More Brocade S-1 excerpts:
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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
OEM 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 their 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 exception to this trend was in the third quarter of fiscal 1998 when gross
margin decreased to 4.8%. This decrease 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.
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. As a result of these charges, total operating expenses declined in
absolute dollars for the three-month periods ended October 31, 1998 and January
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations to date primarily through the sale of
preferred stock, for aggregate proceeds of approximately $35.8 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
and $11.6 million in fiscal 1998. The increases in cash utilized in fiscal 1997
and 1998 reflected the increased working capital required to fund expanding
operations and increases in inventory and accounts receivable. Capital
expenditures were $1.5 million in fiscal 1996, $3.4 million in 1997 and $3.8
million in 1998. 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 January 31, 1999 consisted of
$10.1 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 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 7.8% at January 31, 1999, are secured by our accounts receivable and
inventory, 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 January 31,
1999, there were borrowings under the revolving line of credit of $1.7 million
and under the equipment financing of $2.7 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.
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.
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., in the Santa Clara County, California
Superior Court. The suit involves claims for amounts allegedly owed by us for
circuit boards manufactured by MSL and previously shipped to us (approximately
$900,000), for circuit boards manufactured for us and held by MSL (approximately
$500,000), and for raw material purchased by MSL for inclusion in circuit boards
to be manufactured for us (approximately $1.5 million). 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 amounts due to us under MSL's warranty
(approximately $600,000), the value of equipment and electronic components
consigned by us to MSL (approximately $200,000) and other damages sustained by
us related to MSL's performance during our manufacturing relationship
(approximately $150,000). We deny any liability for the circuit boards
manufactured by MSL but not shipped to us or for raw material purchased by MSL.
In December 1998, MSL obtained a writ of attachment against us for
approximately $1.4 million and related to the circuit boards manufactured by
MSL. We responded by posting a bond for this amount. The parties have exchanged
documents and conducted preliminary discovery. No trial date has been set.
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
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 and
reimburse MSL for some or all of its attorneys' fees which could materially harm
our business.
EMPLOYEES
As of February 15, 1999, we had 110 full-time employees, 41 of whom were
engaged in research and development, 32 of whom were in sales and marketing and
37 of whom were in 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.
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