequent 93 [BROCADE LOGO] 94 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth all expenses to be paid by the Registrant, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the registration fee.
AMOUNT TO BE PAID --------- SEC registration fee........................................ $ 17,664 NASD filing fee............................................. 5,000 Nasdaq National Market listing fee.......................... 90,000 Blue sky qualification fees and expenses.................... 5,000 Printing and engraving expenses............................. 175,000 Legal fees and expenses..................................... 300,000 Accounting fees and expenses................................ 250,000 Transfer agent and registrar fees........................... 10,000 Miscellaneous expenses...................................... 22,336 -------- $875,000 ========
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to officers, directors and other corporate agents under certain circumstances and subject to certain limitations. The Registrant's Certificate of Incorporation and Bylaws provide that the Registrant shall indemnify its directors, officers, employees and agents to the full extent permitted by the Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, the Registrant intends to enter into separate indemnification agreements with its directors, officers and certain employees which would require the Registrant, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. The Registrant also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreement to be entered into between the Registrant and its officers and directors may be sufficiently broad to permit indemnification of the Registrant's officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement provides for indemnification by the underwriters of the Registrant and its officers and directors for certain liabilities arising under the Securities Act, or otherwise. II-1 95 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Since inception, we have issued and sold and issued the following unregistered securities: 1. On August 25, 1995, we sold 523,250 shares of our common stock to Kumar Malavalli, Paul R. Bonderson, Jr. and Seth D. Neiman, the founders of the Company, for an aggregate purchase price of $52,325. 2. From inception through April 30, 1999, we granted stock options to purchase an aggregate of 7,976,424 shares of our common stock at exercise prices ranging from $.025 to $7.00 per share to employees, consultants, directors and other service providers pursuant to our 1995 Equity Incentive Plan, our 1998 Equity Incentive Plan and our 1998 Executive Equity Incentive Plan. 3. From inception through April 30, 1999, we issued and sold an aggregate of 4,531,523 shares of our common stock to employees, consultants, directors and other service providers for aggregate consideration of approximately $5,375,591 pursuant to exercise of options granted under our 1995 Equity Incentive Plan, our 1998 Equity Incentive Plan and our 1998 Executive Equity Incentive Plan. 4. On August 28, 1995, we sold 1,425,000 shares of Series A Preferred Stock for $1.00 per share to a group of private investors for an aggregate purchase price of $1,425,000. 5. On December 26, 1995 and October 3, 1996, we issued two warrants to an equipment lease financing company to purchase 35,444 and 15,753 shares of our Series A Preferred Stock at exercise prices of $4.50 and $1.00 per share, respectively. 6. On June 5, 1996, we sold 386,764 shares of our common stock, for $.05 per share to Bruce L. Bergman, the former President and Chief Executive Officer of Brocade, for an aggregate purchase price of $19,338.20. 7. On June 17, 1996, we sold 816,250 shares of our Series B Preferred Stock for $4.00 per share to a group of private investors for an aggregate purchase price of $3,265,000. 8. On July 16, 1996, we issued 32,813 shares of Common Stock at $.05 per share to a then-current officer of Brocade as partial commission in connection with the Series B Preferred Stock financing. 9. On September 11, 1996, we issued a warrant to an equipment lease financing company to purchase 17,500 shares of our Series B Preferred Stock at an exercise price of $4.00 per share. 10. On August 26, 1996, in connection with the lease of office space, we issued a warrant to a real property lessor to purchase 3,000 shares of our Series C Preferred Stock at an exercise price of $3.00 per share. 11. On December 6, 1996, we sold 3,333,333 shares of our Series C Preferred Stock at $3.00 per share to a group of private investors for an aggregate purchase price of $9,999,999. 12. On May 6, 1997, in connection with a sublease agreement, we issued a warrant to a sublessor of real property to purchase 20,000 shares of our Series C Preferred Stock at an exercise price of $3.00 per share. 13. On June 13, 1997, in connection with a combined line of credit and equipment lease, we issued a warrant to a bank to purchase 25,000 shares of our Series C Preferred Stock at an exercise price of $3.00 per share. II-2 96 14. On September 29, 1997, November 17, 1997 and December 3, 1997, we sold 3,660,900 shares of our Series D Preferred Stock for $5.78 per share to a group of private investors for an aggregate purchase price of $21,160,002. In addition, in connection with the Series D financing, we issued warrants to purchase an aggregate of 296,881 shares of our Series D Preferred Stock at an exercise price of $6.78 per share of which 223,182 have been exercised as of April 30, 1999. 15. On July 13, 1998, we issued 18,000 shares of Common Stock at $2.25 per share as partial compensation for the recruitment of the Company's new president. 16. On April 1, 1999, we issued and sold an aggregate of 330,000 shares of our common stock at $5.00 per share to an officer pursuant to a nonqualified stock option. For additional information concerning these equity investment transactions, reference is made to the information contained under the caption "Certain Transactions" in the form of prospectus included herein. The sales of the above securities were deemed to be exempt from registration in reliance on Rule 701 promulgated under Section 3(b) under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation, or in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. All recipients either received adequate information about Brocade or had access, through employment or other relationships, to such information. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Articles of Incorporation of the Registrant. 3.2** Form of Amended and Restated Certificate of Incorporation to be effective on the closing of the offering made pursuant to this Registration Statement. 3.3** Bylaws of the Registrant. 3.4** Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 4.1** Form of Registrant's Common Stock certificate. 4.2** Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.3** First Amended and Restated Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.4** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.5** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Mason Calle De Luna L.P. 4.6** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Symmetricom, Inc. 4.7** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Imperial Bank. 4.8** Seventh Amended and Restated Investors' Rights Agreement dated December 3, 1997. 5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
II-3 97
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.1** Form of Indemnification Agreement to be entered into by the Registrant with each of its directors and executive officers. 10.2** 1995 Equity Incentive Plan and forms of agreements thereunder. 10.3** 1998 Equity Incentive Plan and forms of agreements thereunder. 10.4** 1998 Executive Equity Incentive Plan and forms of agreements thereunder. 10.5** 1999 Employee Stock Purchase Plan. 10.6** 1999 Director Option Plan and form of agreement thereunder. 10.7** 1999 Stock Plan and forms of agreements thereunder. 10.8** Sublease between Symmetricom, Inc. and the Registrant dated May 6, 1997. 10.9** Security and Loan Agreement between the Registrant and Imperial Bank dated June 19, 1997. 10.10** Amendment to Loan Documents between the Registrant and Imperial Bank dated January 30, 1998. 10.11** Second Amendment to Loan Documents between the Registrant and Imperial Bank dated August 17, 1998. 10.12** Third Amendment to Loan Documents between the Registrant and Imperial Bank dated December 15, 1998. 10.13** Master Equipment Lease Agreement between Venture Lending & Leasing, Inc. and the Registrant dated September 5, 1996. 10.14+ Master Purchase Agreement between Dell Products L.P. and the Registrant dated November 1, 1998. 10.15+ Purchase Agreement between Sequent Computer Systems, Inc. and the Registrant. 10.16**+ Supplement No. 1 to Purchase Agreement between Sequent Computer Systems, Inc. and the Registrant dated September 26, 1997. 10.17+ OEM Agreement between Storage Technology Corporation and the Registrant dated May 1, 1998. 10.18+** Acknowledgement between Wind River Systems, Inc. and the Registrant, dated April 22, 1999. 10.19** Confidential Agreement and General Release of Claims between Bruce J. Bergman, The Bergman Family Trust and the Registrant dated September 23, 1998. 10.20** Letter Agreement with Michael J. Byrd dated April 5, 1999. 10.21+** OEM and License Agreement between Brocade Communications Systems, Inc. and McDATA Corporation, dated April 27, 1999. 16.1** Letter of PricewaterhouseCoopers LLP, Independent Accountants. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants 23.2** Consent of Counsel (included in Exhibit 5.1.). 24.1** Power of Attorney (see page II-6 of the Registration Statement). 27.1** Financial Data Schedule.
- ------------------------- ** Previously filed. + Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission. (b) FINANCIAL STATEMENT SCHEDULES. Schedule II -- Valuation and Qualifying Accounts....... S-2
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or notes thereto. II-4 98 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification by the Registrant for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 14 above or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-5 99 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of San Jose, County of Santa Clara, State of California, on the 20th day of May 1999. BROCADE COMMUNICATIONS SYSTEMS, INC. By: /s/ GREGORY L. REYES ------------------------------------ Gregory L. Reyes President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- * Chairman of the Board May 20, 1999 ------------------------------------------ Seth D. Neiman /s/ GREGORY L. REYES President and Chief Executive Officer May 20, 1999 ------------------------------------------ (Principal Executive Officer) Gregory L. Reyes /s/ MICHAEL J. BYRD Vice President, Finance and Chief May 20, 1999 ------------------------------------------ Financial Officer (Principal Michael J. Byrd Financial and Accounting Officer) Director ------------------------------------------ Neal Dempsey * Director May 20, 1999 ------------------------------------------ Mark Leslie * Director May 20, 1999 ------------------------------------------ Larry W. Sonsini
* Power of Attorney By: /s/ GREGORY L. REYES -------------------------------------------------- Gregory L. Reyes II-6 100 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders of Brocade Communications Systems, Inc. We have audited, in accordance with generally accepted auditing standards, the financial statements of Brocade Communications Systems, Inc. included in this Registration Statement and have issued our report thereon dated November 24, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP San Jose, California November 24, 1998 S-1 101 BROCADE COMMUNICATIONS SYSTEMS, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN B COLUMN C COLUMN D COLUMN E ----------- ---------- ---------- -------- COLUMN A BALANCE AT CHARGED TO BALANCE - -------------------------------------------- BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR - -------------------------------------------- ----------- ---------- ---------- -------- Year ended October 31, 1996: Allowance for doubtful accounts............. $ -- $ -- $ -- $ -- Year ended October 31, 1997: Allowance for doubtful accounts............. $ -- $ 100,000 $ -- $100,000 Year ended October 31, 1998: Allowance for returns and doubtful accounts.................................. $100,000 $ 185,000 $ -- $285,000 Year ended October 31, 1998: Restructuring Accrual....................... $ -- $3,200,000 $2,779,000(1) $421,000
(1) This amount includes $300,000 in cash severance payments, $1,000,000 in noncash compensation charges related to stock severance arrangements and $1,500,000 in asset write-offs. S-2 102 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 1.1** Form of Underwriting Agreement. 3.1** Amended and Restated Articles of Incorporation of the Registrant. 3.2** Form of Amended and Restated Certificate of Incorporation to be effective on the closing of the offering made pursuant to this Registration Statement. 3.3** Bylaws of the Registrant. 3.4** Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement. 4.1** Form of Registrant's Common Stock certificate. 4.2** Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.3** First Amended and Restated Warrant to purchase shares of Series A Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.4** Warrant to purchase shares of Series B Preferred Stock of the Registrant issued to Venture Lending & Leasing, Inc. 4.5** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Mason Calle De Luna L.P. 4.6** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Symmetricom, Inc. 4.7** Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Imperial Bank. 4.8** Seventh Amended and Restated Investors' Rights Agreement dated December 3, 1997. 5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation. 10.1** Form of Indemnification Agreement to be entered into by the Registrant with each of its directors and executive officers. 10.2** 1995 Equity Incentive Plan and forms of agreements thereunder. 10.3** 1998 Equity Incentive Plan and forms of agreements thereunder. 10.4** 1998 Executive Equity Incentive Plan and forms of agreements thereunder. 10.5** 1999 Employee Stock Purchase Plan. 10.6** 1999 Director Option Plan and form of agreement thereunder. 10.7** 1999 Stock Plan and forms of agreements thereunder. 10.8** Sublease between Symmetricom, Inc. and the Registrant dated May 6, 1997. 10.9** Security and Loan Agreement between the Registrant and Imperial Bank dated June 19, 1997. 10.10** Amendment to Loan Documents between the Registrant and Imperial Bank dated January 30, 1998. 10.11** Second Amendment to Loan Documents between the Registrant and Imperial Bank dated August 17, 1998. 10.12** Third Amendment to Loan Documents between the Registrant and Imperial Bank dated December 15, 1998. 10.13** Master Equipment Lease Agreement between Venture Lending & Leasing, Inc. and the Registrant dated September 5, 1996. 10.14+ Master Purchase Agreement between Dell Products L.P. and the Registrant dated November 1, 1998. 10.15+ Purchase Agreement between Sequent Computer Systems, Inc. and the Registrant. 10.16**+ Supplement No. 1 to Purchase Agreement between Sequent Computer Systems, Inc. and the Registrant dated September 26, 1997.
103
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10.17+ OEM Agreement between Storage Technology Corporation and the Registrant dated May 1, 1998. 10.18+** Acknowledgement between Wind River Systems, Inc. and the Registrant, dated April 22, 1999. 10.19** Confidential Agreement and General Release of Claims between Bruce J. Bergman, The Bergman Family Trust and the Registrant dated September 23, 1998. 10.20** Letter Agreement with Michael J. Byrd dated April 5, 1999. 10.21**+ OEM and License Agreement between Brocade Communications Systems, Inc. and McDATA Corporation, dated April 27, 1999. 16.1** Letter of PricewaterhouseCoopers LLP, Independent Accountants. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2** Consent of Counsel (included in Exhibit 5.1.). 24.1** Power of Attorney (see page II-6 of the Registration Statement). 27.1** Financial Data Schedule.
- ------------------------- ** Previously filed. + Confidential treatment requested as to certain portions, which portions are omitted and filed separately with the Securities and Exchange Commission. EX-10.14 2 MASTER PURCHASE AGREEMENT DATED NOVEMBER 1, 1998 1 EXHIBIT 10.14 This Master Purchase Agreement (this "Agreement") by and between Brocade Communications Systems, Inc. ("BROCADE(R)"), a corporation registered in California and located for the purposes of this Agreement at 1901 Guadalupe Parkway, San Jose, California 95131 and Dell Products L.P., a Texas limited partnership ("Dell") located at One Dell Way, Round Rock, Texas 78682, is effective as of November 1, 1998 ("Effective Date"). Dell Computer Corporation ("DCC") and any of its corporate subsidiaries or Affiliates may purchase Products (as defined hereafter) and enjoy the benefits of this Agreement, but all liabilities and obligations incurred by Dell, DCC, or any of DCC's subsidiaries or Affiliates under this Agreement will be the sole responsibility of Dell. This Master Purchase Agreement and its Schedules are hereinafter collectively referred to as the "Agreement." 1.0 Introduction This Agreement sets forth the only terms and conditions under which Dell shall purchase products from BROCADE. For the purpose of this Agreement, products include any software and/or documentation that accompany the products (hereinafter collectively referred to as "Products"). The terms and conditions of this Agreement shall apply to all purchase orders ("Dell PO(s)") issued by Dell for the purchase of Products. In the event of any conflict between the terms of Dell PO(s) or BROCADE order acknowledgment(s) and this Agreement, the terms of this Agreement will prevail. Any additional terms contained in Dell PO(s) or BROCADE order acknowledgment(s) shall not be binding unless accepted by the other party in writing. 2.0 Term and Termination The initial term of this Agreement shall be three (3) years beginning on the Effective Date. This Agreement will automatically renew for additional one-year terms unless one party informs the other of its intent to let the Agreement expire at least one hundred and twenty (120) days before the end of the then current term. Either party may terminate this Agreement upon written notice based on the material breach of the other party, provided that the party alleged to be in material breach receives thirty (30) days written notice stating the cause and an additional thirty (30) days to cure. 3.0 Price 3.1 The initial price for each Product purchased hereunder shall be agreed to by the parties and included in the applicable Schedule. The unit price for each Product will be reviewed on a quarterly basis or as otherwise required by Dell as a result of competitive pressures in quarterly business review meetings ("QBRs"). Product prices shall not be increased unless mutually agreed to by the parties. If prices are changed, the applicable Schedule shall be updated to reflect the new price. Worldwide prices will be negotiated between BROCADE and Dell Worldwide Procurement at Dell's corporate headquarters in Austin, Texas. 3.2 Dell expects material cost reductions to be worked aggressively by BROCADE. BROCADE shall review with Dell, on an ongoing basis, a value chain analysis for each Product and all costs associated with manufacturing each Product. Brocade shall deliver to Dell an [*] for each [*] sold to Dell under this Agreement. Each such [*] shall be deemed to be Brocade's Confidential Information in accordance with the terms of the Non-Disclosure Agreement in effect between the parties ("NDA Agreement"). Notwithstanding the foregoing, Brocade expressly authorizes Dell to provide Solectron (and any other contract manufacturer for the Products utilized by Brocade during the term of this Agreement) with copies of such [*] for the sole purpose of discussing [*] with Solectron (and any other contract manufacturer for the Products utilized by Brocade during the term of this Agreement); provided, that Dell shall ensure that any such disclosure (and the discussions relating thereto) are protected by a non-disclosure agreement that is substantially as protective of BROCADE's rights in such information as the NDA Agreement. Dell and Brocade agree to [*] all [*] realized through either BROCADE's or Dell's efforts. The [*] will be effective upon realization of the new [*] of the [*] and as Product is consumed from the [*] on a first-in first-out (FIFO) basis. All prices shall be in United States dollars. Prices set forth in this Agreement include all charges for Product(s) except for [*] charges. Dell shall pay all such [*] charges to the extent such charges are listed as a separate line item in BROCADE's invoices. Dell shall not be responsible for any duties, fees, taxes or other charges (i) that BROCADE fails to disclose on its on invoices for Product(s), (ii) which are imposed on BROCADE's net income, or (iii) for which Dell has submitted an appropriate exemption certificate or other equivalent documentation for taxing jurisdictions outside of the United States ("Exemption Documentation"). Dell shall pay BROCADE all additional taxes that result from any failure by Dell to provide appropriate Exemption Documentation. Additionally, it is necessary for Dell to determine its business exposure resulting from the volatility of some foreign 2 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2 currencies. The currency content from the various elements of Product cost are required. To the extent available from BROCADE's third party contract manufacturer, this currency content shall be broken out by labor, material, overhead and profit as a percentage of the total Product cost. BROCADE shall use commercially reasonable efforts to provide a complete currency content analysis for 'A' items on a quarterly basis. A typical example of a currency analysis for a component purchased from a Korean company, manufactured in Taiwan, using Japanese, Korean and Malaysian components might show foreign content in at least four (4) currencies, as follows:
Element Currency Content - ------- ---------------- Material Japanese yen (15%), Korean Won (12%) and Malaysian Ringgit (32%) Labor and Overhead New Taiwan Dollar (12%) Profit Korean Won (55%)
3.3 BROCADE represents and warrants that the prices for Products shall not be less favorable than prices applicable to sales by BROCADE to any other customer purchasing like quantities of substantially comparable products. If at any time during the term of this Agreement BROCADE accords to any other such customer more favorable prices, BROCADE shall immediately offer to sell the Products to Dell at equivalent prices accorded to such other customer. 4.0 Payment 4.1 Payment for Dell PO(s) with Dell's European Manufacturing Facility ("EMF") will be made [*] end of month from the later of the date of BROCADE'S invoice or receipt of the Products by Dell. 4.2 For Dell PO(s) issued by all other Dell manufacturing locations, payment will be made [*] from the later of the date of BROCADE'S invoice or receipt of Products by Dell. 4.3 In the event taxes are required to be withheld by any foreign taxing entity on payments due BROCADE, Dell will deduct such taxes from any amount owed BROCADE and pay them to the appropriate taxing authority. Dell will provide BROCADE a receipt for such taxes. 4.4 All will be in U.S. dollars unless the parties otherwise agree. 5.0 Delivery of Products 5.1 The parties recognize that Products may be provided to Dell in two ways: (1) from an [*] or (2) directly to Dell without use of [*]. The parties recognize that some terms and conditions will be the same in both situations and others terms may vary depending on the method by which Dell receives the Products. The parties, therefore, agree that the applicable provisions shall be as follows: 5.2 Provisions applicable to Products whether or not [*] is used: 5.2.1 [*] BROCADE agrees to fill all accepted Dell POs and will use commercially reasonable efforts to reduce the lead-time for Products during the term of this Agreement. Time is of the essence for all deliveries. BROCADE shall not ship Products to Dell that were manufactured in locations not approved in advance and in writing by Dell. 5.2.2 BROCADE will handle, pack, mark, and ship the Products in accordance with Dell's packing and labeling specifications as set forth in Schedules D, E and F attached hereto (and as modified by Dell from time to time). Dell may inspect each delivery of Products and perform those tests it deems necessary to determine if the Products are acceptable. Dell shall inspect the Products within thirty (30) days of delivery to Dell. Dell shall be deemed to have accepted the Products only in the event that Dell: (i) fails to accept or reject the Products on or before the expiration of the thirty (30) day inspection period, (ii) explicitly accepts the Products in writing, or (iii) delivers the Products to any customer. Dell's acceptance of any Products shall in no way be construed as a representation by Dell that Dell has completely tested the Products or that such Products comply with their specifications or conform to any other warranties made by BROCADE under this Agreement. Dell's acceptance of any Product shall in no way negate any warranty provided under this Agreement or affect any other provision of this Agreement. Dell's remedy in the event of non-acceptance is a warranty return for credit. Except as expressly set forth in this Agreement, any 3 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 expenditures or commitments by BROCADE in anticipation of Dell's requirements shall be at BROCADE'S sole risk and expense. 5.3 Delivery to Dell [*]: 5.3.1 Unless Dell specifically requests that Product be delivered directly to Dell, all Products delivered under this Agreement to Dell shall [*] BROCADE agrees to establish [*] requested by Dell as volume thresholds per location are met as agreed by the parties. In advance of establishing [*] to handle inventory requirements for AMF. In advance of establishing [*] BROCADE has agreed to support inventory requirements for these regions from the [*] is to be used to support particular [*] held by BROCADE. 5.3.2 Delivery shall take place Deliver Duty Unpaid ("DDU") (Incoterms 1990) [*] upon withdrawal of Product(s) by Dell from [*] with the exception of [*] Deliveries to Dell's manufacturing location from [*] shall take place [*]. 5.3.3 BROCADE agrees to maintain [*] in quantities equal to [*] unless otherwise agreed to in writing by the applicable Dell region. For the first four (4) weeks of operation, the [*]. After four (4) weeks of operation, [*]. The parties will work together to determine the appropriate [*] required for End of Life ("EOL") situations. BROCADE agrees to replenish the [*] in accordance with Section 6.1, and additionally will make commercially reasonable efforts to ensure the required [*] is on hand at all times. Dell and BROCADE will meet periodically for an [*]. At this meeting [*] at both Dell and BROCADE will be reviewed, along with any changes in Dell [*]. 5.3.4 On approximately a monthly basis, Dell will provide rolling six (6) month forecasts of projected purchases of Products for AMF, EMF, APCC, CCC and possibly other [*] locations, but any such forecasts provided by Dell are for planning purposes only and do not constitute a commitment of any type by Dell. No later than [*] after receipt of the Dell six (6) month forecast, BROCADE agrees to [*] for a rolling six (6) month period (current month plus five). [*] In the event that the Dell forecast is in apparent conflict with the Dell orders received by BROCADE (including reschedule and cancellation signals), the parties agree to meet promptly upon BROCADE's request to discuss the apparent conflict with the intent of resolving the inconsistency. Such meeting shall include the Dell commodity manager or appropriate functional equivalent. 5.3.5 Dell will transmit Dell PO(s) by facsimile or other agreed upon means, on a monthly basis, to cover Dell's forecasted requirements for the next [*]. Such Dell PO(s) will be continually updated to reflect Dell's next [*] forecast. All orders shall be in writing, shall reference this Agreement and shall contain (as a minimum) the following information: price, part number, quantity of each Product required, delivery date and [*]. BROCADE will send Dell an acknowledgement within [*] of receipt of the Dell PO. In order to request particular shipments of Product(s) [*] Dell shall issue written orders authorizing BROCADE to [*] Dell's transmission of a [*] is BROCADE'S only authorization to deliver Products to Dell and invoice Dell for the part numbers and quantities set forth in the [*]. Title and risk of loss for all Products shall remain with BROCADE until the Products are [*]. 5.4 Delivery directly to Dell without using [*]. If Dell authorizes BROCADE to deliver Product directly from BROCADE to Dell without using [*] the following terms shall apply: 4 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 4 5.4.1 Dell will transmit a Dell PO by facsimile or other agreed upon means, on a monthly basis, to cover Dell's forecasted requirements for the next [*]. All orders shall be in writing, shall reference this Agreement and shall contain (at a minimum) the following information: price, part number, quantity of each Product required, delivery date and [*] BROCADE will send Dell an acknowledgement within [*] of receipt of the Dell PO. BROCADE will then schedule delivery of each Product to the [*] on the delivery date listed in the Dell PO. Delivery will not be deemed to be complete until Products have been actually delivered to the [*] BROCADE shall not make deliveries more than [*] earlier than the delivery date listed in the Dell PO. If Products are delivered more than [*] early, Dell may: [*]. If only a portion of the Products are available for shipment to meet the delivery date, BROCADE will notify Dell and ship the available Products unless otherwise directed by Dell. [*] 5.4.2 Dell's transmission of a Dell PO is BROCADE'S only authorization to deliver Products to Dell and invoice Dell for the part numbers and quantities set forth in the Dell PO. Dell's obligation to furnish Dell POs in advance of delivery does not affect, in any way, [*] on a line item basis, as set forth in Section 6.0 of this Agreement. [*] 6.0 Reschedule and Cancellation 6.1 Reschedule In (Increase). Dell shall be permitted to increase the quantities scheduled to be delivered [*] without cost or liability for quantities of Product(s) as set forth in the tables below, with the limitation that each line item on an individual Dell PO may be subject to increase only [*]. Both parties acknowledge that the SilkWorm(TM) Express product will be used for early time-to-market, and will be short lived. The expected launch date for SilkWorm(TM) Express is January 15, 1999, [*]. For the SilkWorm(TM) Express Product, increase of orders by Dell shall be permitted as follows:
Days from planned delivery to [*] Increase Amount 0 - 30 [*] 31 - 45 46 - 60 61 - 90 91+
[*] increase of orders by Dell shall be permitted as follows:
Days from planned delivery to [*] Increase Amount 0 - 14 [*] 15 - 30 31 - 60 61 - 90 91+
By way of example, if on January 1 Dell wanted to increase the quantities scheduled to be delivered on January 31 (31 days notice), BROCADE agrees to increase the originally scheduled delivery quantity by a minimum of [*] Throughout this Agreement, any reference to days means calendar days unless otherwise specified. 5 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 5 6.2 Reschedule Out (Push Out). Dell shall be permitted to extend the delivery date for orders without cost or liability for quantities of Product(s) as set forth in the tables below, with the limitation that (a) for the SilkWorm(TM) Express product, delivery dates for each line item on an individual Dell PO may be [*] and (b) for all other products, delivery dates for each line item on an individual Dell PO may be [*]. For the SilkWorm(TM) Express Product, Dell may extend delivery dates for orders as follows:
Days from planned delivery to [*] Reschedule Amount 0 - 30 [*] 31 - 45 46 - 60 61 - 90 91+
[*] Dell may extend delivery dates for orders as follows:
Days from planned delivery to [*] Reschedule Amount 0 - 14 [*] 15 - 30 31 - 60 61+
6.3 Cancellation: 6.3.1 Dell may cancel Dell PO(s), in whole or in part. Dell's liability, if any, for Dell POs cancelled under the terms of this Agreement shall be limited to BROCADE's [*] for the percentage of Product(s) applicable as set forth below. [*] BROCADE must document BROCADE'S [*] as a result of Dell's cancellation to be entitled to [*]. Furthermore, for the SilkWorm(TM) Express Product, the costs should be [*].
Days from planned Cancellation delivery to [*] Amount 0 - 30 [*] 31 - 45 46 - 60 61 - 90 91+
[*] cancellation of orders by Dell shall be permitted as follows:
Days from planned Cancellation delivery to [*] Amount 0 - 30 [*] 31 - 60 61+
6.3.2 If Dell terminates individual Dell PO(s) in whole or in part because BROCADE'S quality does not meet the agreed to Quality Goals (as defined in Section 12.1) set forth in Schedule B, Dell may terminate any or all outstanding Dell PO(s) without liability or charge. 6 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6 6.3.3 BROCADE acknowledges and agrees that the liabilities set forth herein represent Dell's sole liability for the cancellation of Dell PO(s) in accordance with the terms of this Agreement and represents the sole and exclusive remedies of BROCADE for cancellation of Dell PO(s) in accordance with the terms of this Agreement. 7.0 Software, Documentation and Trademarks 7.1 BROCADE agrees to provide Dell with Product documentation for use in the sale and support of Products that Dell is purchasing ("Documentation"). The BROCADE Documentation (in English) shall be provided in hard copy and FrameMaker source format unless otherwise requested by Dell. Dell may modify, reproduce and distribute the Documentation in hard copy or softcopy form as well as in electronic form on Dell's website or bulletin boards in connection with the sale and support of the Product. BROCADE agrees to provide updates as they become available, in the same format. If Dell modifies and introduces errors into such Documentation, BROCADE has no liability for such errors. 7.2 Software License 7.2.1 BROCADE hereby grants to Dell a non-exclusive, worldwide, revocable except as expressly provided in Section 7.2.4, royalty-free right and license, under all copyrights, patents, patent applications, trade secrets and other necessary intellectual property rights of BROCADE, to (i) use, execute, and display all device drivers, firmware and software of BROCADE used in the operation and support of the Product, [*] or backup copies of the same (collectively the "Software"), in object code form, in conjunction with, or for use with Products, (ii) distribute or license the Software, in object code form, as part of, in conjunction with, or for use with Products sold or leased by Dell to end users, and (iii) authorize, license and sublicense third parties to do any, some or all of the foregoing. Dell shall distribute the Software to end users pursuant to Dell's end user license agreement, attached hereto as Schedule I, as updated by Dell from time to time. 7.2.2 Dell shall have no right to (i) modify or adapt the Software for other products or create derivative works of the Software, (ii) decompile, reverse engineer, or disassemble the Software for purposes of designing similar products, or (iii) use or distribute the Software other than in connection with the use or distribution of the Products. 7.2.3 Dell agrees that the foregoing licenses do not grant any title or other right of ownership to the Software and that BROCADE owns and shall continue to own all right, title and interest in and to the Software. 7.2.4 Upon any termination or expiration of this Agreement, Dell's rights set forth in this Section 7.2 shall terminate except as follows: (i) end users shall be permitted continued use of the Software in conjunction with the operation of the Products so long as they are not in breach of Dell's end user license agreement attached hereto as Schedule I, and (ii) Dell shall retain a nonexclusive, worldwide license to use and execute the then-current version of the Software internally (in object code form only) for the sole purpose of assisting Dell end users with the maintenance of the Products purchased from Dell. 7.3 During the term of this Agreement, BROCADE grants to Dell a nonexclusive, worldwide, royalty-free and non-transferable license to use the BROCADE trademarks, service marks and trade names used by BROCADE in connection with the advertising, promotion and distribution of the Products ("Marks"). This license does not include the right to sublicense the use of the Marks. Dell shall use reasonable efforts to ensure that Dell's use of the Marks is in compliance with BROCADE's trademark usage guidelines, as provided to Dell by BROCADE from time to time. In addition, Dell agrees that the nature and quality of any materials created or distributed by Dell bearing the Marks shall be of a similar quality as that of Dell's other products. Upon BROCADE's written request, Dell shall supply BROCADE with specimens of any requested materials bearing the Marks. If BROCADE reasonably determines that any materials bearing the Marks fail to conform to such quality standards, BROCADE shall promptly so notify Dell and Dell and BROCADE shall mutually agree upon a plan of corrective action. Dell acknowledges that BROCADE is the sole and exclusive owner of the Marks, and Dell agrees that it will do nothing inconsistent with such ownership, either during the term of this Agreement or afterwards. Dell's use of the Marks shall inure to the benefit of and be on behalf of BROCADE. Upon termination or expiration of this Agreement for any reason, Dell immediately will cease use of the Marks, except as necessary (i) to distribute and service remaining Products as provided for under this Agreement, or (ii) for Dell to exercise the rights granted in Section 16 of this Agreement. 8.0 Product Withdrawal 7 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7 8.1 Except for the transition from the SilkWorm(TM) Express Product to [*] BROCADE will provide Dell with at least one hundred and eighty (180) days prior written notice for all Products prior to the last date of manufacture of a Product; PO(s) may be placed up to [*] prior to such last date of manufacture. For the transition from the SilkWorm(TM) Express Product to [*] BROCADE will provide Dell with at least [*] prior written notice prior to the last date of manufacture of the SilkWorm(TM) Express Product; PO(s) may be placed up to [*] prior to such last date of manufacture. For purposes of this Section 8.1, the "Rescheduling In" provisions at Section 6.1 shall not apply in the final [*] of the written notice period. However, BROCADE agrees to use commercially reasonable efforts to support any Dell upside requirements during this period. Subject to Product availability, BROCADE will accept Dell PO(s) for Products to be withdrawn [*] Dell agrees to use commercially reasonable efforts to qualify and release the [*]. 8.2 Spare parts and repair capability for the Products shall be retained by BROCADE for [*] from the last date of manufacture. If spares or repairs are not available during such [*] period, BROCADE will use best commercial efforts to provide similar product with equivalent or better functionality. BROCADE shall allow Dell to make a final last time spares buy in order to provide support for such Products. [*] 9.0 Warranties 9.1 BROCADE represents and warrants on an ongoing basis that: (a) Dell will acquire good and marketable title to the Products, and that all Products will be free and clear of all liens, claims, encumbrances and other restrictions; (b) all Products will be new and unused unless Dell requests Refurbished Products in writing. If Dell requests Refurbished Products, the Refurbished Products will be provided to Dell clearly marked as such ("Refurbished Products" shall mean Products that contain used or repaired parts); (c) all Products will be [*] and will conform to BROCADE'S Product specifications (attached as Schedule H) and specifications provided by Dell attached as Schedules D (packaging), E (labeling) and F (barcode labeling), : (i) for a period of [*] from the date of delivery to Dell for the Gigabit Interface Converter components ("GBICs") of Products, or as extended thereafter in accordance with BROCADE's warranty terms with any qualified supplier of GBICs, and (ii) for a period of [*] from the date of delivery to Dell for all other Products and components. [*] BROCADE agrees to use first-in first-out (FIFO) method for finished goods. The foregoing warranties do not cover BROCADE Products that were subjected to misuse, abuse, improper repair, or unusual physical or electrical stress; (d) it has all the necessary rights and licenses in the Products necessary to allow Dell to distribute and resell Products without restriction or additional charge; (e) the Products shall be able to accurately process date data (including, but not limited to, calculating, comparing, and sequencing) between the twentieth and twenty-first centuries; and (f) BROCADE's own internal systems including, but not limited to, manufacturing systems shall be able to accurately process date data (including, but not limited to, calculating, comparing, and sequencing) between the twentieth and twenty-first centuries. 9.2 If Dell determines that any Product unit does not conform to the foregoing warranties ("Non-complying Product"), BROCADE will provide, within [*] of receipt of Non-complying Product, (i) an initial failure analysis of the Non-complying Brocade manufactured Product, and/or (ii) failure verification of a GBIC product. For line rejects or failures identified by Dell at its distribution centers or manufacturing locations, Dell [*] of the Non-complying Products. [*] shall be applied no later than [*] after Dell's notice of noncompliance, and will take [*] from Dell or the BROCADE RMA. For Non-complying Product which has been sent to a customer, BROCADE shall (at Dell's sole option) either (a) repair or replace such Product with new or Refurbished Product within [*] 8 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 8 following receipt by BROCADE for return to Dell for service spares, or (b) [*] of the Non-complying Products [*]. In the event Dell requests the return of repaired or reworked Products, BROCADE shall ensure that such Products are clearly marked as repaired or reworked, and separated from new Product. In order to facilitate the return of such Non-complying Products, BROCADE will issue Return Material Authorizations ("RMAs") in [*] for each Dell manufacturing facility. When a manufacturing facility has [*] BROCADE will issue [*] of Dell's request (limited to business days). In addition to BROCADE'S obligation to conduct an initial failure analysis, BROCADE agrees to [*]. BROCADE also agrees to provide a failure analysis of the defective Product unit to the component level within [*] of receipt of the Product unit, with a goal of providing such component level analysis within [*]. Non-complying Products may be returned to BROCADE by Dell or Dell's service partners. If the parties determine that there are excessive No Trouble Found returns from Dell's service partners, Dell and BROCADE agree to address this issue. 9.3 Dell agrees to use commercially reasonable efforts to verify field failures before returning Non-complying Product to BROCADE for repair or replacement. The parties will work together to ensure that Dell and its service providers have the tools and expertise required to investigate and troubleshoot failures in the field. In the event that BROCADE has reasonable cause to believe that Dell's verification process has allowed an excessive number of No Trouble Found ("NTF") Products to be returned to BROCADE, then BROCADE shall contact Dell and Dell agrees to examine its process and shall work to reduce NTF Products. BROCADE shall notify Dell in the event that NTF returns exceed [*] of all Product(s) purchased by Dell within [*] and provide Dell with copies of all test reports and documentation related to BROCADE's testing of such Product(s). Dell shall have [*] from the date such notice and documentation is provided to Dell to examine test reports and documentation related to NTF returns and to cure any such excessive NTF returns. Dell agrees to pay all undisputed NTF charges as set out in Schedule A for subsequent NTF rates exceeding [*] over a given [*] period. Disputed NTF charges shall be submitted to the dispute resolution procedures as stated in Section 19.1. 9.4 All Non-complying Products returned by Dell to BROCADE will be shipped at BROCADE'S risk and expense including packing and freight charges to and from BROCADE. Non-complying Product will be returned by Dell in appropriate packaging to protect the Product. 9.5 [*] 9.5.1 [*] is defined as: (1) a [*] requiring the dispatch of (a) any BROCADE-supplied switch assembly (less GBICs) at a rate of [*] or greater of new [*] during the [*] days after [*]; or (b) any FRU (field replaceable unit) other than the switch assembly at a rate of either [*] or greater of new [*] during the [*] days after [*] or (2) a Product [*] equal to or [*] of BROCADE's [*] occurring during any [*] period of Dell's in-warranty installed base. For any of the above, isolated occurrences [*] will not constitute a [*] but will be evaluated and addressed mutually by BROCADE and Dell. If a [*] is declared pursuant to this section, BROCADE agrees to [*] consumed field service spares within [*] of [*] report. The foregoing shall not apply to [*] attributable to GBICs; provided, however, that BROCADE agrees to use all reasonable efforts to work with its GBIC supplier(s) to determine the cause of [*] which trigger the terms of this Section 9.5.1. and to agree on a plan of [*] therefor. BROCADE's compliance with the obligations imposed under the foregoing sentence shall constitute a material term of this Agreement. 9.5.2. {*] may be identified by Dell, Dell's designated service provider, or BROCADE's test procedures or may appear as customer-reported [*]. BROCADE and Dell will promptly and cooperatively attempt to determine [*] of the [*] and [*]. If [*] is determined, then BROCADE and Dell will cooperate in good faith on a [*]. 9.5.3. In the event of a [*] Dell may [*] Products without [*] until [*] is determined. If the [*] is due to confirmed (by Dell or BROCADE) Product or FRU [*] during Dell's warranty, BROCADE shall [*] all related material, transportation and field replacement labor [*] associated with [*] including, as applicable, Product [*]. BROCADE shall render 9 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 9 rework and/or replacement services equivalent to services described herein for Dell's in-warranty product, [*]. 9.6 During the term of this Agreement, any repair and reconditioning of any product not covered by warranty shall be subject to BROCADE's then-standard out of warranty prices, terms, and conditions as set forth in Schedule A. 9.7 THE FOREGOING WARRANTIES, TERMS OR CONDITIONS ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER WARRANTIES, TERMS OR CONDITIONS, EXPRESS OR IMPLIED, EITHER IN FACT OR BY OPERATION OF LAW, STATUTORY OR OTHERWISE, INCLUDING WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT, AND FITNESS FOR A PARTICULAR PURPOSE. 10.0 Indemnification 10.1 BROCADE agrees to defend, indemnify and hold harmless Dell, DCC, DCC's subsidiaries or Affiliates and their respective directors, officers, employees, agents, customers and distributors from and against any and all claims, actions, demands, legal proceedings, liabilities, damages, losses, judgments, authorized settlements, costs and expenses, including, without limitation, reasonable attorney's fees, arising out of or in connection with any claims or actions by third parties alleging: (i) infringement by BROCADE and/or Product(s) of a copyright, patent, trademark, trade secret or other intellectual property right of any third party; (ii) that a Product provided under this Agreement has caused bodily injury (including death) or has damaged real or tangible personal property; (iii) a cause of action arising out of or relating to BROCADE'S provision of repaired Products that contain used or refurbished parts that are not clearly and conspicuously labeled as such; (iv) a cause of action based on any violation by BROCADE of any governmental laws, rules, ordinances or regulations; and/or (v) a cause of action by or on behalf of BROCADE'S subcontractors, materialmen, suppliers, employees or agents. "Affiliate" means, with respect to any party, any other party that, directly or indirectly controls or is controlled by or is under common control with such party. For purposes of this definition, "control" shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management or policies of such party, whether through the ownership of voting securities or by contract or agency or such similar arrangement. 10.2 In the event of any such claims, BROCADE's indemnity option is contingent upon Dell's obligation to: (1) promptly notify BROCADE, (2) cooperate with BROCADE in the defense thereof, and (3) not settle any such claims without BROCADE'S prior written consent, which BROCADE shall not unreasonably withhold unless such settlement could expose BROCADE to additional liability to Dell or third parties or otherwise adversely affect the operation of BROCADE's business. 10.3 In addition to BROCADE'S obligations and liabilities above, if an infringement claim is made or appears likely to be made about a Product, BROCADE shall, at BROCADE's option, either procure for Dell the right to continue to market the Product, modify the Product so that it is no longer infringing or replace it with a non-infringing Product. If the parties determine that none of these alternatives is commercially reasonable, Dell will return any Products in inventory freight collect to BROCADE's designated location for a credit or refund of the purchase price. 10.4 THE FOREGOING PROVISIONS OF THIS SECTION 10.0 STATE DELL'S SOLE AND EXCLUSIVE REMEDY FOR ANY ALLEGED INFRINGEMENT BY THE PRODUCTS OF ANY THIRD PARTY PROPRIETARY RIGHTS OF ANY KIND. 11.0 Liability EXCEPT FOR BROCADE'S OBLIGATIONS AND LIABILITIES UNDER SECTION 10.0 ("INDEMNIFICATION"), OR BREACH BY EITHER PARTY OF CONFIDENTIALITY UNDER THE NDA, NEITHER PARTY SHALL BE LIABLE FOR ANY LOST PROFITS, LOST SAVINGS OR ANY OTHER 10 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 10 INCIDENTAL, INDIRECT, PUNITIVE OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON A BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE), PRODUCTS LIABILITY OR OTHERWISE, UNDER ANY PART OF THIS AGREEMENT EVEN IF ADVISED OR AWARE OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT FOR BROCADE'S OBLIGATIONS AND LIABILITIES UNDER SECTION 10.0 ("INDEMNIFICATION") OR BREACH OF CONFIDENTIALITY UNDER THE NDA, EITHER PARTY'S TOTAL LIABILITY TO THE OTHER UNDER THIS AGREEMENT FROM ALL CAUSES OF ACTION OF ANY KIND WILL BE LIMITED TO THE GREATER OF [*] BY DELL TO BROCADE PRIOR TO THE DATE SUCH CAUSE OF ACTION ACCRUED. IN THE EVENT BROCADE UNDERGOES A CHANGE OF CONTROL (AS DESCRIBED IN SECTION (15), BROCADE'S TOTAL LIABILITY LIMIT SHALL BE INCREASED TO THE GREATER OF [*] BY DELL TO BROCADE PRIOR TO THE DATE SUCH CAUSE OF ACTION ACCRUED. 12.0 Quality, Product Safety, Regulatory Compliance and Engineering Changes 12.1 [*] BROCADE agrees to meet or exceed the quality requirements set forth herein and in the applicable Schedule (the "Quality Goals"), except with respect to GBICs. If BROCADE fails to achieve the Quality Goals, BROCADE shall promptly put into place a corrective action plan to be agreed upon with Dell to bring quality performance back in line with the Quality Goals. In the event that BROCADE fails to meet the Quality Goals, after written notice to BROCADE with a [*] cure period, Dell may cancel any outstanding orders without penalty, notwithstanding any other provision in this Agreement. If BROCADE fails to meet the Quality Goals due to BROCADE fault, then BROCADE and Dell will agree [*] relating to repair or replacement for Product outside of such Quality Goals; provided however that nothing in this Section shall in any way derogate the warranty provision at Section 9 or the [*] at Section 9.5. With respect to GBICs, in the event of a non-compliance with the Quality Goals, BROCADE agrees to use all reasonable efforts to work with its GBIC supplier(s) to determine the cause of such non-compliance under the terms of this Section 12.1 and to agree on a plan of corrective action therefor. [*]. 12.2 In the event either BROCADE or Dell becomes aware of any information which reasonably supports a conclusion that a hazard may exist in any Product and the defect could cause death or bodily injury to any person or property damage (a "Hazard"), the party becoming aware of this information shall notify the other of the Hazard. Whenever possible, notification to the other party shall precede notice to any governmental agency, unless required by law. BROCADE and Dell shall promptly exchange all relevant data and then, if practical, as promptly as possible, meet to review and discuss the information, tests, and conclusions relating to the alleged Hazard. At this meeting the parties shall discuss the bases for any action, including a recall, and the origin or causation of the alleged Hazard. [*] Each party shall, on request, provide to the other reasonable assistance in (i) determining how best to deal with the Hazard; and (ii) preparing for and making any presentation before any governmental agency which may have jurisdiction over Hazards involving Products. 12.3 BROCADE is responsible for obtaining and maintaining all U.S. and foreign regulatory approvals for the Product(s), as specified by Dell in Schedule G and as required for BROCADE's standard products. Additionally, BROCADE will assist Dell in addressing problems with its Products that contribute to a Dell system's failure to meet any regulatory requirement due to BROCADE Products being integrated into the Dell system. 12.4 Engineering Changes 12.4.1 BROCADE agrees to notify Dell of all Product changes. BROCADE shall provide [*] notice of changes that affect the Product's (including Software or drivers) form, fit or function to allow Dell to evaluate such changes. Dell shall respond to such proposed changes within [*] of receiving notice from BROCADE. In the event that Dell fails to respond within such period, BROCADE should use commercially reasonable efforts to contact appropriate representatives at Dell to determine Dell's response and otherwise may deem such changes to be accepted by Dell. Notwithstanding the foregoing, any changes that materially affect the Products (including Software or drivers) form, fit or function require Dell's written consent in the form of an agreed to Engineering Change Order ("ECO"). 12.4.2 BROCADE may issue notice of "Mandatory Changes," which are changes required to satisfy governmental standards, for safety, or to guarantee continuity of supply. BROCADE will make all commercially reasonable 11 of 16 *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 11 efforts to provide Dell with [*] prior written notice of Mandatory Changes prior to implementing such changes, and will notify Dell not more than [*] after BROCADE becomes aware of the need to make a proposed change (with the exception of potential safety and hazard issues which require immediate notification). [*] 13.0 Compliance 13.1 Since Dell transacts business with the United States government, BROCADE must comply with applicable laws and Federal Acquisition Regulations ("FAR") clauses. BROCADE therefore represents and warrants that it will comply with the following FAR clauses, and other provisions of the Code of Federal Regulations, as applicable, which are hereby incorporated by reference into this Agreement: (1) FAR 52.222-26 "Equal Opportunity" (except for subparagraph (c)) (2) FAR 52.222-35 "Affirmative Action for Special Disabled and Vietnam Era Veterans" (3) FAR 52.222-26 "Affirmative Action for Handicapped Workers" (4) FAR 52.219-8 "Utilization of Small, Small Disadvantaged and Women-Owned Small Business Concerns" (5) 40 C.F.R. Section 60-1.4(a) "Equal Opportunity Clause' (6) 40 C.F.R. Section 60-1.7 "Reports and other Required Information" (7) 40 C.F.R. Section 60-1.40 "Affirmative Action Compliance Program" In addition, BROCADE represents and warrants that it will comply with all applicable requirements of 33 U.S.C. Section 1251 "Federal Water Pollution Control Act" and 42 U.S.C. Section 7401 "Clean Air Act". BROCADE represents and warrants that none of the items listed in paragraph (a) of FAR 52.209-5 "Certificate Regarding Debarment, Suspension, Proposed Debarment and Other Responsibility Matters" exist with respect to BROCADE or any of BROCADE's "principals" as that term is defined by FAR 52.209-5. BROCADE further represents and warrants that it will comply with the prohibition on the use of convict labor as set forth in FAR 52.222-3 "Convict Labor." In the event that Dell licenses any Software to the U.S. Government, Dell shall identify such Software to the Government as "commercial computer software" developed exclusively at private expense, and, in accordance with FAR Section 12.212 or Defense FAR Supplement Section 227.7202, as applicable, Dell shall license the Software to the Government in accordance with the terms of the End User license attached as Schedule I ("Software License Agreement"). 13.2 The parties, at their expense, will comply with all applicable laws, orders and regulations of any governmental authority with jurisdiction over their activities in connection with this Agreement and will furnish to each other any information required to enable a party to comply with applicable laws related to the Products. 13.3 In the event that Dell licenses any Software to the U.S. Government, Dell shall identify such Software to the Government as "commercial computer software" developed exclusively at private expense, and, in accordance with FAR Section 12.212 or Defense FAR Supplement Section 227.7202, as applicable, Dell shall license the Software to the Government in accordance with the terms of the End User license attached as Schedule I ("Software License Agreement"). 14.0 Import/Export Requirements 14.1 BROCADE will certify to, and mark Products and packaging with, the country of origin for each Product so as to satisfy the requirements of customs authorities of the country of receipt and any other applicable laws. If any Products are imported, Dell will be the importer of record. BROCADE and Dell shall comply with all import and export laws and regulations and maintain appropriate import and export documentation. At Dell's request, BROCADE shall make available for inspection and audit all import and export documentation for Product(s) sold under this Agreement. At Dell's request, BROCADE shall also provide an appropriate Export Control Classification Number ("ECCN") for all Product(s) sold hereunder. 14.2 BROCADE shall not, directly or indirectly, export, re-export or tranship Products in violation of any applicable U.S. export control laws and regulations or any other applicable export control laws promulgated and administered by the government of any country having jurisdiction over the parties or the transactions contemplated herein. 15.0 Assignment and Merger *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 12 of 16 12 [*] either party may assign this Agreement to a successor entity in the event of a Change of Control. A 'Change of Control' shall mean any of the following events: (i) the direct or indirect sale or exchange of all or substantially all of the stock of a corporation (or partnership interests of a partnership) where the stockholders of such corporation (or partners of such partnership) before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock or other interest of the successor entity; (ii) a merger in which the shareholders or partners of a corporation or partnership before the merger do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock or other interest of the successor entity; or (iii) the sale, exchange, or transfer of all or substantially all of a corporation's or partnership's assets (other than a sale, exchange, or transfer to one or more entities where the shareholders of the corporation or partners of the partnership before such sale, exchange or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting interests in the entity to which the assets were transferred). Subject to this Section 15.0, this Agreement will bind and inure to the benefit of the parties and their respective successors and permitted assigns. 16.0 Right to [*] 16.1 Upon the occurrence of a [*] (as set forth in Section 16.2 of this Agreement), BROCADE hereby grants Dell the [*] the then-current Products being purchased by Dell at the time of the [*] (including the "Cocoon, Jr." (SilkWorm 2400) Product) [*] from BROCADE's [*] for the remainder of the then-current term of this Agreement (or in the event of a termination of the Agreement under Section 2.0 by Dell for material breach by BROCADE, the remainder of the then-current term assuming no termination had occurred) and [*] as provided for in this Agreement. In addition, upon the occurrence of a [*] and Dell's written notice to BROCADE that Dell intends to [*] Product(s) [*] from BROCADE's [*] BROCADE shall immediately provide notice to BROCADE's [*] allowing such [*] to [*] to Dell under the terms of this Section 16.0. Within [*] after the date of this Agreement with respect to [*] and prior to contracting with any new or additional [*] for Products, BROCADE shall enter into a written agreement with any such [*] that will [*] to such [*] necessary to effectuate the intent of this Section 16.0. In the event that BROCADE fails to do so, the parties expressly agree that Dell may provide a copy of this Agreement to any such [*] and such [*] shall be entitled to rely on this Section 16.0 as representing BROCADE's [*] of Products [*] to Dell without the [*] of any further [*] by BROCADE. BROCADE shall consult with Dell prior to contracting with a new or additional [*] for Products. In addition, BROCADE shall give Dell at least [*] prior written notice if BROCADE plans to begin [*] any Product(s) itself rather than using a [*] so that the parties may review whether to modify Dell's rights under this Section 16. 16.2 For purposes of this Section 16.0, a [*] shall mean any one or more of the following circumstances: (a) BROCADE notifies Dell of its intention to [*] sale or support of the applicable Product without providing Dell the notice required by this Agreement, (b) BROCADE is insolvent or has a petition brought by or against it under the insolvency laws of any jurisdiction; if BROCADE makes an assignment for the benefit of creditors; or if a receiver, trustee or similar agent is appointed with respect to any property or business of BROCADE, (c) any material breach by BROCADE of the terms of this Agreement which is not cured by BROCADE within [*] after receipt of written notice of such default, or (d) a [*] occurs with respect to BROCADE. For example, a [*] shall include, but not be limited to, an event whereby BROCADE directly or indirectly [*] (i) [*] (ii) any [*] or [*] that generates its sales predominantly through sales to end users; or *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 13 of 16 13 (iii) any [*] or [*] that has an expressed strategy to attach its [*] products to Dell [*] or (iv) any entity that has expressed an intent to exit the original equipment manufacturer (OEM) [*] business. 17.0 Capacity Constraints On a quarterly basis, or as requested by Dell, BROCADE agrees to provide ramping and capacity plans ("Capacity Plan") to Dell (in a format acceptable to Dell) to ensure continuity of supply. This Capacity Plan shall include percent available capacity and utilization. In the event that BROCADE's total manufacturing production exceeds [*] of available capacity, BROCADE agrees to put in place the additional manufacturing capacity required to achieve and maintain a [*] manufacturing upside capability to the current Dell forecast [*]. 18.0 New Products 18.1 During the term of this Agreement, BROCADE agrees to offer to sell to Dell all standard products developed, manufactured, distributed or sold by BROCADE to (or for) any other customer. If Dell agrees to purchase such products, such sale will be pursuant to the terms and conditions of this Agreement (to the extent that such products are similar to products covered by this Agreement). [*] In the event BROCADE and Dell co-develop a product, a separate contract addendum is required, specifying points of ownership and limitations to distribution. 18.2 Prior to offering for sale any new Standard Product, BROCADE will [*] consult with Dell and allow Dell to place Dell PO(s) for such new Standard Product [*]. Prior to the addition of a new Standard Product to a Schedule, the parties will mutually agree on a new product program schedule which will include the appointment of business and technical contacts for each party to monitor compatibility issues and product release issues with Dell systems. BROCADE agrees that Dell will receive [*] of all new products that are added to this Agreement pursuant to BROCADE'S standard [*]. As used herein, "Standard Product" shall mean and include all products of BROCADE which are being developed or have been developed for the purpose of distributing and selling such products to customers except those products for which NRE funds, technology, or other development contributions are made by a third party for the specific purpose of developing such product. 18.3 Prior to the general availability of Dell's systems containing any new BROCADE product, BROCADE shall provide mutually agreed upon training to Dell for sales, customer support and technical support at prices as stated in Schedule A. 18.4 BROCADE agrees to include Dell systems as mutually agreed in test and development for all applicable new products. Dell will be consulted and given the opportunity to provide input in all hardware and software technology roadmaps for all applicable new products. 18.5 Except for SilkWorm(TM) Express, BROCADE shall provide to Dell the applicable manufacturing, customer, and field diagnostics for Dell's testing and evaluation at least [*] prior to Dell's shipment of a new Product. For SilkWorm(TM) Express, BROCADE shall provide such information to Dell as soon as possible. 19.0 General 19.1 In the event a dispute or claim between the parties on any matter is not resolved by the parties within [*] of an initial notice from either party to the other party regarding the dispute, the dispute or claim shall be escalated first to the OEM Business Manager of Dell ESG Storage and the Director of OEM Sales of BROCADE. If these individuals are unable to resolve the dispute or claim within [*] of such escalation, resolution of the dispute or claim shall be escalated to the Director of OEM Business of Dell ESG Storage and the Vice President of Worldwide Sales of BROCADE, who shall have [*] to resolve such dispute or claim before action is brought by either party. Either party may initiate the escalation procedure of this Section by written notice to the other party which notice shall be without prejudice to the invoking party's rights to any other remedy permitted hereunder. The parties will use commercially reasonable efforts to arrange meetings or telephone conferences, as needed, at mutually convenient times and places, to facilitate negotiations between the parties. Unless otherwise *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 14 of 16 14 agreed in writing, the parties shall be required to invoke the escalation procedures of this Section prior to the initiation of a lawsuit against the other party relating to this Agreement, except if the rights of such party would be materially prejudiced by delay in the filing of such lawsuit. 19.2 Nothing in this Agreement shall prevent Dell, DCC or any of DCC's Affiliates or subsidiaries from purchasing or obtaining products similar to the Products from any other supplier, including competitors of BROCADE. 19.3 The provisions of Sections 7.2.4, 8.0 "Product Withdrawal", 9.0 "Warranties", 10.0 "Indemnification", 11.0 "Liability", 12.2, and 12.3, 16.0 [*] "New Products" and 19.0 General", shall survive any termination or expiration of this Agreement and shall continue to bind the parties and their permitted successors and assigns. 19.4 Except as expressly permitted herein, neither party will use the name of the other or quote the opinion of any employee of the other in any advertising or otherwise without first obtaining the prior written consent of the other; such consent shall not be unreasonably withheld. 19.5 Any confidential information that will be disclosed by either party related to this Agreement shall be disclosed pursuant to the terms and conditions of the 98060301 Non-disclosure Agreement between the parties. The terms and conditions of this Agreement shall be deemed to be confidential information. Notwithstanding the terms of the Non-disclosure Agreement, (i) BROCADE agrees that Dell may provide information related to BROCADE'S technology roadmaps to certain Dell customers provided such Dell customers have executed a non-disclosure agreement with Dell that requires the customer not to disclose the information to a third party, and (ii) Dell agrees that BROCADE may disclose information relating to this Agreement, including without limitation, a copy of this Agreement (which has had the pricing and other strategic terms redacted) to third parties as required by law or as is necessary to comply with disclosure requirements of the Securities Exchange Commission. BROCADE shall use reasonable efforts to protect the confidentiality of specific information before public disclosures under subsection (ii) are made, including making appropriate redactions to any information provided. BROCADE agrees to provide Dell with reasonable advance notice of any such disclosure and to confer with Dell in good faith regarding the scope of such disclosure. 19.6 BROCADE will maintain accurate and legible records and will grant to Dell reasonable access to and copies of, any information reasonably requested by Dell with respect to BROCADE'S performance under this Agreement (including quality programs and test documentation). BROCADE'S obligation to maintain records under this provision is limited to BROCADE'S maintaining records in accordance with BROCADE'S normal course of business. This provision does not impose any obligation on BROCADE to institute new or different document retention procedures. BROCADE represents that it is BROCADE'S standard practice to maintain its records for a period of [*]. Dell may send a representative in its place with BROCADE'S consent and BROCADE agrees not to unreasonably withhold such consent. 19.7 Except as may be otherwise provided in this Agreement, the rights or remedies of the parties hereunder are not exclusive, and either party shall be entitled alternatively or cumulatively, subject to the other provisions of this Agreement, and as allowed by the applicable laws governing this Agreement, to any other remedy available at law or in equity. 19.8 Neither party is an agent or employee of the other or has any authority to assume or create any obligation or liability of any kind on behalf of the other. 19.9 No waiver of any term or condition is valid unless in writing and signed by authorized representatives of both parties, and will be limited to the specific situation for which it is given. No amendment or modification to this Agreement shall be valid unless set forth in writing and signed by authorized representatives of both parties. No other action or failure to act (including inspection, failure to inspect, acceptance of late deliveries, or acceptance of or payment for any Products) will constitute a waiver of any rights. 19.10 This agreement will be governed by the laws of the state of Texas, U.S.A. The parties expressly disclaim the applicability of the United Nations Convention on the International Sale of Goods. Any cause of action brought by BROCADE against Dell under this Agreement shall be filed by BROCADE in and submitted to the jurisdiction of a federal or state court in Travis County, Texas. Any cause of action brought by Dell against BROCADE under this Agreement shall be filed by Dell in and submitted to the jurisdiction of a federal or state court in Santa Clara, California. *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 15 of 16 15 19.11 Any notice required or permitted by this Agreement shall be in writing and delivered by certified or registered mail, return receipt requested, postage prepaid and addressed as follows or to such other addresses as may be designated by notice from one party to the other, all such notices being effective on the date received or, if mailed as set above, three (3) days after the date of mailing: If to Dell: Dell Products L.P. One Dell Way Round Rock, Texas 78682 Attention: Vice President, Worldwide Procurement cc: General Counsel If to BROCADE: BROCADE Communications Systems, Inc. 1901 Guadalupe Parkway San Jose, California 95131 Attention: Chief Financial Officer 19.12 Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement is found to violate a law, it will be severed from the rest of the Agreement and ignored and a new provision deemed added to this Agreement to accomplish to the extent possible, the intent of the parties as evidenced by the provision so severed. The term "including" means "including without limitation." The headings used in this Agreement have no legal effect. 19.13 Neither party will be liable for any delay in performing under this Agreement to the extent such delay is caused by government action, inclement weather, fire, explosion, floods, riots, civil disturbance, earthquakes, other natural disasters or other similar reasons where failure to perform is beyond the control and not caused by the negligence of the non-performing party. Such delay, however, shall only be excused for the period during which such condition continues. 19.14 Dell does not guarantee that its marketing, if any, of the Product(s) will be successful. There is no minimum purchase obligation under this Agreement. Dell may distribute/sell the Products on a standalone basis or in conjunction with a system sale or lease. 19.15 This Agreement, its attached Schedules and Specifications set forth the entire agreement and understanding of the parties relating to the subject matter contained herein, and merges all prior discussions and agreements, both oral and written, between the parties. Each party agrees that use of pre-printed forms, such as purchase orders or acknowledgments, is for convenience only and all terms and conditions stated thereon, except for information requested or allowed by this Agreement, are void and of no effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized representatives as of the day and year first written herein. BROCADE: DELL: By: /s/ GREG REYES By: /s/ MICHAEL LAMBERT -------------------------------- --------------------------------- Greg Reyes Michael Lambert Title: President and CEO Title: Senior Vice President, Systems Group Enterprise Date: 1-17-99 Date: 12/18/98 ----------------------------- ------------------------------- 16 of 16 16 SCHEDULE A TO AGREEMENT NUMBER BRO-001 PRODUCT DESCRIPTION AND PRICING 17 SCHEDULE A TO AGREEMENT NO. BRO-001 REV. 12.9.1. Product Description and Pricing
PRODUCT BROCADE PART NUMBER DELL PART NUMBER DESCRIPTION PRICE - ------- ------------------- ---------------- ----------- ----- 1. SilkWorm Express DL-0880-0002 5829D-X00-01 6FL port, 2G port, 4 SWL GBIC, ICu GBIC with Web Tools and Zoning enabled [*] 2. SilkWorm Express DL-0880-0003 7829D-X00-01 6FL port, 2G port, 5 Cu GBIC with Web Tools and Zoning enabled [*] 3. SilkWorm Express-FRU DL-0880-0004 6410P-X00-00 6FL port, 2G port, O GBIC with Web Tools and Zoning enabled [*] 4. Cu GBIC - FRU DL-1017 TBD 1 Cu GBIC, 1 extraction tool, single pack [*] 5. SWL GBIC - FRU DL-1006 TBD 1 SWL Optical GBIC, 1 extraction tool, single pack [*] 6. FL Port Card - FRU X1015-04 TBD FL Port Card, O GBIC, single pack [*] 7. G Port Card - FRU X1003-03 TBD G Port Card, O GBIC, single pack [*] 8. Cu GBIC - FRU TBD TBD 4 Cu GBIC, 1 extraction tool, four pack [*] 9. SWL GBIC - FRU TBD TBD 4 SWL Optical GBIC, 1 extraction tool, four pack [*] [*] TBD TBD TBD [*]
OUT OF WARRANTY REPAIR: - ----------------------- FL Port Card [*] G Port Card [*] SilkWorm Express-less GBIC [*] 1. CPU Board [*] 2. Mother board [*] 3. Enclosure/power supply [*] 4. Hourly rate [*] (subject to change based on current standard rates) [*] *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 18 CHARGES FOR EXCESSIVE UNDISPUTED NTF (NO-TROUBLE-FOUND) RETURNS: [*] per switch (8 hours testing [*]) if Brocade returns retested Product to Dell. If Dell returns NTF Product for credit, the NTF charge will be [*] plus the difference between the then-current price of a switch (credit return) and the price of the switch FRU (without GBICs). WARRANTY ADVANCE EXCHANGE PRICE: [*] (return unit must be received by Brocade within [*] PRODUCT LEADTIME: Leadtime for Product, including FRUs is [*] ARO, if forecasted, [*] without forecast. [*] NOTE: Pricing to be reviewed by the parties on at least a [*] basis. This Schedule will be revised accordingly to reflect current pricing, products and/or services offered. *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 19 SCHEDULE A.1 [*]
Per Unit # OF PALLETS # of Units [*] [*] [*] [*] [*] [*] Total cost - ------------ ---------- ----- ---- 1 16 [*] [*] [*] [*] [*] [*] [*] [*] 2 32 [*] [*] [*] [*] [*] [*] [*] [*] 3 48 [*] [*] [*] [*] [*] [*] [*] [*] 4 64 [*] [*] [*] [*] [*] [*] [*] [*] 5 80 [*] [*] [*] [*] [*] [*] [*] [*] 6 96 [*] [*] [*] [*] [*] [*] [*] [*] 7 112 [*] [*] [*] [*] [*] [*] [*] [*] 8 128 [*] [*] [*] [*] [*] [*] [*] [*] 9 144 [*] [*] [*] [*] [*] [*] [*] [*] 10 160 [*] [*] [*] [*] [*] [*] [*] [*] 11 176 [*] [*] [*] [*] [*] [*] [*] [*] 12 192 [*] [*] [*] [*] [*] [*] [*] [*] 13 208 [*] [*] [*] [*] [*] [*] [*] [*] 14 224 [*] [*] [*] [*] [*] [*] [*] [*] 15 240 [*] [*] [*] [*] [*] [*] [*] [*]
[*] DEFINITIONS: [*] [*] [*] [*] *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 3 20 IN WITNESS WHEREOF, the parties hereto have caused this Schedule A to be executed by their duly authorized representatives as of the day and year first written herein. BROCADE: DELL: BROCADE: DELL: By: /s/ GREG REYES By: /s/ MICHAEL LAMBERT -------------------------------- --------------------------------- (Authorized Signature) (Authorized Signature) Title: President and CEO Title: Senior Vice President, Systems Group Enterprise Date: 1-17-99 Date: 12/18/98 ----------------------------- ------------------------------- 21 SCHEDULE B TO AGREEMENT NUMBER BRO-001 FIBRE CHANNEL SWITCH PRODUCT QUALITY PLAN 22 DELL FC SWITCH PRODUCT QUALITY PLAN Revision 0.2 Prepared by Tim Killworth 11/11/98 TABLE OF CONTENTS 1 23 1.0 FC SWITCH QUALITY PLAN REVISION HISTORY ........................... 4 2.0 REVIEW AND SIGNATURES.............................................. 4 Area .............................................................. 4 3.0 INTRODUCTION ...................................................... 4 4.0 QUALITY GOALS FY99 ................................................ 5 5.0 APPLICABLE DOCUMENTS AND AMENDMENTS ............................... 5 6.0 QUALITY PROGRAM MANAGEMENT ........................................ 5 6.1 Organization ............................................... 5 6.2 Quality Planning ........................................... 5 6.2.1 Design .............................................. 5 6.2.1.1 Development ................................ 5 6.2.1.2 Prototype .................................. 5 6.2.2 Production .......................................... 6 6.2.2.1 Eval Test .................................. 6 6.2.2.2 Pilot ...................................... 6 6.2.2.3 Launch ..................................... 6 6.3 Metric Goals and Analysis .................................. 6 6.4 Training/Certifications .................................... 6 7.0 CONTROL OF PURCHASES .............................................. 6 7.1 Procurement Control ........................................ 6 7.1.1 General Comments .................................... 6 7.1.2 Development ......................................... 6 7.1.3 Prototype ........................................... 7 7.2 Approved Suppliers ......................................... 7 7.3 Incoming Quality Assurance ................................. 7 7.3.1 First Article Inspection ............................ 7 7.3.2 IQA Instructions .................................... 7 8.0 DESIGN AND MANUFACTURING CONTROL .................................. 7 8.1 Process Capability ......................................... 7 8.2 Commodity Analysis ......................................... 7 8.3 Pilot build ................................................ 7 8.4 Cycle time improvements .................................... 8
2 24 8.5 Work Instruction Review .................................... 8 8.6 Quality Levels ............................................. 8 8.7 Defect Containment ......................................... 8 8.8 Escalation Path ............................................ 8 8.9 Defect Root Cause analysis ................................. 8 8.10 Preventative Corrective Actions ............................ 8 8.11 Material Review Board (MRB) ................................ 8 8.12 Out of Box Experience (OBE) ................................ 8 8.13 Stop Build/Ship Criteria ................................... 9 8.14 Statistical Process Control and Analysis ................... 9 8.15 Tooling/Test Equipment ..................................... 9 8.16 PM/Calibration Process ..................................... 9 8.17 Design Changes ............................................. 9 9.0 RISKS ............................................................. 9 9.1 DFMEA Issues ............................................... 9 9.2 PFMEA Issues ............................................... 9 9.3 System Management Issues ................................... 10
3 25 FC SWITCH QUALITY PLAN 1.0 FC SWITCH QUALITY PLAN REVISION HISTORY
REVISION BY DATE DESCRIPTION - -------- -- ---- ----------- 0.0 Tim Killworth 10-21-98 Initial Draft 0.1 Tim Killworth 11/11/98 Added FY 00 quarterly measurement TBD to section 4.0 and added page breaks 0.2 Tim Killworth 11/16/98 Added FY00 Q1 & Q2 measurements to section 4.0
2.0 REVIEW AND SIGNATURES
Area Signature - ---- --------- WW Enterprise System Group (ESG) Randy Printz Storage Division - Quality Mgr. WW Enterprise System Group (ESG) Randy Printz Storage Division - NPO/Quality/Program Mgr.
3.0 INTRODUCTION This Quality plan is a structured method of defining and establishing the steps necessary to assure that a product meets or exceeds the customer's expectations. The main topics will be used in the overall product schedule to assure systemic quality implementation. The Quality plan also provides a summary description of the systems used in minimizing process and product variations while maintaining focus on improving the business objectives of Initial Field Incident Rate (IFIR), Defects per Hundred Units (DPHU) and overall customer satisfaction. A cross functional team approach is used with members from all strategic disciplines; including the supplier. 4 26 4.0 QUALITY GOALS FY99
FC Switch: FY 99-Q4 FY00-Q1 FY00-Q2 FY00-Q3 FY00-Q4 - ---------- -------- ------- ------- ------- ------- IFIR: [*] [*] [*] TBD TBD
5.0 APPLICABLE DOCUMENTS AND AMENDMENTS ISO 9001 and 9002. 6.0 QUALITY PROGRAM MANAGEMENT 6.1 Organization The Storage Systems organization operates under the direction of the Enterprise Systems Group, and Regional Business units. To ensure appropriate attention, metric responsibilities for the regions are shared at Enterprise Systems Group (ESG) Storage Division level while the individual regions are ultimately responsible for monitoring trends and improvements. All improvements are shared on a world wide scope. 6.2 Quality Planning The Quality Planning Process is designed to assure a comprehensive and critical review of the engineering requirements and other related technical information. At this process stage, a preliminary feasibility analysis will be made to assess the potential problems that occur during manufacturing and field deployment. The scope of this plan will assume that Dell will receive the fully configured and assembled product marked with the Dell logo and packed in Dell boxes as designated in the business agreement. The supplier will ensure product integrity. Dell will ship the already boxed units. 6.2.1 Design 6.2.1.1 Development Review concept to estimate impact on IFIR relating to prior programs. Identify any new key products and process characteristics and performance tracking systems. Assist supplier in performing benchmark studies and initiate DFMEA and DFM/DFS where applicable. 6.2.1.2 Prototype Improve metric targets from lessons learned. Finalize performance tracking methodology. Initiate PFMEA using the previous DFMEA as a baseline. Identify gages/test equipment. Initiate preliminary process capability study. *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 5 27 6.2.2 Production 6.2.2.1 Eval Test Characterize special product and processes for the testing, quality, and defect reporting/prevention systems. Issue control plan to document these and quantify test performance. Finalize process capability study. 6.2.2.2 Pilot Plan for production system integration. Schedule time, hardware and testing requirements including compatibility will Dell products and software. 6.2.2.3 Launch Risks identified in the D/PFMEA have been assessed. Metrics have been adjusted accordingly. Quality Measurement System improvements identified. 6.3 Metric Goals and Analysis Metrics for IFIR, and M&W will be established by the Quality function of the ESG Storage Division organization. These will take in account similarities from historical products along with variables relating to new technology and lessons learned improvements. 6.4 Training/Certifications New technologies and special processes will be targeted for training. JIT training will be scheduled with Customer Support, Field Service, manufacturing and Engineering. Specialized positions necessary for the product may be established with necessary training and position certifications provided to the personnel. Training for third party maintainers for on-site installation and implementation is necessary. 7.0 CONTROL OF PURCHASES 7.1 Procurement Control 7.1.1 General Comments Supplier Quality responsibility for FC Switch (all regions) will be supported out of World Wide Supplier Quality Engineering, which is under the direction of Procurement and will assume responsibility Secondary Storage in Q3, FY 1999. World Wide Suppler Quality Engineering Charter of Expectations that define quality system, manufacturing, and test process requirements are flowed down to the supplier. The Supplier shall comply with all the requirements contained in the Charter of Expectations. Review the drawings and specifications then formulate the supplier quality system requirements invoked at the supplier and provide a level of control class/type of commodity. Ex: design change submittal, test procedures, Pareto listings, inspection plans, etc. 7.1.2 Development Review concept to estimate impact on IFIR and DPHU relating to prior programs. Identify any new key products and process characteristics and performance tracking systems. Perform benchmark studies. Assist suppliers with DFMEA and DFM/DFS 6 28 7.1.3 Prototype Improve metric targets from lessons learned. Finalize performance tracking methodology. Assist suppliers with PFMEA. Identify gages/test equipment. 7.2 Approved Suppliers Facility and system conformance/capability studies performed Supplier Survey performed after approval of business contract. Quality system and document assurance of delivered product quality. Maintain approved status; periodic quality system audits. 7.3 Incoming Quality Assurance 7.3.1 First Article Inspection First Article Inspection shall be performed by the Supplier on all or any parts integrated into the top level assembly and including Top Level Assembly. Additionally, WWSQE will review first article documentation and perform a complete first article inspection of the top level assembly to verify a compliance with engineering intent and processes. Quality Engineering will identify candidates for FAI. An inspection plan will document the necessary inspection criteria. Any inspection discrepancies will be coordinated with Design Engineering and the supplier. All discrepancies will be resolved prior to launch. 7.3.2 IQA Instructions Incoming Inspection Plan will document the part's inspection plan and level. This will determine whether the part should be dock to stock, FAI, etc. 8.0 DESIGN and MANUFACTURING CONTROL * All items listed under the section DESIGN AND MANUFACTURING CONTROL [*] * Supplier shall also adhere to stipulations specified in the WWSQE Charter of Expectations 8.1 Process Capability Processes will be reviewed for capabilities to support the new products. A PFMEA will be based on the DFMEA previously used in the design phase. Capability analysis will include but not limited to: WI, bitmaps, hardware flow, Doc Box kiting, MRB and overall system routing with the overall goal directed to process improvements. This will be used as one of the basis for the metrics forecasting models. 8.2 Commodity Analysis Each major part will be reviewed for impact to production flow, installation process, failure rates and special handling processes. This will be used as one of the basis for the metrics forecasting models. 8.3 Pilot build Select quantities and configurations are built and tested using the manufacturing environment. This type of build is used to verify the readiness of the manufacturing process. All failures during this phase will be applied to the DFMEA or PFMEA for analysis to determine root cause, C/A or risk assessment. *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7 29 8.4 Cycle time improvements Key time related processes will be monitored for baselines. Benchmark studies from other LOBs will be reviewed. Select processes or steps will be the focus for performance improvements. Ex: RMA cycle time, Testing time. 8.5 Work Instruction Review Instruction for activities affecting the product quality will be reviewed for scope, content and context. This will include text and bitmap based instructions for accomplishing inspection and managing hardware activities. Responsibility of implementation and control is documented in the ISO procedures. 8.6 Quality Levels Key metrics are monitored for adverse trends. Daily and weekly failures are monitored for early warning trends. Over the day, three failures of the same type will cause the issue to escalate per the escalation process. 8.7 Defect Containment To prevent further Line Rejects, steps will be taken to isolate or contain the circumstance/part that caused the reject. This will include the following processes: Stop Build, Stock Purge, MRB impound, etc. The scope includes visibility in all stock, revolver, and supplier locations; including materials in transit. 8.8 Escalation Path Steps are in place in the event adverse trends are seen or if more than three repeat failures occur in the same day. The first level is to contact Manufacturing Quality Engineering. Circumstances will be analyzed to decide further escalation. Depending on root cause, the second escalation level is to contact Storage Systems Quality Engineering. They will direct a detailed analysis to address containment and further problem solving steps. The final escalation is to issue a stop ship/build. 8.9 Defect Root Cause analysis Analysis for individual commodities have different documented trigger points. System failure rates will be tracked and monitored on a weekly basis by Storage Systems Quality Engineering. When the analysis extends to a vendor provided item (i.e. HD's), Supplier Quality Engineering involves the supplier, assuring root cause analysis occurs at the earliest point. 8.10 Preventative Corrective Actions Corrective action implementation is dependent on recurring defect trends and the defect's severity. Once root cause has been established, prevention steps are identified, reviewed by Quality Engineering, documented, and implemented. Periodic review assures the action's effectiveness or need for more. 8.11 Material Review Board (MRB) The MRB is responsible to assure nonconforming hardware is segregated from normal production materials. Discrepant material found during the manufacturing cycle is to be conspicuously tagged for subsequent MRB impound. The MRB will evaluate and disposition the discrepancies. 8.12 Out of Box Experience (OBE) A sampling of units will be unpacked after being received by Dell for inspection purposes. Documented OBE procedures will specify the steps necessary for the inspected systems. In the event of a finding, closed loop corrective actions will occur. 8 30 8.13 Stop Build/Ship Criteria During the root cause analysis, if a defective condition will adversely the customer's quality level, a decision for containment is made. Manufacturing, Quality and management considers the defect's impact and reaches a consensus for hardware disposition. Stop ship deals with defects that can be contained via the manufacturing process; stop ship addresses all stock, both work in process and at the revolver. 8.14 Statistical Process Control and Analysis The majority of tests will be one hundred percent in accordance with the automated testing process. SPC is used to specify control limits on these test processes and help identify instances for further investigation. 8.15 Tooling/Test Equipment Hardware necessary for product verification will be controlled to reduce process variability. This will include screen stations, flash stations, network connections, Final Test and Hi-Pot stations. Location monitoring will establish trends for process improvements. Calibration schedules will be maintained for specific equipment and calibrations maintained by Process Engineering. Computer software will be maintained by Quality/Test and Manufacturing Engineering. Code certification and control will be the responsibility of Test Engineering. 8.16 PM/Calibration Process Systems requiring periodic adjustments or susceptible to performance degradation will be assigned a schedule for periodic maintenance. Systems requiring close tolerance activities, i.e. torque or voltage measurements, will be calibrated and identified with a calibration label. Optimum recalibration frequencies will be assigned along with recall dates. Recalibration dates will be reviewed by manufacturing and audited by Quality. 8.17 Design Changes The supplier will ensure advance notification to Dell of design changes consistent with the business contract. 8.18 Failure/Corrective Analysis The supplier will ensure returned failure/corrective analysis within the time specified in the business contract. 9.0 RISKS 9.1 DFMEA Issues Any issues remaining unresolved or not forwarded to the PFMEA will be assigned a rating according to the standard FMEA process. Trend analysis will determine need to forward lessons learned into future products. These will be documented during the product's post mortem. 9.2 PFMEA Issues Any issues remaining unresolved will be assigned a rating according to the standard FMEA process. Trend analysis will determine need to forward lessons learned into future products. These will be documented during the product's post mortem. 9 31 9.3 System Management Issues System issues will be documented during the product's post mortem. Analysis will determine need to forward lessons learned into future products. 10 32 SCHEDULE C TO AGREEMENT NUMBER BRO-001 DELL SERVICE OEM REQUIREMENTS PROJECT: FIBRE CHANNEL SWITCH 33 DELL SERVICE OEM REQUIREMENTS PROJECT: FC-Switch Date: November 19, 1998 Revision 1.2 Furnished By: Rob Tahamtan DELL Customer Service and Support Engineering (512) 728-0364 Rob_Tahamtan@DELL.com 34 DELL Service OEM Requirements The following is a conceptual framework regarding service requirements for Product(s). DELL and BROCADE agree to meet and work cooperatively to identify additional items and further define the service requirements below. To the extent any of the provisions below conflict with the Agreement, the Agreement shall take precedence. 1 BROCADE FIELD SERVICE COMMITMENT 1.1 BROCADE shall provide a [*] from date of BROCADE shipment to DELL, return to factory warranty on all parts and labor on FC-Switch with exception of GBICs. GBICs warranty is limited to [*] from date of BROCADE shipment to DELL. BROCADE shall also provide to DELL a pass-through warranty as defined in Section "9" of the Agreement. 1.1.1 All FRUs are new or remanufactured Products. 1.2 BROCADE shall provide replacement parts -including: hardware, firmware, software, training material, diagnostics and technical support as described in section 4.0 - for [*] from the last date of manufacture, as stated in Section "8.2" of the Agreement. 1.3 BROCADE shall provide worldwide technical support through identified personnel via BROCADE's paging system. (See Section 4.0) 1.4 BROCADE shall provide master copy of service installation and trouble-shooting guides, included in DELL User's Guide, to DELL for all Product(s) sold to/by DELL as normally available from BROCADE. It is DELL's responsibility to supply Service manuals to DELL Service Providers (DSPs) 1.5 BROCADE shall provide listing of recommended field replaceable parts on Products sold to DELL. 1.5.1 BROCADE shall provide estimated repair times (or MTTR) for the FRU list. These estimates should cover the time required to replace each FRU and verify the fix.
FRU MTTR --- ---- CU-GBIC or SW-GBIC [*] Switch (excluding GBICs) [*]
*Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 35 1.6 BROCADE shall provide timely Product updates (firmware, release notes, and technical bulletins) to DELL by permitting DELL access to BROCADE's web site. 1.7 BROCADE shall provide user-friendly diagnostics, as mutually agreed up on, to DELL. DELL may distribute these diagnostics to DSPs. 1.7.1 Diagnostics should reflect DELL name or no reference to either company. 1.7.2 BROCADE grants DELL the right to use FC-Switch embedded diagnostics [*]. 1.7.3 BROCADE shall make available the "Web Tools" and "Zoning" software Products, and other software Products as mutually agreed, to DELL as licensable Products. 1.7.4 DELL has selected not to license the optional SES Product. 1.8 BROCADE shall provide sustaining engineering for all BROCADE Product(s) sold to DELL for the specified warranty period of the Products. 1.9 BROCADE shall provide a detailed RMA process/procedures for defective/returned Product. DELL shall return defective parts for credit for the then-current purchase price during warranty period without verification by DELL Service Logistics. (See Section 9.0 of the Agreement). 1.10 BROCADE shall provide DELL Level III engineers with access to the BROCADE service web site for immediate access to current information pertaining to BROCADE's serviceability, Product updates, software updates, upgrades and patches. BROCADE shall inform DELL Level III personnel of software updates and upgrades via an email. It is DELL's responsibility to obtain the software from the BROCADE web site. 1.11 Provided that DELL POs are received [*] prior to RTS, BROCADE shall deliver to DELL all requested FRUs [*] prior to DELL's RTS. If DELL POs are not placed within this specified lead time, BROCADE shall make commercially reasonable efforts to supply FRUs within the requested time frame. 1.12 BROCADE shall provide FRUs, which shall be priced as defined in Schedule "A" of the Agreement. (Emergency expedited FRUs shall be provided at additional cost.) 1.12.1 DELL requests FRUs to be individually packaged and labeled in accordance with DELL packaging specification, as outlined in Schedule "D" to the Agreement. 1.12.2 Orders for FRUs shall receive the same priority and lead time as orders for manufacturing. *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 36 1.13 BROCADE shall use commercially reasonable resources to resolve/cure all quality problems discovered by DELL or DELL customers in a timely manner. (See Section 4.5) These problems shall be restricted to DELL tested and DELL released configurations. 1.14 BROCADE shall provide DELLsupport/services as specified in the Escalation Section of this document, Section 4. 1.15 BROCADE defines roles of technical support engineers as described in the table below. Level One Level 1 support is the first line, direct Technical Support End User contact, most likely via a Engineer telephone call handling group provided by DELL. - Level One support includes: - First contact direct DELL/End User interaction - Information collection and analysis - Identification of whether the problem is known and has a known solution - Troubleshooting and problem reproduction - Problem report administration and tracking DELL end user customers do not contact BROCADE directly for questions related to BROCADE's Products. Level Two Level 2 support is "technical support" Technical Support provided by DELL personnel. Level 2 is Engineer typically where the Product "experts" reside and serve as the escalation point for Level 1. Level 2 is expected to resolve all known problems, installation and configuration issues, assist in firmware or driver updates at the End User site, search BROCADE posted Technical Notes and other technical information supplied that shall assist in providing problem resolutions. All pertinent data should be entered in the DELL problem tracking database. Should the Level 2 analyst be unable to resolve a problem, either because of lack of expertise, exhausted troubleshooting knowledge, or expiration of the allotted Level 2 resolution time, they may escalate the problem to Level 3 for resolution. Level 2 shall continue to work with Level 3 to accomplish resolution. Level 2 shall communicate all resolutions back to the End User. Escalations should be presented to BROCADE engineers in the form of a problem tracking data base record with all pertinent configuration detail and failure information or symptoms documented. 37 In an effort to maintain an efficient support organization and crisp exchange of information, DELL shall limit the number of support personnel (Level 2) authorized to contact BROCADE (Level 3) to a total of 8. Level Three Both DELL and BROCADE provide level 3 Technical Support support. BROCADE System Engineers (SE) Engineer and/or Technical Support Engineers (TSE). Level 3 is the first point of contact for technical issues between BROCADE and DELL. Once a problem is escalated to Level 3, BROCADE shall utilize commercially reasonable resources to resolve such problem within DELL tested and DELL released configurations. Prior to escalating to Level 3, it is expected that DELL shall provide the following information and documentation: - Any error information from the device connected to the switch and from the switch. - All names and revisions of hardware equipment. - All firmware revisions of the drivers. - Any log files from the devices connected to the switch. - Any trace file from the devices connected to the switch. - The configuration information of the equipment being used. Assigned Level 3 support personnel (SE and/or TSE) can be contacted via direct dial, email to an established "support" alias, web site initiated input, and by calling BROCADE's 1-888-ATFIBRE support number. Direct access to BROCADE support personnel shall be possible during normal BROCADE business hours (8 AM to 5 PM PST, M-F). Emergency situations are handled via 7 X 24 pager coverage at 1- 888-ATFIBRE (1-888-283-4273). 2 DELL FIELD SERVICE COMMITMENT. 2.1 DELL shall agree to BROCADE's definition of Technical Support Engineers in Section 1.17. 2.2 DELL shall agree to provide first, second, and third level support to DELL's worldwide customer base as described in Section 4. 38 2.3 DELL shall identify DELL Level III engineering to BROCADE for direct interface with BROCADE level III staff. 2.4 DELL shall maintain appropriate stocking levels to support service demand in order to reduce FRU expedite occurrences 3 TRAINING REQUIREMENTS 3.1 BROCADE shall provide to DELL a complete set of training classes for proper installation and resolution of field failures (one class not to exceed one week, and each class not to exceed twelve (12) persons for [*] for the fee schedule as defined in the table below. BROCADE shall provide additional Product training for DELL personnel and DELL designated DSPs worldwide at BROCADE's standard charge and terms. Fees and [*] in the table below are one time quotes only for these specific instances as listed.
Brief course Switch provided Audience description by: Duration [*] Price - -------- ----------- --------------- -------- -------- ----- DELL Courses 1, 2 BROCADE 3-5 days, [*] [*] instructors and 3 as [*] Free* described in and DELL BROCADE's Level III published engineers material DELL Courses 1, 2 BROCADE shall 3-5 days [*] [*] international and 3 as provide the instructors described in required number BROCADE's of switches (up to published 6) for training to material DELL. [*] DELL Level I Courses 1, 2 DELL 3-5 days [*] [*] & II and 3 as engineers described in BROCADE's published material
*Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 39 DELL Level I Courses 1, 2 BROCADE shall 3-5 days [*] [*] & II and 3 as provide the engineers described in required number (Japan) BROCADE's of switches (up to published 6) for training to material DELL. [*]
3.2 Training materials shall be made available in "master-copy" format and licensed to DELL. BROCADE shall provide updates to such training materials as available for the life of the Products. 4. TECHNICAL SUPPORT AND ESCALATIONS 4.1 DELL supports their worldwide end user base through a number of regional support centers. 4.1.1 These centers are staffed with Level I and Level II engineers and operated on a 7 day, 24 hour basis. 4.1.2 DELL's Level III Server Product Support is located in Austin, Texas and is currently available on a 5 day, 9 hour per day basis. 4.1.2.1 At the time of this writing the Server Product Support group is managed by Patricia Westerfield. Patricia can be reached via: Phone - 512-728-4260 Pager - 888-857-9801 email - pat_westerfield@DELL.com 4.2 BROCADE's DELL Engineers shall take calls primarily from the DELL Level III Server Product Support group located in Austin. There shall be no charges for support delivered according to these parameters during the Product warranty period as defined in Section 1.1. Charges may apply in situations as defined in Section 4.3.2. 4.2.1 BROCADE shall provide support on DELL tested and DELL released configurations 4.2.2 DELL shall provide BROCADE with representative equipment sufficient to test and duplicate escalated problems/issues. 4.3 DELL and BROCADE agree to following technical support call handling flow: *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 40 [CHART] 4.3.1 DELL shall follow the standard escalation processes, during normal working hours. That is: a DELL Level II, to DELL Level III, to BROCADE Level III escalation path shall be followed. 4.3.2 For after hours Severity One problems, selected DELL Level II engineers as specified by DELL from time to time (up to two per region) in Americas, Europe, Asia and Japan shall escalate to BROCADE Level III directly. After hours in this context is based on the Austin, Texas location of DELL's Level III group, which is in the Central Time Zone. Such escalations are limited to [*] per month per region. Escalations exceeding [*] per month shall be billable at the rate of [*] per incident. Escalations for non-Severity One problems shall be billed at the rate of [*] for the [*] incident and [*]. Dell shall provide an open purchase order to BROCADE for the invoicing of these billable services. 4.3.3 DELL Level II engineers shall be responsible for updating DELL Level III engineers on any after hours activity that took place directly with BROCADE. 4.3.4 Designated Level II engineers shall be identified by DELL management to escalate directly to BROCADE after hours. These names shall be communicated to BROCADE so that any calls from those individuals shall be properly handled. 4.4 BROCADE shall provide DELL with the following response times: Priority 1 System down [*] Priority 2 Degraded system operation [*]
4.5 BROCADE shall provide DELL with the following escalation time lines and process: *Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 41 4.5.1 Escalations from DELL shall generally come from DELL Level III engineers but under certain conditions as covered in Section 4.3.2 may be initiated by DELL Level II engineers. 4.5.2 During normal BROCADE hours of 8 A.M. to 5 P.M., Monday through Friday, PDT, and excluding BROCADE observed holidays, the first escalation request to BROCADE should be to the BROCADE assigned Level III engineer. This person can be reached by pager at 1-888-397-1728. At the present time this contact is Tom Kirchner. 4.5.3 The BROCADE Level III engineer shall normally respond to the initial request within 30 minutes during normal BROCADE business hours. A call shall be opened and a call number assigned through the BROCADE call tracking database. 4.5.4 Calls shall be worked between the BROCADE Level III engineer and the DELL escalation engineer until the problem is resolved. For Severity 1 problems the BROCADE Level III engineer shall gather information, perform problem analysis and trouble shooting, and work this problem for no more than four hours. After this time the call shall be escalated from the BROCADE Level III engineer to the internal BROCADE Technical Support Engineering ("TSE") group to apply more resources. 4.5.5 The TSE group shall analyze the available data and provide a resolution or escalate this problem to BROCADE's development engineering group within four hours. The call record shall be updated by the TSE along with this request for additional resources. If this time frame is missed the Director of BROCADE Engineering is automatically notified by the BROCADE call handling tool. The Director shall then ensure that this issue is escalated to the next level and track until resolved. 4.5.6 An Engineering resource shall be assigned to work with the TSE resource within two hours of the escalation being issued. 4.5.7 DELL shall be contacted by the TSE and the engineering escalation engineer within two hours of the BROCADE internal escalation as described in Section 4.5.5 to further assess the problem, collect data, and either resolve the issue or further develop a plan for resolution. 4.5.8 Resources shall be assigned on a continuing basis until the escalation is closed. Note: the escalation can be closed when DELL is satisfied with BROCADE's response and plan of action - which may not coincide with the final problem resolution (bug fix, patch, etc.) The maximum time to resolve a Severity 1 issue is five working days. 4.5.9 The TSE resource requesting escalation shall facilitate needed communication with DELL and required exchange of data or equipment as appropriate in the course of problem resolution on an as needed basis. 4.5.10 ALL escalated calls require daily updates through the BROCADE call handling tool. Any report not updated by the end of the business day shall result in a 42 warning flag message being sent to the assigned escalation engineer, to the Director of BROCADE Engineering, the VP of Engineering, and the VP of Sales. 4.5.11 If this escalation issue is not resolved within five working days the Director of BROCADE Engineering and the VP of Engineering shall apply all resources and actions as necessary to further expedite resolution of this issue. 4.5.12 In general the following chart specifies BROCADE severity levels and service objective goals.
Severity Definition Service Objective Resolution Time - -------- ---------- ----------------- --------------- 1 BROCADE Product is completely non- Respond to initial request within Less than [*] functional, or deemed a safety hazard, situation [*] during normal (A work around to be has high impact on development or delivery BROCADE business hours, and implemented within efforts. Installation problems. [*] for non-business hours. [*] Resources applied until a solution or acceptable work- around is found. 2 BROCADE Product is functionally impaired, Resources applied continuously, Less than [*] has substantially degraded performance but is during business hours, until a (A work around to be not completely dysfunctional. There are no solution or work-around is found. implemented within [*] available work-arounds. Situation has medium impact on DELL activity 3 BROCADE Product or advertised functionality Resources applied on a priority Next maintenance may be slightly impaired but is operational, has basis, until a solution or a work- release or [*] low to no impact on DELL activity, and there around is found. whichever is less. are work-arounds available. 4 Generic questions, and enhancement requests. Answer generic questions or [*] for generic provide path to answers within questions. reasonable time frames. The Enhancement requests BROCADE web site shall be the are processed on a case prime repository for this type of by case basis. information. Enhancement requests shall be reviewed and implemented in the next major release, where feasible, or to meet specific commitments made.
*Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 43 DELL SOFTWARE LICENSE AGREEMENT This is a legal agreement between you, the user, and Dell Products, L.P. By opening the software packet(s), you agree to be bound by the terms of this agreement. If you do not agree to these terms, promptly return all software items (disks, written materials, and packaging) for a full refund. You may use one copy of the software on only one computer at a time. If you have multiple licenses for the software, you may use as many copies at any time as you have licenses. "Use" means loaded in temporary memory or permanent storage on the computer. Installation on a network server solely for distribution to other computers is not "use", if you have a separate license for each computer to which the software is distributed. If users will exceed the number of licenses, you must have a reasonable process to assure that the number of persons using the software concurrently does not exceed the number of licenses. The software is protected by United States copyright laws and international treaties. You may make one copy of the software solely for backup or archival purposes or transfer it to a single hard disk provided you keep the original solely for backup or archival purposes. You may not rent or lease the software or copy the written materials accompanying the software, but you may transfer the software and all accompanying materials on a permanent basis, if you retain no copies and the recipient agrees to the terms, hereof. Any transfer must include the most recent update and all prior versions. You may not reverse engineer, decompile or disassemble the software. If the package contains 3.5" and 5.25" disks, you may use only the disks appropriate for your computer. You may not use the disks on another computer or network, or loan, rent, lease, or transfer them to another user except as permitted by this agreement. LIMITED WARRANTY Dell warrants that the software disks are free from defects in materials and workmanship under normal use for ninety (90) days from the date you receive them. This warranty is limited to you and is not transferable. Any implied warranties are limited to 90 days. Some jurisdictions do not allow limits on the duration of an implied warranty, so this limitation may not apply to you. The entire liability of Dell and its suppliers, and your exclusive remedy, shall be (a) return of the price paid for the software or (b) replacement of any disk that does not meet this warranty which is sent with a return authorization number to Dell, at your cost and risk. This limited warranty is void if any disk damage has resulted from accident, abuse, misapplication, or service or modification by someone other than Dell. Any replacement disk is warranted for the remaining original warranty period or 30 days, whichever is longer. Dell does not warrant that the functions of the software will meet your requirements or that operation of the software will be uninterrupted or error free. You assume responsibility for selecting the software to achieve your intended results, and for the use and results obtained from the software. Dell disclaims all other warranties, express or implied, including but not limited to implied warranties of merchantability and fitness for a particular purpose, for the software and all accompanying written materials. This limited warranty gives you specific legal rights. You may have others, which vary from jurisdiction to jurisdiction. In no event shall Dell or its suppliers be liable for any damages whatsoever (including, without limitation, damages for loss of business profits, business interruption, loss of business information, or other pecuniary loss) arising out of use or inability to use the software, even if advised of the possibility of such damages. Because some jurisdictions do not allow an exclusion or limitation of liability for consequential or incidental damages, the above limitation may not apply to you. U.S. GOVERNMENT RESTRICTED RIGHTS The software and documentation are provided with Restricted Rights. Use, duplication or disclosure by the Government is subject to restrictions as set forth in subparagraph (c)(1)(ii) of the Rights in Technical Data and Computer Software clause at DFARS 252.227-7013 or subparagraphs (c)(1) and (2) of the Commercial Computer Software-Restricted Rights at 48 CFR 52.227-19, as applicable. Contractor/manufacturer is Dell Products, L.P., One Dell Way, Round Rock, TX 78682. This license is effective until terminated. It will terminate upon the conditions set forth above or if you fail to comply with any term hereof. Upon termination, you agree that the software and accompanying materials, and all copies thereof, will be destroyed. This agreement is governed by the laws of the State of Texas. You acknowledge that you have read this agreement, you understand it, you agree to be bound by its terms, and that this is the complete and exclusive statement of the agreement between you and Dell regarding the software. 44 SCHEDULE D TO AGREEMENT NUMBER BRO-001 DELL INBOUND PACKAGING STANDARDS PART NUMBER 11500 45 DELL COMPUTER CORPORATION INBOUND PACKAGING STANDARDS PN- 11500 REV A06 Page 1 46
REV ECO DESCRIPTION DATE APPROVED - --- --- ----------- ---- -------- A00-00 1285 Release for procurement use. 08/10/87 ---- ---- A01-00 2182 Revise and update. 02/28/89 Pete Genix A02-00 3650 Correct spelling and revise wording. 07/05/90 Pete Genix A02-01 11401 Update description to conform to Naming Standard. 10/19/93 Rita Maloy A03-00 15031 Update rack height requirements. 12/13/94 Greg Peden A04-00 15031 Incorporate reference of PN 00121 for test method. 12/13/94 Pete Genix A05-00 Update and revise spec to include line ready packaging requirements. - JB 12/15/95 A06-00 Tighten palletization methods and add pictorials. - JB 02/27/96
Page 2 47 TABLE OF CONTENTS 1. PURPOSE 2. GENERAL SUPPLIER RESPONSIBILITIES 3. COMPLIANCE 4. DEFINITIONS. 5. PACKAGING CRITERIA 6. LINE READY PACKAGING 7. PALLETIZATION REQUIREMENTS 8. MARKING AND IDENTIFICATION 9. LABELING REQUIREMENTS 10. PACKING LIST
Page 3 48 1.0 PURPOSE This Dell Computer Corporation (DCC) Specification defines for our suppliers packaging requirements that might be specific for Dell Computer Corporation. The goal of this document is to specify DCC's requirements for receiving; packaging protection; warehouse; safety and line ready usage. 2.0 GENERAL SUPPLIER RESPONSIBILITIES 2.1 COMMUNICATIONS 2.1.2 Vendors shall communicate packaging assumptions to Dell Computer Corporation in quote, including factors such as cost, box dimensions, weight, quantity per box and internal packaging descriptions. 2.1.2 This communication shall be coordinated through DCC purchasing. 2.1.3 Vendors shall communicate any modifications to packaging that might be mutually beneficial. 2.1.4 Vendors shall provide packaging drawings and specifications when available. 2.2 PRODUCT PROTECTION 2.2.1 All shipments to DCC must be packaged and/or palletized so that both containers and contents arrive at DCC free from damage. 2.2.2 Pallet loads received by DCC may be broken down into their individual containers to be reshipped. These individual containers may require a packaging test to verify the performance of the suppliers packaging during testing per Dell's Packaged Product Test Procedure. Part Number 00121. 2.3 LEGAL It is the suppliers obligation to ensure that packaging and palletizing comply with all applicable laws and regulations including: Rail Regulations: Uniform Freight Classification, Rule 41. Truck Regulations: National Motor Freight Classification, Item 222. Air Regulations: International Air Transportation Association Page 4 49 3.0 COMPLIANCE 3.1 IN THE EVENT OF NON-COMPLIANCE DCC RESERVES THE RIGHT TO: 3.1.1 Reject and return any shipments received that are improperly packaged or identified. 3.1.2 Charge the supplier for the cost of labor and materials for any repackaging resulting from the non-compliance with DCC specifications. 3.1.3 Remove from it's list of approved suppliers, any who repeatedly fail to comply with the DCC Packaging requirements. 4.0 DEFINITIONS ASTM - American Society of Testing and Materials Line Ready - Part prepared for use on production line. Michelman - A coating process used in the corrugated industry to reduce abrasion. O.D. - Outside Dimensions Unitized Load - Two or more containers secured to a pallet or shipping base. 5.0 PACKAGING CRITERIA 5.1 CONTAINER INTEGRITY All containers must comply with the National Motor Freight Classification rules, items 222 and 222-1 for all packaged product received by DCC. 5.2 CUBE EFFICIENCY Container selection shall consider the amount of space the product occupies, the number of cartons per pallet load, and the number of pallets per trailer/sea container. Page 5 50 PACKAGING CRITERIA (CONTINUED) 5.3 ELECTROSTATIC SENSITIVE PARTS 5.3.1 Shall be packaged as defined in Military Specification 1696 for Class One parts with a 1000 Volt sensitivity or below. 5.3.2 These parts shall be received in containers which provide electrostatic field shielding properties per standard EIA-541. 5.3.3 Static shielding bags shall have the following electrical surface resistivity properties (ohms/square) SURFACE RESISTIVITY (Outside Layer) between 10 7 & 10 12 (+/-10%) SURFACE RESISTIVITY (Inside Layer) 10 7 or less (+/-10%) SURFACE RESISTIVITY (Metalized Layer) 10 3 or less (+/-10%) 5.4 MECHANICALLY HANDLED LOADS Refer to Palletization Requirements in Section 6.0. 5.5 MANUALLY HANDLED PACKAGES Gross weight of the package shall not exceed 50 pounds. Packages with gross weight under 35 pounds is preferred. 5.6 PARTS CLEANLINESS All parts will be clean prior to packaging. Cleanliness of the part is not to be degraded by the packaging materials or any of it's components. 5.7 PARTS INTEGRITY 5.7.1 Parts shipped on different purchase orders must be packaged separately and marked accordingly. 5.7.2 Each different part number item must be packed in it's own discrete package and identified. Refer to Markings and Identification in Section 7.0. 5.8 PACKAGING CLOSURES The packaging closure must maintain interior cleanliness and ensure that contents remain intact and damage free during shipping and handling. Page 6 51 6.0 LINE READY PACKAGING DCC in writing a contract may specify that "line ready packaging" is requested. The ideal is to have packaging and sub-packaging that flow through DCC's manufacturing process without any unboxing or modification to assembly areas. 6.1 GENERAL GUIDELINES 6.1.1 Internal packaging should be designed to allow for minimal material handling and secondary detrashing upon product removal. 6.1.2 Components should not be individually wrapped or bagged unless sensitive to cosmetic or electrostatic discharge. 6.1.3 Donnage should be minimized. 6.1.4 Reusable packaging should be considered when applicable. 6.1.5 Designs should have minimal adhesion of two dissimilar materials (foam and corrugated) to allow for ease of recycling. 6.1.6 Boxes to be manually handled should be smaller than roughly 24" x 20" x 20". If the box is larger then it should be broken into smaller sub-boxes or sub-packs. 6.2 LARGE PALLETIZED BULK CONTAINERS 6.2.1 These containers shall consists of a design that allows for one lid to be removed for access to all parts inside. 6.2.2 The height of the palletized load shall not exceed 48 inches (including pallet). 6.2.3 Pallet shall be a standard 40 x 48 pallet with a 48 x 48 pallet acceptable. Other pallet designs will need approval to insure they are compatible with DCC's internal transport devices. 6.3 BULK BOXES 6.3.1 Bulk boxes should weight no more than 35 pounds (50 pounds absolute maximum). 6.3.2 Boxes shall have Dell part number and part quantity on each of the width panels. 6.3.3 Bags shall be used for abrasion protection as a last resort. Other anti-abrasion measures should be considered first such as coatings on corrugated. 6.3.4 Box shall be designed so that parts will not be damaged if box is opened by a knife. 6.3.5 Ideal box size is 24 x 20 x 18 or smaller. 6.3.6 Ideally lids should be designed so that they can be removed in a one step process. Page 7 52 LINE PACKAGING (CONTINUED) 6.4 PIECE PART BOXES 6.4.1 Small piece part boxes shall easily countable quantities inside (10, 50., 100, etc...). 6.4.2 Boxes shall have Dell part number and part quantity on each width panel. 7.0 PALLETIZATION 7.1 REQUIREMENTS 7.1.1 Palletization is required for all orders that occupy more than 50% of a pallet load or exceeds 50 pounds per package. 7.1.2 Load Height Maximum: 60 inches including pallet(s) 7.1.3 Load Weight Maximum: 1000 pounds gross palletized load 7.1.4 Leaning, bulging, and pallet loads with overhang are not acceptable. --- 7.1.5 Standard 40 X 48 inch pallets are preferred, 42 X 48 inch and 48 X 48 inch pallets are acceptable. 7.1.6 All pallets must be constructed with runner and stringer boards and have four way entry, pallets with corner blocks or cones are unacceptable. Pallets without bottom runners are also unacceptable. 7.1.7 All palletized loads shall have a corrugated slip sheet between the boxes and the top runners to aid in load distribution. [CHART] Page 8 53 PALLETIZATION (CONTINUED) 7.2 STACKING 7.2.1 Packaging shall be designed to withstand double stacking of two similar pallets and must pass National Motor Freight Rule 180. . A "Do Not Stack" label does not absolve the suppliers of their responsibility for proper packaging. 7.2.2 The top surface of the pallet load shall be flat to permit stacking for both carrier and warehouse requirements. 7.3 MIXTURE OF PRODUCT. 7.3.1 Shipments of a given part number must be consolidated on the same pallet. 7.3.2 Different part numbers, as well as different purchase orders, can be consolidated in a bulk shipper with a single bill of lading if each part number group is individually packaged and labeled properly. 7.4 BANDING 7.4.1 Two-way banding using metallic or polyester material is required for all purchase orders that call out banding of loads. 7.4.2 Angle boards or edge protectors are required under bands to maintain individual container's integrity, as well as the pallet's. [CHART] Page 9 54 PALLETIZATION (CONTINUED) 7.5 STRETCHWRAPPED LOADS 7.5.1 Shrink films or stretch wraps must adequately secure the load to the pallet. The film must have adequate tack to prevent loose ends from hanging off the load. 7.5.2 Angle boards shall be used on the four vertical corners to prevent the corrugated from collapsing due to stretchwrap pressure. [CHART] 7.5.3 There shall be a minimum of three spiral wraps per unitized load. 7.6 COMBINATION PALLETIZATION METHODS Some commodity managers may require both banding and stretchwrap as a requirement. If both are required then all requirements in both sections apply. (I.E. angle boards shall be required on all four vertical edges and well as the horizontal banded edges. 7.6 TESTING Palletization loads to be tested per the Dell Packaging Specification 00121. 8.0 MARKING AND IDENTIFICATION Supplier shipments routed by common carriers must be accurately described on the bill of lading with the appropriate package description, as required by the National Motor Freight Classification. Page 10 55 9.0 LABELING REQUIREMENTS 9.1 REQUIREMENTS Receipt and storage of materials, requires that incoming loads be easily and quickly identified. All shipping containers must be identified with an "Outer Package Label" as specified in the "Electronic Industries Association Shipping and Receiving Bar Code Label Standard," available from Dell Computer Corporation's Procurement and Receiving Departments. 9.2 EXCEPTIONS Exceptions for OEM products will have superseding requirements as outlined by each commodity's contract/specification requirements. 10.0 PACKING LISTS 10.1 REQUIREMENTS 10.1.1 One packing list is required with each shipment, as it specifies the contents of the shipment received. 10.1.2 The preferred location of the packing list is on the outside of the shipping container, positioning it on the side or end, not on top. Securely affix a transparent envelope or tape such that the packing list is visible and protected from damage. 10.1.3 When the packing list is enclosed on the inside of a carton, that carton must be identified with a "Packing List Enclosed" label. 10.1.4 All packing lists must contain the following information: Name and Address of Supplier Dell Computer Corporation Part Number Purchase Order Number Name and Address of Receiving Location Number of pieces shipped Description of Material Shipping Date Case Number Page 11 56 SCHEDULE E TO AGREEMENT NUMBER BRO-001 DELL SUPPLIER LABELING SPECIFICATION PART NUMBER 13190 57 DELL SUPPLIER LABELING SPECIFICATION DELL Part No. 13190 Rev. A09-00 PROPRIETARY NOTE THIS ITEM IS THE PROPERTY OF DELL COMPUTER CORP. AUSTIN, TEXAS AND CONTAINS CONFIDENTIAL AND TRADE SECRET INFORMATION. THIS ITEM MAY NOT BE TRANSFERRED FROM THE CUSTODY OF DELL COMPUTER CORP., EXCEPT AS AUTHORIZED BY DELL COMPUTER CORP. AND THEN ONLY BY WAY OF LOAN FOR LIMITED PURPOSES. IT MUST NOT BE REPRODUCED IN WHOLE OR IN PART AND MUST BE RETURNED TO DELL COMPUTER CORP. UPON REQUEST AND IN ALL EVENTS UPON COMPLETION OF THE PURPOSE OF THE LOAN. NEITHER THIS ITEM NOR THE INFORMATION IT CONTAINS MAY BE USED BY OR DISCLOSED TO PERSONS NOT HAVING A NEED FOR SUCH USE OR DISCLOSURE CONSISTENT WITH THE PURPOSE OF THE LOAN WITHOUT PRIOR WRITTEN CONSENT OF DELL COMPUTER CORPORATION. 58 LABELING SPECIFICATION CONTENTS SCOPE 4 Purpose 4 Application 4 Subassembly (Parts) Classes 4 BARCODE DEFINITIONS 5 GENERAL LABEL REQUIREMENTS 6 Subassembly (Parts) Labels 6 Subassembly (Parts) Label Content 6 Type A Label 6 Type B Label 6 Type C Label 7 Type D Label 7 Twenty Digit Barcode 8 DELL Part Number 9 Manufacturer's Identification 9 Seven Character Date Code/Sequence Number Combination 9 Date Code 9 Sequence Number 10 DELL Part Number 10 Revision (Rev) Level Barcode 10 Label Placement 11 Code Density and Dimension 11 Code Height 11 Intercharacter Gap 11 Quiet Zones 11 Spacing Between Barcode and HRI 11 Spacing Between Edge Of Label and HRI 11 Readability and Printing Requirements 11 Subassembly (Parts) Label Material Requirements 12 Non-PCB/PWA (Label Types A and B Only) 12 Face Stock Characteristics 12 Adhesive Characteristics 12 PCB/PWA Labels (Label Type C Only) 12 Face Stock Characteristics 12 Adhesive Characteristics 12 Durability 13 Electronic Industries Association (EIA) Shipping/Receiving Label 13 EIA Label 13 EIA Label Content 13 EIA Label Location 15 Code Density and Dimension 15 Code Height 15 Intercharacter Gap 15 Quiet Zones 15 Spacing Between Barcode and HRI 15 Spacing Between Edge of Label and HRI 15 Height of Human Readable Interpretation 15 Readability and Printing Requirements 16 EIA Label Material Requirements 16
2 59 Face Stock Characteristics 16 Adhesive Characteristics 16 Durability 16 Sample Electronics Industry Association (EIA) Labels 17 ISO Country Codes 19
3 60 LABELING SPECIFICATION SCOPE 1.1 PURPOSE: The purpose of this document is to specify the characteristics, standards and requirements for electronic subassembly (parts) labels (referred to as PPID {piece part identification}) and EIA labels by suppliers to DELL Computer Corporation. 1.2 APPLICATION: This document shall apply whenever label marking and reading are employed on shipping containers and electronic subassemblies used in DELL products and when shipping components to DELL. 1.3 SUBASSEMBLY (PARTS) CLASSES: This document shall apply to each of the following subassembly classes as indicated by DELL Computer Corporation. - AC Adapters - Add on Cards (all types) - CD ROM's - Controller Cards - Tape Drives - Floppy Drives - Hard Drives - PCMCIA Card Interfaces - Keyboards - Monitors - PCB/PWA's (motherboards, risers, backplanes, and {as indicated by procurement}, cache cards, daughter cards, and other PCB's) - Portable Batteries - Power Supplies - Docking Modules/Port Replicators - Thermal Monitoring Cards - Selected notebook components 4 61 - 2.1 BARCODE DEFINITIONS: BAR - The darker element of a barcode. BARCODE - An array of rectangular bars and spaces in a predetermined pattern. BARWIDTH - The perpendicular distance across a bar measured from a point on one edge to a point on the opposite edge. Each point will be defined as having a reflectance that is 50% of the difference between the background and bar reflectances. BINARY - Pertaining to a characteristic or property involving a selection, choice or condition in which there are two possibilities. BINARY CODE - A code which makes use of exactly two distinct characters, usually 0 (zero) or 1 (one). CHARACTER - Letter, digit or other special form that is used as part of the organization, control or representation of data. A character is often in the form of a spatial arrangement of adjacent or connected strokes. CODE 128 - A variable length, alpha-numeric encoding the full ASCII 128 character set. Every character is made up of 11 modules containing three bars and three spaces. Bar and space width is one, two three, or four modules. Three different start characters are used to select one of three character sets, including a high-density numeric arrangement that can encode two numeric digits in each character. CODE DENSITY - The number of characters that can appear per unit of length, normally expressed in characters per inch (CPI). ELEMENT - A generic term used to refer to either a bar or a space. HUMAN READABLE INTERPRETATION (HRI) - The exact interpretation of the encoded barcode data presented in a human readable font. INTERCHARACTER GAP - The space between the last element of one character and the first element of the adjacent character of a discrete barcode. MARGIN (QUIET ZONE) - The area immediately preceding the start character and following the stop character, which contains no markings. SPACE - The lighter element of a barcode. START AND STOP CHARACTER - A distinct character represented by an asterisk (*), used at the beginning and end of each 3 of 9 barcode which provides initial timing references and direction of read information to the coding logic. The asterisk start and stop code is an integral part of, and peculiar to, the 3 of 9 barcode. SYMBOL - A complete barcode containing margins, start character, data characters, check digit (if any) and a stop character. UNIT SIZE - The bar width of a narrow element. The narrow bar and the narrow space are equal in the 3 of 9 barcode. 3 OF 9 BARCODE - a variable length, discrete, self-checking, bi-directional alphanumeric barcode. Its character set contains 43 meaningful characters: 0 - 9, A - Z, -, ., $, /, +, % and space. Each character is composed of nine elements: five bars and four spaces. Three of the nine elements are wide (binary value 1), and six elements of narrow (binary value 0). An additional common character, asterisk (*) is used for both start and stop delimiters. 5 62 LABELING SPECIFICATION GENERAL LABEL REQUIREMENTS 3.1 SUBASSEMBLY (PPID) LABELS 3.1.1 SUBASSEMBLY (PPID) LABEL CONTENT Subassemblies (see Scope for commodities specified as subassemblies) shall be labeled with one of the following three types of barcode labels as indicated in the DELL Specification Control Drawings. The Label Type must be assigned by DELL Procurement Group for all parts. Every label must fit on the part without affecting functionality or cosmetically mar the look of the finished DELL product (see below for detail technical specifications). TYPE A LABEL This barcode label will be applied to most parts on label stock 2.0 inches (50.8 mm) wide by .5 inch (12.7 mm) high using a wide to narrow element ratio of 3 to 1. The narrow element must be a minimum of 5 mils (.127 mm). This is a 12.5 CPI bar code. This is the preferred label for all parts (except motherboards), and is recommended unless the manufacturer is incapable of printing or scanning a label printed with this density bar code. Approval to use an alternative label is to be obtained in writing from DELL via contract or Purchase Order. (Special note: Upon specific approval from Dell, this label may be produced in a smaller size using Code 128 rather than Code 39. This approval is intended only for parts that are too small for a 2" label, such as certain notebook components) [GRAPHIC] TYPE B LABEL For manufacturers not having equipment capable of printing or scanning the standard size label (Type A above), a label up to 3.25 inches (79.4 mm) wide by .5 inch (12.7 mm) high will be permitted, provided the component size permits and it does not interfere with the operation or finished look of the component. When the narrow element exceeds width of 6.6 mils (.167 mm), a 2 to 1 or 2.5 to 1 ratio may be used. DELL discourages the use of this label unless it is absolutely necessary. The bar code densities can, for a label wider than 2 inches, range down to as low as 7.7 CPI which requires a label to be at least 3.125 inches long to have acceptable quiet zones. A bar code density of 10.4 CPI requires a 2.375 inch (60.3 mm) long minimum label. This density is achieved with a 300 DPI printer using a 6.6 mil (2 dot) narrow element at a 2.5 to 1 ratio. 6 63 [GRAPHIC] TYPE C (2 PART) LABEL For subassemblies, such as boards, that do not have sufficient surface area to affix a Type A or Type B label without interfering with the performance or finished look of the part. Use a 3 to 1 ratio where the narrow element must be a minimum of 5 mils (.127 mm). The Type C label may only be used with the written permission of DELL via contract or Purchase Order. The Rev label may have the human readable type above, below, or to the left of the bar code, provided it all fits on the label, with minimum quiet zones on either side of the bar code. [GRAPHIC] TYPE D LABEL For items which require a country of origin label for customs, a Type D label may be used. Use a 4 to 2 ratio where the narrow element must be a minimum of 5 mils (.127 mm). The Rev must have the human readable type below or to the left of the bar code with minimum quiet zones on either side of the bar code. The country of origin, of the form "MADE IN XXXXX," on one or two lines, must be located immediately to the left of the Rev bar code while maintaining minimum quiet zones. The area to the left of the country of origin may be used by the vendor for additional information, such as special handling icons, provided that such information does not interfere with the readability of the human readable code denoting the Dell Part Number or the country of origin text. For portable hard disk drives the label must be located within the position window shown below. 7 64 [GRAPHIC] Parts labels will be made up of three general physical areas: the Twenty Digit Barcode, the DELL Part Number and the Rev Level. TWENTY DIGIT BAR CODE A bar code message, containing the sequence of Dell Part Number, Supplier's Identification Number and location code, and a serial number consisting of a Date code and a sequence number (see definitions below), consisting of CODE 3 of 9 symbols enclosed between start and stop character codes with Human Readable Interpretation (HRI) directly below. The bar code shall not include any dashes (-) or other information besides that specifically mentioned above. The HRI will separate the Manufacturer ID number, the Date Code and the sequence number with a minus sign (-). The Dell part number will be printed in human readable form separately from the other information contained within the bar code (except on Type C labels, where the text string may be 8 65 continuous, and will have DP/N as the leading text.) Note: In special circumstances, Code 128 will be approved, but cannot be used without specific approval. DELL PART NUMBER - Eight alphanumeric characters assigned by DELL to identify the part. In the event that the Dell part number is 5 characters, three leading zeros shall be used to fill out the 8 spaces designated for the DELL part number. The DP/N will be provided on the purchase order placed for the parts. MANUFACTURER'S IDENTIFICATION - Five numeric (currently, may be alphanumeric in the future) characters naming the supplier of the part and the location of the manufacturing plant, to be supplied by DELL Procurement. The first four characters shall represent the base supplier number. The fifth character shall be a numeric character representing the manufacturing plant, and shall be issued by DELL procurement as requested by supplier, one per manufacturing location. SEVEN CHARACTER DATE CODE/SEQUENCE NUMBER COMBINATION The first 3 characters of this component of the bar code shall represent the year, month and day of manufacture. The last four shall be a sequence number. The first character shall be a number representing the last digit of the year of manufacture (1995 would be a 5). The second character shall represent the month per the table below. The third character shall represent the day of manufacture beginning with a 1 through 9, and then with the letters A through V representing the 10th through 31st of a month per the table below. DATE CODE - A three character field used to identify the date a part was manufactured, or the date Dell received the part (If a part label had to be generated by Dell). This date code is made up of a one character code for year (0-9), a one character code for month, and a one character code for day. The following tables apply to the Date Code: Month codes January 1 July 7 February 2 August 8 March 3 September 9 April 4 October A May 5 November B June 6 December C
Day Codes 1st 1 11th B 21st L 31st V 2nd 2 12th C 22nd M 3rd 3 13th D 23rd N 4th 4 14th E 24th O 5th 5 15th F 25th P 6th 6 16th G 26th Q
9 66 7th 7 17th H 27th R 8th 8 18th I 28th S 9th 9 19th J 29th T 10th A 20th K 30th U
SEQUENCE NUMBER A four character field used in conjunction with the Dell Part Number, the MFG ID and the MFG Date Code to provide the detail necessary to uniquely identify an individual part. Suppliers will be allowed the use of characters 0-9, A-O in the first position of the sequence number, with no restrictions on the 2nd through 4th positions. The use of the characters P through Z in the first position of the sequence number is reserved for use internally by Dell, for labels that Dell prints itself. When Dell prints its own labels (not applicable to suppliers), the first position will be used to identify where the part was received, as outlined below: "P" & "Q" Received in AMF facilities (Applies to facilities in Austin, including Manufacturing, Field Service & Board Repair) "R" & "S" Received in EMF facilities (Applies to facilities in Ireland) "T" & "U" Received in APCC facilities (Applies to facilities in Malaysia) "V" through "Z" Reserved for future use with no restrictions on the 2nd through 4th positions. In the event a barcode is not on the part when received, Dell will create a barcode label by entering the DELL Part Number and Manufacturer's Identification, and the computer will assign the next available sequence number for that part number and print a properly formatted barcode label, including a date code reflecting the date of label generation. If the manufacturing location code is unknown for Dell generated labels, a 0 (zero) will be used for the location code portion of the supplier's ID. The Dell receiving location will be indicated by the first character of the sequence number, as noted in the table above, when Dell is printing its own labels. ANY COMPONENT WITHOUT SUBASSEMBLY LABELS (REQUIRING PARTS TO BE BARCODE LABELED BY DELL) WILL NOT BE CAPABLE OF REFERENCING MANUFACTURING INFORMATION SUCH AS DATE OF MANUFACTURE, WHERE BUILT, ETC. THEREFORE, IT IS MOST ADVANTAGEOUS FOR A MANUFACTURER TO PROVIDE THE SUBASSEMBLY (PART) LABEL AND BE A BENEFACTOR OF THE QUALITY MANAGEMENT INFORMATION DERIVED BY THE DELL SYSTEM. DELL PART NUMBER (DP/N) IN HUMAN READABLE FORM, LARGER LETTERS. The eight numeric character part number assigned by DELL that appears as the first eight characters of the subassembly bar code label. The DP/N will be provided on the purchase order placed for the parts. Note: If the Assigned Dell part number is 5 characters, precede it with 3 zeros. REVISION (REV) LEVEL BARCODE A barcode message consisting of three CODE 3 of 9 characters enclosed between start and stop character codes. These three characters represent the first three characters of the DELL revision level 10 67 of the subassembly. The revision level will be supplied to the manufacturer via the purchase order. The supplier's rev level information for a particular PO will be supplied to Purchasing at the time of ordering, and confirmation must be received from DELL prior to shipping a new rev of an existing part where DELL is continuing to use the same DELL part number. 3.1.2 LABEL PLACEMENT The placement of the label on the subassembly (part) must be on a flat surface and in a location that will not cosmetically mar the look of the finished DELL product and not on a surface normally used for the attachment of the component. If DELL controls the specification for the subassembly, the placement will be in the location indicated on the DELL assembly drawings. DELL's purchasing agents should be able to answer questions regarding placement, or refer you to the appropriate contacts, such as peripheral development. Note: The location of labels on hard drives intended for notebooks can be critical due to the close tolerances of hard drive bays (See Type D Label). 3.1.3 CODE DENSITY AND DIMENSION FOR PPID LABELS The maximum bar code density in characters per inch is 12.5 (CPI). The minimum and maximum widths for narrow elements, and allowable ratios are as follows: Narrow element width 0.005 inches (.127 mm) to 0.010 inch (.254 mm) Wide element width 0.015 inches (.381 mm) to 0.020 inch (.762 mm) Wide to narrow element ratios 3:1 for narrow elements less than .065 inch (.165mm) 2.5:1 to 3:1 for narrow elements greater than or equal to 0.066 inch (.167 mm) 2:1 to 3:1 for narrow elements of 0.010 inch or greater Element tolerance 0.0017 inches (0.044 mm)
Special note: If Code 128 has been specifically approved for use on a particular part, the minimum narrow element width must be .005 inches. Only Subset A of Code 128 is allowed for use. 3.1.3.1 CODE HEIGHT - The allowable range for the bar code height is 0.20 inch +/-0.01 inch. 3.1.3. INTERCHARACTER GAP - The distance between characters is the same as the minimum dimension of a narrow element. 3.1.3.3 QUIET ZONES - The minimum left and right margins shall be 15 times the width of one narrow element or 0.12 inch (2.0 mm). 3.1.3.4 SPACING BETWEEN BARCODE AND HRI - A minimum of 0.005 inch (0.127 mm) and a maximum of 0.015 inch(0.38 mm). 3.1.3.5 SPACING BETWEEN EDGE OF LABEL AND HRI - The minimum spacing between the horizontal edge of the label and the HRI shall be 0.015 inch(0.38 mm). 3.1.3.6 READABILITY AND PRINTING REQUIREMENTS. Using commercially available bar code verifiers, labels must have a minimum decode percentage of 95% or more. The label stock and ribbon combination, stock, or other printing method must produce labels acceptable for scanning in the visible light (600 to 660 nm wavelength) as well as 11 68 laser and infrared scanners operating at wavelengths up to 900 nm. Specific details, if required, can be obtained by referring to the EIA-556-A Shipping and Receiving Bar Code Label Specification or ANSI bar code specifications. ANSI bar code quality standard "C" or better is indicative of acceptable labels, although care should be used in using this as the only standard of quality, particularly on higher density labels. These specifications will lay out minimum reflectivity, print contrast ratios, bar growth and size tolerances, defect tolerances, etc. Labels using the direct thermal process are not acceptable for 5 mil narrow element PPID labels. Dell is interested in decodability using commercial laser scanners and will be happy to verify any contemplated labels. Dot matrix printed labels are not acceptable as piece part labels. 3.1.4 SUBASSEMBLY (PARTS) LABEL MATERIAL REQUIREMENTS 3.1.4.1 NON-PCB/PWA (LABEL TYPES A AND B ONLY) a) Face Stock Requirements The actual material used is at the discretion of the affixing party, provided the labels are legible, permanent and meet the following minimum standards: 1) Face Stock Characteristics Type Polyester or topcoated paper Caliper 0.0020 inch Basis Weight 42 lb. / 3000 square feet Color White Background Reflectance 633nm / 80% min. (90nm / 70% min.) Print Contrast Signal 95% min. 85% min. Service Temperature Range 0 to 225 degrees Fahrenheit 2) Adhesive Characteristics Type Permanent Acrylic Minimum Application Temp. 50 degrees Fahrenheit Service Temperature Range 0 to 225 degrees Fahrenheit Dwell: Initial Tack 1 hour (at room temperature) Ultimate Tack 30 hours - Full Strength Caliper 0.0009 inch Conductivity Non-conductive if applied across any contacts on a PWA
3.1.4.2 PCB/PWA LABELS (LABEL TYPE C ONLY) a) Face Stock Requirements - The actual material used is at the discretion of the affixing party, provided the labels are legible, permanent and meet the following minimum standards: 1) Face Stock Characteristics Type Polymide (kapton) or high temperature polyester Caliper 0.0027 inch Basis Weight 70 lb. / 3300 square feet Color Buff / Amber (or white for polyester) Background Reflectance 633nm / 75% (900nm / 80% min.) Print Contrast Signal 63% min. 65% min. 2) Adhesive characteristics
12 69 Type High Temp Permanent Acrylic Minimum Application Temp 50 degrees Fahrenheit Service Temperature Range 0 to 525 degrees Fahrenheit Dwell - Initial Tack 6 Hours at Room Temperature Ultimate Tack 36 Hours - Full Strength Caliper 0.0020 inches
3.1.4.3 DURABILITY Labels must remain scanable at the above listed minimum acceptable levels for a period of 5 years in a non-condensing environment with temperatures up to 150 degrees Fahrenheit (65 degrees C). Direct thermal labels are not allowed for PPID labels without documentation with regards to durability. 3.2 ELECTRONIC INDUSTRIES ASSOCIATION (EIA) SHIPPING/RECEIVING LABEL Sections of the DELL Standard for this label have been taken from the Electronics Industry Association Standard EIA-556-A for OUTER PACKAGE LABELS, but have been retyped to focus on the specific needs of DELL. In the event the EIA standard for this label should change, the DELL Standard will remain in effect until DELL approves in writing any modifications to reflect the EIA Standards change. 3.3.1 EIA LABEL CONTENT Each shipping container received at DELL shall be labeled with the information indicated below. A shipping container is an individual sealed box containing one or more parts. It is not a pallet, or overwrap, but is the container from which individual parts would be removed for assembly into a finished computer. Thus, each individual shipping container on a pallet, or unitized overwrap, will contain multiple individual cartons with individual EIA labels. a) FROM AND TO - This shipping information data field is a non-barcoded mandatory data field located as shown in Figure 1. It shall contain, at a minimum, the supplier's name and address (under the title "FROM") and DELL's name and address (under the title "TO"). Additional information may be printed in this area such as the DELL logo or telephone numbers, all only in human readable form. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). b) VENDOR ORDER / SHIPPING NUMBER (15 characters) - A mandatory barcoded field defined by the supplier which contains the supplier's Invoice or Packing Slip number, in both barcoded and HRI formats. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). c) PO NUMBER (8 characters) - A mandatory barcoded field containing DELL's Purchase Order Number in both barcoded and HRI formats. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). d) LINE NUMBER (2 characters) - A mandatory barcoded field containing the Line Number on the DELL Purchase Order that corresponds to the item contained in the shipping container. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). e) DELL PART NUMBER (5 characters) - A mandatory barcoded field indicating the DELL Part Number of the items in the shipping container. This number will appear on the DELL 13 70 P.O. Only one part number may be packed in each shipping container. The human readable interpretation (HRI) shall be located to the right of the barcode (not closer than 0.25 inch or 6.41mm) and have a minimum height of 0.5 inch (12.7mm). At a future date, if Dell increases the size of its part number, the number of characters for this field will be increased. Until then, even if leading zeroes are being used to fill out the 8 character part number field on the PPID, this field needs to contain only the 5 character Dell Part number, as issued to suppliers by Dell. f) BOX QUANTITY (6 numeric digits) - A mandatory barcoded field containing the total quantity of items within the shipping container. When multiple containers are indicated in the Package Count data field (e.g. 1 of 2), the quantity shown in Box Quantity shall be the quantity in each package, not the total quantity --- of all packages in the shipment. The human readable interpretation (HRI) shall be located to the right of the barcode (not closer than 0.25 inch or 6.41mm) and have a minimum height of 0.5 inch (12.7mm). G) DELL PPID APPLIED? (1 characters) - A mandatory barcoded field indicating whether or not (Y for yes, N for No) the parts within the box are complaint with Dell's PPID labeling requirements, and that the labels are applied. If the parts within the box do not require PPID labels, then this field will always be N. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). h) COUNTRY OF ORIGIN (2 characters) - A mandatory barcoded field designating the country from which the item(s) originated. Country codes have been assigned by DELL and are listed below. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). i) PART DESCRIPTION - A non-barcoded field which conveys summary information of the pertinent features of the part. The 5 character DELL Part Number is required to be in the first 5 characters of this field. Optional information such as supplier's description, date of manufacture, lot number, etc. may also be included in this field. This information must be in human readable form only and the height shall be a minimum 0.2 inch (5.1mm). j) PACKAGE COUNT - A non-barcoded mandatory field that describes the numerical sequence of the package when more than one package is shipped for a specific order or when multiple packages are required for a specific part number. When only one package is required, this should be indicated as 1 of 1. When multiple packages are required, the form X of Y should be used, where X is the number of the package and Y is the total number of packages. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). k) TOTAL ORDER QUANTITY - A non-barcoded field indicating the total quantity shipped of the specific part (corresponding to the PO Number and Line Number). The Total Order Quantity may be contained in more than one shipping container. This should not be confused with Box Quantity as defined above. The height of the human readable interpretation (HRI) shall be a minimum 0.2 inch (5.1mm). 14 71 3.3.2 LABEL LOCATION Whenever possible, the label should be affixed to the smaller end of the package or box, which might be facing the aisle if the package is stored on the shelving or racks, to permit easy identification during storage. In addition, the EIA Label should not be covered by tape, stickers or other materials that might inhibit scanning. [GRAPHIC] 3.3.3 CODE DENSITY AND DIMENSION - The optimum barcode density in characters per inch (CPI) is 3.70 to 6.90. The allowable range for the nominal width of the narrow elements (unit size) and nominal ratio of the wide-to-narrow elements is as follows: Minimum width of narrow elements 0.010 inch (0.254 mm) Minimum width of wide elements 0.02 inch (0.432 mm) Minimum wide to narrow ratio 2:1 to 3:1 Element tolerance +/-0.0017 inch (0.41 mm) 3.3.3.1 CODE HEIGHT - The allowable range for the bar code height is 0.50 inch +/- 0.1 inch. 3.3.3.2 INTERCHARACTER GAP - Shall be the range of 1X to 2X. 3.3.3.3 QUIET ZONES - The minimum clear area immediately preceding and following the barcode shall be 0.17 inch (4.32 mm). 3.3.3.4 VERTICAL SPACING BETWEEN BARCODE AND HRI - A minimum of 0.005 inch (0.127 mm) and a maximum of 0.015 inch (0.38 mm). 3.3.3.5 SPACING BETWEEN EDGE OF LABEL AND HRI - The minimum spacing between the horizontal edge of the label and the HRI shall be 0.015 inch (0.38 mm). 3.3.3.5 HEIGHT OF HUMAN READABLE INTERPRETATION - The minimum height shall be 0.2 inch (5.1mm). 15 72 3.3.3.6 READABILITY AND PRINTING REQUIREMENTS Using commercially available bar code verifiers, labels must have a minimum decode percentage of 95% or more. The label stock and ribbon combination, direct thermal stock, or other printing method must produce labels acceptable for scanning in the visible light (600 to 660 nm wavelength) as well as laser and infrared scanners operating at wavelengths up to 900 nm. Specific details, if required, can be obtained by referring to the EIA-556-A Shipping and Receiving Bar Code Label Specification or ANSI bar code specifications. These specifications will lay out minimum reflectivity, print contrast ratios, bar growth and size tolerances, defect tolerances, etc. DELL is interested in decodability using commercial laser scanners and will be happy to verify any contemplated labels. 3.3.4 EIA LABEL MATERIAL REQUIREMENTS 3.3.4.1 EIA LABELS a) Face Stock Requirements - The actual material used is at the discretion of the affixing party, provided the labels are legible, permanent and meet the following minimum standards: 1) Face Stock Characteristics Type Polyester or top coated paper Caliper 0.0020 inch Optimum Dimensions - width 4 inches (102mm) - height 6.5 inches (165mm) Basis Weight 42 lb. / 3000 square feet Color White Background Reflectance 670nm (visible light) & 900nm (infra-red light) 2) Adhesive Characteristics Type Permanent Acrylic Min. Application Temp. 50 degrees Fahrenheit Svc Temperature Range 0 to 225 degrees Fahrenheit Dwell: Initial Tack 1 hour (at room temperature) Ultimate Tack 30 hours - Full Strength Caliper 0.0009 inch
3.3.4.2 DURABILITY - Labels must remain scanable at minimum standards for a period of 12 months with storage in an indoor, controlled environment at temperatures up to 100 degrees Fahrenheit (38 degrees Centigrade). 16 73 ELECTRONICS INDUSTRIES ASSOCIATION (EIA) LABEL [GRAPHIC] 17 74 DELL COMPUTER CORPORATION ISO COUNTRY CODE TABLE Feb. 23, 1995
COUNTRY COUNTRY CODE COUNTRY CODE COUNTRY - ------- ------- ------- ------- AF Afghanistan CO Columbia AL Albania CN Comoros AG Algeria CF Congo AQ American Samoa CW Cook Islands AN Andorra CS Costa Rica AO Angola HR Croatia AV Anguilla CU Cuba AY Antarctica CY Cyprus AC Antigua EZ Czech Republic AR Argentina DA Denmark AM Armenia DJ Djibouti AS Australia DO Dominica AU Austria DR Dominican Republic AJ Azerbaijan EC Ecuador BF Bahamas, The EG Egypt BA Bahrain ES El Salvador BG Bangladesh EK Equatorial Guinea BB Barbados ER Eritrea BO Belarus EN Estonia BE Belgium ET Ethiopia BH Belize FA Falkland Islands DM Benin FO Faroe Islands BD Bermuda FJ Fiji BT Bhutan FI Finland BL Bolivia FR France BK Bosnia and Herzegovina FG French Guiana BC Botswana FP French Polynesia BV Bouvet Island FS French Southern BR Brazil GB Gabon IO British Indian Ocean GA Gambia, The VI British Virgin Islands GZ Gaza Strip BX Brunei GG Georgia BU Bulgaria GE Germany, Federal Republic BM Burma GH Ghana BY Burundi GI Gibraltar CB Cambodia GR Greece CM Cameroon GL Greenland CA Canada GJ Grenada PQ Canal Zone GP Guadaloupe CV Cape Verde, Republic GQ Guam CJ Cayman Islands GT Guatemala CT Central African Empire GV Guinea CD Chad PU Guinea-Bissau CI Chile GY Guyana CH China (PRC) HA Haiti KT Christmas Island HM Heard & McDonald Islands CK Cocos (Keeling Island) HO Honduras
18 75 DELL COMPUTER CORPORATION ISO COUNTRY CODE TABLE Feb. 23, 1995
COUNTRY COUNTRY CODE COUNTRY CODE COUNTRY - ------ ------- ------ ------- HK Hong Kong MW Montenegro HU Hungary MH Monserrat IC Iceland MO Morroco IN India MZ Mozambique ID Indonesia WA Namibia IR Iran NR Nauru IZ Iraq BQ Navassa Island EI Ireland NP Nepal IS Israel NL Netherlands IT Italy NA Netherlands Antilles IV Ivory Coast NC New Caledonia JM Jamaica NZ New Zealand JA Japan NU Nicaragua JQ Johnson Atoll NG Niger JO Jordan NI Nigeria KZ Kazakhstan NE Niue KE Kenya NF Norfolk Island KR Kiribati CQ Northern Mariana Island KN Korea, PDR NO Norway KS Korea, Republic of MU Oman KU Kuwait PK Pakistan KG Kyrgyzstan PM Panama LA Laos PP Papua New Guinea LG Latvia PF Paracel Islands LE Lebanon PA Paraguay LT Lesotho PE Peru LI Liberia RP Philippines LY Lybia PC Pitcaim Islands LS Liechtenstein PL Poland LH Lithuania PO Portugal LU Luxemborg RQ Puerto Rico MC Macao QA Qatar MK Macedonia RE Reunion MA Madagascar RO Romania MI Malawi RS Russia MY Malaysia RW Rwanda MV Maldives SM San Marino ML Mali TP Sao Tome & Principe MT Malta SA Saudi Arabia MB Martinique SG Senegal MR Mauritania SR Serbia MP Mauritius SE Seychelles MX Mexico SL Sierra Leone MQ Midway Islands SN Singapore MD Moldova LO Slovakia MN Monaco SI Slovenia MG Mongolia BP Solomon Islands
76 DELL COMPUTER CORPORATION ISO COUNTRY CODE TABLE Feb. 23, 1995
COUNTRY COUNTRY CODE COUNTRY CODE COUNTRY - ------ ------- ------ ------- SO Somalia VQ Virgin Islands (U.S.) SF South Africa WQ Wake Island SP Spain WF Wallis and Futuna PG Spratly Islands WI Western Sahara CE Sri Lanka WS Western Samoa SC St. Christopher-Nevis YE Yemen, Rep. of (SANA) SH St. Helena CG Zaire SB St.Pierre and Miquelon ZA Zambia ST St. Lucia ZI Zimbabwe VC St. Vincent SU Sudan NS Surinam JS Svalbard and Jan Mayen WZ Swaziland SW Sweden SZ Switzerland SY Syria TW Taiwan TI Tajikistan TZ Tanzania, United Republic TH Thailand TO Togo TL Tokelau TN Tonga TD Trinidad and Tobago NQ Trust Terr. of the Pacific Is. TS Tunisia TU Turkey TX Turkmenistan TK Turks and Caicos Islands TV Tuvalu UG Uganda UP Ukraine TC United Arab Emirates UK United Kingdom US United States ZZ Unknown UV Upper Volta UY Uruguay IQ US. Misc. Pacific Islands UZ Uzbekistan NH Vanuatu VV Various YY Various Bloc Countries VT Vatican City VE Venzuela VM Vietnam
19 77 SCHEDULE F TO AGREEMENT NUMBER BRO-001 DELL UNIQUE SERVICE TAG/BARCODE LABELING REQUIREMENTS 78 DELL UNIQUE SERVICE TAG/BARCODE LABELING REQUIREMENTS Due to the fact that the Product will not be introduced into the Dell manufacturing process, specific Product tracking code labels will be required to be applied by BROCADE or their authorized subcontractor. The following labeling requirements will be required in addition to those specified in Schedule E - Dell Supplier Labeling Specification, Part Number 13190. 1. Service Tag Track Code Dell will provide BROCADE a supply of unique 5-digit alpha numeric Service Tag Track Codes (Codes) for use on barcode labels to be applied to the Product and to the shipping container. The quantity of codes to be supplied will be mutually agreed to by both parties. BROCADE will notify Dell when the remaining supply of Codes has reached approximately two (2) weeks. Dell will issue a new supply of Codes upon request. 2. Barcode Label Requirements BROCADE shall barcode label the Product with the Service Tag Track Code and shall apply the same information on each shipping container to be received at Dell. The location and size of labels shall be mutually agreed to by the parties. Barcode definitions are contained in Schedule E of this Agreement. 1 79 SCHEDULE G TO AGREEMENT NUMBER BRO-001 PRODUCT REGULATORY AND SAFETY REQUIREMENTS 80 FIBRE CHANNEL SWITCH EMC REGULARLY AND PRODUCT SAFETY REQUIREMENTS
Responsibility Country / Mark Markings which apply Brocade Dell Comments FCC Class A EMC CE EMC VCCI - A EMC UL Safety Agency CSA Safety Agency TUV Safety Agency NEMKO Safety Agency Post RTS - requires translations EZU Safety Agency NORTH AMERICA United States UL, FCC Canada CSA, ICES SOUTH & CENTRAL AMERICA Mexico NOM, Safety Agency WESTERN EUROPE United Kingdom/Ireland CE Benelux CE France CE Post RTS - requires translations Germany TUV-GS,CE Austria CE Spain/ Portugal/ Italy CE SCANDINAVIAN COUNTRIES Switzerland/Austria CE Sweden NEMKO/SEMKO, Safety Agency Norway CE Finland NEMKO/FIMKO, Safety Agency Denmark NEMKO, Safety Agency EASTERN EUROPE Russia GOST, Safety Agency requires EMC Czech Republic EZU, Safety Agency requires EMC Slovenia SIQ Slovakia EVPU Hungary PCBC, Safety Agency requires EMC Poland PCBC, Safety Agency requires EMC ASIA PACIFIC Japan VCCI Post RTS - requires translations Australia C-Tick, EMC New Zealand C-Tick, EMC SOUTH EAST ASIA China CCIB, Safety Agency Not required for SilkWorm Express
Page 1 of 2 81 FIBRE CHANNEL SWITCH EMC REGULARLY AND PRODUCT SAFETY REQUIREMENTS Hong Kong CCIB, Safety Agency Post RTS - requires translations Taiwan BCIQ, EMC Korea RRL, EMC Post RTS - requires translations Singapore PSB, Safety Agency Philippines No Known Requirements Indonesia No Known Requirements INDIAN CONTINENT India No Known Requirements Malaysia No Known Requirements Thailand No Known Requirements AFRICA South Africa SABS MIDDLE EAST Saudi Arabia SASO
Page 2 of 2 82 SCHEDULE H TO AGREEMENT NUMBER BRO-001 PRODUCT SPECIFICATIONS 1. NO. 0027-SEDS-2 -- SILKWORM EXPRESS SWITCH 83 [BROCADE LOGO] SILKWORM EXPRESS(TM) SWITCH THE ESSENTIAL ELEMENT TO CREATE AN ENTRY-LEVEL SAN [GRAPHIC] SILKWORM EXPRESS is an 8-port, full-duplex, gigabit Fibre Channel switch in the SilkWorm(TM) Switch Family offered by Brocade Communications Systems, Inc. (BROCADE (R)). This low-cost, high-performance switch ideally suits applications requiring fewer ports while delivering full SilkWorm Family benefits including: - - Scalability for expanding a network's initial size and capability - - Resiliency to resolve faults immediately, isolating down time to the faulty connection/device - - Connectivity that increases aggregate bandwidth instead of degrading port performance Configuration flexibility for attaching devices, arbitrated loops, and switches - - Management that is completely automatic and transparent, minimizing administration The SilkWorm Express switch houses four interface modules (a selection of G-PORT OPTIONS OR FL-PORT OPTIONS). Each of the two ports on a module supports mixed industry media. The GBICs (Gigabit Interface Converters) plug in from the front of the switch. Each port operates independently at I-gigabit-per-second (Gb/sec), full-duplex data rate. A SilkWorm Express switch connects servers and storage devices to create an entry-level Server-Storage Area Network (SAN). The SAN coexists with and complements an existing LAN/WAN communications infrastructure. [GRAPHIC] STATE-OF-THE-ART SWITCHING FOR THE SAN BROCADE switches fully comply with the Fibre Channel ANSI Standards, as well as provide exclusive leadership hardware design including: - - In-order delivery of data frames--guarantees that frames are delivered to a destination in the same order as received by the switch from the originator - - Cut-through frame hardware routing--sends a frame without waiting for the end of the frame or for a response back from its destination, improving bandwidth utilization and minimizing transmission delays - - Cascading--enables a switch to connect to as many other BROCADE switches as there are available ports, enabling a maximum of 32 switches for thousands of connections and long distances by placing switches at intervals - - Flexible switch buffering--stores a data frame for only as long as is absolutely necessary, moving data faster through the switch - - Path selection--automatically identifies a failure and immediately reroutes data onto alternate pathing, creating a highly resilient network - - Registered state change notification--dynamic detection of changes in configuration and port status CONFIGURATION VERSATILITY The customer predetermines the configuration of interface options and media to be installed at the factory: - - G-PORT OPTION--automatically detects the connection's operating mode to either a device (F-port mode) or another BROCADE switch (E-port mode) - - FL-PORT OPTION--connects both Fibre Channel Arbitrated Public and Private Loops (i.e., legacy environments), providing their devices full-citizenship status in the SAN SCALABILITY AS NEEDED The SAN grows by adding an additional SilkWorm Family switch and will: - - Seamlessly incorporate more BROCADE switches into the network - - Increase in aggregate bandwidth as connectivity increases - - Network services automatically expand without additional system resources [GRAPHIC] 84 FL-PORT OPTION AN INTERFACE FOR FIBRE CHANNEL CONNECTIONS TO SILKWORM(TM) FAMILY SWITCHES [GRAPHIC] The FL-PORT OPTION, offered by Brocade Communications Systems, Inc. (Brocade(R)), is an interface module used for connecting either Public or Private Fibre Channel Arbitrated Loops (loops) to a SilkWorm Family switch. The module provides two FL Ports, each port operating independently at I-gigabit-per-second (Gb/sec) data rate, with full-duplex communication. Two GBICs (Gigabit Interface Converters) are plugged into the module and are accessible from the front panel of the switch. The form factor of the FL-PORT OPTION is the same as the Brocade G-Port Option. The latter is used to connect servers and storage devices to the network. BOTH PUBLIC AND PRIVATE LOOP SUPPORT A unique feature of Brocade's FL-PORT OPTION is that any device connected to the Server-Storage Area Network (SAN) may communicate with a Fibre Channel disk or other type of device on either Public or Private Loops: - - In Public Loop operation--all loop devices are available to all other network-connected devices and loop devices in the SAN. The loop devices behave the same as devices attached directly to the SAN. - - In Private Loop (legacy) operation--Brocade's translative mode allows up to 32 devices connected to the SAN to appear as phantom devices on a Private Loop. [GRAPHIC] FULL NETWORK SUPPORT TO LOOP DEVICES The interface module acts as a bridge-to-the-world for loop devices, allowing full citizen status in the Brocade Fibre Channel Fabric--the intelligent interconnection scheme created by the switch. Loop devices realize the same network benefits as a device connected directly to a switch, because the module manages loop communication with the Brocade Fabric. IMPROVED LOOP BANDWIDTH UTILIZATION The module makes best use of a loop tenancy, which begins when a port gains control of the loop and opens another port to send and/or receive frames, and ends when a port gives up control of the loop. The FL_Port's intelligent-transmit buffer collects data frames for optional transmission. Collected frames delivered in a single loop tenancy reduce overhead from loop arbitration, thus using loop bandwidth more efficiently. Collected frames are delivered based on certain criteria, such as when: - - a specific number of frames have been accumulated, - - the end of a sequence has been detected, - - or after a specific time period has elapsed. SIMPLE NETWORK MANAGEMENT Brocade, in partnership with such companies as Sun Microsystems, Hewlett Packard, and Seagate Technology, led in the creation of the industry-standard Fibre Channel Fabric Loop-Attachment technical report (profile). In addition to full Fibre Channel switching capability and normal Fibre Channel Fabric operation, Brocade extends to loops its commitment of providing value-added software and services available for the SAN. [GRAPHIC] 85 G-PORT OPTION AN INTERFACE FOR FIBRE CHANNEL CONNECTIONS TO SILKWORM(TM) FAMILY SWITCHES The G-PORT OPTION, offered by Brocade Communications Systems, Inc. (Brocade(R)), is an interface module used for connecting nodes to a SilkWorm Family switch. The module provides two G_Ports, each port operating independently at I-gigabit-per-second (Gb/sec) data rate, with full-duplex communication. The module provides point-to-point connections between the switch and devices, such as a server or storage, or to other Brocade switches. The two GBICs (Gigabit Interface Converters) support a choice of industry-standard media. The GBICs are accessible from the front panel of the switch. A Public or Private Fibre Channel Arbitrated Loop can also connect to the network (see the Brocade FL-Port Option data sheet). VERSATILE CONNECTIVITY The module operates in two Fibre Channel modes: - - E-port mode for connecting the switch with another Brocade switch - - F-port mode for connecting a storage device or server to the network A port has an auto-sensing capability that determines its mode transparently. The module's ports can be operating in different modes. [GRAPHIC] MEDIA FLEXIBILITY The configuration of G-PORT OPTIONS and FL-PORT OPTIONS is predetermined by the customer and installed in the switch at the factory. Each port can support a different type of media module. The GBICs plug into an interface module without powering down the unit, making it easy to swap or replace media modules. The SilkWorm Switch Family supports short- and long-wave-length laser optical fiber and copper media. Connection distances vary depending on the type of industry GBIC selected. TRANSPARENT CONFIGURATION AND RECONFIGURATION Upon initialization of the network, a port automatically identifies information about its connections. The information determines the mode of operation. The module then reports the port mode to the local Brocade switch. Reconfiguration is automatic--addition of or change in connections is automatically and transparently recorded in every switch, a key element in making the network resilient. TRAFFIC MANAGEMENT In the E-port mode, traffic congestion within the network is managed on the Inter-Switch Link (ISL) via virtual channels. Establishing parallel links between switches creates alternate pathing to increase network resiliency. An ISL has up to eight virtual channels with four priority levels. The virtual channels can be configured to logically separate: - - Interswitch and node-related traffic - - Multicast and unicast traffic - - Class-2 and -3 service-related traffic [GRAPHIC] 86 BROCADE(R) WEB TOOLS MANAGEMENT OF A SAN VIA THE INTERNET OR INTRANET MAJOR BENEFITS - - Dynamic remote management - - Control at all levels--at the Fabric, switch, and port viewpoints - - Graphical user interface (GUI)--for quick and intuitive management - - One-stop administration--for routine management functions - - Access to all switches--by simple point-and-click - - "Expert Administrator"--displays appear automatically with suggested actions - - Simple setup--accessible via familiar in-band and out-of-band interfaces [GRAPHIC] BROCADE WEB TOOLS, optional software offered by Brocade Communications Systems, Inc. (BROCADE(R)), helps to remotely manage a Server-Storage Area Network (SAN) of SilkWorm(TM) Family switches via the Internet or Intranet. The IT (Information Technology) administrator logs onto a switch from a host with a Java-based Web browser. From that switch, the administrator dynamically interacts with any switch in the SAN to monitor its status and performance. Information is available to assist the administrator in making decisions about the overall topology (for example, increasing bandwidth on a path saturated with data). The Administrative Interface and the Telnet session provide the means to make administrative changes to the switches/network, with security enforced by user name and encrypted password. ESSENTIAL CAPABILITIES YET A SIMPLE GUI BROCADE WEB TOOLS comprise seven screens. Five provide tools for managing: - - Fabric (SAN) View--depicts the number of switches in the network and confirms worldwide names, domain IDs, and switch names, if applicable - - Fabric Topology View--depicts the physical configuration, including active domains and paths, and routing information (for example, hop counts--the number of switches that handle a data frame from its origination through its destination) - - General Switch View--displays information about the endosure, gives general switch information, and includes GUI buttons for quick access to the Administrative Interface, a Telnet session, and the Performance View - - Performance View--graphically portrays real-time data throughput for each port and displays switch bandwidth utilization - - Port Detail View--displays statistics, general information, and status for all ports Two of the seven screens provide secured interfaces for taking administrative action: - - Administrative Interface--for performing routine functions, such as upgrading firmware versions or reconfiguring a switch - - Telnet Interface--to use BROCADE's superset of Telnet commands (configuration, diagnostics, displaying, and routing) for switch diagnostics, troubleshooting, and management 87 BROCADE(R) ZONING A SERVICE FOR EXTRA CONTROL OF THE SAN MAJOR BENEFITS - - Increased environmental security applied where and when needed - - Optimization of Information Technology (IT) resources in response to user demand and changing user profiles - - Versatility to customize environments - - Flexibility to manage a Server-Storage Area Network (SAN) to meet the objectives of different closed-user groups [GRAPHIC] Brocade Communications Systems, Inc. (BROCADE(R)) provides advanced management for the SAN with its introduction of BROCADE ZONING. This optional licensed software allows finer segmentation of SANs. One or more BROCADE switches create the BROCADE Fibre Channel Fabric. This intelligent infrastructure is the backbone for deploying and managing enterprise resources in a network. Using BROCADE ZONING, Fabric-connected devices are arranged into logical groups over the physical configuration of the Fabric. ZONING is one of the BROCADE Fabric services that provide management for the SAN both automatically and transparently. INCREASED CONTROL OF A SAN The BROCADE Fabric provides fast, reliable, seamless information access within the SAN for anyone, anywhere, at anytime. ZONING allows an administrator to create segmentation--or zones--within a Fabric, comprised of selected storage, servers, or even workstations. It also enforces access of information to only the devices in the defined zone. Zones may be configured dynamically. The number of zones and zone membership are effectively unlimited. Zones vary in size and shape, depending on the number of Fabric-connected devices included and device locations. Devices may be members of more than one zone. In addition, temporary zones can be created, as an example, for enterprise backup. Zone members "see" only members in their zones and, therefore, access only one another. A device not included in any zone is not available to the devices in the zones. THE SIMPLICITY OF BROCADE ZONING BROCADE ZONING involves: - - Zone Specification--a set of Telnet commands are used to create, delete, and display zones, to add or remove zone members, and to configure a set of zones. - - Zone Enforcement--the BROCADE Fabric automatically and transparently restricts access to only the devices that are members of the defined zone(s). - - Zone Management--the administrator creates and controls the zones. CUSTOMIZATION OF THE SAN Uses for BROCADE ZONING include: Integrated support for heterogeneous environments--by isolating systems that have different operating environments or uses Creating functional areas in the Fabric--for example, by separating test or maintenance areas from production areas Designating closed user groups--by including certain devices in a zone for exclusive use by zone members Simplifying resource utilization--for instance, by consolidating equipment logically for IT convenience Facilitating time-sensitive functions--for example, by creating a temporary zone used to back up a set of devices that are members of other zones Securing Fabric areas--by providing another level of software-managed security to control access 88 SCHEDULE I TO AGREEMENT NUMBER BRO-001 END USER LICENSE AGREEMENT EX-10.15 3 PURCHASE AGREEMENT 1 EXHIBIT 10.15 PURCHASE AGREEMENT BETWEEN BROCADE COMMUNICATIONS SYSTEMS, INC. AND SEQUENT COMPUTER SYSTEMS, INC.
CONTENTS PAGE 1. DEFINITIONS 2 2. SCOPE OF AGREEMENT 2 3. TERM AND TERMINATION 3 4. PRODUCT DOCUMENTATION AND TRAINING 3 5. PRICE AND PAYMENT 4 6. FORECASTING 5 7. PURCHASE ORDERS 5 8. SHIPPING, DELIVERY AND PACKAGING 9 9. INSPECTION AND ACCEPTANCE 10 10. WARRANTY 10 11. [*] 12. RETURN MATERIAL AUTHORIZATION 12 13. MANDATORY CHANGES 12 14. SEQUENT REQUESTED CHANGES 13 15. BROCADE REQUESTED CHANGES 14 16. PRODUCT WITHDRAWAL 15 17. MEETINGS AND SUPPLIER PERFORMANCE 15 18. REPORTS 16 19. MATERIAL MANAGEMENT 16 20. LIMITATION OF LIABILITY 16 21. CONFIDENTIAL AND PROPRIETARY INFORMATION 16 22. INFRINGEMENT 17 23. INDEMNITY AND INSURANCE 18 24. NOTICES 19 25. MISCELLANEOUS PROVISIONS 19 26. ENTIRE AGREEMENT 21 ATTACHMENTS A PRODUCT SPECIFICATION 23 B PRODUCT AND PRODUCT SUPPORT PRICING 24 C SUPPLIER QUALITY 26 D PRODUCT SUPPORT 32 E REPORTS 38
*Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 1 2 PURCHASE AGREEMENT BETWEEN BROCADE COMMUNICATIONS SYSTEMS, INC. AND SEQUENT COMPUTER SYSTEMS, INC. This Agreement, effective_______________("Effective Date"), is entered into by and between Sequent Computer Systems, Inc. ("Sequent"), an Oregon corporation, and Brocade Communications Systems, Inc. ("Brocade"), a California corporation. Now, therefore, the parties agree as follows: 1. DEFINITIONS 1.1 "Product(s)" means the products described in Attachment A, Product Specification and any other product(s) added to this Agreement by mutual consent of the parties. 1.2 "Product Documentation" means Brocade's assembly drawings, user manuals, diagnostic software documentation, operations manuals, and any other such materials required for the maintenance, operation, and use of the Products generally made available to customers. Upon mutual agreement between the parties, Brocade will provide additional documentation not generally made available to customers. 1.3 "Product Support" means the type and level of support described in Attachment D, Product Support, subject to the provisions contained in this Agreement. 1.4 "Field Replaceable Unit" ("FRU") means a component of the Product that will be used to replace or repair failed Product in the field. 2. SCOPE OF AGREEMENT 2.1 Brocade agrees to sell Products and Product Support to Sequent in accordance with the terms and conditions of this Agreement. This Agreement is non-exclusive and the parties may enter into similar agreements with other parties. The parties acknowledge that Sequent may sell the Products worldwide for use with Sequent's NUMA-Q and Symmetry product lines and other product lines as mutually agreed between the parties. Sequent shall not be obligated to purchase any Products or Product Support from Brocade hereunder. 2.2 The parties acknowledge that this Agreement may be executed prior to complete qualification of the Product by Sequent. Qualification of the Product by Sequent and the Product meeting all Product specifications as required in Attachment A are conditions precedent to Sequent's willingness to purchase Products or Product Support under this Agreement. Page 2 3 3. TERM AND TERMINATION 3.1 Subject to the provisions of sub-Sections 3.2, 3.3, and 3.4, below, the term of this Agreement shall be for a period of three (3) year(s) from the Effective Date. 3.2 Sequent may terminate this Agreement at any time, without cause, by giving Brocade at least sixty (60) calendar days prior written notice. Termination of the Agreement will not relieve the parties of any obligations incurred prior to the date of termination, including any Sequent liability for cancellations as described in sub-Section 7.7. 3.3 Either party may immediately terminate this Agreement if the other party: (i) becomes insolvent or bankrupt, files or has filed against it a petition in bankruptcy and any proceeding under the bankruptcy or insolvency laws is not dismissed within thirty (30) calendar days, or undergoes a reorganization pursuant to a petition in bankruptcy filed with respect to it; or (ii) has all or a substantial portion of its capital stock or assets expropriated by any government; or (iii) is dissolved or liquidated, or has a petition for dissolution or liquidation filed with respect to it; or (iv) is subject to property attachment, court injunction, or court order which substantially and negatively affects its operations; or (v) makes an assignment for the benefit of creditors. 3.4 Either party may terminate this Agreement if the other party fails to perform any of its material obligations under the terms and conditions of this Agreement so as to be in default hereunder and fails to cure such default within thirty (30) calendar days after receiving written notice thereof. 4. PRODUCT DOCUMENTATION AND TRAINING 4.1 Brocade shall provide Sequent with one (1) reproducible copy of the Product Documentation in the form of printed material, magnetic media, CD ROM, or electronic means as mutually agreed, at no charge to Sequent. Brocade reserves the right to change the content of the Product Documentation at any time. In the event that such Documentation is changed during the term of this Agreement, Brocade agrees, also at no charge, to promptly notify Sequent of revised Product Documentation and its availability on Brocade's web site. Additional copies of Product Documentation and changes thereto may be ordered by Sequent at Brocade's then-current price. 4.2 Brocade hereby grants to Sequent without additional charge the right to reproduce any Product Documentation furnished under this Section together with an unconditional license to Sequent or each Sequent customer who purchases the Product to use the Product Documentation to maintain, use, or provide training on the Product purchased by such customer. Any reproduced *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 3 4 copies of such Documentation shall contain legends and copyrights appearing on the copies of the Product Documentation which were furnished to Sequent. 4.3 Brocade will provide one initial training course to a maximum of [*] Sequent employees at a time and location to be agreed upon between the parties. The training course and materials will be at no charge to Sequent. [*] for use in subsequent training. [*] 4.4 Brocade will provide additional training to Sequent when Product changes are made that affect Product Support. [*] 4.5 Sequent may request training courses in addition to those described in sub-Section 4.3 and 4.4, above, at Brocade's then-current charges. 5. PRICE AND PAYMENT 5.1 [*] 5.2 [*] 5.3 [*] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 4 5 5.4 [*] 5.5 Pricing does not include federal, state, or local excise, sales, or use taxes, except those taxes that are based on Brocade's income. If such taxes are applicable, they shall be set out as a separate line item on Brocade's invoice. 5.6 Payment terms for all Products and Product Support shall be net [*] from the date of a correct invoice. Payment of an invoice shall not constitute or imply acceptance of the Product or Product Support or relieve Brocade of any obligations assumed under this Agreement, nor prevent Sequent from asserting any other rights it may have under this Agreement or at law or in equity. 5.7 [*] 5.8 [*] 6. FORECASTING Sequent agrees to provide Brocade with twelve-month rolling forecasts of Sequent's estimated annual Product purchase requirements. These forecasts are good faith estimates only, and Sequent shall not be liable to Brocade for failure to purchase any of the forecasted Product. 7. PURCHASE ORDERS 7.1 Sequent's purchase orders shall be the sole basis for purchase of Product and Product Support under this Agreement. Designated Sequent procurement agents shall be the only persons authorized to issue purchase orders or changes to purchase orders. Purchase orders and change orders may be transmitted by mail, facsimile, or other methods approved by both parties. Purchase order numbers shall be referenced on all correspondence, invoicing, and packing slips relating to each order. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 5 6 7.2 Purchase orders will specify: (i) Sequent's part numbers, (ii) Product description, (iii) Product revision level, (iv) quantity ordered, (v) shipping destination, and (vi) due-on-dock dates. Brocade shall acknowledge in writing its acceptance of such purchase orders within [*] from receipt of Sequent's purchase order. 7.3 Sequent's part numbers and part number revision levels appearing on the purchase orders shall be considered the most recent. In the event that Brocade finds any discrepancy between the part or revision level numbers appearing on a purchase order and any other part or revision level numbers which Brocade believes are correct, Brocade shall obtain clarification from Sequent before shipment of the Product. 7.4 Product lead-time shall be no greater than the lead times in the schedule below, from receipt of Sequent's purchase order until shipment by Brocade to Sequent's requested point of delivery. Brocade shall use best efforts to meet deliveries requested inside the Product lead-time. Brocade agrees to meet the Product lead-times according to the following schedule.
Time Period Lead Time (Calendar Days) ----------- ------------------------- through 9/30/97 [*] 10/1/97-3/31/98 [*] 4/1/98-onward [*]
7.5 Upside Flexibility Model: Sequent shall have the right for any given purchase order on "unallocated Product" as that term is described below, to an increase in quantities in issued purchase orders as follows:
Number of Calendar Days Prior to Scheduled Due on Dock Date Allowable Increase [*] [*]% [*]% [*]% [*]% [*]% [*]% [*]% [*]%
For the purposes of this sub-Section, "unallocated Product" shall mean a Product not on allocation; with allocation defined as Brocade's inability to meet the allowable increase in quantities provided above due to Product component or capacity constraint which is beyond the reasonable control of Brocade. 7.6 Sequent shall have the right to reschedule delivery for [*] up to maximum of [*] out from the original scheduled due-on-dock date for all quantities not scheduled for delivery in Sequent's then- current fiscal quarter. For all reschedules of quantities scheduled *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 6 7 for delivery in Sequent's then-current fiscal quarter, [*] of the monthly volume can be rescheduled up to [*] out into Sequent's next fiscal quarter. Sequent shall provide Brocade written notice of requested reschedules at least [*] prior to the scheduled due-on-dock date. 7.7 This sub-Section governs cancellation of Product by Sequent. Sequent shall have the right to cancel delivery for any particular Product subject to the provisions of this sub-Section. 7.7.1 Sequent cancellations of Product occurring in calendar year 1997 are subject to the following cancellation schedule and fees:
[*]
* On cancellations occurring within 1 - 30 calendar days from the due on dock date of the cancelled Product cancellation fees will be; [*] of the Product purchase price of the cancelled Product, [*] ** On cancellations occurring within 31 - 60 calendar days from the due on dock date of the cancelled Product; Cancellation fees shall be based on [*] of the cancelled Product purchase price. *** On cancellations occurring greater than [*] calendar days from the due on dock date of the cancelled Product; [*] 7.7.2 Cancellations occurring during calendar year 1998 through the remainder of the term of the Agreement are subject to the following cancellation schedule and fees:
[*]
*Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 7 8 [*] * On cancellations occurring within 1 - 15 calendar days from the due on dock date of the cancelled Product cancellation fees will be; [*] of the Product purchase price of the cancelled Product, [*] ** On cancellations occurring within 16 - 30 calendar days from the due on dock date of the cancelled Product; Cancellation fees will be based on Brocade's [*] of the cancelled Product purchase price. *** On cancellations occurring within 31 - 60 calendar days from the due on dock date of the cancelled Product; Cancellation fees shall be based on [*] of the cancelled Product purchase price. **** On cancellations occurring greater than [*] calendar days from the due on dock date of the cancelled Product; [*] 7.7.3 [*] 7.7.4 Prior to any subsequent re-sale of a cancelled Product Brocade may invoice Sequent for such Product, as of the Product's due-on-dock date. Payment terms will be net [*] from the date of a correct invoice. [*] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 8 9 8. SHIPPING, DELIVERY, AND PACKAGING 8.1 Brocade shall follow all instructions contained in Sequent's routing instructions, which Sequent will provide to Brocade. Sequent may modify its routing instructions from time to time and will provide Brocade with an updated version of any such modified instructions. Brocade shall be responsible for any freight charges incurred for Product shipped outside the routing instructions to include, but not be limited to, use of other than Sequent preferred carriers. 8.2 Brocade will ship the Product so that delivery is made at Sequent's dock or a dock location designated by Sequent on the due-on-dock date specified in the purchase order, subject to Sequent's right to reschedule or cancel delivery as provided in sub-Sections 7.6 and 7.7, above. Brocade shall maintain a minimum on-time delivery performance of [*] to Sequent's requested due-on-dock dates. Deliveries will be considered on time if they are made no more than [*] earlier or [*] later than the due-on-dock date specified in the Sequent purchase order. Sequent may refuse to accept deliveries that are not on time. [*] If Sequent agrees to take partial shipments of any order, each such partial shipment shall be deemed a separate transaction. [*] 8.3 If Brocade anticipates or becomes aware that it will not supply the Product on the due-on-dock delivery date acknowledged by Brocade for any reason, Brocade shall notify Sequent immediately after Brocade has knowledge of the situation. The notification may be communicated by facsimile, telephone, electronic mail, or any other method agreed to by the parties, provided that Brocade shall obtain Sequent's actual acknowledgment of the notice of anticipated delay. Brocade and Sequent will jointly develop alternatives to resolve any late delivery of the Product, including use of premium routing. Brocade will develop recovery plans with new committed due-on-dock dates and communicate such plans to Sequent within [*] of missed shipments. If Brocade is unable to deliver the Product on the acknowledged due-on-dock date, through no fault of Sequent, Sequent may require Brocade to use premium routing and ship the Product freight pre-paid at Brocade's expense. 8.4 In the event of Product allocation due to circumstances beyond Brocade's reasonable control, Brocade shall [*] to supply the number of Products in Sequent's then current forecast covering the affected period of allocation, in no event less than the proportion of Sequent's percentage of Product on order to the total Product on order by all of Brocade's customers for the Product or similar Products. 8.5 Except as provided otherwise in sub-sections 8.1 and 8.3, above, sub-section 13.2.1, below, and applicable provisions of Attachment D, [*] unless otherwise specified by Sequent's designated procurement agents. 8.6 Each shipment of the Product by Brocade shall include a packing slip which contains at a minimum: (i) Brocade's name; (ii) box number (e.g., 1 of 3, 2 of 3); (iii) receiving address; (iv) Sequent's purchase order number; (v) Sequent's part *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 9 10 number; (vi) revision level of Sequent's part number; (vii) Product serial number; (viii) shipping quantity; (ix) date of shipment; and (x) return material authorization ("RMA") number, when applicable. 8.7 Unless requested otherwise by Sequent, all shipments to a single Sequent-designated location shipped on the same day shall be consolidated by Brocade into a single shipment. 8.8 Brocade shall provide the following information about its Product in writing within two weeks of execution of the Agreement: (i) country of origin; (ii) NAFTA preference criteria; (iii) harmonized scheduled tariff classification number; and (iv) export commerce control number ("ECCN"). Brocade, at its expense, will prepare all international shipping documentation, including commercial invoice, NAFTA certificate, Shipper's Letter of Instruction, Shipper's Export Declaration, and any other necessary documentation, for international shipments upon request from Sequent, provided that the Product can be shipped to the requested destination under a General License under the U.S. Export Administration Regulations. If a validated or other specific prior license is required under the U.S. Export Administration Regulations, Brocade may request that the Product be exported by Sequent and that Sequent assume all responsibility for export licenses and other export documentation. 9. INSPECTION AND ACCEPTANCE Inspection and acceptance of the Product by Sequent will be made within [*] after delivery. Failure to inspect and accept or reject the Product shall neither relieve Brocade from warranty responsibility or any applicable quality requirements, infringement, or Product liability as provided in this Agreement nor impose any liability on Sequent. Product not conforming to Product specifications may, at Sequent's option, be returned to Brocade at Brocade's expense for repair or replacement of the Product, [*] for any amounts previously paid by Sequent for the Product, or, if the foregoing remedies are insufficient, [*]. 10. WARRANTY Brocade warrants that all new Product delivered under this Agreement will for a period of [*] from the date of shipment of the Product by Brocade: (i) conform to and perform in accordance with the Product specifications identified in Attachment A, and to any drawings agreed upon by the parties or samples provided to and approved by Sequent; and (ii) be free from defects in materials and workmanship. This warranty shall survive inspection, test, acceptance, and payment. The warranties provided in this Section, referred to hereinafter as the Product Warranty, are in addition to any other remedies available at law or in equity, including the remedies set forth in Section 11, below. 11. [*] 11.1 In addition to the provisions of this Section, Brocade shall be subject to the requirements and expectations provided for in Attachment C. 11.2 For the purposes of this Section, the following definitions apply. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 10 11 11.2.1 "Reimbursement" shall mean monetary compensation, no charge replacement Product, unscheduled price reductions, or some mutually agreed to combination thereof. Other forms of Reimbursement may be identified by mutual agreement on a case by case basis. 11.2.2 The terms "Quality Failure," "Reliability Failure," "Red Light," and "Purge" are defined in Attachment C. 11.3 [*] Quality Failures, Reliability Failures, Red Lights, and Purges when the quality and/or reliability of the Product drops below the thresholds defined in this sub-Section. 11.3.1 [*] will be [*] when any of the following events occur: (i) Brocade-confirmed Quality Failures in parts per million ("PPM") exceed [*] the PPM defined in Section 5 of Attachment C; or (ii) A Red Light or Purge is directly attributable to Brocade's inability to meet the Product specification or PPM thresholds described in this sub-Section, or results from a safety violation. 11.3.2 [*] when any of the following events occur: (i) Product mean time between failures ("MTBF") drops below [*] of Brocade's predicted MTBF of [*] for a 16 port switch and [*] for an 8 port switch; or (ii) A Red Light or Purge is directly attributable to Brocade's inability to meet the Product specification or the MTBF thresholds described in this sub-Section, or results from a safety violation. 11.3.3 [*] to Sequent will be based on accumulated performance over a [*] rolling period. For instance: [*] 11.3.4 The parties will summarize and communicate quality and reliability data to provide metrics needed to track performance as provided in Section 7 of Attachment C. 11.4 [*] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 11 12 (ii) [*] (iii) An "incident" as described in 11.4 (i) and 11.4 (ii) above begins when a Quality Failure, Reliability Failure, Red Light or Purge is directly attributable to Brocade's inability to meet the Product specification or the appropriate PPM or MTBF thresholds, as provided in this Section 11, or results from a safety violation. An "incident" ends when Brocade meets or exceeds the deficient Product specification or PPM or MTBF threshold or the safety violation has been fully resolved. 11.5 [*] to Sequent under this Section shall be made by the parties at the end of each calendar year quarter and [*] Brocade to Sequent within [*] from the date of the accounting. 11.6 Remedies in this Section are in addition to those outlined in Section 10, Warranty. Payment under this Section shall not relieve Brocade of any obligations assumed, nor prevent Sequent from asserting any other rights it may have, under this Agreement. Amounts paid pursuant to sub-Section 11.4 constitute all damages per incident for Quality Failures and/or Reliability Failures under this Agreement. 12. RETURN MATERIAL AUTHORIZATION If Brocade requires an RMA to expedite the return of defective Product, Brocade shall provide a verbal RMA allowing immediate return of the Product and follow up with a written RMA within [*] from the date of giving the verbal RMA. Except for the need to obtain an RMA, Brocade shall not require prior approval for the return of Product from Sequent. 13. MANDATORY CHANGES 13.1 In the event that changes are required to make the Product conform to safety and/or regulatory agency requirements ("Mandatory Engineering Changes"), Brocade shall immediately implement the Mandatory Engineering Changes *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 12 13 without charge to Sequent in further production of the Product. Brocade shall provide Sequent with written notice of any Mandatory Engineering Changes at the time that Brocade knows of such requirements. 13.2 Brocade and Sequent shall discuss and mutually agree upon one or more of the following remedies, or any other agreed upon remedies, for implementing Mandatory Engineering Changes on previously delivered Product. Brocade shall use best efforts to immediately implement the selected remedies, [*]. 13.2.1 Sequent may return the affected Product to Brocade or an authorized Brocade facility for implementation of the Mandatory Engineering Change or Product replacement. [*] 13.2.2 Sequent may request and Brocade will ship Mandatory Engineering Change kits for Product delivered to Sequent before the Mandatory Engineering Change was implemented. Brocade shall provide Sequent with installation instructions and/or training necessary to implement the Mandatory Engineering Change. 13.2.3 Brocade may be requested to provide on-site technical assistance at the appropriate location to implement the Mandatory Engineering Change. 13.2.4 Sequent may request that a Brocade-approved third party organization implement Mandatory Engineering Change kits for the affected Product. 13.3 In the event that Brocade cannot implement all Mandatory Engineering Changes to Product delivered to Sequent within a reasonable time, not to exceed [*] from the date of Brocade's written notice to Sequent of the requirement for such changes, Brocade shall provide no charge replacement Product to Sequent in exchange for the Product requiring the Mandatory Engineering Change. 13.4 Sequent shall have the option to cancel open purchase orders without penalty if the Mandatory Engineering Changes are incompatible with or adversely affect performance of Products purchased by Sequent and such changes are not made compatible with the Products or Sequent is not provided with an acceptable remedy within [*] after Brocade receives notification from Sequent of its intent to cancel its open purchase orders. 14. SEQUENT REQUESTED CHANGES 14.1 Sequent may request that Brocade provide [*] evaluation of changes to the Product or changes to the method of packing, packaging, or shipment of the Product. Sequent's request will include a written description of the proposed change sufficient to permit Brocade to evaluate its feasibility. 14.2 If Sequent's proposed change is accepted by Brocade, Brocade shall notify Sequent in writing within [*] from the date of request, of the terms and conditions under which it would make the change requested by Sequent. Brocade's written evaluation shall state the cost, if any, to make the *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 13 14 change and the date that Brocade would be able to implement such change. If the proposed change would be at cost to Sequent, Sequent must provide prior written approval to Brocade before the change is made. In the evaluation of the effect such changes may have on regulatory agency certifications, the above referenced [*] may be extended to take into account the time necessary for Brocade to obtain new regulatory agency certifications. 15. BROCADE REQUESTED CHANGES 15.1 Subject to the provisions of this Section 15, Brocade may propose optional changes, including changes that affect form, fit, function, [*] as those terms are defined below, which are not Mandatory Engineering Changes ("Optional Engineering Changes"). For the purposes of this Section, the following definitions apply: 15.1.1 "Form" means the dimensions, weight, appearance, packaging, labeling, finish, texture, color, or material properties of the Product. 15.1.2 "Fit" means the assembly interchangeability or attachment scheme of the Product or FRU within the Product. Fit includes the ability of an item to become an integral part of another item. 15.1.3 "Function" means performance, operational interface to other components or functions, fitness for use, or testability of the Product or FRU within the Product. 15.1.4 [*] 15.1.5 [*] 15.2 Brocade shall maintain a formal product change control system to ensure that notification is submitted to Sequent on all proposed changes to Products covered by Attachment A. Brocade shall provide ongoing Product technology directions and schedules for all Product and Product-related options. Included in the change notification process shall be the following: (i) anticipated last shipment date of unchanged Product; (ii) means of identification between changed and unchanged Product; (iii) a complete and detailed description of the change proposed and any data that will support the benefits of the change; (iv) impact to installed base of Product, including FRU inventories. 15.3 [*] 15.4 If the Optional Engineering Changes proposed by Brocade in Sequent's sole opinion necessitate evaluation by Sequent for compatibility with Sequent's systems and/or specifications, Brocade upon Sequent's request shall provide Sequent with one (1) set of evaluation products, FRUs, or designs which *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 14 15 incorporate the proposed changes. Sequent will request such evaluation products, FRUs, or designs within [*] of receipt of Brocade's change proposal. Evaluation products, FRUs, or designs that are provided to Sequent under this provision are for evaluation purposes and will be returned to Brocade after the evaluation period. Sequent has the right, without liability, to accept or reject Brocade's proposed Optional Engineering Changes and will inform Brocade of its approval or rejection of those changes in writing within [*] from Sequent's receipt of notice of Brocade's proposed changes or within [*] of receipt of the evaluation products, FRUs, or designs, whichever is later. If no written response is received by Brocade from Sequent within the applicable period, Sequent will be deemed not to have accepted the changes. 15.5 If Sequent rejects the Optional Engineering Changes, Brocade shall continue supplying the unaltered Product or provide Sequent with opportunities for last time buy of the unaltered Product under the terms of Section 16, below. 15.6 Brocade will incorporate changes accepted by Sequent into Product on Sequent's open purchase orders and, at Sequent's request, into Product going through Brocade's repair process. 15.7 Any changed Product resulting from application of this Section shall be considered added to this Agreement and subject to its terms and conditions. 16. PRODUCT WITHDRAWAL Brocade will notify Sequent in writing at least [*] prior to withdrawal of a Product. Brocade will ship Product for open purchase orders that Brocade has accepted before the withdrawal date for an additional [*] after the withdrawal date. All EOL ("End of Life") purchase orders will be considered non-cancellable. 17. MEETINGS AND SUPPLIER PERFORMANCE 17.1 Brocade appoints its Account Manager and Sequent appoints its designated Supplier Business Manager as liaisons to monitor Brocade's performance under this Agreement. These liaisons will also be responsible for coordinating meetings, discussions and reports provided for in this Agreement. The names and telephone and facsimile numbers of the liaisons will be provided and may be changed by notice from one party to the other. 17.2 Sequent's designated liaison will conduct quarterly supplier performance review and planning meetings with Brocade's Sequent account management team. Sequent and Brocade shall mutually develop supplier performance requirements and goals based on Brocade's obligations and responsibilities under this Agreement, to be evaluated by the parties at these periodic meetings. Brocade's performance requirements and goals will be based on: [*] The locations and times for these meetings will be determined by Sequent and Brocade. The purpose of these meetings will include the following: *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 15 16 (i) Review Brocade's performance over the previous quarter; (ii) Review action items and resolution; (iii) Identify opportunities and areas of improvement; (iv) Agreement on commitments, set target dates, and identify persons responsible; (v) Review appropriate Brocade reports; (vi) [*] (vii) Review Brocade quality and reliability improvement plans; (viii) Publish minutes. 18. REPORTS Recurring reports to be provided by Brocade and Sequent under this Agreement are listed in Attachment E, Reports. All reports will be made available in electronic form or as otherwise mutually agreed. There shall be no charge to either for any recurring reports required under this Agreement. 19. MATERIAL MANAGEMENT AND PERFORMANCE STANDARDS 19.1 Brocade shall manage the scheduling of material to meet Sequent's Product availability and delivery requirements as set forth in this Agreement and on accepted purchase orders. Brocade will provide status reports to Sequent that include open order status and ship date information, on the following schedule: 1997: [*] 1998: [*]
19.2 Brocade shall manage sub-tier supplier performance in areas to include quality, availability, including allocated Product, and delivery to meet the requirements of this Agreement. Brocade shall set performance goals and objectives with sub-tier suppliers and monitor progress against goals. Sequent may request status reports periodically to audit these suppliers' performance. 20. LIMITATION OF LIABILITY EXCEPT AS PROVIDED FOR IN [*] NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES, INCLUDING LOST PROFITS, ARISING OUT OF THIS AGREEMENT OR ANY PERFORMANCE HEREUNDER, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. 21. CONFIDENTIAL AND PROPRIETARY INFORMATION 21.1 Both parties may, in connection with this Agreement, disclose to the other party information considered confidential and proprietary information of the disclosing party ("Confidential Information"). Information shall be considered Confidential Information if identified as confidential in nature by the disclosing party at the time of disclosure, or which by its nature is normally and reasonably considered confidential, such as information related to past, present or future research, development, or business affairs, any proprietary products, materials or *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 16 17 methodologies, or any other information which provides the disclosing party with a competitive advantage. Confidential Information, if disclosed or provided in tangible form, shall be clearly and conspicuously identified as company confidential or proprietary. Confidential Information, if orally or visually disclosed, shall be identified as company confidential or proprietary in nature at the time of disclosure. The receiving party shall protect the disclosing party's Confidential Information with the same degree of care that it regularly uses to protect its own Confidential Information from unauthorized use or disclosure, but in no event less than a reasonable degree of care. Confidential Information shall not be provided or disclosed to anyone except those employees of the receiving party with a need to know under this Agreement. No rights or licenses under patents, trademarks or copyrights are granted or implied by any disclosure of Confidential Information. Confidential Information and any and all authorized copies thereof shall remain the property of the disclosing party and shall be destroyed or returned if requested by the disclosing party. The receiving party shall not export or re-export Confidential Information without the appropriate United States or foreign government export licenses. This Section 21 shall survive the expiration or termination of this Agreement for a period of [*] 21.2 The obligations of confidentiality imposed by this Agreement shall not apply to any Confidential or Proprietary Information that: (a) is rightfully received from a third party without accompanying markings or disclosure restrictions; (b) is independently developed by employees of the receiving party who have not had access to such Confidential Information; (c) is or becomes publicly available through no wrongful act of the receiving party; (d) is already known by the receiving party as evidenced by documentation bearing a date prior to the date of disclosure; or, (e) is approved for release in writing by an authorized representative of the disclosing party. 21.3 The terms and conditions of this Agreement, but not its existence, are considered Confidential Information. 22. INFRINGEMENT 22.1 Brocade will defend or settle at its own expense any action or claim brought against Sequent to the extent that such action is based upon a claim that any Product purchased hereunder infringes a patent, copyright, trade secret, or any intellectual property right of any third party. Brocade shall indemnify and hold Sequent harmless against all costs and expenses and damages, including reasonable attorneys' fees, and shall pay those costs, expenses, and damages incurred by Sequent, so long as Sequent provides the following: (i) prompt notification of any claim, provided that Sequent has actual knowledge of such claim; (ii) reasonable cooperation and assistance with a claim at Brocade's expense; (iii) sole control of defense and settlement to Brocade. 22.2 In the defense or settlement of a claim for infringement of a patent, copyright, trade secret, or any intellectual property right of any third party, Brocade may procure for Sequent the right to continue using the Product, or if such remedy is not reasonably available, replace or modify the Product so that its use or resale becomes non-infringing, provided that any replacement or modified product meets substantially the same specifications as the original and is acceptable to *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 17 18 Sequent. If any of the above remedies are not available, Sequent may return the Product to Brocade and receive [*] for the Product. 22.3 Brocade shall have no liability to Sequent to the extent that a claim of infringement is based upon (i) compliance with Sequent's designs, plans, or specifications if without such designs, plans, or specifications the Product would not have been infringing; (ii) the combination of the Product with other products or devices not supported hereunder where the Product itself would not be infringing; or (iii) modifications of the Product made by Sequent or on Sequent's behalf by a party other than Brocade, where the unmodified Product would not be infringing. 23. INDEMNITY AND INSURANCE 23.1 Brocade shall defend, indemnify, and hold Sequent harmless at Brocade's sole cost and expense, from tangible property damage, personal injury including death, and expense, including attorney's fees, incurred by an employee, agent, invitee, or customer of Sequent, regardless of how caused if arising out of a Product defect or defect that results from the providing of services, except to the extent such loss, property damage, personal injury, or expense, including attorneys' fees, was caused by the negligence of Sequent or its employees, customers, or authorized agents while acting within the scope of their authority. 23.2 Brocade shall provide Sequent with a certificate of insurance with not less than the following coverages upon execution of this Agreement. Sequent shall be named as an additional insured on Brocade's insurance coverage. The fulfillment of the insurance obligations shall not otherwise relieve Brocade of any liability assumed under the Agreement or in any way modify or limit any obligations of indemnification hereunder.
Coverage Required Limits -------- --------------- Worker's Compensation: Statutory Employer's Liability: [*] each accident, bodily injury by accident [*] each employee, bodily injury by disease [*] policy limit, bodily injury by disease Comprehensive General Liability: [*] general aggregate [*] products/completed operations aggregate [*] personal and advertising injury limit [*] each occurrence limit Automobile Liability: [*] combined single limit, bodily injury and property damage coverage
23.3 Certificates of insurance shall state that a policy or policies have been issued and are in force at such time, that the policy or policies shall not expire or lapse, and that the policy or policies will not be cancelled or changed so as to affect the insurance described in the certificate until after thirty (30) days prior written *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 18 19 notice to Sequent of such change. Such certificates or true copies thereof and any notices regarding insurance shall be sent to: Sequent Computer Systems, Inc. 15450 S.W. Koll Parkway Beaverton, OR 97006-6064 Attn: Manager, Contracts, MS EDO2-805 23.4 Upon Sequent's request, Brocade shall furnish Sequent, for its inspection and approval, policies of insurance with all endorsements, or conformed specimens thereof, certified by the insurance company to be true and correct copies. The fulfillment of this insurance obligation shall not otherwise relieve Brocade of any liability assumed under this Agreement or in any way modify or limit Brocade's obligations to indemnify Sequent hereunder. 24. NOTICES Any legal notice required or permitted to be made or given to either party pursuant to this Agreement shall be sufficiently made or given on the date of delivery if delivered personally or on the date of mailing if sent by certified or registered mail (postage prepaid and return receipt requested) to the other party at the address set forth below. Either party may change the information below by giving the other party prior written notice of such change. Brocade: Brocade Communications Systems, Inc. 1901 Guadalupe Parkway San Jose, CA 95131 Attn: Chief Financial Officer Sequent: Sequent Computer Systems, Inc. 15450 S.W. Koll Parkway Beaverton, OR 97006 Attn: Manager, Contracts, MS EDO2-805 25. MISCELLANEOUS PROVISIONS 25.1 Compliance with Laws Brocade shall comply with all applicable federal, state, country, and local laws, ordinances, regulations, and codes in the performance of this Agreement. 25.2 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. 25.3 Waiver The failure of either party to insist upon or enforce strict conformance by the other party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as a waiver or relinquishment of such party's Page 19 20 right unless made in writing and shall not constitute any subsequent waiver or relinquishment. 25.4 Amendments, Changes, and Modifications Amendments, changes, or modifications to the Agreement, to be valid, must be in writing and signed by authorized representatives of both parties. Any verbal agreements, discussions, and understandings, express or implied, shall not constitute an amendment to this Agreement. 25.5 Invalid Provisions If any provision of this Agreement is finally held by a court of competent jurisdiction to be illegal or unenforceable, the legality, validity, and enforceability of the remaining provisions of this Agreement shall not be affected or impaired. 25.6 Survival The provisions of Section 10 (Warranty), Section 11 [*], Section 16 (Product Withdrawal), Section 20 (Limitation of Liability), Section 21 (Confidential and Proprietary Information), Section 22 (Infringement), Section 23 (Indemnity and Insurance), sub-Section 25.1 (Compliance with Laws), sub-Section 25.2 (Governing Law), and applicable provisions of Attachment D (Product Support) of this Agreement shall survive the termination or expiration of this Agreement. Outstanding purchase orders shall survive the termination of this Agreement. 25.7 Force Majeure Neither party shall be responsible for delays or failures in performance resulting from acts beyond the reasonable control of such party, including, but not limited to, acts of God, strikes or other labor disputes, riots, acts of war, communication line failures, power failures, fire, or disasters. The time for performance of any delayed obligation shall be extended for the time period lost by reason of the delay, except that if the delay exceeds thirty (30) calendar days from the beginning of the delay, Sequent may terminate this Agreement for cause without further notice or liability to Brocade. 25.8 Successors and Assigns Except as specifically provided for in sub-Section 3.3.2 of Attachment D, below, neither party may assign any rights hereunder without the prior written consent of the other party, which consent shall not be unreasonably withheld. Any assignment of rights shall not work as a novation of obligations hereunder without written agreement. Any attempt to assign any rights, duties, or obligations hereunder without the other party's written consent will be void, either party may assign this Agreement to a surviving entity in connection with any merger, acquisition, or consolidation of not less than a majority ownership in the merged, acquired, or consolidated company by the surviving entity. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 20 21 25.9 Attorney's Fees If either party commences litigation to enforce any provision of this Agreement, the prevailing party shall be entitled to recover reasonable attorneys' fees and expenses of litigation, including fees and expenses of any appeal. 25.10 Headings The section and paragraph headings of this Agreement are intended as a convenience only, and shall not affect the interpretation of its provisions. 25.11 Conflicting Terms The terms and conditions of this Agreement shall take precedence over any conflicting terms and conditions contained on Sequent's purchase orders and Brocade's quotation or acknowledgment. 25.12 Cumulative Remedies The rights and remedies afforded to either party pursuant to any provision of this Agreement are in addition to and do not in any way limit any other rights or remedies afforded to either party by any other provision of this Agreement or by law. All such rights and remedies are cumulative and may be exercised singularly or concurrently. 26. ENTIRE AGREEMENT This Agreement, including all Attachments, constitutes the entire Agreement between the parties and supersedes all prior or contemporaneous agreements, discussions, and understandings between the parties, either express or implied. The following Attachments are part of this Agreement and are incorporated herein by this reference. Attachments: A Product Specification B Product and Product Support Pricing C Supplier Quality D Product Support E Reports Page 21 22 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. Sequent Computer Systems, Inc. Brocade Communications Systems, Inc. By: /s/ Wayne A. Pittarger By: /s/ Bruce J. Bergman ------------------------------- ---------------------------- (Signature) (Signature) Name: Wayne A. Pittarger Name: Bruce J. Bergman -------------------------- -------------------------- (Printed or Typed) (Printed or Typed) Title: VP Operations Title: CEO ------------------------- ------------------------- Date: 6/17/97 Date: 6/17/97 -------------------------- ------------------------- Page 22 23 ATTACHMENT A PRODUCT SPECIFICATION This Attachment describes the Product and Product specifications required under the Agreement. 1. PRODUCT DESCRIPTION AND PRODUCT SPECIFICATIONS The Products and Product specifications are described below. The Product specifications are further described in Sequent documents identified by the Sequent part numbers listed below. Such documents identified below are incorporated by reference as though fully set forth herein. Product descriptions and specifications are subject to change by mutual agreement of the parties.
PRODUCT DESCRIPTION Production Specifications ------------------- (By Sequent Part Numbers) ------------------------- 16 Port Fibre Channel Switch 1003-69661 8 Port Fibre Channel Switch 1003-69660 0 Port Fibre Channel Switch for Service Spares 1003-73151 G-Port Card for Service Spares 1003-73153 GBIC, multi-mode, non-OFC for FC Switch (2M to 500M) 1003-73152
Page 23 24 ATTACHMENT B PRODUCT AND PRODUCT SUPPORT PRICING This Attachment sets forth Product and Product Support pricing to Sequent from Brocade under the Agreement. 1. PRODUCT PRICING
1997 1998* (not to exceed) 1.1 8 Port Sequent part number 1003-69660; Brocade part number B1600-110 [*] [*] 1.2 16 Port: Sequent part number 1003-69661; Brocade part number B1600-100 [*] [*] 1.3 0 Port: Sequent part number 1003-73151; Brocade part number X1017 [*] [*] 1.4 GBIC: Sequent part number 1003-73152 Brocade part number X1006 [*] [*] 1.5 G-Port Card: Sequent part number 1003-73153; Brocade part number X1003 [*] [*]
* Note: Pricing for 1999 through the remainder of the term of the Agreement will be as agreed upon between the parties [*]. ** Note: For initial stocking orders and subsequent orders in excess of a net aggregate of [*], Brocade will apply a [*] for Brocade part number X1003 and a [*] for Brocade part number X1006. 2. PRODUCT SUPPORT PRICING 2.1 Exchange Product Charges The charge for Exchange Product, as that term is defined in sub-Section 3.1 of Attachment D, shall be [*] of the then-current Product price or the repair price for the Product, whichever is less. 2.2 Out of Warranty Repair Charges (i) Switch: [*] (ii) G Port without GBIC: [*]
2.3 NTF Charges Charges for NTF testing of Product will be per the following schedule: (i) Switch: [*]
*Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 24 25 (ii) G-Port Card: [*]
2.4 Recertification Charges Charges for re-certification, as provided in sub-Section 6 of Attachment D, shall be [*]. 2.5 Charges for out of warranty upgrade will be as agreed upon between the parties on a case-by-case basis. 3. TRAINING Charges for additional training (training conducted other than the original/initial one day training course provided to Sequent and Sequent service partners) shall be as follows: (i) One (1) day at Brocade: [*] per person Includes: Copy of all course materials (ii) One (1) day at Sequent-specified site: [*][*] persons/5 person minimum, plus travel expenses [*] per person for more than five persons Includes: Copy of all course materials for each person *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 25 26 ATTACHMENT C SUPPLIER QUALITY 1. INTRODUCTION, SCOPE AND [*] 1.1 This Attachment is subject to applicable terms and conditions of the Agreement and defines the quality requirements and expectations for Brocade under the Agreement. Changes to this Attachment must be approved by the parties' designated quality representatives. Except as specifically provided otherwise, there will be no charge to Sequent for activities and discharge of obligations required of Brocade described in this Attachment. 1.2 Brocade shall implement the procedures, plans, goals and processes to include but not be limited to: (i) document control; (ii) continuous improvement; (iii) customer feedback; (iv) performance tracking against objectives; and (v) corrective action processes required of Brocade to remain in compliance with its obligations under the Agreement. 1.3 Brocade shall create, implement and maintain a continuous process improvement program with the goals of reducing costs and lead-time and improving quality and service to Sequent. Such program shall be documented and provided to Sequent. 1.4 [*] 2. INSPECTION, AUDIT RIGHTS AND STOP SHIPS 2.1 Sequent shall have the right to inspect and audit any manufacturing or administrative site, including Brocade sites that supply goods or services, including the Product, subject to agreements with Brocade suppliers. In addition, on an annual basis at a time which is mutually agreed upon between the parties, Sequent shall be entitled to audit Brocade records and processes which directly insure that Brocade [*]. Sequent shall also be entitled to review relevant documents pertaining to quality information including but not limited to procedures and certificates of conformance affecting materials, including the Products, if requested. Brocade shall assist Sequent in arranging such inspections, audits and reviews. 2.2 Sequent shall have the right, without liability, to stop Brocade's shipments to Sequent and/or Sequent's customers of Product that does not conform to the specifications and criteria contained herein. Sequent will advise Brocade of such non-conformance. Such Products shall not be shipped by Brocade unless (i) Brocade has corrected the areas of non-conformance in the Product and Sequent approves Product shipment or (ii) Sequent permits shipment of such Products pending Brocade's correction of the non-conformance. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 26 27 3. DEFINITIONS 3.1 Quality Failure: Any failure that occurs in Sequent's factory during integration/systems test or during the first [*] after installation at a Sequent customer site, both circumstances sometimes referred to as "dead on arrival" ("DOA"). These failures are considered in the calculation of the parts-per-million ("PPM") failure rate. This includes any and all functional and non-functional failures, to include but not be limited to incorrect labels and missing jumpers. 3.2 Reliability Failure: Any failure that occurs after the first [*] of operation after installation at Sequent's customer's site. Reliability is measured as mean-time-between-failure(s) ("MTBF"). 3.3 Red Light: A Red Light is anything that causes data corruption, loss of use, safety, and/or other problems that negatively impact the customer's ability to effectively use the Product per its functional specification or intended use. This includes not only the Product or a service but also related processes such as shipping and documentation. When a Red Light occurs, Product is not shipped and resources are redirected to solve the situation. 3.4 Purge: Removal and segregation of Product in Sequent's factory and service centers due to a discrepancy with a particular lot or date code of the Product. 3.5 Quality Issues: Quality Issues are those issues that arise when the Products do not meet the Product specifications and include but are not limited to incorrect packaging, labeling, incorrect revision levels and Purges. 3.6 Routine Questions and Issues: Routine Questions and Issues are those that do not address Quality Failures, Red Lights, Purges or Quality Issues. 4. PERFORMANCE ACTIVITIES 4.1 Brocade shall establish, implement and maintain a comprehensive quality assurance program to ensure the consistent supply of Products that meet the requirements specified in the Agreement and this Attachment. Details of the program shall be made available to Sequent upon request and Sequent has the right to survey and audit the program. Sequent will provide a minimum of two (2) weeks notice prior to any planned survey or audit. 4.2 Brocade shall have a documented system to ensure a consistent supply of materials used for the assembly of Products. This system shall maintain procedures for incoming inspection per category of material and procedures outlining the qualification of new materials suppliers. 4.3 Brocade shall have a formally documented manufacturing process and quality control system. Brocade shall also maintain established intervals for preventive maintenance of manufacturing equipment. 4.4 Brocade shall have a documented system to ensure continued accuracy of measurement equipment in manufacturing. Measuring equipment shall be Page 27 28 calibrated at established intervals against certified standards that have valid relationships to national standards. 4.5 Brocade shall have an established program for statistical process control ("SPC") in manufacturing. This program shall use SPC tools to control and improve the manufacturing process and its capabilities. Documentation for process control shall consist of control procedures, SPC limits and SPC violation rules. 4.6 Brocade shall maintain and use a system for identifying and segregating non-conforming material. Adequate documentation concerning the nature of the non-conformance shall be generated and maintained. 4.7 All material received at Sequent shall conform with the requirements specified in the purchase order and the Product specifications. To support Sequent's quality assurance program and to enable compliance with regulatory requirements, the current revision of each of the following items must be furnished to Sequent upon request: (i) [*] (ii) [*] (iii) [*] 5. SEQUENT QUALITY FAILURE AND RELIABILITY FAILURE REQUIREMENTS 5.1 The Quality Failure requirement for the Product is that the failure rate shall be no higher than [*]. This failure rate will be measured by calculating the number of defects found in Sequent factory in addition to any failures that occur within the first [*] after installation at a customer site, divided by the total number of Products shipped. [*] [*] 5.2 The Reliability Failure Goal for the 16 Port Switch is [*] MTBF (Annual Failure Rate (AFR) x [*]). The Reliability Failure Goal for the 8 Port Switch is [*] MTBF (Annual Failure Rate (AFR) equal to or approximately %) 5.3 A Red Light will occur if the reliability of the Product drops below the required [*] for the 16 port switch or [*] for the 8 port switch. [*] *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 28 29 6. TECHNICAL SUPPORT AND RESPONSIVENESS 6.1 Brocade shall promptly notify Sequent, in writing, of any discrepancies found which could have a detrimental effect on previously shipped Product. In such cases, Brocade shall provide a timely response with effective corrective action for any nonconformity discovered. 6.2 Routine Questions and Issues. Brocade will provide [*] acknowledgment, by electronic mail ("Email"), facsimile ("Fax") or other method of communication agreed to by the parties, of all Sequent requests for assistance with Routine Questions and Issues, including but not limited to questions regarding Product service and support. Sequent shall have access to Brocade personnel, to include but not be limited to developers, order fulfillment, quality and technical personnel, to assist Sequent. Brocade personnel shall use best efforts to provide a response to Sequent's requests for assistance within [*] of receipt of the request. 6.3 Failure Analysis. Brocade shall perform failure analysis on all failed Products returned to Brocade. Failure analysis will be a cooperative effort between Brocade and Sequent to determine the root cause of the failure. Initial failure analysis on failed Products shall be completed within [*] from Brocade's receipt of the Products; except in isolated incidents based on extreme critical Sequent customer need, from the time of receipt by Brocade of defective Product from Sequent, Brocade agrees to provide expedited failure analysis on a commercially reasonable basis, including isolation of the defect to the basic component level. Complete failure analysis to root cause shall be completed within [*] from receipt of failed Product. Once failure analysis has been completed, Brocade will Email or Fax a failure analysis report to the Sequent Supplier Engineer designated by Sequent to work with Brocade. The failure analysis report shall include at a minimum, the Product part number, Product serial number, failure cause and corrective action that Brocade will take to prevent further occurrences of the failure. There will be no charges for failure analysis. 6.4 Quality Issues. Quality Issues must be responded to by Brocade within two (2) business days after being notified that such an issue exists. Brocade shall completely close the Quality Issue with effective corrective action that will prevent a repeat failure within [*] depending on the nature of the issue. 6.5 Red Lights. Red Lights shall be highest priority and shall cause immediate allocation of all necessary Brocade resources to expeditiously develop and implement effective containment and resolution plans in conjunction with Sequent, until problem resolution. Brocade's commitment of resources shall be at its expense and shall include but not be limited to committing Brocade personnel to work evenings and weekends or, if necessary, to send such personnel to Sequent's site or Sequent's customer's site. 6.6 Brocade shall comply with the Sequent Corporate Standard Operating Policy for Electrostatic Discharge Control, Sequent part number 1003-55472-E01, a copy of which has been provided to Brocade. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 29 30 6.7 Depending on the amount and/or complexity of quality issues outstanding at any given time, either party may initiate ongoing weekly conference calls between the parties for the purpose of quality issue resolution. 7. QUALITY DATA AND REPORTING 7.1 The parties will be responsible for providing each other with quality data. The specific data, the party responsible for the data, and the time for reporting is as follows:
Data (Field Metrics) & Responsible Party Time of Reporting Summary of field Quality Failures [*] after On or before the install) (Sequent) 15th of the month Reliability Data in the form of average time between On or before the replacement ("ATBR"). ATBR includes all 15th of the month replacements, some of which may not have been actual failures (Sequent) Data (Factory Metrics) & Responsible Party Time of Reporting Summary of all inspection/test station yields for the On or before the month for all Products shipped to Sequent (Brocade) 15th of the month Pareto of failures for the above stations for the month On or before the for all Products shipped to Sequent (Brocade) 15th of the month Failure analysis summary of Sequent returned On or before the Products (Brocade) 15th of the month [*]
7.2 This above data will be sent by Email, Fax or other method agreed to by the parties, between Brocade and Sequent quality personnel no later than the required time of reporting. 7.3 All Brocade test records must be archived for a minimum of [*]. Brocade shall maintain and analyze in-process failure data and use best efforts to improve test suites to drive the number of in-process failures to zero. 7.4 Test flow diagram and content for all Products including systems, features and spares shall be available to Sequent upon request. 8. CORRECTIVE ACTION PROCESS All Quality Failures and Reliability Failures shall be resolved to root cause. Brocade shall perform failure analysis on defective Products in accordances with sub-Section 6.3 of the Agreement. Upon determining the root cause of the failure, Brocade shall establish a corrective action plan, with Sequent's assistance if requested, to insure that the Product defect is removed and that root cause corrective action is implemented. Sequent will assist Brocade with tracking all open failures and will work with Brocade to insure that the proper repair priority is set. In the event Brocade encounters a no trouble found ("NTF") in a Product sent from Sequent, Brocade shall re-submit through the complete manufacturing test process for a final assembly. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 30 31 9. MULTIPLE FAILURE PRODUCT DISPOSITION 9.1 Product of a specific part and serial number with a history of [*] or more failures ("Multi-failure Product") shall be clearly labeled as non-conforming due to multiple failures and segregated from good Product, as the term "good" is described in sub-section 9.2, below. 9.2 Multi-failure Product may be re-labeled as "good" and used as a replacement Product when the following criteria have been met: (i) Brocade provides to the designated Sequent Supplier Engineer ("SE"), written documentation of a positive correlation between all failures and Brocade's fixes; and (ii) Product meets all Product specifications and test criteria; and (iii) Sequent's SE has provided Brocade with written authorization to label the documented Multi-failure Product as good. 9.3 In the event that no positive correlation between failure and fix can be established for a Multi-failure Product, then Brocade shall not repair or use such Product as a replacement Product. Brocade shall submit a scrap request to Sequent's designated Supplier Engineer for review and authorization. Brocade's requests for scrap authorization shall include the following information: (i) Product part, revision, and serial numbers; (ii) Documented history of remedial processes performed on the Product; and (iii) Product's failure mode or quality conformance issue. 9.4 Brocade may be required to return scrapped Product to Sequent for verification and analysis. Sequent will notify Brocade of this requirement at the time of Product scrap authorization. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 31 32 ATTACHMENT D PRODUCT SUPPORT This Attachment sets forth the terms and conditions that govern the support for the Product(s). Notwithstanding anything that may be construed to the contrary, Sequent shall not have an obligation to purchase any Product Support from Brocade under the Agreement. 1. PRODUCT SUPPORT AND PRODUCT SUPPORT DURATION 1.1 At Sequent's request, Brocade shall provide the Product Support described in this Attachment. Charges for Product Support are provided in Attachment B to the Agreement. 1.2 Product Support may include but not be limited to Product: (1) testing; (ii) repair; (iii) upgrades; (iv) failure analysis; and (v) advance exchange. 1.3 Brocade shall provide Product repair and testing at reasonable prices and throughput time as provided in this Attachment D for a period of not less than [*] years after Product withdrawal. 1.4 In the event that Brocade is unable or unwilling to comply with Sequent's Product Support requirements, Brocade will, at Sequent's request, assist Sequent in identifying another repair source to provide all or part of the Product Support. Brocade's assistance may include, but is not limited to: (i) training required by Sequent and/or the third party to provide Product Support and (ii) providing Sequent and/or the third party with all necessary documentation and component sourcing information required to perform Product Support. Such assistance will be provided to Sequent [*]. 1.5 The parties acknowledge that Product returns to Brocade may come from three (3) different sources: (i) Sequent's service organization; (ii) Sequent's evaluation and demonstration product organization; and (iii) [*]. Processing returns may differ depending on the source of the return. [*] 2. PRODUCT REPAIR 2.1 Upon Sequent's request for Product repair, Brocade shall ship repaired or replacement Product within [*] of receipt of Sequent's defective Product. 2.2 All field returned Product shall be upgraded and/or repaired as agreed between the parties, and then reassembled, tested and packaged per Sequent's requirements for new Product. All final test and inspection as required by Brocade for new Product shall be performed on field returned Product prior to its return to Sequent. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 32 33 2.3 There shall be no charge for Product repair during Product warranty. Prices for out-of-warranty Product repair are as provided in sub-Section 2.2. of Attachment B. 3. EXCHANGE PRODUCT 3.1 For purposes of this Section 3, the following definitions apply: 3.1.1 "Exchange Product" means a new Product or a Product that has been previously repaired or refurbished and which Brocade uses to replace defective Product. 3.1.2 "Product Warranty" means the warranty period as provided for in Section 10 of the Agreement. 3.1.3 "Product Support Warranty" means the warranty, as described in sub-Section 3.5.3, below, applicable to Exchange Product delivered pursuant to this Section 3 after expiration of the Product Warranty. 3.2 Brocade will provide replacement Product to Sequent under the provisions of this Section 3. The charge for Exchange Product shall be as provided in sub-Section 2.1 of Attachment B. 3.3 Repair of Exchange Product 3.3.1 All field returned Product shall be upgraded and/or repaired as agreed between the parties, and then reassembled, tested and packaged per Sequent's requirements for new Product. All final test and inspection required by Brocade for new Product shall be performed on field returned Product prior to its return to Sequent. 3.3.2 Brocade shall be responsible for repair and/or refurbishment of Products that may be provided to Sequent as Exchange Product. Brocade may assign repair or refurbishment activities to a third party provided that Brocade's assignee repairs and/or refurbishes Product in accordance with Attachment C, Supplier Quality, and the provisions of this Agreement. Brocade shall remain liable to Sequent for its obligations under the Agreement, to include but not be limited to providing Exchange Product. 3.4 In-Warranty Product Exchange 3.4.1 During Product Warranty, Brocade shall replace defective Product under Product Warranty in accordance with and subject to the following provisions. Except as provided in sub-Section 3.4.1.2, below, there shall be no charge to Sequent for Exchange Product provided under this sub-Section 3.4. 3.4.1.1 Upon Sequent's request for an Exchange Product, Sequent shall provide the serial number of the failed Product and Brocade Page 33 34 shall ship Exchange Product to Sequent or to a location designated by Sequent: (i) within [*] of Sequent's request; or (ii) in case of a Quality Failure, as defined in Attachment C, Brocade will ship an Exchange Product (equivalent to new, defined as any repaired line integration failure, and line integration and DOA NTFs) within [*] of Sequent's request. If a new (not previously repaired or refurbished) Exchange Product is required, Brocade will ship such Exchange Product within [*] starting the next business day. Brocade may request that line integration failures be retained at Sequent as Brocade will have the option to send a trained technician to diagnose a failure to a FRU level and effect repair on site, provided that Sequent can accommodate Brocade's request without impact to the Sequent customer requested ship date. 3.4.1.2 Sequent will use best efforts to return the defective Product to Brocade within [*] from domestic locations and [*] from international locations from the date of delivery of the Exchange Product unless otherwise directed to hold or dispose of the defective Product by Brocade. Brocade shall provide to Sequent a listing by location of Brocade's exchange facilities. In the event that the failed Product is not returned to Brocade within the applicable time period, Brocade may invoice Sequent for the difference between the then-standard commercial list price of a new Product and the price of an Exchange Product, for the replacement Product; provided, however, that upon receipt of the defective Product from Sequent, Brocade shall credit Sequent for the amount invoiced less any reasonable and necessary administrative costs incurred by Brocade for the invoice and credit transactions. 3.4.1.3 Upon shipment of an Exchange Product, Brocade shall notify Sequent of the Exchange Product serial number that is being shipped as the replacement. 3.4.1.4 Sequent shall be responsible for all freight charges for return of failed Product and Brocade shall be responsible for freight charges for shipment of Exchange Product. 3.4.1.5 Brocade shall honor the original Product Warranty of a Product and provide Exchange Product under this Agreement, regardless of whether Sequent was the original purchaser of the Product. 3.4.2 From the date of delivery, the Exchange Product shall be warranted in accordance with and for the remainder of the Product Warranty of the defective Product which was replaced or in accordance with and for the period of the Product Support Warranty provided at sub-Section 3.5.3 of *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 34 35 this Attachment, whichever is longer, provided that Sequent has provided Brocade with the serial number of the failed Product, as defined in sub-Section 3.4.1.1. In the case where no serial number is provided by Sequent, the Exchange Product warranty shall default to [*]. Warranty tracking and documentation for Products and FRUs as configured upon initial shipment from Brocade, including Exchange Products, shall be the responsibility of Brocade. 3.5 Post-Warranty Product Exchange and Repair 3.5.1 The provisions of this sub-Section 3.5 shall apply solely to replacement of Product after expiration of the Product Warranty. 3.5.2 Brocade shall repair or replace or exchange defective Product under Product Support Warranty in accordance with and subject to the following provisions. 3.5.2.1 Upon Sequent's request for Exchange Product, Brocade shall ship Exchange Product to Sequent within three (3) business days of Sequent's request at no charge. 3.5.2.2 Sequent will use best efforts to return the defective Product to Brocade within [*] from domestic locations and [*] from international locations, from the date of delivery of the Exchange Product unless otherwise directed to hold or dispose of the defective Product by Brocade. Brocade shall provide to Sequent a listing by location of Brocade's exchange facilities. In the event that the failed Product is not returned to Brocade during the applicable time period, Brocade may invoice Sequent for the Exchange Product Charge per Attachment B less the Out of Warranty Repair charge per Attachment B. Invoices generated under these circumstances shall be payable net [*] from the date of receipt of a correct invoice. 3.5.2.3 Upon shipment of an Exchange Product, Brocade shall notify Sequent of the Exchange Product serial number that is being shipped as the replacement. 3.5.2.4 Sequent shall be responsible for freight charges for shipment of defective Product to Brocade. Brocade shall be responsible for freight charges for shipment of Exchange Product. 3.5.3 Products, including Exchange Product used to replace defective Products under this Section 3.5 of Attachment D, are warranted for a period of [*] from the date of delivery of the Exchange Product, to conform to and perform in accordance with the Sequent's specifications in effect at the time of the replacement of the defective Product, and to be free from defects in materials and workmanship ("Product Support Warranty"). The above-referenced Product Support Warranty is subject to the applicable provisions of Section 10, Warranty, of the Agreement. Warranty tracking and documentation for Products, *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 35 36 including Exchange Products, shall be the responsibility of Brocade. Sequent shall have the right to audit Brocade's records that directly verify and monitor Product warranty, at times and places mutually agreed upon. 4. FAILURE ANALYSIS Brocade shall provide failure analysis in accordance with the provisions of sub-Section 6.3 of Attachment C. 5. NO TROUBLE FOUND ("NTF") TESTING 5.1 Brocade shall provide NTF testing under the provisions of this Section 5. For purposes of this Section 5, NTF shall mean that a Product has undergone testing and has been determined by Brocade to conform to and perform in accordance with all applicable specifications, without repair, upgrade, or other modification being required. Charges for NTF testing of Products are provided for in Attachment B. 5.2 Upon Sequent's request, Brocade shall provide NTF testing on Products, Such testing shall commence no later than [*] from Brocade's receipt of the Product to be tested. Brocade shall provide Sequent with the reports documenting and describing its NTF results no later than [*] after Brocade receives the Product. There shall be no charge to Sequent for NTF reports. 6. RECERTIFICATION 6.1 For purposes of this sub-Section, the following definition applies: "Recertification" shall include the following: (i) diagnostic testing; (ii) upgrade with Mandatory Engineering Changes, if required; (iii) system test; (iv) HASS test; (v) burn-in; and (vi) final test. 6.2 Brocade shall provide Recertification under the provisions of this Section 6. Charges for Recertification testing of Products are provided for in Attachment B. 6.3 Upon Sequent's request, Brocade shall provide Recertification on Products. Such testing shall commence no later than [*] from Brocade's receipt of the Product to be tested. Brocade shall provide Sequent with the reports documenting and describing the Recertification results no later than [*] after Brocade receives the Product. There shall be no charge to Sequent for Recertification reports. 6.4 Recertification will be performed on any Product that has been at Sequent or one of Sequent's customers for period not exceeding [*]. This Product would have originally been shipped to Sequent or one of Sequent's customers for the purpose of qualification, demonstration or on a similar trial basis. The expectation is that after undergoing Brocade's Recertification process, this Product could be returned to Sequent as "equivalent-to-new" product. 6.5 In the event that Product is returned from one of Sequent's customers after a period exceeding [*] and Brocade's estimated cost of *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Page 36 37 recertification exceeds the standard cost provided in sub-Section 2.4 of Attachment B, Brocade shall provide a quotation with a complete breakdown of time and materials for the Recertification and upon Sequent's acceptance of the pricing Brocade shall perform the Recertification. Page 37 38 ATTACHMENT E REPORTS This Attachment summarizes the reports required of Brocade and Sequent under the Agreement. There shall be no charge to either party for any reports required under the Agreement. 1. RECURRING REPORTS 1.1 Brocade Provided Reports 1.1.1 Brocade Factory Metrics Brocade will provide these reports to the designated Sequent Supplier Engineer as provided in sub-Section 7.1 of Attachment C. The content of these reports shall include: (i) Summary of all inspection/test station yields for the month for all Products shipped to Sequent; (ii) Pareto of failures for all inspection/test stations for the month for all Products shipped to Sequent; and (iii) Failure analysis summary of Sequent returned Products. 1.1.2 Repair Throughput and Aging Profile Brocade will provide these reports [*] as agreed upon between the parties. 1.2 Sequent Provided Reports 1.2.1 Sequent Field Metrics Sequent will provide the following reports as provided for in sub-Section 7.1 of Attachment C. The content of these reports shall include: (i) Summary of field Quality Failures (ii) Reliability Data in the form of average time between failures ("ATBR"). ATBR includes all replacements, some of which may not have been actual failures. 2. REQUESTED REPORTS 2.1 Brocade Provided Reports 2.1.1 Sub-Tier Supplier Performance The content shall include status reports indicating sub-tier supplier performance as provided in Section 19 of the Agreement. *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. Pg. 38 39 2.1.2 NTF Test Reports The NTF reports required in Section 5 of Attachment D are to be supplied no later than ten 10) business days after completion of the NTF testing. Content of the reports will be as provided in sub-Section 5.2 of Attachment D. 2.1.3 Failure Analysis Reports Failure Analysis reports, including report content and time requirements, are to be supplied under sub-Section 6.3 of Attachment C. 2.1.4 Recertification Reports The Recertification reports required in Section 6 of Attachment D are to be supplied no later than ten (10) business days after completion of the Recertification. Content of the reports will be as provided in sub-Section 6.3 of Attachment D. Page 39 EX-10.17 4 OEM AGREEMENT DATED MAY 1, 1998 1 EXHIBIT 10.17 OEM AGREEMENT This OEM Agreement (hereinafter, "Agreement") is effective as of May 1, 1998, by and between Brocade Communications Systems, Inc., a corporation organized under the laws of the State of California, with its principal place of business at 1901 Guadalupe Parkway, San Jose, California 95131 (hereinafter, "Brocade") and Storage Technology Corporation (including its subsidiaries and affiliates), a company organized under the laws of the state of Delaware, with its principal place of business at 2270 South 88%gth%g Street, Louisville, Colorado 80022 (hereinafter, "OEM"). This Agreement will be administered on behalf of OEM by the Storage Tek Network Systems Group, with its principal place of business at 7600 Boone Avenue North, Minneapolis, Minnesota 55428. All primary correspondence to OEM with respect to this Agreement shall be sent to the Minnesota address. RECITALS WHEREAS, Brocade manufactures certain equipment useful for gigabit data communication interconnect products such as hubs, switches and transceivers which contain hardware components and software programs compatible with such equipment, and which Brocade is willing to provide to OEM on the terms and conditions set forth herein; and WHEREAS, OEM shall combine such equipment with other equipment, software programs and/or services so as to add Significant Value to Brocade's equipment to create OEM Products and to market the OEM Products on a "turnkey" basis; NOW, THEREFORE, the parties hereto, for consideration mutually exchanged, agree as follows: 1. DEFINITIONS. For purposes of this Agreement, the definitions below apply to the respective capitalized terms; (a) "End-User" A prospective customer of OEM or OEM's distribution channels to whom OEM Products are offered and/or sold for use in the regular course of such customer's business. (b) "End-User License Agreement" The form of OEM's license agreement set forth in Exhibit C and attached hereto, under which OEM grants an End-User a license to use the Software in conjunction with the Product as part of an OEM Product. (c) "OEM Products" Certain storage interconnect solutions and transceivers manufactured and sold by OEM consisting of combinations of the Products with other substantial value added equipment and software independently developed or procured by OEM, to be offered by OEM, together with related services, directly or indirectly to End-Users, on a turnkey basis. 2 (d) "Products" Brocade's products and services set forth in the then current version of Exhibit A and attached hereto, including all model conversions, elements and accessories, whether incorporated into OEM Products or used as spares in support of OEM Products. All Products sold to OEM shall be newly manufactured products, not containing used materials, unless specifically agreed in advance by OEM and Brocade. (e) "Significant Value" The value added by the OEM through product enhancements, either hardware or software, tradename and significant sales/service leverage or also by other means approved, in advance and in writing, by Brocade. (f) "Software" The computer software incorporated within the Product which provides the basic operating environment for the Product. 2. TERM. This Agreement shall commence on the date set forth above and shall remain in full force and effect for a period of three (3) years, unless earlier terminated as provided herein. Thereafter, this Agreement shall automatically renew for successive one (1) year periods unless either party notifies the other party at least sixty (60) days prior to expiration of the Term. Notwithstanding the foregoing, this Agreement shall remain in full force and effect and shall apply to any accepted purchase order (hereinafter, "Order(s)") issued during the Term of this Agreement and until the obligations of each party, under such Orders, have been fulfilled. 3. OEM'S RESPONSIBILITIES. In consideration for the rights and licenses granted to OEM hereunder, OEM shall: (a) Combine the Product with other equipment and/or computer software programs independently developed or procured by OEM so as to create OEM Products; (b) Market, sell and deliver OEM Products directly or indirectly to End-Users; (c) Provide a copy of the appropriate End-User License Agreement, when applicable, to all customers and prospective customers as part of any OEM Products. The End-User License Agreement provided by OEM shall be at least as protective of Brocade's interests as Brocade's License Agreement; (d) Provide technical support for OEM Products directly or indirectly to End-Users, including all necessary maintenance, training, and support to enable proper operation of the OEM Products; (e) Order, pay for, take delivery of and accept Products; and (f) Protect Brocade's proprietary rights in the Software; 4. FORECAST. On the first working day of each month, OEM shall provide Brocade with a written minimum [*] rolling non-binding forecast of expected monthly purchases of * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 3 Products. If OEM fails to timely provide Brocade with the forecast, Brocade reserves the right to extend the lead time for shipment of Products. 5. PRODUCT PRICES AND PAYMENT TERMS. (a) Prices for all Products are set forth in the then current version of Exhibit B and attached hereto. All freight, insurance, taxes, duties or other shipping expenses shall be borne by OEM. All prices, charges, and fees quoted by Brocade are in United States Dollars and all amounts to be paid by OEM shall be paid in United States Dollars. (b) Payment terms are [*] from the Invoice date. Invoices will be forwarded at the time of shipment. Amounts not paid [*] after the invoice date are subject to a late payment charge of the lesser of one and one-half percent (1.5%) or the maximum rate permitted by law, which shall be enforced if delinquency in payment is not promptly brought current upon notice by Brocade, or in the event of a continued pattern of delayed payments. OEM shall pay all of Brocade's collection costs and expenses to enforce and preserve Brocade's rights under this Section. [*] 6. ORDER, DELIVERY, AND ADMINISTRATION. (a) OEM shall initiate purchases of Products under this Agreement by issuing Orders to Brocade either in hard copy form, by fax, or by electronic data interchange (hereinafter, "EDI"). OEM's Orders shall be governed only by the terms and conditions of this Agreement. Any additional terms and conditions contained on any Order or other OEM document are of no force or effect, and Brocade hereby gives notice of objection to such additional terms.-- (b) Orders are for the purpose of identifying types and quantities of Products to be shipped and requesting delivery times. Each Order placed by the OEM must include quantity, price, shipping instructions, agreed designated destination and billing addresses, part or model number, and desired delivery date, which date shall be no later than 120 days after the date of the Order. OEM shall forward all Orders to Brocade's principal office or as otherwise instructed by Brocade. Brocade reserves the right, in its sole discretion, to accept or reject, in whole or in part, any or all Orders placed by OEM that are not in compliance with this Agreement. Brocade shall use reasonable commercial efforts to notify OEM of the acceptance or rejection of an Order within [*] after receipt of the Order. Brocade shall use reasonable commercial efforts to meet such dates, but Brocade will not be liable for late delivery. If * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 4 delivery is delayed beyond [*] OEM shall have the right to cancel an unshipped Order, or portion thereof, without penalty. With OEM's prior approval, Brocade may make partial deliveries of Orders. Such deliveries will be invoiced and paid when due, without regard for subsequent deliveries. (c) All shipments shall be made [*] Shipments shall be sent to designated locations mutually acceptable to Brocade and OEM. Title in and the right of possession to such Products passes to OEM upon [*]. OEM is responsible for obtaining any insurance for the Products and for filing all claims with the carrier, or insurer, for damages or loss in transit. 7. PRODUCT DISCONTINUATION AND CHANGES. (a) Discontinuation of Products. Brocade may, from time to time, in its discretion, discontinue the offering of any Product by providing an End of Life notice (hereinafter "EOL") to OEM, effective [*] after written notice to OEM of such discontinuation. Such EOL notice will notify OEM of any special conditions, such as time frames for placing final Purchase Orders and accepting delivery thereof, and minimum order quantities, applicable to Brocade's acceptance of final Purchase Orders for certain EOL Products. EOL Product Purchase Orders are non-cancelable and are, if canceled by OEM, subject to a cancellation charge equal to the value of the EOL Products canceled. EOL Purchase Orders for EOL Products shall be considered as being in addition to Purchase Orders placed against forecasted requirements. Products shall be delivered within [*] after receipt of an EOL Purchase Order. (b) Changes to Products. Brocade reserves the right to introduce modifications to the Products, so long as the product specifications are not adversely affected. Brocade will use reasonable commercial efforts to inform OEM of significant product changes prior to their implementation in units shipped to OEM. It is recognized by the parties that there may be optional changes requested by either OEM or by Brocade which are not required to make the Products conform to their specifications. The cost of implementing such changes, if any, (including kits and labor) on previously delivered units shall be borne by OEM. Brocade shall not change any elements affecting the OEM's unique image associated with the Products, including OEM's logo, labeling or packaging, without OEM's prior approval. (c) In the event that changes that may affect the form, fit, function, [*] Brocade shall first obtain OEM's approval, which shall not be unreasonably withheld. After mutual agreement that any such changes are to be made, Brocade shall promptly ensure that such changes ("Mandatory Engineering Changes") are included at no additional charge to OEM in all Products which are not yet delivered to OEM. OEM may also request that Brocade incorporate such changes to Products previously delivered under the warranty provisions of Section 11. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 5 8. CANCELLATION AND RESCHEDULING (a) OEM may cancel or reschedule the quantity on any Order previously accepted by Brocade by sending written notice to Brocade, subject to the following limitations. Each Order may be rescheduled only once. Any rescheduling may not delay delivery for more than [*] but in no event beyond the Term of this Agreement, Cancellation requests for quantities on Orders that have already been rescheduled will be subject to charges and limitations based upon the original scheduled delivery date, which may preclude a cancellation due to the [*] limitation. The following charge will apply:
Number of Days prior to Cancellation charges Rescheduling charges scheduled delivery per unit per unit 91 days or more [*] [*] 61-90 days 31-60 days 0-30 days
(b) Cancellation and/or rescheduling charges, [*] are subject to [*] terms from the date of OEM's request subject to such charges. 9. INSPECTION, ACCEPTANCE, RETURN, AND SPARING. (a) OEM shall promptly inspect all Products shipped to OEM upon receipt thereof and may reject any item that falls substantially to conform to the then current specifications. To reject a Product, OEM shall, within [*] after receipt of the Products notify Brocade of any defect or deficiency and request a Return Material Authorization number (hereinafter "RMA"). If no notice is given within that time, then the Products shall be deemed accepted and thereafter are returnable only for warranty repair. Products which fail upon initial installation at End-User locations may be deemed by OEM as "DOA", so long as such initial failures are reported by OEM not later than [*] from the date of shipment by Brocade. Brocade shall use commercially reasonable efforts to provide replacements for DOA units on an expedited basis to be received at the Continental US location specified by the OEM within [*] of receipt of the returned DOA units. Brocade shall have the right to utilize the [*] spare inventory (as defined in section 9(d)) for fulfillment of this DOA replacement, which does not waive Brocade's obligation for maintaining the [*] spares inventory. (b) Within [*] of receiving an RMA number, which shall be issued by Brocade within two (2) business days of OEM's request, OEM shall return rejected or DOA Product(s), freight prepaid and properly insured, in the original shipping carton, or in other suitable protective packaging if the original carton is no longer available, FOB destination with the RMA number displayed on the outside of the carton, to the address and by the shipping means, as * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 6 specified by Brocade in the RMA. Product returns will not be accepted by Brocade without an RMA number. (c) If Brocade confirms the defect, Brocade shall, at Brocade's option and expense, either repair or replace the Product or issue credit to OEM. Brocade shall reimburse OEM for the shipping charges to return properly rejected Product and for the shipment of the replacement Product; otherwise OEM shall be responsible for all shipping charges. (d) Brocade [*] of spare parts which are specified and paid for by the OEM. The procedures for maintaining, configuring, testing, and shipping of spares will be defined in the technical support procedures. Maintenance of the level of [*] spare inventory is the responsibility of the OEM. 10. TECHNICAL SUPPORT. The parties agree to negotiate in good faith to develop and honor the terms of mutually acceptable technical support procedures which shall define the responsibilities of each party with respect to end user support, including provisions to address continuously available emergency support, appropriate levels of support and means of communicating issues between the parties, and problem tracking and escalation procedures. 11. WARRANTY LIMITATION. (a) BROCADE WARRANTS AND REPRESENTS TO THE OEM THAT THE PRODUCTS DELIVERED TO OEM BY BROCADE WILL PERFORM SUBSTANTIALLY IN ACCORDANCE WITH BROCADE'S PUBLISHED PRODUCT SPECIFICATIONS FOR A PERIOD OF [*] FROM THE DATE OF SHIPMENT ("WARRANTY PERIOD"). TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, BROCADE DISCLAIMS ALL OTHER WARRANTIES, EITHER EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THIS LIMITED WARRANTY PROVIDES THE OEM WITH SPECIFIC LEGAL RIGHTS IN ADDITION TO OTHER LEGAL RIGHTS WHICH VARY FROM STATE TO STATE. (b) During the Warranty Period Brocade shall, at its sole option and expense, repair or replace any hardware Product, or part or component thereof, which Brocade determines was defective in material or workmanship. Products shipped as exchanged units under this Section 11, (i) may be newly manufactured, (ii) may be assembled from new or serviceable used parts that are equivalent to new parts in performance, or (iii) may have been previously installed, but in other respects meets the Product specifications. (c) OEM shall request and receive an RMA number, which shall be issued by Brocade within two (2) business days of OEM's request, for repair of Product prior to return for repair. OEM shall use reasonable commercial efforts to return Product with defects covered by the foregoing warranty to Brocade, [*] pursuant to the shipping and other requirements specified by Brocade in its RMA, within [*] of issuance of the RMA number. Brocade shall use reasonable commercial efforts to ship repaired/replacement Product * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 7 within [*] but in no event later than [*] of receipt of the defective units. Repair or replacement of the Product does not extend the Warranty Period. (d) OEM's sole and exclusive remedy for breach of any of the foregoing warranties shall be to seek repair or replacement of the affected Product, and, if such repair or replacement is not effected after reasonable notice and opportunity for remedial action by Brocade, to obtain repayment of any amounts paid to Brocade for that Product. (e) This warranty does not apply to any Product which (i) has been altered, except by Brocade or at Brocade's direction, (ii) has been improperly handled, installed, operated or packaged, or (iii) has been damaged by accident, misuse, negligence, or external factors such as failure or fluctuation of electrical power or air conditioning which subjects Products to conditions beyond their specification, fire, flood, or failures induced by interconnection with non-Brocade products. (f) During the Term of this Agreement, any repair or reconditioning of any Product not covered by warranty shall be subject to Brocade's then standard out of warranty prices, terms, and conditions. (g) Brocade and OEM agree to work together to minimize no-trouble-found (NTF) returns to Brocade by identifying and correcting the root cause. If the NTF returns exceed 5% of all returns, and if OEM is not participative or effective at problem resolution, and Brocade gives OEM thirty day written notice, Brocade may invoke the NTF charges as defined in Exhibit B. 12. LIMITATION OF LIABILITY. (a) Brocade's entire liability, for any and all damages, arising out of or relating to this agreement or the products, shall in no event exceed [*]. (b) Notwithstanding any other provision in this Agreement to the contrary, neither party shall be liable for any incidental, indirect, special or consequential damages, including loss of profits, revenue, data or use, or cost of procuring substitute services or goods, incurred by either party or any third party, whether in an action in contract or tort or an action based on a warranty claim, even if the other party, or any other person, has been advised of the possibility of such damages and notwithstanding any failure of essential purpose of any limited remedy provided herein. 13. INTELLECTUAL PROPERTY INDEMNIFICATION. (a) Brocade will defend, at its expense, any suit or proceeding brought against the OEM to the extent that such action is based on a claim that Products manufactured or developed and supplied by Brocade to the OEM hereunder constitute a direct infringement of any duly [*]. Brocade will pay all damages and costs finally awarded against the OEM in any such action which are attributable to such claim, provided that Brocade is promptly informed in writing and furnished a copy of each communication, notice or other action relating to the alleged infringement and is given the authority, information and * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 8 assistance necessary to defend or settle such claim. OEM shall have the right, at its expense, to participate in any such claim or action. (b) Brocade will not be obligated to defend or be liable for costs and damages if the infringement arises out of compliance with the OEM's specifications or from a combination with or an addition to Products not manufactured or developed by Brocade, modifications of the Products after delivery by Brocade or the use of such Products beyond that established or approved in writing by Brocade. Should the Products delivered by Brocade become, or in Brocade's opinion be likely to become, the subject of a claim of infringement of any duly [*] then Brocade may, at its option, (i) procure for the OEM the right to use such Products free of any liability or infringement or (ii) replace such Products with non-infringing substitutes or modify such Products to be non-infringing, (in either case with no material degradation in performance) or (iii) if neither (i) nor (ii) is available, [*] accept the return of such Products. 14. TERMINATION. (a) Either party may terminate this Agreement for a material breach of this Agreement if the defaulting party has not cured such breach within thirty (30) days after receipt of notice that it has breached a provision of this Agreement and/or such defaulting party has not begun substantial efforts to cure any such breach which requires more than thirty (30) days to correct. (b) Either party may terminate this Agreement, effective immediately and without liability, upon written notice to other party if the other party (i) becomes insolvent, (ii) declares bankruptcy, (iii) becomes the subject of any proceeding seeking relief, reorganization or rearrangement under the laws relating to insolvency, (iv) makes an assignment for the benefit of its creditors, or (v) commences the liquidation, dissolution or winding up of its business. 15. PROPRIETARY RIGHTS. (a) Brocade retains all of its right, title and interest in and to all patents, copyrights, trademarks, tradesecrets, mask works and other intellectual property embodied in the Products (for purposes of this Section, "Intellectual Property") including any improvements or enhancements to the Products. OEM may not copy, reproduce, distribute, (except as set explicitly forth in this Agreement), reverse engineer, decompile or disassemble the Products or Intellectual Property, as the case may be. No rights or licenses, with respect to the Products or Intellectual Property, are granted or deemed granted hereunder, except as explicitly set forth in this Agreement. All Product(s) incorporated into OEM Products shall be marked with such copyright, patent, proprietary legends, restrictions or other notices as Brocade may reasonably require to protect its interests or Brocade's suppliers' interests therein. (b) OEM retains all proprietary rights in and to all designs, engineering details, schematics, drawings, specifications, software, business data and other similar data which may * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 9 be provided to Brocade unless OEM specifically requests changes to be incorporated in Brocade's standard product. Brocade shall not sell Products containing unique elements, features, or characteristics developed by OEM or based specifically upon OEM's specifications to any third party without OEM's written consent. (c) Each party agrees (i) to hold the other party's confidential information in strict confidence, (ii) not to disclose such confidential information to any third parties, and (iii) not to use any confidential information for any purpose except for the business purpose. 16. SOFTWARE LICENSE. Notwithstanding anything to the contrary contained herein, title to all Software shall remain with Brocade or its suppliers, as applicable. Brocade hereby grants to OEM a nonexclusive, nontransferable right and license to distribute copies of the applicable Software solely in conjunction with the distribution of the Products, as part of OEM Products, to End-Users during the term of this Agreement. No modification or preparation of derivative works of the Software whatsoever is permitted. The Software is provided and is authorized to be installed, executed and used only in machine-readable, object code form. 17. RESTRICTED MANUFACTURING RIGHTS. (a) Events. The rights described in Section 17(b) shall become effective during the term of this Agreement for a specific Product when: (a1) OEM has given notice to Brocade of its intent to establish a funded escrow account for the Product accompanied by payment of fees as detailed in Exhibit D, Restricted Manufacturing Rights Fees and Requirements, and either (a2) Brocade becomes bankrupt or insolvent, becomes the subject of any proceedings seeking relief or reorganization which are not stayed within ninety (90) days, or makes an assignment for the benefit of creditors; or (a3) otherwise, only after [*] and then only upon the occurrence of situation (i) below and at least one or more of the situations (i) through (iv): (i) Brocade fails to deliver at least [*] of the scheduled delivery quantities during any [*] and such default has not been cured within [*] after receipt of written notification from OEM, except for events of Force Majeure or allocation which are reasonably beyond the control of Brocade, including, but not limited to, scarcity of parts or components within the industry and/or such increased market demand that would necessitate allocation of Product; or (ii) OEM has placed Brocade on "Stop Ship" as provided is Section 19(b) for a Manufacturing Quality problem (as distinct from a Design problem) and Brocade has failed to cure such event within sixty (60) days after receipt of OEM's Stop Ship notice; or * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 10 (iii) One-hundred-eighty (180) days after the time when Brocade provides an EOL notice pursuant to Section 7(a), then Brocade and OEM agree to negotiate in good faith to support OEM's existing long-term obligations, this support to include the necessary and foreseeable EOL purchases and the thresholds for invoking (this) Restricted Manufacturing Rights section; or (iv) Brocade is merged or consolidated with or into a competitor of OEM ("Competitor") or enters into a cooperative arrangement with a Competitor which is the functional equivalent of such an acquisition or merger or consolidation; and thereafter Brocade fails to deliver at least [*] of the scheduled delivery quantities during any [*] period; and such reduced deliveries have not been cured within [*] after written notification from OEM. (b) Rights Granted. Brocade hereby grants to OEM, which shall become effective on the occurrence of the appropriate events set forth in Section 17(a), parts (a2) or (a3), a non-exclusive, [*] non-transferable, right and license to manufacture or have manufactured such Product and related parts thereof, as necessary for sale of OEM Products as defined in Section 1c herein, in consideration of the payment by OEM of a mutually agreed-upon royalty, not to exceed thirty-three-percent (33%) of the then-current OEM Price of the said Product, but only until such time as Brocade may give reasonable assurance to OEM that Brocade has cured the default condition that gave rise to granting the rights here before stated. No such royalty as described above in this paragraph shall be due in the case that this paragraph is invoked because of the bankruptcy or insolvency of Brocade as defined in Section 17(a),part (a2) above. 18. INSTALLATION SUPPORT. Upon OEM's written request, Brocade will, at no charge for Brocade's employee's time, assist in installing Products purchased hereunder at the first two (2) customer sites, charging only for reasonable travel and living expenses. 19. QUALITY ASSURANCE. (a) In an effort to maintain the quality of the manufacturing and other processes related to the Products, Brocade agrees to not make a material move in its current manufacturing facilities without the prior written consent of OEM, which consent shall not be unreasonably withheld. Brocade shall maintain an effective quality control system which shall ensure that the entire process of design, manufacture and repair, including packaging and shipping, is maintained under continuous control. Brocade's systems shall ensure that all Product specifications and test specifications for the Products are satisfied, including workmanship standards. Upon request, Product specifications and test specification shall be made available to OEM. Brocade shall develop and implement continuous quality improvement methodologies to monitor, control, and improve its processes and Products, including obtaining and maintaining appropriate ISO 9000 certifications, including ISO 9002 at Brocade's manufacturing partners' facilities. (b) Brocade and OEM agree to work together to ensure a "Plug-and-Play" rate of greater than or [*] for the Products over the term of this Agreement. Upon any occurrence of a "Plug-and-Play" failure, OEM and Brocade will work together to promptly identify and correct * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 11 the root cause of the failure. If a subsequent failure is reported prior to resolution of the preceding occurrence OEM reserves the right to place Brocade on a "Stop Ship" and Brocade shall not resume shipments to OEM until Brocade and OEM have identified the cause of the quality problem and have agreed upon a course of action to correct such problem. If resolution of the problem is not resolved within [*] of the "Stop Ship", OEM may cancel any undelivered quantities on Orders for Products without payment of cancellation charges per Section 8(a). 20. RELIABILITY. Brocade's Products are designed for long life and robustness and should generally perform to their specifications for up to five years (the "Service Life"). If the Products fail to meet their reliability standards by more than [*] during their Service Life, as measured by mutually agreeable means, Brocade shall use all reasonable commercial efforts to implement appropriate corrective actions as may be necessary in order to achieve such reliability standards. In addition, if OEM experiences an actual field failure rate on a population of Products that fails to meet their reliability standards of such Products by more than [*] and which causes additional service requirements on the part of OEM over and above those assumed in the Product specifications, then Brocade shall extend the original Warranty Period of such population of units to [*] (or such longer period as may mutually agreed based upon the specific circumstance) as compensation for OEM's additional service expenditures. 21. DOCUMENTATION. Brocade hereby grants to OEM, without additional charge, the right to reproduce, copy, display, translate, modify and private label any documents/manuals of the general categories (unless specifically prohibited) of (i) Product description, (ii) installation, maintenance, reference, or diagnostics, or (iii) user guides, for use by OEM or OEM's customers to sell and maintain the Products when sold or provided in conjunction with OEM Products and further grants to OEM the right to grant its subsidiaries and distributors appropriately restricted rights to copy such documentation solely for use in selling and maintaining OEM Products at OEM's End-Users. All such documentation shall bear OEM's trade name, trademark and logo (and shall not bear any evidence of Brocade's trade name, trademark, or logo or other ownership rights, unless distributed in a completely unmodified form from that originally supplied by Brocade), and shall also contain a restrictive legend regarding distribution and copying rights furnished by OEM. Use of OEM's trade name, trademark or logo shall not diminish Brocade's right, title or interest in any documentation owned by Brocade or Brocade's suppliers. OEM hereby agrees to assist in the enforcement and protection of Brocade's rights, title, or interests thereto. 22. GENERAL PROVISIONS. (a) Force Majeure. Neither party shall be liable for its inability to perform due to causes beyond its reasonable control such as acts of God, fire, theft, war, riot, embargoes, civil insurrections, labor or transportation strikes, flood, earthquake, volcanic eruption, shortages of material or energy, acts of civil, military or government authorities, acts of public enemy, terrorist acts or sabotage. If either party's performance is to be delayed by any such * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 12 contingencies, that party's performance shall be extended for a reasonable period of time provided the delayed party gives prompt notice to the other party of such delays. (b) Independent Contractors. Brocade and OEM are independent contractors. Neither party has the authority, express or implied, to assume or create any obligations, responsibility or liability on behalf of the other party nor to bind the other party in any manner. (c) Confidentiality. Both parties agree to keep the information contained in this Agreement confidential and not to disclose any of the terms and conditions of this Agreement, to any third parties, without the prior written consent of the other party. (d) Survivability. In the event that this Agreement expires or is terminated for any reason by either party hereto, each party's duties and obligations that by their nature would normally extend beyond the term of this Agreement, shall do so. (c) Responsibility for Taxes. Taxes imposed with respect to the transactions contemplated hereunder (with the exception of income taxes or other taxes imposed upon Brocade and measured by the gross or net income of Brocade), shall be the responsibility of OEM. (f) Export Regulations. The parties hereto acknowledge and agree to comply with the laws and regulations of the United States which restrict the export of commodities and technical data of United States origin. (g) Notice. All notices, Orders, acceptances of Orders given under this Agreement shall be made in writing and will be effective (i) when delivered, if delivered in person, (ii) during the business day of receipt (or the next business day if not received during a normal business hour), if by telecopy and confirmed with the receiving party by telephone, or (iii) three (3) days after depositing same in the U.S. mail as registered mail, return receipt requested, postage prepaid and addressed to the other party at the address of the other party set forth on the first page hereof or at such other address as may be specified to the other party via notice in accordance with this Section (g). (h) Assignment. Either party may delegate or assign any of its rights, duties, or obligations under this Agreement provided prior written notice is given to the other party. (i) Severability. If any provision of this Agreement is declared invalid or unenforceable by a court of competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court and the parties shall negotiate, in good faith, a substitute, valid, and enforceable provision which most nearly effects the parties' intent in entering into this Agreement. (j) Waiver. The failure or delay of either party to require performance by the other party hereto, or to enforce its rights under any provision of this Agreement, shall not affect the rights with respect to such provision unless and until such performance has been waived in writing by such party. 13 (k) Inventory. OEM shall stock inventory of Products and replacement/spare units sufficient to fulfill its obligations under this Agreement. (l) Insurance. At its sole cost and expense, Brocade shall carry and maintain Commercial and General Liability Insurance covering all operations of Brocade, including but not limited to products, completed operations, and contractual liability, against claims for personal and bodily injury and property damage with a combined single limit of [*]. (m) Compliance with Law. The parties hereto shall comply with all laws applicable to the manufacture and sale of the Products or OEM Products, including, by way of example and not limitation, Executive Order 1126 as amended by Executive Order 11375 (non-discrimination in employment) and the U.S. Clean Air Act of 1990. Brocade shall use reasonable efforts to give OEM as much notice as is practicable in the event Brocade uses ozone depleting chemicals in the manufacture of the Products. OEM reserves the right to reject any Products manufactured utilizing or containing such materials if OEM has not been previously notified of the same. (n) Governing Law. This Agreement shall be governed by and construed in accordance with the substantive laws of the State of California. (o) Audit Rights. OEM may, upon five (5) business days' prior notice, audit Brocade's manufacturing sites to review Brocade's manufacturing processes, statistical process control records, quality assurance procedures, packaging and shipping procedures and other related procedures, functions or facilities of Brocade which produce Products bought by OEM under the terms of this Agreement, but only to the extent such audit does not unreasonably disrupt Brocade's business in which case the parties shall mutually agree upon a more reasonable time period for such audit. (p) Regulatory Responsibility. The responsibility to obtain and maintain regulatory approvals for the Products shall remain with Brocade. (q) Statute of Limitations. No action, regardless of form, arising from the transactions under this Agreement, may be brought by either party more than three (3) years after the cause of the action has accrued. (r) Training. At times and places to be mutually agreed upon, Brocade will offer OEM training courses for OEM's personnel. Brocade shall provide such courses [*] associated with any Brocade [*] materials consumed by OEM's attendees at such training classes. OEM shall pay all expenses of its personnel for travel, food, and lodging. Additional training courses will be provided upon reasonable request at a rate of [*] to cover instruction costs. Enrollment in training classes will be limited to a maximum of [*]. (s) Brocade warrants that the Item will operate without error or interruption related to date data in the same manner in the 21st Century as it does in the 20th Century so as not to cause * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 14 abnormal output or incorrect values, unless Product's operation is dependent upon and noncompliance is caused by other Products over which Brocade has no control. (t) Entire Agreement. This Agreement, including the Exhibits attached hereto, constitutes the entire agreement between the parties and no modifications or waiver of any of the provisions or any future representation, promise or addition shall be binding upon the parties unless agreed to in writing. This Agreement supersedes and cancels any prior discussions, understandings or agreements, whether written or verbal, in their entirety. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed by their authorized representatives as set forth below: BROCADE CORPORATION [OEM] By: /s/ Signature Illegible By: /s/ Signature Illegible --------------------------- ---------------------------- Title: CEO Title: VP, Gn Mgr. S ------------------------ --------------------------- Date: 5/28/98 Date: 5/29/98 ------------------------- --------------------------- 15 EXHIBIT A PRODUCTS
Brocade Model # OEM Part # Description B1630-STK 8912998101 Silk Worm II "Privatized" Per Storage Tek Specification Base unit, not orderable. X1003 8912998201 G Port Card (two ports, no GBICs) X1015 8912999201 FL Port Card (two ports, no GBICs) X1017 8912998401 Copper GBIC X1006 8912998301 Short Wave Optical GBICX10118912998501 Slide Rack Kit
OEM may order Products from Brocade in a number of pre-defined configurations which are defined in the pricing table in Exhibit B.
Qty. of Qty. of G Ports FL Ports Base Unit Cards Cards Models (8912998101) (8912998201) (8912999201) Description - ------ ------------ ------------ ------------ ----------- SNFCS41 1 6 2 Switch, 12 G Ports & 4 FL Ports SNFCS42 1 4 4 Switch, 8 G Ports & 8 FL Ports SNFCS43 1 2 6 Switch, 4 G Ports & 12 FL Ports
Qty. of Copper Qty. of Short Wave GBICs Optical GBICs Features (8912998201) (8912998201) Description - -------- ------------ ------------ ----------- SNFCS4x-GB01 12 4 12 Copper & 4 Short Wave Laser GBIC Option SNFCS4x-GB02 8 8 8 Copper & 8 Short Wave Laser GBIC Option SNFCS4x-GB03 4 12 4 Copper & 12 Short Wave Laser GBIC Option SNFCS4x-GB05 0 16 16 Short Wave Laser GBIC Option
"x" = 1, 2, or 3; Per STK Standards, a Feature is an 11 alpha-numeric character string, the first seven of which are the Base Model into which the Feature may be installed. Technically, we have 12 Features defined for the GBIC's. 16 RELIABILITY STANDARDS
Brocade Product OEM Part # Description [*] B1630-STK 8912998101 Silkworm II "Privatized" [*] No Port cards [*] No GBICs. [*] X1003 8912998201 G Port Card, No GBIC. [*] X1015 8912999201 FL Port Card, No GBICs. [*] X1017 8912998401 Copper GBIC. [*] X1006 8912998301 Short Wave Optical GBIC [*]
[*] * At 40 Degrees C., Sea Level * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 17 EXHIBIT B PRICE LIST OEM may order Products from Brocade in a number of pre-defined configurations which are defined in the following table with each configuration priced separately.
Description STK Model Brocade Price -------------- ---------- Part Number ------- ---------- SilkWorm II, 12 G Ports, 4 FL Ports SNFCS41 SK-1630-0001 [*] GBICs Set, 12 Cu, 4 SWL SNFCS41-GB01 SK-1630-0002 [*] GBICs Set, 8 Cu, 8 SWL SNFCS41-GB02 SK-1630-0003 [*] GBICs Set, 4 Cu, 12 SWL SNFCS41-GB03 SK-1630-0004 [*] GBICs Set, 0 Cu, 16 SWL SNFCS41-GB05 SK-1630-0005 [*] SilkWorm II, 8 G Ports, 8 FL Ports SNFCS42 SK-1630-0006 [*] GBICs Set, 12 Cu, 4 SWL SNFCS42-GB01 SK-1630-0007 [*] GBICs Set, 8 Cu, 8 SWL SNFCS42-GB02 SK-1630-0008 [*] GBICs Set, 4 Cu, 12 SWL SNFCS42-GB03 SK-1630-0009 [*] GBICs Set, 0 Cu, 16 SWL SNFCS42-GB05 SK-1630-0010 [*] SilkWorm II, 4 G Ports, 12 FL Ports SNFCS43 SK-1630-0011 [*] GBICs Set, 12 Cu, 4 SWL SNFCS43-GB01 SK-1630-0012 [*] GBICs Set, 8 Cu, 8 SWL SNFCS43-GB02 SK-1630-0013 [*] GBICs Set, 4 Cu, 12 SWL SNFCS43-GB03 SK-1630-0014 [*] GBICs Set, 0 Cu, 16 SWL SNFCS43-GB05 SK-1630-0015 [*]
* Includes Web Tools Software bundle at no extra charge. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 18 Field Replaceable Units (FRUs) Pricing: X1006 GBIC, short wave length [*] X1017 GBIC, copper [*] X1011 Slide RackMount Kit [*]
Warranty Advanced Exchange Product Price: [*] plus receipt of return unit within [*]. Out of Warranty Repair Price: Switch: [*] SFL/G Port Card: [*] GBIC swl: [*] GBIC copper: [*] No Trouble Found (NTF) Charges: [*] Switch: [*] FL/G Port Card: [*] * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 19 EXHIBIT C END-USER LICENSE AGREEMENT The form(s) of the End-User License(s) that are applicable will be supplied as an amendment replacing this Exhibit C. Both parties will negotiate the language of the End-User License as referenced in Section 1(b). 20 EXHIBIT D RESTRICTED MANUFACTURING RIGHTS FEES AND REQUIREMENTS The parties hereto agree to negotiate a separate written agreement ("Escrow Agreement") with Brocade's designated "Escrow Agent" upon written request of OEM. Such agreement shall provide for OEM to pay all costs, fees and charges of the Escrow Agent for performing its functions as escrow agent. Upon fulfillment of the obligations of Section 17(a1) by OEM, and within thirty (30) days of execution of the Escrow Agreement, Brocade shall promptly deposit with Escrow Agent, if not previously provided, all such Brocade information that exists that would be required to support the manufacture, sale, and support of the Product or Products which OEM specifies. Nothing herein shall require that Brocade create any additional documentation or information beyond that which Brocade has already created and normally makes available to have the Product or Products manufactured for its own resale purposes. Brocade shall also, in a timely manner, keep such information deposited with the Escrow Agent current by supplying all related Product ECOs, process changes, specifications, etc., so long as OEM has paid to Brocade the appropriate fees and maintains with the Escrow Agent a current relationship. Fees payable to Brocade for Escrow Services related to Manufacturing Rights 1. Initial Escrow Deposit Fee (one time, per Product) [*] 2. Escrow Account Administration and Maintenance ECO Deposit Fee (per ECO package) [*] Clerical (one hour minimum) [*] Consultation [*] Outside costs [*]
Initial Escrow Deposit Fee(s) and Account Administration and Maintenance fees shall be invoiced and paid in advance, in minimum increments of [*]. Brocade may exercise reasonable practices to group or accumulate ECOs and/or related information for deposit with the Escrow Agent so as to minimize costs for both Brocade and OEM. * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. EX-23.1 5 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this registration statement. ARTHUR ANDERSEN LLP San Jose, California May 20, 1999 -----END PRIVACY-ENHANCED MESSAGE-----