1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 000-25601
BROCADE COMMUNICATIONS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-------------------
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION 77-0409517
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1901 GUADALUPE PARKWAY
SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 487-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
To the best of the Company's knowledge, the aggregate market value of
voting stock held by non-affiliates of the Registrant was approximately
$8,845,632,997 as of December 30, 1999, based upon the closing price on the
Nasdaq National Market reported for such date. This calculation does not reflect
a determination that certain persons are affiliates of the Registrant for any
other purpose. The number of shares of Common Stock of the Registrant
outstanding as of December 30, 1999 was 107,709,382 (as adjusted for a split of
the Company's Common Stock to be effected as of March 14, 2000).
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's executive officers and directors, and
persons who own more than ten percent of a registered class of the Company's
equity securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission ("Commission") and the National Association
of Securities Dealers, Inc. Executive officers, directors and greater than ten
percent stockholders are required by Commission regulation to furnish the
Company with copies of all Section 16(a) forms they file. Two late reports on
Form 4 were filed in January 2000 with respect to distributions made to Neal
Dempsey, a director of the Company, by Bay Partners SBIC, L.P. in August 1999
and September 1999. An amended From 4 was filed in February 2000 with respect to
distributions made to Larry W. Sonsini, a director of the Company, by WS
Investment Company 98B in August 1999. Based solely on its review of the copies
of such forms received by it, or written representations from certain reporting
persons, the Company believes that, other than the exceptions described in this
paragraph, during fiscal 1999 all executive officers and directors of the
Company complied with all applicable filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth certain information
regarding the compensation of the Chief Executive Officer of the Company and the
other four most highly compensated executive officers of the Company (the "Named
Executive Officers") for services rendered in all capacities to the Company in
the fiscal years ended October 31, 1998 and October 31, 1999. The entries under
the column heading "Other Compensation" in the table represent the cost of term
life insurance for each Named Executive Officer. The share amounts below are
adjusted to reflect a two-for-one split of the Company's Common Stock effected
as of December 3, 1999 and a two-for-one split of the Company's Common Stock to
be effected as of March 14, 2000 (the "Stock Splits").
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ---------------------------------------- ------ --------- -------- ------------ ---------------
Gregory L. Reyes...................... 1999 $200,000 $150,000 -- $ 576
President and Chief Executive Officer 1998 60,606 -- 6,142,648 480
Kumar Malavalli....................... 1999 167,160 21,071 134,000 475
Vice President, Technology 1998 162,840 13,027 -- 1,188
Peter J. Tarrant...................... 1999 143,750 46,250 200,000 432
Vice President, Marketing and 1998 109,848 33,021 800,000 870
Business Development
Victor M. Rinkle...................... 1999 171,875 20,188 160,000 504
Vice President, Operations 1998 115,340 39,375 800,000 990
Charles W. Smith...................... 1999 120,000 62,250 140,000 272,782(1)
Vice President, Worldwide Sales 1998 118,500 -- 140,000 87,306(1)
- ----------------------------
(1) Also includes amounts earned by Mr. Smith as commissions.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information for each grant of
options to purchase the Company's Common Stock during fiscal 1999 to each of the
Named Executive Officers. All of these options granted by the Company were
granted under the 1995 Equity Incentive Plan and the 1998 Equity Incentive Plan
which, together with the Company's 1998 Executive Equity Incentive Plan, have
been combined and continue as the Company's 1999 Stock Plan. All of these
options have a term of 10 years, subject to earlier termination in the event the
optionee's services to the Company cease. The share amounts and per share prices
below are adjusted to reflect the Stock Splits.
INDIVIDUAL GRANTS
-------------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE PRICE FOR OPTION TERM(1)
OPTIONS IN FISCAL PER SHARE EXPIRATION --------------------------
NAME GRANTED(2) FISCAL 1999 ($/SHARE)(3)(4) DATE 5% 10%
- ------------------------- ---------- ------------- --------------- ---------- ---------- ------------
Gregory L. Reyes......... -- -- -- -- -- --
Kumar Malavalli (5)...... 134,000 1.11% $ 1.25 2/26/09 $ 105,340 $ 266,952
Peter J. Tarrant......... 200,000 1.65 51.7032 10/4/09 6,503,173 16,480,317
Victor M. Rinkle......... 160,000 1.32 1.25 4/1/09 125,779 318,748
Charles W. Smith (6)..... 140,000 1.16 0.5625 12/7/08 49,525 125,507
- --------------------
(1) Potential realizable values are (i) net of exercise price before taxes,
(ii) based on the assumption that the Common Stock of the Company
appreciates at the annual rate shown (compounded annually) from the date of
grant until the expiration of the ten-year option term and (iii) 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 the requirements promulgated by the Commission and do
not reflect the Company's estimate of future stock price growth.
(2) All options shown granted to Mr. Malavalli, Mr. Rinkle and Mr. Smith in
fiscal 1999 vest with respect to 25% of the shares underlying The option
starting one year after the date of grant, with 1/48th of the shares
vesting at the end of every month thereafter, with full vesting occurring
on the fourth anniversary of the date of grant. The option granted to Mr.
Tarrant in fiscal 1999 vests as follows: (i) with respect to 80,000 of the
shares underlying the option, 1/36 of the shares vest at the end of every
month after the date of grant, with full vesting occurring on the third
anniversary of the date of grant, and (ii) with respect to 120,000 of the
shares underlying the option, the option vests starting three years after
the date of grant with 1/12 of the shares vesting at the end of every month
thereafter with full vesting occurring on the fourth anniversary of the
date of grant. Under the Plans, the Board of Directors retains the
discretion to modify the terms, including the price, of outstanding
options.
(3) Options were granted at an exercise price equal to the fair market value of
the Company's Common Stock, as determined by reference to the closing price
reported on the Nasdaq National Market on the date of grant, or as
determined by the Board of Directors prior to the Company's securities
being traded on the Nasdaq National Market. The Board of Directors based
its determination on the Company's financial results and prospects, the
share price derived for arms-length transactions and evaluations conducted
by valuation experts.
(4) Exercise price and tax withholding obligations may be paid in cash,
promissory note, by delivery of already-owned shares subject to certain
conditions, or pursuant to a cashless exercise procedure.
(5) Mr. Malavalli's options have been exercised subject to a right of
repurchase by the Company at the original exercise price paid per share
upon Mr. Malavalli's cessation of service with the Company prior to vesting
of the shares. The repurchase right lapses and Mr. Malavalli 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.
(6) Mr. Smith's options have been exercised subject to a right of repurchase by
the Company at the original exercise price paid per share upon Mr. Smith's
cessation of service with the Company prior to vesting of the shares. The
repurchase right lapses and Mr. Smith 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. Mr. Smith's
options have been exercised in conjunction with a promissory note and a
stock pledge agreement. See "Certain Relationships and Related Transactions
-- Loans to Certain Executive Officers" for descriptions of these
exercises.
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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, 1999. The share amounts and per share prices below are adjusted to
reflect the Stock Splits.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT OCTOBER 31, 1999 AT OCTOBER 31, 1999(2)
ACQUIRED ON REALIZED --------------------------- -------------------------
NAME EXERCISE(#) ($)(1) VESTED UNVESTED VESTED UNVESTED
- ----------------------- ----------- ---------- --------- --------- ----------- ------------
Gregory L. Reyes(3).... 6,142,648 $ 0 -- -- -- $ --
Kumar Malavalli(4)..... 134,000 134,000 -- -- -- --
Peter J. Tarrant....... -- -- -- 200,000 -- 3,110,000
Victor M. Rinkle(5).... 800,000 0 -- 160,000 -- 10,560,000
Charles W. Smith(6).... 280,000 0 -- -- -- --
- ----------------------
(1) Market value of the Company's Common Stock at the exercise date minus the
exercise price.
(2) Market value of the Company's Common Stock at fiscal year-end minus the
exercise price. The market value of the Company's Common Stock on October
29, 1999 was $67.25 per share (as adjusted for two two-for-one splits of
the Company's Common Stock that occurred after the end of fiscal 1999).
(3) Of the exercised shares, 4,223,072 shares are subject to repurchase by the
Company upon Mr. Reyes' cessation of service with the Company prior to the
vesting of the shares.
(4) Of the exercised shares, 134,000 shares are subject to repurchase by the
Company upon Mr. Malavalli's cessation of service with the Company prior to
the vesting of the shares.
(5) Of the exercised shares, 450,000 shares are subject to repurchase by the
Company upon Mr. Rinkle's cessation of service with the Company prior to
the vesting of the shares.
(6) Of the exercised shares, 428,334 shares are subject to repurchase by the
Company upon Mr. Smith's cessation of service with the Company prior to the
vesting of the shares.
CHANGE OF CONTROL AND SEVERANCE ARRANGEMENTS
Options granted to Mr. Malavalli, Mr. Rinkle and Mr. Smith under the
Company's 1999 Stock 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 the Company.
Mr. Reyes's option agreement originally under the 1998 Equity Incentive
Plan provides that if, during the first year of his employment, he is terminated
other than:
o constructively or without cause during the first year following a
change of control; or
o for cause,
Mr. Reyes will vest as to 767,832 shares plus a number of shares equal to
127,972 multiplied by the number of full months of his service to the Company.
If Mr. Reyes is terminated any time after the first year of his employment,
other than:
o constructively or without cause during the first year following a
change of control; or
o for cause,
Mr. Reyes will vest as to 767,832 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
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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 originally under the 1998 Executive Equity
Incentive Plan provides that if he is terminated at any time on or after May 13,
2001, other than:
o constructively or without cause during the first year following a
change of control; or
o for cause,
then, in addition to any shares that have vested under the normal four-year
vesting schedule contemplated by the agreement, 767,832 additional shares will
vest, less the number of shares that may vest as a result of his termination
pursuant to the option agreement under the former 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. The share amounts set forth above are adjusted to reflect
the Stock Splits.
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.
The Company entered into a Confidential Agreement and General Release of
Claims with Jack Bergman, the Company's former President, Chief Executive
Officer and director, effective as of September 23, 1998. This agreement
outlines the terms governing Mr. Bergman's termination of employment, as a
member of the Company's board of directors and as a consultant to the Company.
In exchange for and pursuant to the agreement, the Company agreed to provide Mr.
Bergman with the following severance benefits for one year following his
termination date:
o base salary at his then current rate;
o existing employee health benefits insurance; and
o continued vesting of 64,460 shares per month of Mr. Bergman's unvested
shares of the Company's Common Stock, until the complete vesting of
his 3,094,112 total shares occurred.
The share amounts above are adjusted to reflect the Stock Splits. The
agreement also includes a release of claims relating to or arising from Mr.
Bergman's relationship with the Company and the continued obligation of
confidentiality with regard to the Company's proprietary information. All
severance benefits under this agreement have been paid or provided by the
Company and Mr. Bergman's stock has fully vested.
1999 KEY EMPLOYEE INCENTIVE PROGRAM
During fiscal 1999 the Company compensated its key employees under the
1999 Key Employee Incentive Program, an executive bonus program pursuant to
which selected key employees of the Company were eligible for quarterly and
annual cash bonuses based upon achieving specified individual and company-wide
objectives, including revenue targets. For
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Mr. Smith, bonuses were not based on the 1999 Key Employee Incentive Program,
but rather on achievement of sales revenue and other specified sales objectives.
DIRECTORS' COMPENSATION
Directors currently do not receive any cash compensation from the Company
for their services as members of the board of directors, although the Company is
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 the
Common Stock of the Company, including automatic option grants under the
Company's 1999 Director Option Plan. See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions--Stock Option Grants and Loan to Certain Directors." 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 until January 31, 2002. The Director Plan provides for the
automatic grant of 10,000 shares (as adjusted to reflect the Stock Splits) of
Common Stock to each non-employee director on the date on which such person
first becomes a non-employee director. After the first 10,000 share option is
granted to the non-employee director, he or she shall automatically be granted
an option to purchase 10,000 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 vest 100% and become fully exercisable on the first anniversary of 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
the Company 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 the Company, 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.
REPORT OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION
The following is the report of the Board of Directors with respect to the
compensation paid to the Company's executive officers during fiscal 1999. Actual
compensation earned during fiscal 1999 by the Named Executive Officers is shown
in the Summary Compensation Table.
Compensation Philosophy
The Company operates in the extremely competitive and rapidly changing high
technology industry. The Board believes that the compensation programs for the
executive officers should be designed to attract, motivate and retain talented
executives responsible for the success of the Company and should be determined
within a competitive framework and based on the achievement of designated
business objectives, individual contribution, customer satisfaction and
financial performance. Within this overall philosophy, the Board's objectives
are to:
o Provide a competitive total compensation package that takes into
consideration the compensation practices of companies with which the
Company competes for executive talent.
o Provide variable compensation opportunities that are linked to
achievement of financial, organization, management, and individual
performance goals.
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o Align the financial interests of executive officers with those of
stockholders by providing executives with an equity stake in the
Company.
Components of Executive Compensation
The compensation program for the Company's executive officers consists of
the following components:
o Base Salary
o Quarterly and Annual Cash Incentives
o Long-Term Stock Option Incentives
Base Salary
The Board of Directors reviewed and approved fiscal 1999 salaries for the
Chief Executive Officer and other Named Executive Officers at the beginning of
the fiscal year. Base salaries were established by the Board based upon
competitive compensation data, an executive's job responsibilities, level of
experience, individual performance and contribution to the business. In making
base salary decisions, the Board exercised its discretion and judgment based
upon these factors. No specific formula was applied to determine the weight of
each factor. The Board based its determination of Mr. Reyes' salary on both his
individual performance and the salaries paid to chief executive officers of peer
companies.
Quarterly and Annual Cash Incentives
Quarterly and annual incentive bonuses for executive officers are intended
to reflect the Board's belief that a significant portion of the compensation of
each executive officer should be contingent upon the performance of the Company,
as well as the individual contribution of each executive officer. To carry out
this philosophy, the Company has implemented a variable compensation bonus plan,
which compensates officers in the form of quarterly and annual cash bonuses.
During the fiscal year, the executive officers were eligible for a target
quarterly and annual incentive bonus, calculated by the Committee as a
percentage of the officers' base salary. At the beginning of fiscal 1999, the
Board established target bonuses for each executive officer as a percentage of
the officer's base salary. The target level of bonuses that the executive
officers were eligible to receive varied from 10% to 50% of base salaries. The
variable compensation bonus plan is intended to motivate and reward executive
officers by directly linking the amount of any cash bonus to specific
Company-based performance targets and specific individual-based performance
targets. The quarterly bonus amounts are tied to specific individual, team and
product - based performance targets. The annual bonus amounts are tied to
Company-based performance goals such as specific levels of revenue and profit.
The Board evaluates the performance of the executive officers and the Company
and approves a performance rating based upon the results of its evaluation. In
fiscal 1999, Mr. Reyes and the other Named Executive Officers were paid the
bonus amounts shown in the Summary Compensation Table as the Company exceeded
its corporate performance targets for revenue and profit. Mr. Reyes was eligible
for an annual bonus targeted at 50% of his base salary upon achievement of
specific milestones. These milestones were related to both individual
performance factors and company performance targets.
Long-Term Stock Option Incentives
The Board provides the Company's executive officers with long-term
incentive compensation through grants of options to purchase the Company's
Common Stock. The goal of the long-term stock option
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incentive program is to align the interests of executive officers with those of
the Company's stockholders and to provide each executive officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. It is the belief of the Board that stock
options directly motivate an executive to maximize long-term stockholder value.
The options also utilize vesting periods that encourage key executives to
continue in employ of the Company. The Board considers the grant of each option
subjectively, reviewing factors such as the individual performance, the
anticipated future contribution toward the attainment of the Company's long-term
strategic performance goals and the number of unvested options held by each
individual at the time of the new grant. In fiscal 1999, no options were granted
to Mr. Reyes because the Board believed that his current option status was
competitive based on market data and his future vesting.
SECTION 162(m)
The Company has considered the potential future effects of Section 162(m)
of the Internal Revenue Code on the compensation paid to the Company's executive
officers. Section 162(m) disallows a tax deduction for any publicly held
corporation for individual compensation exceeding $1.0 million in any taxable
year for any of the Named Executive Officers, unless compensation is
performance-based. The Company has adopted a policy that, where reasonably
practicable, the Company will seek to qualify the variable compensation paid to
its executive officers for an exemption from the deductibility limitations of
Section 162(m).
Respectfully submitted by:
Seth D. Neiman
Neal Dempsey
Mark Leslie
Gregory L. Reyes
Larry W. Sonsini
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PERFORMANCE GRAPH
Set forth below is a line graph comparing the annual percentage change in the
cumulative return to the stockholders of the Company's Common Stock with the
cumulative return of the NASDAQ Market Index and of the SIC Code Computer
Peripheral Equipment Index for the period commencing May 25, 1999 and ending on
October 31, 1999. Returns for the indices are weighted based on market
capitalization at the beginning of each measurement point.
[The following descriptive data is supplied in accordance with Rule 304(d) of
Regulation S-T]
5/25/1999 5/28/1999 6/30/1999 7/30/1999 8/31/1999 9/30/1999 10/29/1999
Brocade Communications Systems, Inc. 100.00 142.54 213.12 261.60 415.75 464.09 594.48
SIC Code Computer Peripheral
Equipment Index 100.00 100.00 114.86 111.05 121.12 123.76 135.09
NASDAQ Market Index 100.00 100.00 108.54 106.61 110.27 110.43 118.97
- -----------------
(1) The graph assumes that $100 was invested on May 25, 1999
in the Company's Common Stock, the NASDAQ Market Index and the SIC Code
Computer Peripheral Equipment Index and that all dividends were reinvested.
No dividends have been declared or paid on the Company's Common Stock.
Stockholder returns over the indicated period should not be considered
indicative of future stockholder returns.
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The information contained above under the captions "Report of the Board of
Directors on Executive Compensation" and "Performance Graph" shall not be deemed
to be "soliciting material" or to be "filed" with the Securities and Exchange
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates it by reference into such filing.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1999, none of the members of the compensation committee was
an officer or employee of the Company. Seth D. Neiman served as the Company's
President and Chief Executive Officer from August 1995 to June 1996. 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 the Company's board of directors or compensation
committee.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of February 24, 2000 as to (i) each
person who is known by the Company to own beneficially more than 5% of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers named in the Summary Compensation Table below and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the address of each listed stockholder is c/o Brocade
Communications Systems, Inc., 1901 Guadalupe Parkway, San Jose, California
95131. The share amounts below are adjusted to reflect the Stock Splits.
NUMBER OF SHARES PERCENT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
- ------------------------------------------- ------------------ ---------------------
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Gregory L. Reyes(2)........................ 4,796,440 4.4%
Kumar Malavalli(3)......................... 2,005,720 1.9
Peter J. Tarrant(4)........................ 697,988 *
Victor M. Rinkle(5)........................ 739,660 *
Charles W. Smith(6)........................ 643,660 *
Neal Dempsey(7)............................ 1,801,716 1.7
Mark Leslie(8)............................. 438,680 *
Seth D. Neiman(9).......................... 344,876 *
c/o Crosspoint Venture Partners
2925 Woodside Road
Woodside, CA 94062
Larry W. Sonsini........................... 44,616 *
5% STOCKHOLDERS
FMR Corp................................... 15,434,600 14.2
82 Devonshire St.
Boston, MA 02109
All Executive Officers and Directors 15,455,324 14.2
as a group (12 persons)(10)
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* Less than 1%
(1) Applicable percentage ownership is based on 108,342,098 shares of Common
Stock outstanding as of February 24, 2000 together with applicable options
for such stockholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission (the "Commission"), and
includes voting and investment power with respect to shares. Shares of
Common Stock subject to options currently exercisable or exercisable within
60 days after February 24, 2000 are deemed outstanding for computing the
percentage ownership of the person holding such options, but are not deemed
outstanding for computing the percentage of any other person. Except as
noted 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 the Company's Common Stock
shown as beneficially owned by them.
(2) All shares listed are held by The Reyes Family Trust. Includes options to
purchase 20,000 shares of Common Stock exercisable within 60 days of
February 24, 2000.
(3) All shares listed are held by The Malavalli Revocable Trust. Includes
options to purchase 1,736 shares of Common Stock exercisable within 60 days
of February 24, 2000.
(4) Includes options to purchase 13,332 shares of Common Stock exercisable
within 60 days of February 24, 2000.
(5) All shares are held by Victor Rinkle and Paula Rinkle as community
property. Includes options to purchase 160,000 shares of Common Stock
exercisable within 60 days of February 24, 2000.
(6) Includes 36,000 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. Mr. Smith disclaims beneficial ownership
in these shares. The balance of the shares are held by Charles Smith and
Helen Smith as joint tenants.
(7) Mr. Dempsey is a general partner of Bay Partners SBIC, L.P. and is a
director of Brocade. Includes 1,753,968 shares held by Bay Partners SBIC,
L.P. 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. Includes 47,748 shares held
by The Dempsey Family Limited Partnership.
(8) Includes 106,656 shares held by Leslie Investments, LLC and 332,024 shares
held by The Leslie Family Trust.
(9) Mr. Neiman is a partner of Crosspoint Venture Partners and the Chairman of
the Board. Includes 315,824 shares held by Crosspoint Venture Partners LS
Fund 1997. 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) Includes options to purchase 134,760 shares of Common Stock exercisable
within 60 days of February 24, 2000.
- ------------------------
* Less than one percent of the outstanding Common Stock.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Since the Company's inception in August 1995, there has not been nor is
there currently proposed any transaction or series of similar transactions to
which the Company 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 the Company 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 "Change of Control and Severance Agreements" and (2)
the transactions described below.
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
LOANS TO CERTAIN EXECUTIVE OFFICERS
On April 11, 1997, the Company loaned $30,000 to Charles W. Smith, the
Company's Vice President, Worldwide Sales, secured by a stock pledge agreement,
in connection with his purchase of 400,000 shares of the Company's common stock
for $0.075 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,
the Company loaned $15,000 to Mr. Smith, secured by a stock pledge agreement, in
connection with his purchase of 100,000 shares of the Company's common stock for
$0.15 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,
the Company loaned $78,750 to Mr. Smith, secured by a stock pledge agreement, in
connection with his purchase of 140,000 shares of the Company's Common Stock for
$0.5625 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,
the Company loaned $78,750 to Mr. Smith, secured by a stock pledge agreement, in
connection with his purchase of 140,000 shares of the Company's Common Stock for
$0.5625 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. The share amounts and per
share prices above are adjusted to reflect the Stock Splits.
On April 11, 1997, the Company loaned $45,000 to B. Carl Lee, the Company's
former Vice President, Finance and Chief Financial Officer, secured by a stock
pledge agreement, in connection with his purchase of 600,000 shares of the
Company's Common Stock for $0.075 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, the Company loaned $112,500 to Mr. Lee, secured by a
stock pledge agreement, in connection with his purchase of 200,000 shares of the
Company's Common Stock for $0.5625 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 share amounts and per share prices above are adjusted to reflect the
Stock Splits. The entire principal balance and all accrued interest under these
notes have been repaid.
On January 26, 1998, the Company loaned $360,000 to Peter J. Tarrant, the
Company's Vice President, Marketing and Business Development, secured by a stock
pledge agreement, in connection with his purchase of 800,000 shares of the
Company's Common Stock for $0.45 per share (as adjusted to reflect the Stock
Splits). This note accrues interest at the rate of 6.5% per annum, compounded
semi-annually, and is due on January 26, 2003. A principal balance of $180,000
plus accrued interest of $3,413 on this note remain outstanding.
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On December 8, 1998, the Company loaned $647,854 to Gregory L. Reyes, the
Company's President and Chief Executive Officer, secured by a stock pledge
agreement, in connection with his purchase of 1,151,740 shares of the Company's
Common Stock for $0.5625 per share. This note accrues interest at the rate of
4.47% per annum, compounded semi-annually, and is due on May 24, 2000. Also on
December 8, 1998, the Company loaned $2,807,386 to Mr. Reyes, secured by a stock
pledge agreement, in connection with his purchase of 4,990,908 shares of the
Company's Common Stock for $0.5625 per share. This note accrues interest at the
rate of 4.47% per annum, compounded semi-annually, and is due on May 24, 2000. A
principal balance of $3,117,740 and accrued interest in the amount of $185,765
remain outstanding on both notes. The share amounts and per share prices above
are adjusted to reflect the Stock Splits.
On December 24, 1998, the Company loaned $450,000 to Victor M. Rinkle, the
Company's Vice President, Operations, secured by a stock pledge agreement, in
connection with his purchase of 800,000 shares of the Company's Common Stock for
$0.5625 per share (as adjusted to reflect the Stock Splits). This note accrues
interest at the rate of 6.5% per annum, compounded semi-annually, and is due on
December 24, 2004. A principal balance of $369,000 and accrued interest in the
amount of $20,454 remain outstanding on this note.
On April 1, 1999, the Company loaned $1,650,000 to Michael J. Byrd, the
Company's Vice President, Finance and Chief Financial Officer. The loan is
secured by a stock pledge agreement, in connection with his purchase of
1,320,000 shares of the Company's Common Stock pursuant to a nonqualified stock
option for $1.25 per share (as adjusted to reflect the Stock Splits). The note
accrues interest at the rate of 5.21% per annum, compounded semi-annually, and
is due on April 1, 2006. A principal balance of $1,485,000 and accrued interest
in the amount of $45,132 remain outstanding on this note.
On April 21, 1999, the Company loaned $100,000 to Paul R. Bonderson, Jr.,
the Company's Vice President, Engineering. The loan was secured by a stock
pledge agreement. This note accrued interest at the rate of 5.21% per annum,
compounded semi-annually, and was due on April 21, 2004. The entire principal
balance and all accrued interest under this note has been repaid.
On May 17, 1999 the Company loaned $312,562 to Jean Zorzy, the Company's
Vice President of Program Management, secured by a stock pledge agreement, in
connection with her purchase of 145,000 shares of the Company's Common Stock for
$0.5625 per share and 132,000 shares of the Company's Common Stock for $1.75 per
share (as adjusted to reflect the Stock Splits). This note accrues interest at
the rate of 6.5% per annum, compounded semi-annually, and is due on May 17,
2004. A principal balance of $305,531 and accrued interest in the amount of
$9,047 remain outstanding on this note.
STOCK OPTION GRANTS AND LOAN TO CERTAIN DIRECTORS
On January 6, 1999, the Company granted to Mark Leslie, a director of
Brocade, a fully vested stock option under the 1999 Stock Plan to purchase
487,424 shares of the Company's common stock at $0.5625 per share. On January
28, 1999, the Company loaned $274,176 to Mr. Leslie, secured by a stock pledge
agreement, in connection with his purchase of 487,424 shares of the Company's
Common Stock for $0.5625 per share. The share amounts and per share prices above
are adjusted to reflect the Stock Splits. The entire principal balance was
repaid before any interest accrued under this note.
On January 29, 1999, the Company granted to Larry W. Sonsini, a director of
Brocade, a fully vested stock option under the 1999 Stock Plan to purchase
487,424 shares of the Company's Common Stock at $1.25 per share (as adjusted to
reflect the Stock Splits). 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 solicitation.
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INDEMNIFICATION
The Company has entered into indemnification agreements with each of its
directors and officers. Such indemnification agreements require the Company to
indemnify its directors and officers to the fullest extent permitted by Delaware
law.
CONFLICT OF INTEREST POLICY
The Company believes that all transactions with affiliates described above
were made on terms no less favorable to The Company than could have been
obtained from unaffiliated third parties. The Company's policy is to require
that a majority of the independent and disinterested outside directors on the
Board 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 the Company's than it could obtain
from unaffiliated third parties.
All future transactions, including loans, between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board, including a majority of the independent and
disinterested outside directors, and will continue to be on terms no less
favorable to the Company than could be obtained from unaffiliated third parties.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf of the undersigned, thereunto duly authorized on February 28, 2000.
BROCADE COMMUNICATIONS SYSTEMS, INC.
By: /s/ GREGORY L. REYES
---------------------------------
Gregory L. Reyes
President, Chief Executive
Officer and Director
February 28, 2000
Pursuant to the requirements of the Security Exchange Act of 1934, this
Amendment to Report on Form 10-K has been signed on behalf of the Registrant by
the following persons and in the capabilities and on the dates indicated:
SIGNATURE TITLE DATE
- --------------------------- ---------------------------------- -----------------
/s/ * President, Chief Executive Officer February 28, 2000
- --------------------------- and Director
Gregory L. Reyes
/s/ MICHAEL J. BYRD Vice President, Finance and Chief February 28, 2000
- --------------------------- Financial Officer and Assistant
Michael J. Byrd Secretary
/s/ * Chairman of the Board February 28, 2000
- ---------------------------
Seth D. Neiman
/s/ * Director February 28, 2000
- ---------------------------
Neal Dempsey
/s/ * Director February 28, 2000
- ---------------------------
Mark Leslie
/s/ * Director February 28, 2000
- ---------------------------
Larry W. Sonsini
* /s/ MICHAEL J. BYRD
- ---------------------------
Michael J. Byrd
Attorney-in-fact