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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
/ / 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 0-23263
EXCEL SWITCHING CORPORATION
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2992806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
255 INDEPENDENCE DRIVE
HYANNIS, MASSACHUSETTS 02601
(Address of principal executive offices) (Zip code)
(508) 862-3000
(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,
$.01 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 filing
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 this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of March 22, 1999 was $194,825,744 based on
the price of $26.875, the closing price of the Common Stock on that date as
reported on the Nasdaq National Market. As of March 22, 1999, 34,465,955 shares
of the Registrant's Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Specified portions of the Company's Proxy Statement, which is expected to
be filed within 120 days after the end of the Company's fiscal year, are
incorporated by reference into Part III (Items 10, 11, 12 and 13) of this
Report.
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EXCEL SWITCHING CORPORATION
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
<S> <C> <C> <C>
Item 1 Business 3
Item 2 Properties 10
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A Quantitative and Qualitative Disclosures about Market Risk 28
Item 8 Financial Statements and Supplemental Data 29
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
PART III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners and Management 29
Item 13 Certain Relationships and Related Transactions 30
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K 30
Signatures 32
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PART I
ITEM 1. BUSINESS
INFORMATION CONTAINED IN THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS
SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS, THAT CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "BELIEVE", "PLAN", "INTEND",
"COULD", "ESTIMATES", "IS BEING" OR "GOAL" OR OTHER VARIATIONS OF THESE TERMS OR
COMPARABLE TERMINOLOGY. SUCH STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED. THE
CAUTIONARY STATEMENTS MADE IN THIS REPORT SHOULD BE READ AS BEING APPLICABLE TO
ALL FORWARD-LOOKING STATEMENTS WHENEVER THEY APPEAR IN THIS REPORT. FACTORS THAT
COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN THE
RISK FACTORS SET FORTH IN ITEM 7 BELOW (THE "RISK FACTORS") AS WELL AS THOSE
DISCUSSED ELSEWHERE HEREIN.
Excel Switching Corporation is a leading provider of open switching
platforms for telecommunications networks worldwide. The Company develops,
manufactures, markets and supports a family of open, programmable, carrier-class
switches that address the complex enhanced services and wireless and wireline
infrastructure needs of network providers. Excel's products offer network
providers the flexibility to address multiple market applications and the
scalability to deploy a variety of system capacities. The Company's programmable
switching platforms enable network providers to deliver improved networking
functionality at a lower cost than purchasing, upgrading or reprogramming
traditional, closed, central office switches. The Company's products are
currently deployed in telecommunications networks in 60 countries throughout the
world.
Excel offers a family of programmable switching platforms that are designed
with distributed architecture and open software to maximize performance and
provide multiple levels of programmability and redundancy. Excel's open
switching platforms integrate with a wide variety of host computer systems,
operating systems and application development environments. The Company's
product family scales from approximately 100 to 30,720 ports. Using Excel's
patented Programmable Protocol Language ("PPL"), application developers can
customize the switching software to their unique requirements, allowing them to
introduce new services and applications rapidly. As customer requirements
evolve, the Excel platform can be upgraded without requiring extensive and
complex programming changes to the underlying software.
The Company sells to a variety of customers in the worldwide
telecommunications market. Excel's customers integrate the Company's open,
programmable switching platforms with their product offerings to address a
variety of market applications for network providers, ranging from enhanced
services such as voice messaging, one number services and prepaid debit cards,
to wireless and wireline infrastructure services such as tandem, end-office,
mobile switching centers, intelligent base station controllers and wireless
local loop.
Excel's products and technology are contained within the framework of Open
Network Expansion Architecture ("ONE Architecture(TM)") which was introduced in
February 1998. ONE Architecture is Excel's concept that its switching solutions
provide an open, scalable and cost-effective solution for the telecommunication
needs of network providers. ONE Architecture encompasses the existing family of
switching products and related embedded software technologies described below.
EXCEL PRODUCT FAMILY
The Company offers a family of open, programmable switching products for
application developers, OEMs, systems integrators and network service providers.
The Company's product family includes the EXS-2000 (formerly referred to as the
LNX), a 2,048 port switching platform and the EXS-1000 (formerly referred to as
the CSN), a 1,024 port switching platform. Multiple nodes of EXS-2000s or
EXS-1000s can be easily linked to form an EXS system of up to 30,720 ports. The
LNX and CSN product names have been changed to EXS-2000 and EXS-1000,
respectively, to better reflect the continuity and common architecture shared
across the entire EXS product line. All of the Company's EXS products can be
used in a wide range of enhanced services and wireless and wireline
infrastructure applications.
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All of Excel's products share a common embedded software architecture,
allowing any specific application to run on any platform, and are designed with
multiple levels of redundancy. All EXS switching platforms share a set of common
card components which include network interface line cards such as T1, E1 and J1
interfaces, and service resource cards such as multi-function Digital Signal
Processors, Primary Rate ISDN, SS7, DASS2 and DPNSS. Excel's network interface
line cards provide direct connectivity to, and ease of integration with, a
variety of international signaling protocols. The service resource cards provide
customers with a range of common channel signaling and switching applications,
offering network providers the ability to control their applications and the
flexibility to expand to other services or signaling protocols as needed.
Multiple cards can be installed on a single chassis to manage various signaling
and call control capabilities or to provide fault tolerant configurations. In
addition, the Company offers network interface line cards and service resource
cards separately to allow customers to upgrade or enhance previously deployed
switching platforms.
The EXS-2000 is a 2,048 port, non-blocking, open, programmable switching
platform that provides high performance and fault tolerance in a small chassis.
With all modules supporting redundant configurations, the EXS-2000 is designed
for central office environments requiring a high level of reliability and ease
of maintainability. The EXS-2000 can operate as a stand-alone switch or as a
node in Excel's patented EXS switching system, currently supporting scalability
up to 30,720 non-blocking ports. The EXS-2000 consists of the 2,048 port matrix
card residing in a 20-slot chassis, a host interface and a fully configurable
combination of network interface line and service resource cards. All EXS-2000
cards can be replaced while the system is operating ("hot-swappable"), providing
ease of maintenance and upgrading without interruption of service. The
predecessor to the EXS-2000, the XLDX, is a 1,536 port programmable platform
first installed in a central office environment in 1988. XLDX systems are still
supported by the Company for customers with an XLDX installed base.
The EXS-1000 is a 1,024 port, non-blocking, open, programmable switching
platform that provides the same features and scalability as the EXS-2000 but in
a more compact chassis. The EXS-1000 utilizes the same common cards for network
line interfaces and service resources as well as utilizes common channel
signaling packet engines and host interfaces as the EXS-2000, with the same
reliability features such as hot-swappability and full redundancy. The EXS-1000
is suited for wireless applications where space constraints dictate the need for
carrier-class switching within a compact chassis.
The EXS system is an open, non-blocking system comprised of multiple
EXS-2000 and or EXS-1000 programmable switching platforms distributed across
EXNET, the Company's fiber optic expansion network. The current EXNET network
can support up to 30,720 ports, encompassing combinations of EXS-2000s and or
EXS-1000s. The patented EXS architecture is designed to allow further expansion
beyond the current 30,720 ports. Parallel EXNET fiber networks can also be used
to create fully redundant systems to ensure maximum availability and fault
tolerance. Because each EXS node is a self-contained EXS-2000 or EXS-1000
switching platform, processing power can scale linearly as the system is
expanded. Individual EXS-2000 or EXS-1000 nodes can be isolated and serviced
without the entire system being brought out-of-service, providing ease of
maintenance. Since each node can operate and process calls independently, total
system reliability and availability is increased.
The Company also offers another switching product, the PCX, which is
designed for the customer premise equipment marketplace. The PCX is designed to
provide a total solution in a small chassis and address the needs of midrange
switching applications. The PCX is a PC-based, 512 port, non-blocking, open,
programmable switching platform that supports the same programmable features and
shares the same hardware and software architecture as the EXS-2000 and EXS-1000
platforms. With its PC-based platform, the PCX can support an internal host
processor as well as internal voice processing resources. The PCX enables
application developers to combine Excel's programmable switching features with
industry-standard voice processing technology for a single, stand-alone
solution. Although, sales of the PCX product were not significant in 1998, the
Company continues to supply PCX components and support the existing installed
customer base.
A unique aspect of Excel's distributed architecture is its embedded
patented Selective Space Switching technology which allows the platform's
internal bus to switch traffic between any input or output port, DSP, packet
engine resource or EXNET Controller without losing critical port capacity.
Unlike traditional switches, with Selective Space Switching
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technology, available port capacity is not compromised as additional modules are
added. When resource modules are added, the platform's switching capacity
increases, and its full non-blocking switch port capacity is retained.
Unlike traditional, proprietary switches, Excel's programmable platforms
share a common, open, embedded software architecture designed to be programmable
by third parties. The open programmability of Excel's switching platforms is
based on its Application Programming Interface ("API") and its patented
Programmable Protocol Language ("PPL").
The API is a message-based protocol designed for communication between the
programmable switching platform and the application software located on a host
computer. Excel's open API allows the application software to access call
processing control, configuration, maintenance and alarm reporting functions
within the switch at a level that is not currently available in competitive
products. The API also allows multiple host computers to attach to the EXS
platform to provide multiple applications on a single platform or application
load sharing architectures. Excel's API is embedded within the Company's
switching product family.
Excel's PPL is a patented technology that provides an easy and convenient
mechanism for developers and operators to implement modifications without having
to write complex software code. PPL provides a development environment at
multiple programmable levels including signaling protocol and the call control
and application service layers of the system software. PPL programmability is
currently available at all layers except the application service layer. The
Company is currently developing PPL programmability for the service layer.
PPL provides the customer greater control over their development of
competitive custom service offerings and an ability to independently customize
the switching platform to add functionality. Software, including protocols, is
developed and modified using a graphical user interface development environment,
requiring the user to have only limited software programming experience. PPL can
be layered in the call control layer to customize the EXS API to match external
application requirements. This allows developers to create their own
host-to-switch API to optimize their applications and services. With PPL,
support personnel can implement detailed changes to the switching software on
site without using expensive equipment or requiring additional technical
personnel. These benefits provide increased software maintainability while
reducing development costs and eliminating customized work for Excel and its
customers.
Excel's EXS programmable switching platforms supports the worldwide
telecommunications industry's Signaling System 7 ("SS7") requirements. All phone
systems require signaling to supervise or monitor the circuit, alert for
incoming calls and transmit routing and destination signals over the network.
Excel's products are also used in the Intelligent Network (IN), via its SS7
products. Excel's SS7 provides a robust, high-reliability, scalable SS7 solution
that supports multiple layers of the SS7 model. Because it uses PPL technology,
Excel's SS7 is highly programmable. With Excel's SS7, developers can build
custom IN services, enabling service providers to offer a wide variety of
competitive services to their subscribers. Excel's SS7 products support both
domestic and international standards, and enable the Excel switch to operate
either as an Intelligent Peripheral (IP) or a Service Switching Point (SSP) in
the Intelligent Network.
The Company's PPL, API and Selective Space Switching software technology
are embedded within the system software of the switching products. The Company
also sells certain separate software tools and applications including a PPL
toolkit assists in the development of custom protocols and services, independent
of the switch architecture.
In September 1998, Excel acquired XNT Systems, Inc, a former Excel
customer. Prior to the acquisition, XNT supplied network service providers with
intelligent switch-control and comprehensive call-processing and control
software applications that managed the underlying Excel switch platform. The
acquired XNT technology enhances Excel's ability to offer its network service
providers a turnkey infrastructure switching solution containing such service
capabilities as tandem and end-office switching. In September 1998, the Company
also acquired Quantum Telecom Solutions, Inc., a former Excel customer. Prior to
the acquisition, Quantum provided its customers with software to configure and
manage Excel switching platforms for use in networks. Both of these acquisitions
provided Excel with switch-related technology and applications that increased
both the functionality and the ease of programmability of the Excel switching
platforms. On December 31, 1998, both acquired entities were merged into the
Company.
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CUSTOMERS
During 1998, the Company sold its products to more than 150 customers
engaged in a variety of areas of the telecommunications industry. The Company's
customers include application developers, OEMs, systems integrators and service
providers. Approximately 10.2% and 19.6% of the Company's revenues in 1997 and
1998, respectively, were derived from sales to QUALCOMM Incorporated and
approximately 26.0% of the Company's revenues in 1997 were derived from sales to
Comverse Network Systems (formerly Boston Technology, Inc.). No other customer
accounted for greater than 10% of the Company's revenues for these periods. The
primary end-users of the Company's products are public network providers,
including LECs, IXCs, CLECs, wireless carriers and PTTs. The Company's products
also are used by a number of large corporations to satisfy specific
telecommunications requirements.
CUSTOMER SERVICE, SUPPORT AND TRAINING
The Company provides pre- and post-sales engineering services and has a
technical assistance center that provides support and service by telephone. The
Company offers a variety of engineering services such as customer application
design review, protocol development, product training, performance testing and
field support. The Company has a fully equipped training facility and provides a
wide range of training courses to its customers, both on- and off-site. The
Company also has a fully equipped applications lab with call traffic load
capabilities where customers can test and verify new applications or
enhancements to existing applications. The Company's technical assistance center
provides telephone support and service on a 24-hour, seven-day-a-week basis. To
ensure that the Company is providing quality support services, the Company has a
formal customer satisfaction program which involves senior management review and
regularly scheduled customer support surveys. In addition, Company personnel
meet regularly with customers to discuss product quality and customer
satisfaction.
The Company provides a product warranty on its hardware products, which
generally covers a period of 14 months from shipment. This warranty coverage
includes technical assistance, as well as product repair or product replacement,
depending upon the circumstances of the warranty claim. In late 1998, Excel
began to offer a warranty on the software embedded within its products. This
warranty covers a period of 90 days and provides that the Excel embedded
software shall be free from certain defects. In addition, Excel began to offer
its customers an option to purchase service and support contract covering
post-sales support. These post-sales support agreements provide additional
technical support and professional services such as training, application
planning, design consultation and implementation assistance. Under these
agreements, customers generally will be charged an annual fee based upon the
level of support requested. Through December 31, 1998, revenue from such
agreements and other fees for support and services has been immaterial.
SALES AND MARKETING
The Company has historically sold its products primarily to application
developers, OEMs and systems integrators which incorporated the Company's
products into their service and product offerings. During 1998, the Company
began selling more of its products directly to service providers. The Company's
principal marketing activities are to identify customers that could benefit from
the Company's products, identify new markets for the Company's products and
increase sales to existing customers.
The sale of the Company's products is a multi-step and interdisciplinary
process which can typically range from 12 to 24 months or more from initial
customer contact to large-scale commercialization of a customer's application or
service based on the Company's products. The initial evaluation stage, typically
three to six months, is primarily the role of the Company's sales, marketing and
engineering personnel, and members of the Company's senior management. The sales
process involves educating potential customers on the functionality and benefits
derived from using the Company's products. The next stage, which can involve
members of both the Company's customer support and research and development
organizations, involves providing the customer with the required training and
technical support to integrate the Company's products into a new application or
service. This stage of the sales process is generally the longest and is
dependent upon an application or service provider's own internal application or
service development program.
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The Company sells to its customers through its own sales force, from its
headquarters, as well as from sales offices in California, Georgia, Illinois,
Massachusetts, Ohio and Texas. In addition, the Company has home-based sales
representatives in Connecticut and Maryland. The Company has foreign sales
offices in Brussels, Belgium and Tokyo, Japan. The Company currently has no
other offices outside the United States, but is exploring the establishment of
additional foreign sales offices in Europe and Asia. To date, the Company has no
firm commitments to establish such international sales offices and there can be
no assurance that the Company will actually open any foreign offices. In
addition, the Company maintains an inside sales group, located at its
headquarters, which is responsible for platform configuration and price
quotations, order administration and telephone sales activities. In order to
create awareness, market demand and sales opportunities, the Company engages in
a number of marketing activities which include exhibiting products and customer
applications at industry trade shows, advertising in selected publications aimed
at targeted markets, public relations activities with trade and business press,
publication of technical articles and the distribution of sales literature,
technical specifications and documentation.
RESEARCH AND PRODUCT DEVELOPMENT
Management believes that the Company's success will depend on its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products. The Company has in the past made, and intends to continue
to make, significant investments in product and technological development.
Extensive product development input is obtained through customers and the
Company's monitoring of end-user needs and changes in the marketplace.
The Company is focusing its development efforts on: providing enhanced
functionality to its products including increased port capacity, reliability and
performance; the development of network switching software; the improvement of
third-party application integration including packet data technology such as
VoIP, RAS and other protocols; and enhancement of development tools. These
research and development projects are being designed to: enhance the Company's
turnkey switching solution for use by network service providers; enhance the
ability to integrate voice, data and media resources onto a single switching
platform; and to enable customers to shorten their application development cycle
thereby improving time-to-market and reducing initial investment in research and
development.
The Company may experience difficulties that could delay or prevent the
successful development, introduction or marketing of such new products and
enhancements. It is possible that new products and enhancements may not
adequately meet the requirements of the marketplace and achieve market
acceptance. Announcements of currently planned or other new product offerings by
the Company or its competitors may cause customers to defer or cancel the
purchase of existing Company products. The Company's inability to develop on a
timely basis new products or enhancements to existing products, or the failure
of such new products or enhancements to achieve market acceptance, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, avoid excessive levels of older
product inventories and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. There can be no assurance that
the Company will successfully develop, introduce or manage the transition to new
products. Furthermore, products such as those offered by the Company may contain
undetected or unresolved errors when they are first introduced or as new
versions are released. Despite extensive testing by the Company, errors may be
found in new products or upgrades after commencement of commercial shipments,
resulting in delays in or loss of market acceptance and sales, diversion of
development resources, injury to the Company's reputation or increased service
and warranty costs, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company's engineering, research and development expenditures totaled
approximately $11.1 million, $13.3 million and $22.7 million in 1996, 1997 and
1998, respectively. During 1998, Excel incurred one-time charges totaling $7.5
million for acquired in-process research and development relating to the
acquisitions of XNT Systems, Inc. and Quantum Telecom Solutions, Inc. See
"Management's Discussion and Analysis of Financial Condition" and "Notes to
Consolidated Financial Statements" for more detailed disclosures relating to
these acquisitions.
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The Company performs most of its research and product development
activities at its principal offices in Hyannis, Massachusetts. In addition, the
Company performs research and product development activities in offices located
in New Jersey and New Hampshire. The Company has maintained International
Standard Organization (ISO) 9001 registration for quality assurance in design,
production, installation and service since originally receiving ISO 9002
certification in 1996 and ISO 9001 certification in 1997.
MANUFACTURING
The Company's manufacturing operations consist primarily of materials
planning and procurement, final assembly, testing and quality control. The
Company uses several independent manufacturers to provide certain printed
circuit boards, chassis and subassemblies. The Company's manufacturing process
enables it to configure its products to meet a wide variety of individual
customer requirements. The Company plans to strengthen manufacturing capability
both in its existing facilities and through expansion of activities with
independent manufacturers. Future growth of the Company will require extension
of existing internal and external manufacturing resources, hiring of additional
technical personnel, improved coordination of supplier relationships with the
Company's inventory ordering and management practices, and expansion of
information systems to accommodate planned growth across these areas.
Although the Company generally uses standard parts and components for its
products, many critical components are purchased from sole or single source
vendors for which alternative sources may not be currently available. Some of
these components are available from only one supplier, for which there is no
substitute at this time. Also, from time to time, Excel provides or resells
various third party applications for use with its switching products. If supply
of these components or third party applications should cease or become
unavailable, the Company would be required to redesign its products or stop
providing such applications with its products. Although the Company works
closely with well-established vendors, the Company has no supply commitments
from its vendors and generally purchases components on a purchase order basis as
opposed to entering into long term procurement agreements with vendors. With
respect to third party applications, the Company intends to enter into supply
contracts to assure availability. To date, the Company has generally been able
to obtain adequate supplies in a timely matter from its primary vendors or, when
necessary to meet production needs, from alternate vendors. In addition, the
Company has been able to maintain relationships with application developers who
provide third party applications. The Company believes that, in most cases,
alternate vendors can be identified if current vendors are unable to fulfill
needs. However certain applications may be only available from a single
developer. Delays or failure to identify an alternate vendor, if required, a
reduction or interruption in supply, a significant increase in the price of
components or the inability to maintain a relationship with a particular
application developer would materially and adversely affect the Company's
business, financial condition, results of operations and customer relationships.
COMPETITION
The markets in which the Company competes are characterized by intense
competition, with a large number of suppliers providing different types of
products to different segments of such markets. The telecom industry has also
been subject to rapid consolidation of equipment suppliers by larger telecom and
data network service providers.
The Company currently competes principally on the basis of: (i) the breadth
of its products' features and benefits; (ii) the flexibility, scalability,
quality, ease of use, reliability and cost effectiveness of its products; and
(iii) the Company's reputation and the depth of its expertise, customer service
and support. While the Company believes that overall, it currently competes
favorably with respect to these factors, there can be no assurance that the
Company will be able to continue to do so.
The Company competes or may compete directly or indirectly with the
following categories of companies: (i) other manufacturers of programmable
switches such as Cisco Systems, Inc. (primarily through its recent acquisition
of Summa Four, Inc.), Redcom Laboratories, Inc. and Harris Corporation; (ii)
large, well-established switch and telecommunications equipment manufacturers
such as Alcatel Alsthom Compagnie Generale d'Electricite SA, Lucent Technologies
Inc., Northern Telecom Limited, Siemens AG and Telefonaktiebolaget LM Ericsson;
and (iii) to a lesser degree, systems integrators and application developers
whose switches are based on PC card-level products manufactured by companies
such as Aculab Inc., Dialogic Corporation and Natural MicroSystems Corporation.
In
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addition, several smaller companies have begun recently to manufacture
programmable switching platforms. Due to the rapidly evolving markets in which
the Company competes, additional competitors with significant market presence
and financial resources, including large telecommunications equipment
manufacturers and computer hardware and software companies, may enter those
markets, thereby further intensifying competition. Additionally, there can be no
assurance that one or more of the Company's application developers will not
begin to develop or market products in competition with the Company.
Many of the Company's current and potential competitors have significantly
greater financial, selling and marketing, technical, manufacturing and other
resources than the Company. As a result, these competitors may be able to devote
greater resources to the development, promotion, sale and support of their
products than the Company. The Company, however, does not believe any of its
competitors are currently dominant in its industry segment. Some of the
Company's competitors currently offer financing alternatives to their customers,
a service that the Company does not generally provide at this time. The Company
is investigating the possibility of establishing a relationship with an
independent leasing company to offer a financing alternative to some or all of
Excel's customers. It is not certain that the Company will be able to establish
such a relationship or offer such financing alternatives in the future.
Moreover, these companies may introduce additional products that are competitive
with those of the Company or enter into strategic relationships to offer
complete solutions which the Company does not currently offer. It is unknown
whether the Company's products would compete effectively with such products.
The Company believes that its open, programmable switching platform, with
the Company's patented Selective Space Switching technology and Programmable
Protocol Language, offers its customers a competitive advantage for flexible,
scaleable and cost-effective switching capabilities. Although the Company
believes these technological features represent advantages over its competitors,
maintaining these advantages will require continued investment by the Company in
research and development, selling and marketing and customer service and
support. In addition, as the Company enters new markets, distribution channels,
technical requirements and levels and bases of competition may be different than
those in the Company's current markets. Accordingly, it is uncertain whether the
Company will be able to compete successfully against either current or potential
competitors in the future.
INTELLECTUAL PROPERTY
The Company relies upon a combination of patent, copyright and trademark
and trade secret laws as well as confidentiality procedures and contractual
restrictions to establish and protect its proprietary rights. The Company has
also entered into confidentiality and invention assignment agreements with its
employees and consultants and enters into non-disclosure agreements with its
suppliers, distributors and customers so as to limit access to and disclosure of
its proprietary information. There can be no assurance such measures will be
adequate to deter and prevent misappropriation of the Company's technologies or
independent third-party development of similar technologies. The laws of certain
foreign countries in which the Company's products are or may be developed,
manufactured or sold may not protect the Company's products or intellectual
property rights to the same extent as do the laws of the United States and thus
make the possibility of piracy of the Company's technology and products more
likely.
As of December 31, 1998, a total of 11 U.S. patents and nine foreign
patents have been issued to the Company. The Company has a total of 21 U.S.
patent applications and 62 international and foreign national patent
applications pending. The U.S. issued patents cover various aspects of: (i) the
architecture and division of call processing responsibility in the Company's PCX
product; (ii) the design and internal construction of a rack-mountable chassis
used with the Company's PCX product; (iii) the architecture of certain
communications resource and I/O cards which may be used in conjunction with any
of the Company's family of programmable switching platforms relating to the
Company's Selective Space Switching technology; (iv) the PPL software which may
be used, in conjunction with any of the Company's family of programmable
switching platforms, to create or modify applications or communications
protocols; (v) a line card redundancy arrangement for use in conjunction with
the Company's EXS-2000 and EXS-1000 products; (vi) the architecture of and
communication methods used with the Company's fiber optic expansion network,
EXNET; and (vii) a universal application programming interface (API) used in the
Company's products. The U.S. patents will expire at various times between the
years 2008 and 2014. The Company also has the following pending: two U.S.
trademark registrations; three foreign trademark registrations; six U.S.
trademark applications; and 19 foreign trademark applications.
9
<PAGE>
The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of patent
infringement. From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to the Company. Although the Company has from time to time received
communications from third parties asserting that the Company's products infringe
or may infringe proprietary rights of third parties, the Company generally
believes that none of such claims, if determined adversely to the Company, would
have a material adverse effect on the Company's business, financial condition or
results of operations. However, the Company is presently involved in a legal
proceeding involving among other things, a claim of patent infringement. See
"Item 3 - Legal Proceedings" for further discussion. In its distribution
agreements, the Company agrees to indemnify its customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. In certain limited instances, the amount of such
indemnities may be greater than the revenues the Company may have received from
the customer. In the event of litigation to determine the validity of any
third-party claims, such litigation, whether or not determined in favor of the
Company, could result in significant expense to the Company and divert the
efforts of the Company's technical and management personnel. In the event of an
adverse ruling in such litigation, the Company might be required to discontinue
the use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses from third parties. There can be no
assurance that licenses from third parties would be available on reasonable
commercial terms, if at all. In the event of a successful claim against the
Company and the failure of the Company to develop or license a substitute
technology, the Company's business, financial condition and results of
operations would be materially adversely affected. The Company changed its name
from Excel Inc. to Excel Switching Corporation in September 1997. Searches
performed on the term Excel have revealed several registrations and numerous
uses of that term, and terms substantially similar to it, alone and in
combination with other terms and designs. Accordingly, there can be no assurance
that third parties will not assert trademark infringement claims relating to the
name Excel Switching Corporation in the future.
EMPLOYEES
As of December 31, 1998, the Company employed 365 persons, including 162 in
engineering, research and development, 85 in selling, marketing and customer
service and support, 64 in manufacturing and 54 in finance, administration and
management information systems. None of the Company's employees are represented
by collective bargaining arrangements, and the Company believes that its
relations with its employees are good. The Company expects to hire additional
management, engineering, finance, sales and marketing personnel over the next 12
to 18 months to accommodate planned domestic and international expansion. The
hiring of additional personnel will place additional demands on management's
ability to assimilate, direct and supervise a growing work force. Accordingly,
it is uncertain whether the Company will be successful in assimilating this
growth in personnel.
The Company's success depends to a significant degree upon the continuing
contributions of its key management, sales, engineering, customer support and
product development personnel. The loss of any of the key management or
technical personnel could have a material adverse effect on the Company. The
Company believes that its future success will depend in large part upon its
ability to attract and retain highly-skilled managerial, sales, customer support
and product development personnel. The Company has at times experienced and
continues to experience difficulty in recruiting qualified personnel.
Competition for qualified personnel in the Company's industry is intense, and
there can be no assurance that the Company will be successful in attracting and
retaining such personnel. Failure to attract and retain key personnel could have
a material adverse effect on the Company's business, financial condition and
results of operations.
ITEM 2. PROPERTIES
The Company's headquarters total approximately 128,000 square feet and are
located in four buildings in Hyannis, Massachusetts. All of the buildings are
owned by the Company and house the engineering, sales, marketing, administrative
and manufacturing functions of the Company. During 1998, the Company initiated
construction of an addition to connect two existing buildings, expected to be
completed in 1999, which will add approximately 58,000 square feet of space for
engineering and manufacturing activities.
10
<PAGE>
The Company also leases sales and support offices in San Jose and San
Diego, California; Atlanta, Georgia; Rolling Meadows, Illinois; Newton,
Massachusetts; Cleveland, Ohio; and Grapevine, Texas and leases research
facilities in Concord, New Hampshire and Paramus, New Jersey. In addition, the
Company leases sales and support offices in Brussels, Belgium and Tokyo, Japan.
The Company intends to expand the capabilities and size of these offices and
open additional offices, both domestically and internationally, as needs arise.
Although the Company anticipates that it will not require additional
manufacturing space for at least the next 12 months, the Company's business,
financial condition and results of operations could be materially adversely
affected if it does not expand manufacturing capacity as required. The Company
believes that its current facilities and planned expansions are adequate to meet
its needs through the next 12 months. However, due to the limited supply of
suitable additional or alternative office and manufacturing space in the
Hyannis, Massachusetts area, there can be no assurance that the Company will not
be required in the future to invest heavily in the renovation of space in the
Hyannis vicinity or in relocating the Company's headquarters.
ITEM 3. LEGAL PROCEEDINGS
In 1998, the Company filed suit in the U.S. District Court for the District
of Massachusetts alleging certain of Summa Four, Inc.'s ("Summa Four")
telecommunication equipment infringes three patents owned by the Company and
seeking a finding of infringement of each of the three patents, an injunction
against further infringement, and damages. Summa Four filed a counterclaim
asserting the breach of a certain confidentiality agreement, and seeking
unspecified damages. The Company filed an answer denying the allegation of
breach of the confidentiality agreement and raising several defenses to the
claims raised in the counterclaim. On March 17, 1999, Summa served additional
counterclaims alleging that certain of the Company's telecommunication equipment
infringes a patent owned by Summa Four and seeking an injunction against further
infringement and unspecified damages. The additional counterclaims further
allege fraud, breach of duty of good faith and fair dealing, intentional
misrepresentation and/or inducement, and unfair competition, and seek
unspecified damages. The Company expects to file an answer denying the
additional counterclaims and raise several defenses to the additional
counterclaims. On March 20, 1999, the Court substituted Cisco Systems, Inc.
("Cisco") for Summa Four as defendant and counterclaimant, as a result of
Cisco's acquisition of Summa Four. The case remains in the early stages of
litigation and although the Company believes that the claims are without merit
and intends to vigorously defend against such claims, there can be no assurance
that this litigation will ultimately be resolved on terms that are favorable to
the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
11
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION - The Company's Common Stock is quoted on the Nasdaq National
Market under the symbol "XLSW". The following table sets forth the quarterly
high and low sale prices per share of Common Stock since the Company's initial
public offering on November 4, 1997, as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, 1998 High Low
- ----------------------------------- ---- ----
<S> <C> <C>
First Quarter $25.75 $16.25
Second Quarter 27.00 18.00
Third Quarter 27.88 16.00
Fourth Quarter 38.88 16.75
Fiscal Year Ended December 27, 1997
Fourth Quarter (from November 4, 1997) $27.88 $14.25
</TABLE>
NUMBER OF HOLDERS - As of March 22, 1999, there were approximately 130 holders
of record of the Company's Common Stock, including multiple beneficial holders
at depositories, banks and brokers listed as a single holder in the street name
of each respective depository, bank or broker. The Company believes there are
over 400 beneficial owners of its Common Stock.
DIVIDEND POLICY - The Company does not expect to pay cash dividends on its
Common Stock in the foreseeable future. The Company currently intends to retain
all of its future earnings, if any, for use in the operation of the business. In
addition, the Company's credit facility restricts the Company's payment of cash
dividends.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING - On November 4, 1997 the Securities
and Exchange Commission declared effective the Company's Registration Statement
on Form S-1, Commission file number 333-35791, relating to the initial public
offering of the Company's Common Stock, $.01 par value. The offering commenced
on November 4, 1997 and all shares covered by the Registration Statement were
sold. The following sets forth certain information regarding the Company's
application of the net proceeds therefrom through December 31, 1998.
<TABLE>
<S> <C>
Net offering proceeds to the Company $87,106,000
Less:
Purchases of property and equipment 11,053,000
Payments on long-term obligations 4,213,000
Payments related to acquisitions 9,419,000
Payments related to payroll 6,697,000
Interest payments on debt obligations 212,000
Payments related to vendor purchases or taxes 18,942,000
Payment relating to customer's note receivable 5,000,000
------------
Remaining offering proceeds, December 31, 1998 $31,570,000
-------------
-------------
</TABLE>
The Company has invested the net proceeds from the initial public offering
in November 1997 in investment grade, interest-bearing securities. None of the
net proceeds from the IPO were used to pay, directly or indirectly, directors,
officers, persons owning ten percent or more of the Company's equity securities,
or affiliates of the Company.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data
of the Company and is qualified in its entirety by the more detailed
Consolidated Financial Statements included herein. This data should be read in
conjunction with "Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and the Consolidated Financial Statements
appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF INCOME DATA:
<S> <C> <C> <C> <C> <C>
Revenues ...................................................... $ 20,723 $ 36,161 $ 62,050 $ 88,727 $ 123,258
Cost of ....................................................... 7,074 12,100 24,312 26,631 35,603
--------- --------- --------- --------- ---------
revenues
Gross profit ............................................ 13,649 24,061 37,738 62,096 87,655
--------- --------- --------- --------- ---------
Operating expenses:
Engineering, research and development ..................... 3,301 8,117 11,121 13,260 22,679
Selling and marketing ..................................... 362 2,923 6,621 11,486 15,906
General and administrative ................................ 2,903 4,238 6,426 7,949 11,069
Acquired in-process research and development -- -- -- -- 7,459
--------- --------- --------- --------- ---------
Total operating expenses ............................. 6,566 15,278 24,168 32,695 57,113
--------- --------- --------- --------- ---------
Income from operations ............................... 7,083 8,783 13,570 29,401 30,542
Other income (expense) ....................................... (4) 38 (384) 1,392 6,127
--------- --------- --------- --------- --------
Income before provision for income taxes ............. 7,079 8,821 13,186 30,793 36,669
Provision for income taxes .................................... 2,889 3,410 5,285 12,177 14,979
--------- --------- --------- --------- ---------
Net income .................................................... $ 4,190 $ 5,411 $ 7,901 $ 18,616 $ 21,690
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share ...................................... $ .15 $ .19 $ .65 $ .28 $ .65
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share .................................... $ .13 $ .17 $ .24 $ .54 $ .55
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic weighted average shares outstanding ..................... 27,946 27,962 28,090 28,756 33,216
Diluted weighted average shares outstanding ................... 31,341 31,822 32,697 34,361 39,242
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 28, DEC. 27, DEC. 31,
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital ............................................... $ 5,906 $ 10,238 $ 14,960 $ 116,374 $ 131,403
Total assets .................................................. 9,973 22,683 34,772 149,694 198,782
Long-term obligations, less current maturities ................ -- 3,537 3,837 108 4,858
Total stockholders' equity .................................... 6,471 12,125 20,086 125,915 161,441
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"ITEM 1. BUSINESS", "ITEM 6. SELECTED FINANCIAL DATA", "ITEM. 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK", THE COMPANY'S CONSOLIDATED
FINANCIAL STATEMENTS AND NOTES THERETO AND THE INFORMATION DESCRIBED UNDER THE
CAPTION "RISK FACTORS" BELOW.
OVERVIEW
Excel Switching Corporation has been profitable since it was founded in
1988 and has financed its operations principally through cash generated from
operations as well as proceeds from its initial public offering in November
1997. The Company has experienced significant revenue growth resulting from
increased acceptance of programmable switching as a means of addressing the
enhanced services and wireless and wireline infrastructure needs of network
providers.
During the early years of the Company's operations, revenues from one
customer represented substantially all of the Company's annual revenues. The
Company has since continued to penetrate new markets and broaden its customer
base, establishing customer relationships with other application developers,
OEMs, systems integrators and network service providers. With an emphasis on
product development, the Company has continued to improve the capacity,
functionality and features of its switching products.
On September 30, 1998, the Company acquired all the outstanding capital
stock of XNT Systems, Inc. and Quantum Telecom Solutions, Inc, both former Excel
customers. These transactions have been accounted for as purchases and,
accordingly, Excel's results of operations include the results for these two
entities only for periods subsequent to the date of acquisition. Prior to the
acquisition, XNT supplied network service providers with intelligent switch
control and comprehensive call-processing and control software applications that
managed the underlying Excel switch platform. This acquisition enhanced Excel's
ability to offer network service providers a turnkey infrastructure switching
solution. Prior to the acquisition, Quantum provided its customers with software
to configure and manage Excel switching platforms for use in networks. Both of
these acquisitions provided Excel with switch-related technology and
applications that increased both the functionality and the ease of
programmability of the Excel switching platforms. Effective December 31, 1998,
XNT and Quantum were merged into the Company and are no longer incorporated
entities.
During 1998, Excel sold its products to more than 150 customers engaged in
a variety of areas of the global telecommunications industry. Through December
31, 1998, the majority of the Company's revenues have been derived from sales to
application developers, OEMs and systems integrators. The Company's products are
sold through its direct sales force primarily to application developers, OEMs
and systems integrators, which incorporate the Company's products into their
service and product offerings. In addition, the Company's products are sold
directly to end-users, particularly network service providers. The Company sells
each of its switching platforms with a varying combination of network interface
line cards and service resource cards that are specified by customer and
application requirements. The Company also sells additional network interface
line cards and service resource cards that allow customers to expand capacity
and functionality and provide for redundancy of their installed systems.
Revenue is generally recognized when all significant contractual
obligations have been satisfied and collection of the resulting receivable is
reasonably assured. Revenue from product sales is recognized at the time of
delivery and acceptance, and after consideration of all the terms and conditions
of the customer contract. Revenue from providing services and post-sale support
is recognized at the time of performance. The Company provides for anticipated
product returns and warranty costs at the time of revenue recognition. In
addition, the Company adjusts reserves for the realizability of accounts
receivable and inventory. While the Company believes its estimates for post-sale
support, warranty costs, sales returns and the realizability of accounts
receivable and inventory are adequate, actual results could differ from those
estimates. Revenues from sales of software development tools and services such
as technical support, training and product maintenance have not been significant
to date. The Company has not capitalized any software development costs and all
research and development costs have been expensed as incurred.
14
<PAGE>
The Company determines its requirements for its accrual for sales returns
and allowances based upon a number of factors including the Company's historical
sales credit activity, anticipated concessions on current sales, estimated
product failures and sales trends. The accrual for sales returns and allowances
was approximately $1.2 million, $4.4 million and $4.7 million at the end of
fiscal years 1996, 1997 and 1998, respectively. The increase in the accrual for
sales returns and allowances can be attributed to the volume increase in sales,
the timing and significance of new product introductions and the increased
complexity of the uses of the Company's equipment. During the first quarter of
1997, the amount of credits issued increased significantly, primarily as a
result of the introduction of the EXS switching system and related technology.
As a result of this increase in credit activity and in light of increasing sales
volumes, management estimated that future claim volumes would be similar. During
1997, the provision for sales returns and allowances as a percentage of revenue
averaged approximately 5.7%. In subsequent periods, as actual credits
materialized at a lower than expected volume, the sales credit provision as a
percentage of revenue declined. During 1998, this provision averaged 2.9% of
revenues. Management does not anticipate a significant change in its
requirements for its accrual for sales returns and allowances in the near term.
However, new product introductions, sales trends and other activity will
continue to influence management's estimates for such requirements.
The Company's profitability is influenced by a number of factors, including
pricing, cost of materials, product and technological advancements from research
and development efforts and the expansion of its operations. The Company
anticipates the addition of personnel and related infrastructure as it seeks to
increase revenues, and to meet other strategic goals such as developing new
products and technologies, broadening strategic partnerships with, and
incorporating new applications for, its customers, entering new markets and
expanding internationally. The Company anticipates that engineering, research
and development expenses will increase in absolute dollars, and may increase as
a percentage of revenues, as the Company pursues engineering efforts to provide
enhanced functionality to its products, increase port capacity and develop
additional software features. The Company also anticipates that selling and
marketing expenses will increase in a similar fashion as the Company enters new
markets and expands internationally.
During 1998, the Company elected to change its fiscal year-end from the
last Saturday in December to December 31 to better synchronize its fiscal
periods with the majority of its customers and suppliers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
of revenues represented by certain items reflected in the Company's Consolidated
Statements of Income:
<TABLE>
<CAPTION>
FISCAL YEAR
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Revenues ......................................................... 100.0% 100.0% 100.0%
Cost of revenues ................................................. 39.2 30.0 28.9
----- ------ ------
Gross profit ................................................ 60.8 70.0 71.1
------ ------ ------
Operating Expenses:
Engineering, research and development ....................... 17.9 14.9 18.4
Selling and marketing ....................................... 10.7 13.0 12.9
General and administrative .................................. 10.3 9.0 9.0
Acquired in-process research and development ................. -- -- 6.0
------ ------ ------
Total operating expenses ......................................... 38.9 36.9 46.3
------ ------ ------
Income from operations ........................................... 21.9 33.1 24.8
Other income (expense) ........................................... (.6) 1.6 5.0
------ ------ ------
Income before provision for income taxes ......................... 21.3 34.7 29.8
Provision for income taxes ....................................... 8.5 13.7 12.2
------ ------ ------
Net income ....................................................... 12.8% 21.0% 17.6%
------ ------ ------
------ ------ ------
</TABLE>
15
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED
DECEMBER 27, 1997
REVENUES. The Company's revenues consist of sales, primarily in the United
States, of its open, programmable switching platforms and related network
interface line cards and service resource cards. Revenues increased 38.9% from
$88.7 million in 1997 to $123.3 million for 1998. The Company believes that the
increase resulted from a number of factors. The Company's efforts to enhance the
scalability, performance, capacity and functionality of its products has
contributed to an increased interest in Excel's programmable switching platforms
as a means of addressing the evolving needs of the telecommunications industry.
This includes enhancements in the areas of switch management, PPL and SS7 as
well as in infrastructure solution offerings. Over the past several years, the
Company's customer base has also broadened, resulting in increased sales from a
larger number of sources. The introduction of new or enhanced offerings by this
growing customer base as well as the expansion of their markets resulted in an
increased demand for Excel's products. Excel also increased its efforts to
provide customers with assistance in designing, planning and testing new
customer applications. The Company expanded or established relationships with a
growing number of network service providers, resulting in an increased amount of
direct sales to end-users. Revenues also benefited by the expansion of the
selling and marketing organizations, including the establishment of two
international sales organizations.
Revenues from the Company's five largest customers represented
approximately 50.9% and 45.0% of the Company's revenues for 1997 and 1998,
respectively. QUALCOMM Incorporated represented approximately 10.2% and 19.6% of
the Company's revenues for these same periods, respectively. Additionally, 26.0%
of the Company's revenues in 1997 were derived from Comverse Network Systems. No
other customer represented greater than 10% of the Company's revenues for these
periods. The Company anticipates that revenues in 1999 from Qualcomm may
decrease from the previous two fiscal years on both an absolute dollar and
percentage of sales basis. Although the Company's largest customers have varied
from period to period, the Company believes that revenues derived from current
and potential large customers will continue to represent a significant
proportion of revenues, and that its results of operations in any given period
will continue to depend to a significant extent upon sales to a limited number
of customers. The volume level of future purchases, if any, by the Company's
principal customers cannot be estimated based upon historical purchasing trends.
Revenues from the Company's largest customers may significantly fluctuate period
to period on both an absolute dollar basis and as a percentage of sales.
GROSS PROFIT. Cost of revenues consists primarily of the cost of purchased
components and subassemblies, contract manufacturing costs, labor and overhead
relating to material procurement, final assembly, testing and quality control,
and warranty and post-sale support costs. Cost of revenues increased 33.7% from
$26.6 million in 1997 to $35.6 million for 1998. Gross margin increased from
70.0% in 1997 to 71.1% in 1998. The increase in gross margin was primarily
attributable to lower component prices, changes in the product mix, particularly
in the number of line and resource cards shipped, and increased manufacturing
efficiencies as the Company increased its production volume in 1998.
ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and
development costs consist primarily of compensation and benefit related costs of
engineering and development personnel, materials and supplies consumed in
prototype development, related facility costs and depreciation of engineering
and test equipment. All research and development costs, including software
development costs, have been expensed as incurred. Engineering, research and
development costs increased 71.0% from $13.3 million in 1997 to $22.7 million
for 1998. As a percentage of revenues, these costs were 14.9% and 18.4%,
respectively, in such periods. The increase in engineering, research and
development costs in absolute dollars was primarily attributable to an increase
in engineering and research personnel and, to a lesser extent, by increases in
the consumption of prototype supplies and materials. Engineering and research
personnel increased from 98 employees at the end of 1997 to 162 employees at the
end of 1998.
SELLING AND MARKETING. Selling and marketing costs consist primarily of
compensation and benefit related costs for sales, marketing and customer support
personnel, travel, advertising, trade show and other promotional activities and
related facility costs. Selling and marketing costs increased 38.5% from $11.5
million in 1997 to $15.9 million for 1998. As a percentage of revenues, these
costs were 13.0% and 12.9%, respectively, in such periods. The increase in
selling and marketing costs in absolute dollars was primarily attributable to an
increase in sales, marketing and customer support personnel. In addition,
increases during 1998 in trade show and promotional activities as well as
facility related costs contributed to the overall increase in selling and
marketing activities. Sales, marketing and customer support personnel increased
from 69 employees at the end of 1997 to 85 employees at the end of 1998.
16
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative costs include
compensation and benefit related costs of management, finance, management
information systems and administrative personnel, professional services, costs
to maintain manufacturing and management information systems and other general
corporate expenses. General and administrative costs increased 39.3% from $7.9
million in 1997 to $11.1 million for 1998. As a percentage of revenues, these
costs were 9.0% in both periods. The increase in general and administrative
costs in absolute dollars was primarily attributable to an increase in
professional fees associated with recruiting activities and legal and accounting
activities, including those related to acquisition investigations, international
expansion and litigation. In addition, increases in administrative, finance and
information technology personnel contributed to the overall general and
administrative costs. General and administrative personnel increased from 44
employees at the end of 1997 to 54 employees at the end of 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. In connection with the
purchase of XNT in the fourth quarter of 1998, the Company allocated
approximately $3.5 million of the $8.8 million purchase price to in-process
research and development projects. In connection with the purchase of Quantum,
also in the fourth quarter of 1998, the Company allocated approximately $4.0
million of the $8.9 million purchase price to in-process research and
development projects. These allocations represent the estimated fair value
related to the incomplete research and development projects. The estimated fair
values were determined by an independent third party appraisal based upon
risk-adjusted cash flow methodologies. These costs were expensed as
non-recurring charges to operations as of the acquisition dates as the projects
had not yet reached technological feasibility and had no alternative future use.
XNT's primary projects in progress at the time of acquisition involved
designing a technology and application platform for a next-generation ADS, XNT's
core switch-control and call-processing control system. Overall, these projects
were approximately 70% complete at the time of acquisition. The estimated
revenues for the in-process technologies assumed compound annual growth rates of
60% in the five years following introduction, assuming the successful completion
and market acceptance of the major research and development projects. These
estimated revenues are expected to peak within five years of acquisition and
then decline sharply as other new products and technologies enter the market.
The cost of remaining efforts to complete the projects is estimated at
approximately $583,000. It is expected that the remaining development work will
be completed by the end of the third quarter of 1999.
Quantum's critical in-process projects related to the SwitchKit toolkit
which is a core switch control and application development toolkit. Overall,
these projects were approximately 55% complete at the time of acquisition. The
estimated revenues for the in-process technologies assumed compound annual
growth rates of 32% in the three years following introduction, assuming the
successful completion and market acceptance of the major research and
development projects. These estimated revenues are expected to peak within three
years of acquisition and then decline sharply as other new products and
technologies enter the market. The cost of remaining efforts to complete the
projects are estimated at approximately $1.2 million. It is expected that the
remaining development work will be completed by the end of the second quarter of
1999.
The nature of the efforts required to develop the acquired in-process
technology into commercially viable products principally relate to the
completion of all planning, designing and testing activities necessary to
establish that the product can be produced to meet its design requirements
including functionality, features and technical performance requirements.
Although the Company currently expects that the acquired in-process technology
will be successfully developed, it is possible that commercial or technical
viability of these products will not be achieved. Furthermore, future
developments in the telecommunications industry, changes in programmable
switching technology, changes in other product offerings, changes in technology
requirements of telecom service providers or other developments may cause the
Company to alter or abandon these plans.
The value assigned to acquired in-process technology was determined by
estimating the completion percentage of research and development efforts at the
acquisition date, forecasting risk-adjusted revenues considering the completion
percentage, estimating the resulting net cash flows from the projects and
discounting the net cash flows to their present values. The completion
percentages were estimated based on cost incurred to date, the importance of the
completed development tasks and the elapsed portion of the total project time.
The revenue projection used to value the in-process research and development is
based upon management's estimate of the software component contributions of the
17
<PAGE>
respective software technologies intended to be integrated with the Excel
switching products. Net cash flow estimates include selling, marketing and
general administrative expenses as well as research and development expenses.
Operating expenses were estimated based on historical results and management's
estimates regarding possible profit margin improvements. Due to purchasing power
increases and general economies of scale, estimated operating expenses as a
percentage of revenues were expected to decrease within two years following the
acquisition.
In addition, net cash flow estimates were adjusted to allow for fair return
on working capital and fixed assets, charges for core technology leverage and a
return on goodwill and other intangibles. An appropriate risk-adjusted discount
rate was selected to discount the net cash flows back to their present value.
The discount rates selected for developed and in-process technology were 15% and
20%, respectively. These rates were calculated based upon an estimate of the
cost of capital and the required rates of returns typical for companies at a
similar stage of development. In the selection of these discount rates,
consideration was given to the Weighted Average Cost of Capital ("WACC"), which
was determined, in part, by using the Capital Asset Pricing Model. The discount
rate utilized for the in-process technology was higher than Excel's WACC due to
the risk of realizing cash flows from products that had yet to reach
technological feasibility. The remaining identified intangibles will be
amortized on a straight-line basis over four to ten years based upon the
expected useful lives of developed technologies, retention of workforce and
other intangible assets. If these projects are not developed, the Company may
not realize the value assigned to the in-process research and development
projects. In addition, the value of other acquired intangible assets may also
become impaired.
OTHER INCOME (EXPENSE). Other income (expense), which primarily includes
interest income and interest expense, increased from $1.4 million in 1997 to
$6.1 million in 1998. This increase was primarily derived from a larger average
balance of invested cash and securities during 1998.
PROVISION FOR INCOME TAXES. The Company's effective rate for Federal and
state income taxes was 39.5% and 40.8% for 1997 and 1998, respectively. The
increase in the overall effective rate is primarily attributable to the effect
of non-deductible goodwill and acquired in-process research and development
related to the acquisition of XNT, offset by a decrease in the effective state
income tax rate and the utilization of certain tax credits.
FISCAL YEAR ENDED DECEMBER 27, 1997 COMPARED TO FISCAL YEAR ENDED
DECEMBER 28, 1996
REVENUES. Revenues increased 43.0% from $62.1 million in 1996 to $88.7
million for 1997. The increase resulted, in part, from the Company's continuing
efforts to enhance the scalability, performance, capacity and functionality of
its products through the modification and introduction of features and products.
The increase in revenues also resulted from the introduction of new or expanded
offerings by existing customers incorporating the Company's products, the
expansion of customers' existing markets and the introduction of new
applications by new and existing customers. In addition, revenues increased due
to increased market penetration resulting from the efforts of the Company's
expanded selling and marketing organizations.
Revenues from the Company's five largest customers represented
approximately 57.1% and 50.9% of the Company's revenues for 1996 and 1997,
respectively. Comverse represented approximately 36.7% and 26.0% of the
Company's revenues for these same periods, respectively. Additionally, 10.2% of
the Company's revenues in 1997 were derived from Qualcomm.
GROSS PROFIT. Cost of revenues increased 9.5% from $24.3 million in 1996 to
$26.6 million for 1997. Gross margin increased from 60.8% in 1996 to 70.0% in
1997. The increase in gross margin was primarily attributable to lower component
prices, changes in product mix and increased manufacturing efficiencies as the
Company increased its production volume in 1997, all of which the Company
estimates represents approximately one-half of the gross margin increase from
1996 to 1997. In addition, gross margins for 1996 were negatively impacted by
the introduction of the EXS switching system and related technology which
resulted in valuation adjustments of certain existing inventory components,
which the Company estimates represents the other half of the gross margin
increase from 1996 to 1997.
ENGINEERING, RESEARCH AND DEVELOPMENT. Engineering, research and
development costs increased 19.2% from $11.1 million in 1996 to $13.3 million
for 1997. As a percentage of revenues, these costs were 17.9% and 14.9%,
respectively, in such periods. The increase in engineering, research and
development costs in absolute dollars was
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primarily attributable to an increase in engineering and research personnel
partially offset by decreases in the consumption of prototype supplies and
materials. Engineering and research personnel increased from 68 employees at the
end of 1996 to 98 employees at the end of 1997.
SELLING AND MARKETING. Selling and marketing costs increased 73.5% from
$6.6 million in 1996 to $11.5 million for 1997. As a percentage of revenues,
these costs were 10.7% and 13.0%, respectively, in such periods. The increase in
selling and marketing costs in absolute dollars was primarily attributable to an
increase in sales, marketing and customer support personnel and an increase in
trade show and promotional activities during 1997. Sales, marketing and customer
support personnel increased from 51 employees at the end of 1996 to 69 employees
at the end of 1997.
GENERAL AND ADMINISTRATIVE. General and administrative costs increased
23.7% from $6.4 million in 1996 to $7.9 million for 1997. As a percentage of
revenues, these costs were 10.3% and 9.0%, respectively, in such periods. The
increase in general and administrative costs in absolute dollars was primarily
attributable to an increase in general and administrative personnel from 35
employees at the end of 1996 to 44 employees at the end of 1997.
OTHER INCOME (EXPENSE). Other income (expense) increased from ($384,000) in
1996 to $1.4 million in 1997. This increase was primarily attributable to an
increase in interest income derived from larger balances of invested cash and
securities.
PROVISION FOR INCOME TAXES. The Company's effective rate for Federal and
state income taxes was 40.1% and 39.5% for 1996 and 1997, respectively. The
decrease in effective rates is primarily attributable to a decrease in the
effective state income tax rate and the utilization of certain tax credits.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's principal sources of liquidity
consisted of cash, cash equivalents and marketable securities of approximately
$118.1 million, working capital of approximately $131.4 million and $15.0
million of funds available under a bank line of credit.
During 1996, 1997 and 1998, cash provided by operating activities totaled
$7.3 million, $27.2 million and $29.7 million, respectively. The increase in
1997 was primarily attributable to an increase in profitability, accounts
payable and accrued expenses. The increase in 1998 was primarily attributable to
an $11.6 million tax benefit resulting from the exercise of common stock
options. This increase was offset by an $18.1 million increase in accounts
receivable. Management believes the increase in accounts receivable at December
31, 1998 is due to a number of factors including: the increase in sales volume
in the fourth quarter of 1998 as compared to the same quarter of 1997; the
timing of order placements and shipments within the quarter; and an increase in
sales to international customers and to network providers and other end-users.
Sales to such customers typically require longer payment terms than the Company
historically has extended to its established customer base. The Company expects
this trend to continue as it seeks to increase revenues and further expand its
business internationally and with network service providers.
The Company's investing activities consumed $4.1 million, $70.4 million and
$12.9 million in 1996, 1997 and 1998, respectively. The increase in 1997 was
primarily attributable to the net $67.0 million purchases of marketable
securities largely due to the net proceeds received from the Company's initial
public offering in November 1997. The decrease in 1998 was primarily
attributable to the net proceeds of approximately $11.5 million received from
the sale or maturity of marketable securities during 1998 as opposed to the net
purchases of $66.9 million in marketable securities in 1997. Other significant
contributing factors included: an increase in expenditures totaling
approximately $11.0 million related to the acquisition of property and equipment
and the construction of a new building; the $7.4 million paid, net of cash
received, in connection with the acquisitions of XNT and Quantum; and a payment
of $5.0 million made in connection with promissory note issued by a customer.
In October 1998, the Company initiated construction of an addition to
connect two existing buildings. Construction is scheduled for completion by the
end of the third quarter of 1999 at an estimated cost of approximately $7.0
million. Management anticipates that available cash resources will fund this
construction.
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The Company's financing activities provided $48,000 and $87.1 million in
1996 and 1997 and consumed $2.3 million in 1998. During 1997, the Company
received net proceeds of approximately $87.1 million from an initial public
offering of common stock. During 1998, payments of $4.2 million on long-term
debt obligations were offset by proceeds from the exercise of stock options of
$1.5 million. In January 1998, the Company repaid all existing bank obligations
totaling approximately $3.1 million under a Mortgage and Security Agreement, a
promissory note payable and a Real Estate Promissory Note. In September 1998,
the Company exercised an option for $875,000 to purchase a building under an
existing capital lease arrangement. In connection with the acquisition of XNT
and Quantum, the Company paid approximately $7.8 million and issued promissory
notes totaling approximately $8.2 million. Such notes bear interest of 10% per
annum and are payable at various dates through September 2001. Upon the
occurrence of certain events, maturity of principal amounts may be accelerated
or decelerated.
The Company's unsecured line of credit arrangement with a bank provides up
to $15.0 million in credit availability. Borrowings under this agreement bear
interest, at the Company's discretion, at either the bank's base rate or the
Eurodollar rate plus 1.75%. The agreement requires the Company to comply with
certain financial covenants, including a ratio of liabilities to tangible net
worth, a ratio of current assets to current liabilities and a minimum
profitability covenant. The agreement also restricts the Company's ability to
pay cash dividends. The Company was in compliance with these covenants as of
December 31, 1998. There were no amounts outstanding under this line of credit
during 1997 or 1998. The agreement expires June 30, 1999, however, the Company
anticipates entering into a similar new or amended agreement.
The Company does not have any other significant capital commitments and
believes that available funds and cash generated from operations will be
sufficient to meet the Company's working capital requirements for at least the
foreseeable future. The Company plans to finance its long-term capital needs
with available funds, together with available borrowings and cash flow from
operations. To the extent that such funds are insufficient to finance the
Company's activities, the Company may have to raise working capital through the
issuance of additional equity or debt securities. However, such additional
financial alternatives may not be available at such time or on acceptable terms.
YEAR 2000 READINESS DISCLOSURE STATEMENT
Many currently installed computer systems and software products are
designed to accept only two-digit entries in the date code field. As a result,
they may have problems properly recognizing 1/1/00 as January 1, 2000. In less
than a year, computer systems and/or software used by many companies may need to
be upgraded to comply with such "Year 2000" or "Y2K" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with the Year 2000 issue.
In 1997, the Company commenced a program to review the Y2K compliance
status of the Company's product offerings and the software and systems used in
its internal business processes. Suppliers of the components that make up
Excel's products, as well as service providers, are being contacted as part of
the Company's Y2K assessment.
The Company has integrated Y2K testing into the development process for all
of its products. The Company believes that its entire EXS family of products,
which includes the EXS, LNX and CSN systems, is generally Y2K compliant.
Accordingly, the use or occurrence of dates on or after January 1, 2000 and the
occurrence of leap years will not affect the performance of the Company's
products with respect to the ability of such products to correctly create,
store, process and output information related to such date data. Excel's
programmable switches are controlled by a host computer owned and operated
generally by a customer or end user, and are typically integrated into
telecommunication applications by application developers, original equipment
manufacturers and system integrators or other third parties. Excel's switch
software is embedded, real time software. By design, date values are rarely used
in Excel's products. Excel has thus far reviewed all its EXS products for Year
2000 compliance. The Company found no discrepancies with Y2K or leap year date
processing during its internal testing. Excel believes that the PCX product line
will also function properly with a host computer using DOS version 6.22 and
beyond. This belief is based on an engineering review and internal test results
of the PCX product line.
In July 1998, Excel received ITAA*2000 certification from ITAA (Information
Technology Association of America). ITAA's review examined eleven discrete
process areas deemed necessary for a successful Y2K conversion. ITAA's
certification indicates that Excel meets the information technology's best
software development practices for addressing the Year 2000 issue. Through
discussions with suppliers and or reviews of publicly disclosed information,
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Excel also believes that its primary internal information systems used to
support its operations (specifically, its ERP system, individual servers and
workstations and common office applications) are Y2K compatible.
The Company has also reviewed the product offerings resulting from the
acquisitions of XNT and Quantum for Y2K compliance and believes they are
generally Y2K compliant. Prior to being acquired by Excel, both XNT and Quantum
performed their own Y2K assessment. Quantum's products use a 4-digit date code
and, therefore, have no known Y2K problems. Excel received assurances from XNT
that XNT's NT-based ADS software from version 5.14.98 forward had passed their
internal Y2K testing. The DOS-based ADS software is scheduled for testing in the
second quarter of 1999. These products and their related product development
processes are currently being integrated into Excel's existing, ITAA-approved
process for the development, test and release of enhancements.
The Company is in the process of contacting its major customers and
critical suppliers of components, equipment and services to determine whether
products and services obtained by the Company from such vendors or sold by the
customer to third parties are Y2K compliant. The Company's suppliers and
customers are under no contractual obligation to provide such information to the
Company. The Company intends to continue its efforts to monitor the Y2K
compliance of suppliers and major customers.
Based on the information available to date, the Company believes it will be
able to complete its Y2K compliance review and make modifications, if necessary,
prior to the end of 1999. The Company is prioritizing its efforts to focus on
Y2K discrepancies that would significantly impact operations. Nevertheless, to
the extent the Company is relying on vendors or suppliers to notify Excel or
resolve Y2K issues within their own products, the Company may experience delays
in implementing such changes. If key systems, or a significant number of systems
were to fail as a result of Y2K problems, the Company could incur substantial
costs and disruption of its business, which would potentially have a material
adverse effect on the Company's business and results of operations. In addition,
because the Company purchases many critical components from single or
sole-source suppliers, failure of any such supplier to adequately address issues
relating to the Y2K problem in its own products or internal systems may have a
material adverse effect on the Company's business, financial condition and
results of operations.
Because a majority of the Company's products are sold through application
developers, original equipment manufacturers and system integrators or other
third parties, users of the Company's products may experience Y2K problems as a
result of the integration of the Company's Y2K compliant products with
noncompliant Y2K products of third party suppliers. In certain circumstances,
the Company has warranted to customers that the use or occurrence of dates on or
after January 1, 2000 will not adversely affect the performance of the Company's
products with respect to the ability to create, store, process and output
information related to such date data. If any of these customers experience Y2K
problems, such customers could assert claims for damages against the Company.
To date, the Company has not required a complete and separate budget for
investigating and remedying issues related to Y2K compliance of the Company's
own products or the software underlying systems used in its internal operations.
The costs of Excel's Y2K initiative have been incorporated into existing
workloads and budgets within the quality, engineering and information technology
departments, and are not expected to be material to the Company's results of
operations or financial position. Management will develop a contingency plan in
the third quarter of 1999 based upon the results of Excel's supplier and
customer readiness reviews. To the extent the Company has not adequately
assessed its Y2K compliance, additional or significant Company resources may be
spent on investigating and remedying Y2K issues and the expenditure of such
resources may have a material adverse effect on the Company's business,
financial condition and results of operations in the future.
RISK FACTORS
THIS REPORT CONTAINS STATEMENTS WHICH MAY BE "FORWARD-LOOKING" STATEMENTS
AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER SIGNIFICANTLY FROM EXPECTATIONS. IN PARTICULAR, STATEMENTS CONTAINED IN
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" WHICH ARE NOT HISTORICAL FACTS, INCLUDING, BUT NOT LIMITED TO,
STATEMENTS REGARDING: THE ANTICIPATED ADEQUACY OF CASH RESOURCES TO MEET THE
COMPANY'S WORKING CAPITAL REQUIREMENTS; ANTICIPATED REQUIREMENTS FOR THE ACCRUAL
FOR SALES RETURNS AND ALLOWANCES; ANTICIPATED PAYMENT TERMS RELATING TO ACCOUNT
RECEIVABLES; THE ANTICIPATED PROPORTION OF REVENUES TO BE DERIVED FROM A
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LIMITED NUMBER OF CUSTOMERS; ANTICIPATED REVENUES FROM QUALCOMM; ANTICIPATED
EXPENDITURES AND COMPLETION DATES WITH RESPECT TO RESEARCH AND DEVELOPMENT AND
THE EXPANSION OF MARKETING AND SELLING EFFORTS; AND STATEMENTS REGARDING THE
COMPANY'S READINESS FOR Y2K MAY CONSTITUTE FORWARD LOOKING STATEMENTS. FACTORS
THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED
BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT.
FLUCTUATIONS IN RESULTS OF OPERATIONS. The Company's results of operations
have varied significantly in the past and may vary significantly in the future,
on a quarterly and annual basis, as a result of a variety of factors, many of
which are outside the Company's control. These factors include, without
limitation: (i) the timing and size of orders which are received and can be
shipped in any particular period; (ii) the commercial success of the Company's
products; (iii) delays in the introduction of products or product enhancements
by the Company and the Company's ability to introduce new products and
technologies on a timely basis; (iv) the financial stability of the Company's
major customers; (v) the timing of new product introductions or announcements by
the Company or its competitors; (vi) the availability of adequate supplies of
key components and assemblies and the adequacy of third-party manufacturing
capabilities; (vii) the seasonality of the placement of customer orders; (viii)
the timing and nature of selling and marketing expenses such as tradeshows and
advertising campaigns; (ix) the timing of development expenditures and personnel
changes; (x) the publication of opinions about the Company and its products, or
its competitors or their products, by industry analysts; (xi) customer order
deferrals in anticipation of product enhancements or new product offerings by
the Company or its competitors; and (xii) customer cancellation of orders and
the gain or loss of significant customers, including those due to industry
combinations. Moreover, any downturn in general economic conditions could
precipitate significant reductions in corporate spending for telecommunications
infrastructure, which could result in delays or cancellations of orders for the
Company's products. The Company's expense levels are relatively fixed and are
based, in significant part, on expectations of future revenues. Consequently, if
revenue levels are below expectations, expense levels could be
disproportionately high as a percentage of revenues, and the Company's business,
financial condition and results of operations would be materially adversely
affected. The Company has historically operated with little backlog because the
Company generally ships its products within 60 days of acceptance of an order.
As a result, revenues in any quarter are substantially dependent on orders
booked and shipped in that quarter and on sales by the Company's customers to
end users.
The Company has experienced significant fluctuations in revenues, expenses
and results from operations from quarter to quarter, and such fluctuations are
likely to continue. The Company typically receives more product orders and
generates greater revenues in the fourth quarter. During the last several years,
revenues in the first quarter have typically been lower than those recorded in
the preceding fourth quarter. The Company believes that this concentration of
order placements in specific quarterly periods is due to customers' buying
patterns and budgeting cycles. A significant portion of the Company's revenues
have been generated from a limited number of customers and it is difficult to
predict the timing of future orders and shipments to these and other customers.
The Company anticipates that its results of operations in any given period will
continue to depend to a significant extent upon sales to a small number of
customers.
The Company also believes that the purchase of its products generally
involves a significant commitment of a customer's capital resources. Therefore,
any downturn in any customer's business could have a material adverse effect on
the Company's revenues, business, financial condition and quarterly results of
operations. In addition, the Company historically has recognized a large portion
of its revenues from sales booked and shipped in the last month of a quarter
such that the magnitude of quarterly fluctuations may not become evident until
late in, or at the end of, a particular quarter. Because a number of the
Company's individual orders are for significant amounts, the failure to ship a
significant order in a particular quarter could materially adversely affect
revenues and results of operations for such quarter. To the extent that
significant sales occur earlier than expected, results of operations for
subsequent quarters may be materially adversely affected. Due to these and other
factors, the Company's quarterly revenues, expenses and results of operations
could vary significantly in the future, and period-to-period comparisons should
not be relied upon as indications of future performance. The Company's ability
to increase its revenues in future periods, sustain its level of revenues in
future periods or sustain its rate of revenue growth on a quarterly or annual
basis cannot be assured.
Due to all of the foregoing factors, it is possible that in some future
quarter, the Company's results of operations will be below the expectations of
public market analysts and investors. In such event, the market price of the
Company's Common Stock would likely be materially adversely affected.
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CONCENTRATION OF CUSTOMERS. Approximately 10.2% and 19.6% of the Company's
revenues in 1997 and 1998, respectively, were derived from sales to QUALCOMM and
approximately 36.7% and 26.0% of the Company's revenues in 1996 and 1997,
respectively, were derived from sales to Comverse Network Systems. In 1996, 1997
and 1998, the Company's five largest customers accounted for approximately
57.1%, 50.9% and 45.0%, respectively, of the Company's revenues. Although the
Company's largest customers have varied from period to period, the Company
anticipates that its results of operations in any given period will continue to
depend to a significant extent upon sales to a small number of customers. None
of the Company's customers have entered into a long-term supply agreement
requiring any of them to purchase a minimum amount of product from the Company.
Revenues from the Company's largest customers may significantly fluctuate period
to period on both an absolute dollar basis and as a percentage of sales. The
Company anticipates that revenues in 1999 from Qualcomm will decrease from the
previous two fiscal years on both an absolute dollar and percentage of sales
basis. It is unknown whether the Company's principal customers will continue to
purchase product from the Company at current levels, if at all, or whether the
Company will be able to replace such purchases with sales to other customers.
The loss of one or more major customers could have a material adverse effect on
the Company's business, financial condition and results of operations.
HIGHLY COMPETITIVE MARKET. The market for telecommunications products is
highly competitive and subject to rapid technological change. The telecom
industry has also been subject to rapid consolidation of equipment suppliers by
larger telecom and data network service providers. The Company competes or may
compete directly or indirectly with the following categories of companies: (i)
other manufacturers of programmable switches such as Cisco Systems, Inc.
(primarily through its recent acquisition of Summa Four, Inc.), Redcom
Laboratories, Inc. and Harris Corporation; (ii) large, well-established switch
and telecommunications equipment manufacturers such as Alcatel Alsthom Compagnie
Generale d'Electricite SA, Lucent Technologies Inc., Northern Telecom Limited,
Siemens AG and Telefonaktiebolaget LM Ericsson; and (iii) to a lesser degree,
systems integrators and application developers whose switches are based on PC
card-level products manufactured by companies such as Aculab Inc., Dialogic
Corporation and Natural MicroSystems Corporation. In addition, the Company may
be subject to competition from several smaller companies that have begun to
manufacture programmable switching platforms as well as from emerging data
communications equipment manufacturers. Due to the rapidly evolving markets in
which the Company competes, additional competitors with significant market
presence and financial resources, including large telecommunications equipment
manufacturers and computer hardware and software companies, may enter those
markets, thereby further intensifying competition. Additionally, one or more of
the Company's application developers may begin to develop or market products in
competition with the Company. Increased competition could result in price
reductions and loss of market share which would materially adversely affect the
Company's business, financial condition and results of operations. Many of the
Company's current and potential competitors have significantly greater
financial, selling and marketing, technical, manufacturing and other resources
than the Company. Some of the Company's competitors currently offer financing
alternatives to their customers, a service that the Company generally does not
provide at this time. The Company is investigating the possibility of
establishing a relationship with an independent leasing company to offer a
financing alternative to some or all of Excel's customers. It is not certain
that the Company will be able to establish such a relationship or offer such
financing alternatives in the future. Moreover, the Company's competitors may
also foresee the course of market developments more accurately than the Company.
Although the Company believes it has certain technological and other advantages
over its competitors, realizing and maintaining such advantages will require a
continued high level of investment by the Company in research and product
development, marketing and customer service and support. It is not certain that
the Company will have sufficient resources to continue to make such investments
or that the Company will be able to make the technological advances necessary to
compete successfully with its existing competitors or with new competitors.
YEAR 2000 COMPLIANCE. The Company has implemented a Year 2000 compliance
program designed to ensure that the Company's computer systems and applications
will function properly beyond 1999. The Company believes that adequate resources
have been allocated for this purpose and expects the Company's Year 2000 date
conversion programs to be completed on a timely basis. The Company does not
expect to incur significant expenditures to address this issue. However, there
can be no assurance that the Company will identify all Year 2000 problems in its
computer and other systems in advance of their occurrence or that the Company
will be able to successfully remedy any problems that are discovered. The
expenses of the Company's efforts to address such problems, or the expenses or
liabilities to which the Company may become subject as a result of such
problems, could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the revenue stream
and financial stability
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of existing customers may be adversely impacted by Year 2000 problems, which
could cause fluctuations in the Company's revenues and operating profitability
and which could have a material adverse effect on the Company's business,
results of operations and financial condition.
DEPENDENCE ON RELATIONSHIPS WITH APPLICATION DEVELOPERS, OEMS AND SYSTEMS
INTEGRATORS. The Company sells a majority of its products to, and maintains
strategic relationships with, application developers, original equipment
manufacturers and systems integrators which incorporate the Company's products
into their service and product offerings. As a result, sales of the Company's
products are dependent upon the continued market acceptance of the service and
product offerings of the Company's customers. Although the Company maintains
contractual relationships with a substantial number of its customers, such
contracts do not provide for minimum purchase requirements, nor do they contain
provisions requiring the exclusive purchase of the Company's products. The
development of an application or service for the telecommunications market can
involve a substantial amount of time and expense. The delay or failure of a
customer's application development program incorporating the Company's products
could delay or prevent expected sales of the Company's products. The inability
or cessation of customers to integrate the Company's products into their service
and product offerings, product development delays by application developers and
other customers, lack of market acceptance of the service and product offerings
of the Company's customers or a customer's decision to market products
manufactured by a competitor of the Company, or the manufacture of such products
themselves, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Additionally, selling through indirect channels may limit the Company's
information concerning the volume of products sold by the Company's customers to
end users and the Company's contact with its end users. As a result, the
Company's ability to forecast revenues accurately (notwithstanding the forecasts
of its customers), evaluate end-user satisfaction and recognize emerging
end-user requirements may be hindered.
DEPENDENCE ON SINGLE AND SOLE SOURCE SUPPLIERS AND THIRD-PARTY
MANUFACTURERS. The Company purchases many critical component from single or sole
source vendors and relies upon a limited number of independent manufacturers,
some of which are small, privately-held companies, to provide certain components
and assemblies made to the Company's specifications. In addition, from time to
time Company relies upon certain third-party software application vendors to
supply certain software applications used with the Company's switching products.
The inability to develop alternative sources for these products or to obtain
sufficient quantities of these products could result in delays or reductions in
product shipments which could materially adversely affect the Company's
business, financial condition and results of operations. In the event of a
reduction or interruption of supply, a significant amount of time, in some cases
as much as three to four months, could be required before the Company would
begin receiving adequate supplies from such alternative suppliers. Further, in
such event, the Company's business, financial condition and results of
operations would be materially adversely affected. In addition, the manufacture
of certain of these single or sole source components is extremely complex, and
the Company's reliance on the suppliers of these components exposes the Company
to potential production difficulties and quality variations, which could
negatively impact cost and timely delivery of the Company's products. Certain
components and applications are available from only one supplier, for which
there is no substitute at this time. If supply of these components should cease,
the Company would be required to redesign its products or stop providing such
applications with its products. It is not certain that supply problems will not
occur or, if such problems do occur, that satisfactory solutions would be
available. The Company does not have long-term contracts with its suppliers and
therefore it is not certain that these suppliers will continue to be able to
produce these components or to meet the Company's requirements. Any significant
interruption in the supply, or degradation in the quality, of any such component
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Although the Company generally requires its customers to submit quarterly
forecasts of their needs, the Company's customers frequently require rapid
delivery after placement of a purchase order. Because the Company does not
maintain significant component inventories, a delay in shipment by a supplier
could lead to lost sales. Lead times for materials and components may vary
significantly and depend on factors such as specific supplier performance,
contract terms and general market demand for components. If orders vary from
forecasts, the Company may experience excess or inadequate inventory of certain
materials and components. While the Company has not experienced shortages and
allocations of these components to date, any shortages in the future, including
those occasioned by increased sales, could
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result in delays in fulfillment of customer orders. Such delays, shortages and
allocations could have a material adverse effect on the Company's business,
financial condition and results of operations.
EVOLVING MARKET FOR TELECOMMUNICATIONS SERVICES AND RAPID TECHNOLOGICAL
CHANGE. The Company's future success will depend on continued growth in the
market for telecommunications services. The global telecommunications
marketplace is evolving and it is difficult to predict its potential size or
future growth rate. It is not known whether deregulation and continued
improvements and expansions of infrastructure will continue to cause this market
to grow or that increased regulation will not present barriers to the sales of
existing or future products. In addition, telecommunications applications and
infrastructure needs may emerge for which the Company's products are not
designed. If this market fails to grow or grows more slowly or in a different
direction than the Company currently anticipates, the Company's business,
financial condition and results of operations could be materially adversely
affected.
The telecommunications equipment market is also subject to rapid
technological change, evolving industry standards and frequent new product
introductions and enhancements that may render existing products obsolete. As a
result, the Company's position in this market could erode rapidly due to
unforeseen changes in product features and functions of competing products. The
Company's growth and future results of operations will depend in part on its
ability to respond to these changes by enhancing its existing products and
developing and introducing, on a timely and cost-effective basis, new products
and features to meet or exceed technological advances in the marketplace. The
failure of the Company to respond to rapidly changing technologies could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATING TO ACQUISITIONS. During 1998, the Company acquired Quantum
Telecom Solutions, Inc. and XNT Systems, Inc. The Company may also, from time to
time, pursue the acquisition of other companies, assets, products and
technologies although the Company has no present commitments or agreements with
respect to any such acquisitions. Acquisitions involve a number of operating
risks that could materially adversely affect the Company's results of
operations, including the diversion of management's attention to assimilate the
operations, products and personnel of the acquired companies, the acquired
company's existing customer and support obligations, the amortization of
acquired intangible assets and the potential loss of key employees of the
acquired companies. Furthermore, acquisitions may involve businesses in which
the Company lacks experience. Because management and the Company have limited
experience in acquisitions and integrating acquired companies or technologies
into its operations, it is not certain that the Company will be able to manage
present and future acquisitions successfully, or that the Company will be able
to integrate the operations, products or personnel gained through any such
acquisitions without a material adverse effect on the Company's business,
financial condition and results of operations.
CONCENTRATED PRODUCT FAMILY AND RISK OF NEW PRODUCT INTRODUCTIONS. The
Company currently derives substantially all of its revenues from its family of
open, programmable switching platforms and expects that this concentration will
continue in the foreseeable future. As a result, any decrease in the overall
level of sales of, or the prices for, open, programmable switching platforms due
to product enhancements, introductions or announcements by the Company's
competitors, a decline in the demand for open, programmable switches, product
obsolescence, price competition, technological change or any other reason could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the Company intends to continue to invest in product and
technology development, including increasing port capacity and performance, the
development of additional related software applications and tools, the
improvement of third-party application integration and the continued provision
of updated product features and enhancements. The Company may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of such new products and enhancements. It is not known
whether the Company's new products and enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. Announcements of
currently planned or other new product offerings by the Company or its
competitors may cause customers to defer or cancel the purchase of existing
Company products. The Company's inability to develop on a timely basis new
products or enhancements to existing products, or the failure of such new
products or enhancements to achieve market acceptance, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
25
<PAGE>
The development of new, technologically advanced products is a complex and
uncertain process requiring the accurate anticipation of technological and
market trends. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, avoid excessive levels of older
product inventories and ensure that adequate supplies of new products can be
delivered to meet anticipated customer demand. It is not certain that the
Company will successfully develop, introduce or manage the transition to new
products. Furthermore, products such as those offered by the Company may contain
undetected or unresolved errors when they are first introduced or as new
versions are released. Despite extensive testing by the Company, errors may be
found in new products or upgrades after commencement of commercial shipments,
resulting in delays in or loss of market acceptance and sales, diversion of
development resources, injury to the Company's reputation or increased service
and warranty costs, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
MANAGEMENT OF GROWTH, HIRING OF ADDITIONAL PERSONNEL AND DEPENDENCE ON KEY
PERSONNEL. The Company has experienced growth in revenues and expansion of its
operations which have placed significant demands on the Company's management,
engineering staff and facilities. During 1998, the Company completed the
acquisitions of two existing corporations and established operations
internationally. The Company is also implementing additional financial and
management procedures that the Company believes will address increasing demands
on resources. However, the Company believes that further improvements in
management and operational controls are needed, and will continue to be needed,
to manage any future growth. Continued growth will also require the Company to
hire more engineering, selling and marketing and administrative personnel,
expand customer support capabilities, expand the infrastructure of its
international operations, expand management information systems and improve its
inventory management practices. The Company has at times experienced, and
continues to experience, difficulty in recruiting qualified personnel.
Recruiting qualified personnel is an intensely competitive and time-consuming
process. It is not certain whether the Company will be able to attract and
retain the necessary personnel to accomplish its growth strategies or that it
will not experience constraints that will adversely affect its ability to
satisfy customer demand in a timely fashion or to support satisfactorily its
customers and operations. If the Company's management is unable to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially adversely affected.
While the Company believes its current and planned facilities are adequate
to meet its needs through the next 12 months, future growth may require the
Company to obtain additional or alternative facilities. Due to the limited
supply of suitable additional or alternative office and manufacturing space in
the Cape Cod, Massachusetts area, there can be no assurance that such space can
be leased or acquired without substantial required renovations. Relocation of
any segment of the Company's operations may disrupt business and have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the local permitting and variance procedures for the
renovation or construction of buildings in the Cape Cod area is more onerous
than found in metropolitan areas. Accordingly, it is not certain that the
Company will not be required in the future to devote significant resources to
the permitting and renovation of additional facilities or in relocating some or
all of the Company's facilities.
The Company's success depends to a significant degree upon the continued
contributions of its President, Chief Executive Officer and principal
stockholder, Robert P. Madonna, and its key management, engineering, selling and
marketing and manufacturing personnel, many of whom would be difficult to
replace. The Company does not have employment contracts with its key personnel.
The loss of the services of any key personnel, the inability to attract or
retain qualified personnel in the future or delays in hiring required personnel,
particularly software engineers, could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In 1997 and 1998, direct sales
to customers located outside of the United States accounted for approximately 8%
and 11%, respectively, of the Company's revenues in each such period. However,
the Company sells a majority of its products to application developers, OEMs and
systems integrators located within the United States which market products and
services based on the Company's products worldwide. The Company intends to
further expand its operations outside the United States and enter additional
international markets, which will require significant management attention and
financial resources. International sales are subject to a variety of risks,
including difficulties in establishing and managing international distribution
channels, in servicing and supporting products sold outside the United States
and in translating products and related materials into foreign languages.
International operations are also subject to difficulties in collecting accounts
receivable, staffing and
26
<PAGE>
managing personnel and enforcing intellectual property rights. Other factors
that can adversely affect international operations include fluctuations in the
value of foreign currencies and currency exchange rates, changes in
import/export duties and quotas, introduction of tariff or non-tariff barriers
and economic or political changes in international markets. Any inability to
obtain foreign regulatory approvals on a timely basis could have a material
adverse effect on the Company's business, financial condition and results of
operations. If the Company's international sales increase, its revenues may also
be affected to a greater extent by seasonal fluctuations resulting from lower
levels of sales which typically occur during the summer months in Europe and
other parts of the world. It is not certain that these factors will not have a
material adverse effect on the Company's future international sales and,
consequently, on the Company's business, financial condition and results of
operations.
LENGTH OF SALES CYCLE. The time between the date of initial contact with a
potential customer and large-scale commercialization of a new customer
application or system based on the Company's products is often lengthy,
typically ranging from 12 to 24 months or more, and is subject to delays over
which the Company has little or no control, including customers' budgetary
constraints, customers' internal acceptance reviews, the success and continued
internal support of customers' own development efforts, and the possibility of
cancellation of projects by customers. Although the Company attempts to develop
its products with the goal of shortening the time to market of its customers'
products, the timing of the commercialization of a new customer application or
service based on the Company's products is primarily dependent on the success
and timing of a customer's own internal development program. Delays can also be
caused by late deliveries by other vendors, changes in implementation priorities
and slower than anticipated growth in demand for the services that the Company's
products support. A delay in, or cancellation of, the sale of the Company's
products could have a material adverse effect on the Company's business,
financial condition and results of operations and cause the Company's results of
operations to vary significantly from quarter to quarter.
DEPENDENCE ON PROPRIETARY RIGHTS. The Company's success and its ability to
compete are dependent, in part, upon its proprietary rights. The Company relies
primarily on a combination of patent, copyright, trademark and trade secret
laws, as well as confidentiality procedures and contractual restrictions to
establish and protect its proprietary rights. It is not known whether such
measures will be adequate to protect the Company's proprietary rights. Further,
the Company may be subject to additional risks as it enters into transactions in
countries where intellectual property laws are not well developed or are
difficult to enforce. Legal protections of the Company's proprietary rights may
be ineffective in such countries. Litigation to defend and enforce the Company's
intellectual property rights could result in substantial costs and diversion of
resources and could have a material adverse effect on the Company's business,
financial condition and results of operations, regardless of the final outcome
of such litigation. Despite the Company's efforts to safeguard and maintain its
proprietary rights both in the United States and abroad, it is not known whether
the Company will be successful in doing so or that the steps taken by the
Company in this regard will be adequate to deter misappropriation or independent
third-party development of the Company's technology or to prevent an
unauthorized third party from copying or otherwise obtaining and using the
Company's products or technology. There also can be no guarantees that others
will not independently develop similar technologies or duplicate any technology
developed by the Company. Any such events could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company has entered into agreements with a small number of its
customers requiring the Company to deposit its source code and, on occasion,
manufacturing blueprints, tooling diagrams and production specifications, in
escrow with a third party. These escrow agreements typically provide that these
customers have a non-exclusive, limited right to use such code and other
materials in the event that there is a bankruptcy proceeding by or against the
Company, if the Company ceases to conduct business or if the Company defaults on
its support obligations. The use of such agreements may increase the likelihood
of misappropriation by third parties.
As the number of entrants to the Company's markets increases and the
functionality of the Company's products increases and overlaps with the products
of other companies, the Company may become subject to claims of infringement or
misappropriation of the intellectual property rights of others. In its
distribution agreements, the Company agrees to indemnify its customers for any
expenses or liabilities resulting from claimed infringements of patents,
trademarks or copyrights of third parties. In certain limited instances, the
amount of such indemnities may be greater than the revenues the Company may have
received from the customer. There can be no guarantee that third parties will
not assert infringement or misappropriation claims against the Company in the
future with respect to current
27
<PAGE>
or future products. Any claims or litigation, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing arrangements. Such
royalty or licensing arrangements, if required, may not be available on terms
acceptable to the Company, if at all, which could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, the Company changed its name from Excel Inc. to Excel Switching
Corporation in September 1997. Searches performed on the term Excel have
revealed several registrations and numerous uses of that term, and terms
substantially similar to it, alone and in combination with other terms and
designs. Accordingly, there can be no guarantee that third parties will not
assert trademark infringement claims relating to the name Excel in the future.
COMPLIANCE WITH REGULATIONS AND EVOLVING INDUSTRY STANDARDS. The market for
the Company's products is characterized by the need to meet a significant number
of communications regulations and standards, some of which are evolving as new
technologies are deployed. In the United States, the Company's products must
comply with various regulations including those promulgated by the Federal
Communications Commission and standards established by Underwriters Laboratories
and Bell Communications Research. Furthermore, there are regulations and
standards imposed by various foreign countries where the Company's products are
installed. The failure of the Company's products to comply, or delays in
compliance, with the various existing and evolving industry regulations and
standards could delay the introduction of the Company's products. Moreover, the
enactment by federal, state or foreign governments of new laws or regulations,
changes in the interpretation of existing laws or regulations or a reversal of
the trend toward deregulation in the telecommunications industry could
materially adversely affect the Company's customers, and thereby materially
adversely affect the Company's business, financial condition and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company, in the normal course of business, is subject to the risks
associated with fluctuations in interest rates and changes in foreign currency
exchange rates.
INTEREST AND MARKET RISK. The Company maintains a portfolio of marketable,
primarily fixed income, available-for-sale securities of various issuers, types
and maturities. The Company has not used derivative financial instruments in its
investment portfolio. The Company attempts to limits its exposure to interest
rate and credit risk by placing its investments with high-quality financial
institutions and has established investment guidelines relative to
diversification and maturities designed to maintain safety and liquidation.
Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates decline. Due in part to these factors, the Company's future investment
income may fall short of expectations due to changes in interest rates or the
Company may suffer losses in principal if forced to sell securities which have
seen a decline in market value due to changes in interest rates. The fair market
value of investment securities held at December 31, 1998 was $115.1 million,
including unrealized gains of approximately $107,000.
28
<PAGE>
The table below provides information about the Company's investment
portfolio in debt securities and includes cash flow and related weighted average
interest rates by expected maturity periods. The Company's other investments
bear interest at variable interest rates and will therefore be affected by
changes in market interest rates.
<TABLE>
<CAPTION>
Market Value FY 2000 to Variable
DEC. 31, 1998 FY 1999 FY 2004 MATURITY
------------- ------- ------- --------
<S> <C> <C> <C> <C>
Investments (in thousands) $97,735 $46,761 $25,648 $25,326
Weighted Average Interest Rate 5.1% 5.4% 5.8% 3.9%
</TABLE>
The Company's existing debt obligations are at fixed interest rates and
therefore will not be affected by changes in market interest rates. Under the
Company's line-of-credit arrangement with a bank, borrowings may bear interest
at either the bank's base rate or the Eurodollar rate plus 1.75%. At December
31, 1998, no amounts were outstanding under this line. Any interest which may in
the future become payable on the line-of-credit will be based upon variable
interest rates and will therefore be affected by changes in market interest
rates.
FOREIGN CURRENCY RISK. To date, the Company's exposure to foreign currency
fluctuations has been minimal. All sales transactions are denominated in US
dollars. Letters of credit are utilized when warranted. The Company funds its
international operations from US dollar bank accounts on an as-needed basis and,
accordingly, does not maintain a significant amount of funds in foreign
currencies. Presently, the Company does not hedge foreign currency exposure for
its non-US dollar denominated operating expenses as such amounts have not been
material in relation to the Company's domestic operating expenses.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and Supplementary Data of the Company
are listed under Part IV, Item 14, in this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is hereby incorporated by
reference to the information under the headings "Elections of Directors" and
"Executive Officers" in the Company's definitive proxy statement to be filed by
the Company within 120 days after the close of its fiscal year ended December
31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is hereby incorporated by
reference to the information under the heading "Executive Compensation" and
"Options and Stock Plans" in the Company's definitive proxy statement to be
filed by the Company within 120 days after the close of its fiscal year ended
December 31, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is hereby incorporated by
reference to the information under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the definitive proxy statement to be filed
by the Company within 120 days after the close of its fiscal year ended December
31, 1998.
29
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is hereby incorporated by
reference to the information under the heading "Certain Transactions", if any,
in the Company's definitive proxy statement to be filed by the Company within
120 days after the close of its fiscal year ended December 31, 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) The following documents are filed as part of this report: PAGE
(1) Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Income F-3
Consolidated Statements of Stockholders' Equity and Comprehensive Income F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedule
Report of Independent Public Accountants
Valuation and qualifying accounts Schedule II
</TABLE>
30
<PAGE>
(3) Listing of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. REFERENCE
- ----------- ---------
<S> <C> <C>
3.1 Restated Articles of Organization of the Company. A**
3.2 Restated By-laws of the Company. Filed herewith
4.1 Specimen certificate representing the Common Stock. A**
10.1 Amended and Restated 1997 Stock Option Plan (as approved by the Board of Directors Filed
on March 22, 1999 and to become effective upon approval of the Stockholders at the herewith
1999 Annual Meeting of Stockholders on May 14, 1999).
10.2 Amended and Restated 1997 Non-Employee Director Stock Option Plan (as approved by Filed
the Board of Directors on March. 22, 1999 and to become effective upon approval of herewith
the Stockholders at the 1999 Annual Meeting of Stockholders on May 14, 1999).
10.3 1997 Employee Stock Purchase Plan. A**
10.4 Form of Stock Option Agreement of the Company used under Stock Option Program. A**
10.6 Purchase and Resale Agreement dated as of May 27, 1994 between the Company and A**
Boston Technology, Inc.
10.7 Credit Agreement and Promissory Note dated as of December 21, 1995 between the A**
Company and The First National Bank of Boston, as amended.
21.1 Subsidiaries of the Company Filed herewith
23.2 Consent of Arthur Andersen LLP Filed herewith
27 Financial Data Schedule Filed herewith
</TABLE>
A Incorporated by reference to the Company's registration statement on Form
S-1 (Registration No. 333-35791). The number set forth herein is the number
of the Exhibit in said registration statement.
** In accordance with Rule 12b-32 under the Securities Exchange Act of 1934,
as amended, reference is made to the documents previously filed with the
Securities and Exchange Commission, which documents are hereby incorporated
by reference.
(B) REPORTS ON FORM 8-K
The Company filed a current report on Form 8-K dated December 14, 1998
reflecting a change in fiscal year from the last Saturday in December to
December 31 of each year.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
EXCEL SWITCHING CORPORATION
Dated: March 31, 1999 By: /S/ ROBERT P. MADONNA
---------------------
Robert P. Madonna
President, Chief Executive Officer &
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- -----
<S> <C> <C>
/S/ ROBERT P. MADONNA Director, President, Chief Executive Officer and March 31, 1999
- --------------------- Chairman of the Board (Principal Executive Officer)
Robert P. Madonna
/S/ STEPHEN S. GALLIKER Vice President, Finance and Administration March 31, 1999
- -----------------------
Stephen S. Galliker and Chief Financial Officer (Principal Financial
and Accounting Officer)
/S/ CHRISTOPHER STAVROS Director, Vice President, General Counsel March 31, 1999
- -----------------------
Christopher Stavros and Clerk
/S/ EDWARD L. BRESLOW Director March 31, 1999
- ---------------------
Edward L. Breslow
/S/ JOHN LOUGHLIN Director March 31, 1999
- ---------------------
John Loughlin
</TABLE>
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excel Switching Corporation:
We have audited the accompanying consolidated balance sheets of Excel Switching
Corporation (a Massachusetts corporation) and subsidiaries as of December 27,
1997 and December 31, 1998, and the related consolidated statements of income,
stockholders' equity and comprehensive income and cash flows for each of the
three years in the period then ended. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Excel Switching
Corporation and subsidiaries as of December 27, 1997 and December 31, 1998, and
the results of their operations and their cash flows for each of the three years
in the period then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1999
F-1
<PAGE>
EXCEL SWITCHING CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 27, DECEMBER 31,
1997 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 47,968 $ 62,517
Marketable securities 66,929 55,579
Accounts receivable, net of reserves of $1,350 and $2,000
in 1997 and 1998, respectively 12,843 30,912
Inventories 4,740 5,404
Prepaid taxes 122 -
Deferred tax asset 5,626 7,461
Other current assets 1,298 2,013
------------- -------------
Total current assets 139,526 163,886
PROPERTY AND EQUIPMENT, NET 10,168 18,438
DEFERRED TAX ASSET - 990
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION - 9,702
OTHER ASSETS - 5,766
------------- -------------
$ 149,694 $ 198,782
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations $ 4,213 $ 3,408
Accounts payable 4,177 5,102
Accrued expenses 11,156 16,874
Accrued income taxes 3,606 6,052
Deferred revenue - 1,047
------------- -------------
Total current liabilities 23,152 32,483
DEFERRED INCOME TAXES 519 -
LONG-TERM OBLIGATIONS, LESS CURRENT MATURITIES 108 4,858
COMMITMENTS (Note 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value-
Authorized--10,000,000 shares; no shares issued and outstanding - -
Common stock, $.01 par value-
Authorized--100,000,000 shares
Issued and outstanding--32,592,000 and 34,020,043 shares
at December 27, 1997 and December 31, 1998, respectively 326 340
Additional paid-in capital 88,134 101,864
Deferred compensation (491) (526)
Accumulated other comprehensive income (20) 107
Retained earnings 37,966 59,656
------------- -------------
Total stockholders' equity 125,915 161,441
------------- -------------
$ 149,694 $ 198,782
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
EXCEL SWITCHING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 28, DECEMBER 27, DECEMBER 31,
1996 1997 1998
<S> <C> <C> <C>
REVENUES $ 62,050 $ 88,727 $ 123,258
COST OF REVENUES 24,312 26,631 35,603
-------------- -------------- --------------
Gross profit 37,738 62,096 87,655
-------------- -------------- --------------
OPERATING EXPENSES:
Engineering, research and development 11,121 13,260 22,679
Selling and marketing 6,621 11,486 15,906
General and administrative 6,426 7,949 11,069
Acquired in-process research and development - - 7,459
-------------- -------------- --------------
Total operating expenses 24,168 32,695 57,113
-------------- -------------- --------------
Income from operations 13,570 29,401 30,542
OTHER INCOME (EXPENSE):
Interest income and other expense, net 111 1,764 6,422
Interest expense (495) (372) (295)
-------------- -------------- --------------
Total other income (expense) (384) 1,392 6,127
-------------- -------------- --------------
Income before provision for income taxes 13,186 30,793 36,669
PROVISION FOR INCOME TAXES 5,285 12,177 14,979
-------------- -------------- --------------
NET INCOME $ 7,901 $ 18,616 $ 21,690
-------------- -------------- --------------
-------------- -------------- --------------
BASIC EARNINGS PER SHARE $ .28 $ .65 $ .65
-------------- -------------- --------------
-------------- -------------- --------------
DILUTED EARNINGS PER SHARE $ .24 $ .54 $ .55
-------------- -------------- --------------
-------------- -------------- --------------
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 28,090 28,756 33,216
-------------- -------------- --------------
-------------- -------------- --------------
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 32,697 34,361 39,242
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
EXCEL SWITCHING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(in thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
NUMBER OF $.01 PAR PAID-IN DEFERRED
SHARES VALUE CAPITAL COMPENSATION
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 28,089,600 $ 281 $ 667 $ (272)
Compensation expense associated with stock options - - - 73
Forfeiture of stock options with deferred
compensation - - (20) 7
Net income - - - -
-------------- ------------- -------------- --------------
Comprehensive income - 1996
BALANCE, DECEMBER 28, 1996 28,089,600 281 647 (192)
Compensation expense associated with stock options - - 424 (299)
Exercise of stock options 2,400 - 2 -
Proceeds of initial public offering of common
stock, net of approximately $7,394,000 in
issuance costs 4,500,000 45 87,061 -
Unrealized loss on investments, net of taxes - - - -
Net income - - - -
-------------- ------------- -------------- --------------
Comprehensive income - 1997
BALANCE, DECEMBER 27, 1997 32,592,000 326 88,134 (491)
Compensation expense associated with stock options - - 224 (35)
Exercise of stock options 1,407,805 14 1,519 -
Issuance of common stock under employee stock
purchase plan 20,238 - 361 -
Tax benefit from exercise of stock options - - 11,626 -
Unrealized gain on investments, net of taxes - - - -
Net income - - - -
-------------- ------------- -------------- --------------
Comprehensive income - 1998
BALANCE, DECEMBER 31, 1998 34,020,043 $ 340 $ 101,864 $ (526)
-------------- ------------- -------------- --------------
-------------- ------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE
INCOME EARNINGS TOTAL INCOME
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ - $ 11,449 $ 12,125 $ -
Compensation expense associated with stock options - - 73 -
Forfeiture of stock options with deferred
compensation - - (13) -
Net income - 7,901 7,901 7,901
-------------- -------------- -------------- --------------
Comprehensive income - 1996 $ 7,901
--------------
--------------
BALANCE, DECEMBER 28, 1996 - 19,350 20,086 -
Compensation expense associated with stock options - - 125 -
Exercise of stock options - - 2 -
Proceeds of initial public offering of common
stock, net of approximately $7,394,000 in
issuance costs - - 87,106 -
Unrealized loss on investments, net of taxes (20) - (20) (20)
Net income - 18,616 18,616 18,616
-------------- -------------- -------------- --------------
Comprehensive income - 1997 $ 18,596
--------------
--------------
BALANCE, DECEMBER 27, 1997 (20) 37,966 125,915 -
Compensation expense associated with stock options - - 189 -
Exercise of stock options - - 1,533 -
Issuance of common stock under employee stock
purchase plan - - 361 -
Tax benefit from exercise of stock options - - 11,626 -
Unrealized gain on investments, net of taxes 127 - 127 127
Net income - 21,690 21,690 21,690
-------------- -------------- -------------- --------------
Comprehensive income - 1998 $ 21,817
--------------
--------------
BALANCE, DECEMBER 31, 1998 $ 107 $ 59,656 $ 161,441
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
EXCEL SWITCHING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 27,
DECEMBER 28, 1996 1997 DECEMBER 31, 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,901 $ 18,616 $ 21,690
Adjustments to reconcile net income to net cash provided by
operating activities-
Acquired in-process research and development - - 7,459
Depreciation and amortization 1,166 2,259 3,582
Unrealized gain (loss) on investments - (20) 127
Deferred income taxes (3,417) (1,346) (3,788)
Deferred revenue - - 996
Compensation expense associated with stock options 60 125 189
Changes in assets and liabilities, net of acquisitions-
Accounts receivable (2,020) (2,514) (17,737)
Inventories (409) 2,618 (543)
Prepaid taxes 401 (122) 122
Other current assets (132) (1,006) (713)
Accounts payable (2,473) 2,281 182
Accrued expenses 3,877 5,349 4,361
Accrued income taxes 2,350 959 13,792
------------- ------------- -------------
Net cash provided by operating activities 7,304 27,199 29,719
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (4,053) (3,464) (11,010)
Purchases of marketable securities, net - (66,929) 11,350
Change in other assets - - (754)
Issuance of note receivable - - (5,000)
Cash paid for acquisitions, net of cash acquired - - (7,437)
------------- ------------- --------------
Net cash used in investing activities (4,053) (70,393) (12,851)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations 649 460 -
Payments on long-term obligations (601) (475) (4,213)
Proceeds from the sale of common stock - 87,106 -
Proceeds from the exercise of stock options, excluding tax
benefit - 2 1,533
Issuance of common stock under employee stock purchase plan - - 361
------------- ------------- -------------
Net cash provided by (used in) financing
activities 48 87,093 (2,319)
------------- ------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,299 43,899 14,549
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 770 4,069 47,968
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,069 $ 47,968 $ 62,517
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 490 $ 377 $ 295
------------- ------------- -------------
------------- ------------- -------------
Taxes $ 5,951 $ 13,271 $ 4,131
------------- ------------- -------------
------------- ------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of property and equipment under capital lease
obligations $ 489 $ - $ -
------------- ------------- -------------
------------- ------------- -------------
During 1998, the Company acquired Quantum Telecom Solutions,
Inc. and XNT Systems, Inc., as described in Note 2. These
acquisitions are summarized as follows:
Fair value of assets acquired, excluding cash $ - $ - $ 18,470
Cash paid, net of cash acquired - - (7,437)
------------- ------------- -------------
Liabilities assumed and promissory notes issued $ - $ - $ 11,033
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Excel Switching Corporation (the Company) is a leading provider of open
switching platforms for telecommunications networks worldwide. The
Company develops, manufactures, markets and supports a family of open,
programmable, carrier-class switches that address the complex enhanced
services and wireless and wireline infrastructure needs of network
providers. The Company sells to a variety of customers in the worldwide
telecommunications market, including applications developers, original
equipment manufacturers (OEMs), system integrators and network service
providers.
The accompanying consolidated financial statements reflect the
application of certain accounting policies as described below and
elsewhere in these notes to consolidated financial statements.
(a) PRINCIPLES OF CONSOLIDATION
These consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated.
(b) CHANGE IN FISCAL YEAR-END
During 1998, the Company elected to change its fiscal year-end
from the last Saturday in December to December 31 to better
synchronize its fiscal periods with the majority of its customers
and suppliers. In the accompanying consolidated financial
statements, 1996 refers to the year ended December 28, 1996; 1997
refers to the year ended December 27, 1997; and 1998 refers to the
year ended December 31, 1998.
(c) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
The market for telecommunications equipment in which the Company
operates can be characterized as rapidly changing due to several
factors including technological advancements, the introduction of
new products and services by the Company and its competitors, and
the increasing demands placed on equipment in worldwide
telecommunications networks. Significant assets and liabilities
with reported amounts based on estimates include accounts
receivable, note receivable, inventory and accrued expenses for
post sale support costs, warranty costs and sales returns and
allowances. While the Company believes its estimates are adequate,
actual results could differ from those estimates.
F-6
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(d) REVENUE RECOGNITION
Revenue is generally recognized when all significant contractual
obligations have been satisfied and collection of the resulting
receivable is reasonably assured. Revenue from product sales is
recognized at time of delivery and acceptance, and after
consideration of all the terms and conditions of the customer
contract. Revenue from providing services and post-sale support
are recognized at time of performance. The Company provides for
anticipated product returns and warranty costs at the time of
revenue recognition.
(e) SOURCES OF SUPPLY AND THIRD-PARTY MANUFACTURING RELATIONSHIPS
Certain components used in the manufacture of the Company's
products are currently available only from single- or sole-source
suppliers. In addition, the Company relies on a limited number of
third parties to manufacture certain other components and
subassemblies. Shortages resulting from a change in arrangements
with these suppliers and manufacturers could cause delays in
manufacturing and product shipments and possible deferral or
cancellation of customer orders.
(f) RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS
Research and development costs have been charged to operations as
incurred. The Company believes its current process for developing
software is essentially completed concurrently with the
establishment of technological feasibility. Accordingly, no
software development costs have been capitalized to date.
(g) CONCENTRATIONS OF CREDIT RISK
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash, cash
equivalents, marketable securities, notes receivable and trade
accounts receivable. The Company's investments are in financial
instruments of high quality. Concentration of credit risk with
respect to accounts receivable is limited to customers to whom the
Company makes significant sales. Two significant customers
accounted for approximately 18% and 15%, respectively, of accounts
receivable at December 27, 1997. Another significant customer
accounted for approximately 12% of accounts receivable at December
31, 1998 (see Note 12). To control credit risk, the Company
performs regular credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. At
December 31, 1998, the Company has a $5.0 million note receivable
from a customer, secured by a first security interest in all the
assets of the customer (see Note 6).
F-7
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(h) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents,
marketable securities, accounts receivable and accounts payable
approximate fair value due to the short-term nature of these
instruments. The Company has determined that the carrying amount
of its note receivable from a customer approximates fair value
based on the interest rate on the note and the value of the
collateral that secures the note. Based on the borrowing rates
currently available to the Company, the carrying amounts of debt
issued during 1998 in connection with acquisitions approximate
fair value.
(i) EARNINGS PER SHARE
Basic earnings per share was determined by dividing net income by
the weighted average common shares outstanding during the period.
Diluted earnings per share was determined by dividing net income
by diluted weighted average shares outstanding. Diluted weighted
shares outstanding reflects the dilutive effect, if any, of common
stock options based on the treasury stock method. The calculations
of diluted weighted average shares outstanding exclude 459,800 and
141,600 common stock options in 1997 and 1998, respectively, as
their effect would be anti-dilutive. There were no anti-dilutive
common stock options in 1996.
The calculations of basic and diluted weighted average shares
outstanding are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Basic weighted average common shares outstanding 28,090 28,756 33,216
Weighted average common equivalent shares 4,607 5,605 6,026
------------ ------------ ------------
Diluted weighted average shares outstanding 32,697 34,361 39,242
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
(j) COMPREHENSIVE INCOME
Comprehensive income represents the change in equity of a business
enterprise resulting from transactions and other events and
circumstances from nonowner sources. For 1997 and 1998, the only
difference between comprehensive income and net income relates to
unrealized gains and losses on marketable securities, net of the
related tax effect.
F-8
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(2) ACQUISITIONS
On September 30, 1998, the Company acquired all of the outstanding
capital stock of Quantum Telecom Solutions, Inc. (Quantum), a New Jersey
based provider of switch-configuration software. The total consideration
of $8.9 million consisted of approximately $5.4 million of cash plus the
issuance of promissory notes totaling $3.5 million. On September 30,
1998, the Company also acquired all of the outstanding capital stock of
XNT Systems, Inc.(XNT), a New Hampshire based supplier of intelligent
switch control and comprehensive call-processing and control software.
The total consideration of $8.8 million consisted of cash payments of
approximately $2.3 million plus the issuance of promissory notes totaling
$4.7 million and the assumption of certain liabilities of XNT totaling
approximately $1.8 million.
These acquisitions were accounted for under the purchase method of
accounting, and accordingly, the results of operations from the date of
acquisition are included in the Company's consolidated statements of
income. The fair market value of assets acquired and liabilities assumed
was based on an independent appraisal. The portion of the purchase price
allocated to in-process research and development was based on a
risk-adjusted cash flow appraisal method and represents projects that had
not yet reached technological feasibility and had no alternative future
use. This portion of the purchase price was expensed upon consummation of
the acquisitions.
Based on the independent appraisal, the Company has allocated a portion
of the purchase price to certain intangible assets. Intangible assets
consist of the following at December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
<S> <C> <C>
Developed technology 4 years $ 2,190
Assembled workforce 5 years 350
Goodwill 10 years 7,519
---------------
10,059
Less--accumulated amortization 357
---------------
$ 9,702
---------------
---------------
</TABLE>
F-9
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
The Company periodically reviews the realizability of its intangible
assets and has not recorded any impairment of these assets to date. The
following unaudited pro forma summary information presents the combined
results of operations of the Company, Quantum and XNT as if the
acquisitions had occurred at the beginning of 1997. This unaudited pro
forma financial information is presented for informational purposes only
and may not be indicative of the results of operations as they would have
been if the Company, Quantum and XNT had been a single entity, nor is it
necessarily indicative of the results of operations that may be expected
in the future. Anticipated efficiencies from the consolidation of the
Company, Quantum and XNT and the effects of the acquired in process
research and development have been excluded from the amounts presented
below (in thousands, except per share data).
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Revenues $ 93,474 $ 126,322
Net income 19,494 26,663
Earnings per share
-Basic $ 0.68 $ 0.80
-Diluted 0.57 0.68
</TABLE>
(3) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents are highly liquid investments with original maturities
of three months or less. Marketable securities are highly liquid
investment grade securities with original maturities of greater than
three months. Investments purchased to be held for indefinite periods of
time and not intended at the time of purchase to be held-to-maturity are
classified as available-for-sale and reported at fair market value. At
December 27, 1997 and December 31, 1998, the Company has classified all
investments as available-for-sale. The unrealized gain on
available-for-sale securities at December 31, 1998 was approximately
$107,000, which has been recorded as other comprehensive income in
stockholders' equity. During 1996, 1997 and 1998, the Company realized
net gains of $0, 55,000 and $3,000, respectively, calculated using the
specific identification method. The Company's investments include time
deposits, commercial paper, bankers' acceptances and corporate, state
municipality and U.S. government debt and equity securities.
F-10
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Cash, cash equivalents and marketable securities consist of the following
(in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Cash and cash equivalents-
Cash $ 1,655 $ 2,999
Time deposits 1,459 -
Money markets 9,791 12,362
Commercial paper 32,071 38,156
Corporate debt securities - 4,000
Corporate equity securities - 5,000
Bankers' acceptance 2,992 -
------------- -------------
Total cash and cash equivalents $ 47,968 $ 62,517
------------- -------------
------------- -------------
</TABLE>
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Marketable securities-
Time deposits $ 2,004 $ -
U.S. government and agency debt securities 31,090 505
Municipality debt securities 2,000 27,134
Commercial paper 4,900 4,606
Corporate debt securities 26,935 23,334
------------- -------------
Total marketable securities $ 66,929 $ 55,579
------------- -------------
------------- -------------
</TABLE>
The following table summarizes the remaining maturity of the Company's
investments in debt securities as of December 31, 1998 (in thousands):
One year or less $ 46,761
One to five years 25,648
Variable maturity 25,326
-------------
$ 97,735
(4) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or
market. Work-in-process and finished goods consist of materials, labor
and manufacturing overhead. Inventories at December 27, 1997 and December
31, 1998 consist of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Raw materials $ 396 $ 2,566
Work-in-process 3,713 2,030
Finished goods 631 808
------------ ------------
$ 4,740 $ 5,404
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(5) PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization using both
straight-line and accelerated methods by charges to operations in amounts
that allocate the cost of the assets over their estimated useful lives.
Property and equipment consists of the following at December 27, 1997 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ESTIMATED USEFUL
1997 1998 LIVES
<S> <C> <C> <C>
Test equipment $ 4,015 $ 7,540 2-5 years
Buildings 3,991 7,763 40 years
Office equipment, furniture and fixtures 3,460 7,064 2-7 years
Land 576 1,250 N/A
Building improvements 523 528 7-40 years
Assets under capital lease 489 489 3 years
Construction in progress (Note 13) 1,129 1,037 N/A
--------------- ---------------
14,183 25,671
Less--Accumulated depreciation and amortization 4,015 7,233
--------------- ---------------
$ 10,168 $ 18,438
--------------- ---------------
--------------- ---------------
</TABLE>
(6) OTHER ASSETS
In October 1998, the Company entered into a promissory note receivable
with a customer in the amount of $5.0 million. The note bears interest at
the prime rate (7.75% at December 31, 1998) plus 3%. Interest is payable
quarterly in arrears. Principal is payable in twelve equal quarterly
installments beginning October 2000 through July 2003. Under certain
circumstances, as defined, the principal amount may become due upon
demand. This note is secured by a first security interest in all the
assets of the customer. Revenues derived from this customer in 1998
were not material.
F-12
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(7) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at December 27, 1997 and
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Promissory notes payable--XNT $ - $ 4,702
Promissory notes payable--Quantum - 3,456
Mortgage and Security Agreement 2,386 -
Capital lease obligation--building 926 -
Real Estate Promissory Note 460 -
Promissory note payable to a bank 272 -
Other 277 108
------------ ------------
4,321 8,266
Less--Current maturities 4,213 3,408
------------ ------------
$ 108 $ 4,858
------------ ------------
------------ ------------
</TABLE>
In connection with the 1998 acquisition of XNT (see Note 2), the Company
issued promissory notes in the amount of $4.7 million. Interest at a rate
of 10% per annum is payable annually in arrears. The notes mature as
follows: $1.5 million in September 1999 and $1.6 million each in
September 2000 and 2001. Upon the occurrence of certain events, as
defined, the maturity of principal amounts outstanding under the notes
may be accelerated or decelerated.
In connection with the 1998 acquisition of Quantum (see Note 2), the
Company issued promissory notes in the amount of $3.5 million. Interest
at a rate of 10% per annum is payable quarterly in arrears. The notes
mature as follows: $1.8 million in September 1999, $900,000 in March 2000
and $756,000 in September 2000. Upon the occurrence of certain events, as
defined, the maturity of principal amounts outstanding under the notes
may be accelerated or decelerated.
In 1995, the Company entered into a building capital lease obligation
that included a purchase option exercisable beginning in August 1998 for
$875,000. During 1998, the Company exercised this option.
In January 1998, the Company repaid all outstanding obligations under the
Mortgage and Security Agreement, a promissory note payable and the Real
Estate Promissory Note. Accordingly, all outstanding balances as of
December 27, 1997 have been reflected as current liabilities in the
accompanying December 27, 1997 consolidated balance sheet.
F-13
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Future maturities of the remaining long-term obligations are as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 3,408
2000 3,257
2001 1,601
------------
$ 8,266
------------
------------
</TABLE>
(8) LINE-OF-CREDIT ARRANGEMENT
The Company has an unsecured line-of-credit arrangement with a bank to
provide up to $15.0 million in financing. Borrowings under this line bear
interest at either the bank's base rate (7.75% at December 31, 1998) or
the Eurodollar rate (5.07% at December 31, 1998) plus 1.75%. The Company
is required to maintain certain restrictive covenants under this
agreement. This agreement expires June 30, 1999. There have been no
borrowings outstanding under this agreement in 1997 or 1998.
(9) INCOME TAXES
Deferred tax assets or liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities,
as measured by the enacted tax rates expected to be in effect when the
differences reverse. The provision for income tax is based on pretax
financial income.
The components of the provision for income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Current-
Federal $ 6,731 $ 11,249 $ 15,397
State 1,971 2,274 3,370
------------ ------------ ------------
8,702 13,523 18,767
------------ ------------ ------------
Deferred (prepaid)-
Federal (2,904) (1,036) (2,294)
State (513) (310) (1,494)
------------ ------------ ------------
(3,417) (1,346) (3,788)
------------ ------------ ------------
Total provision $ 5,285 $ 12,177 $ 14,979
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-14
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Income tax provision at federal statutory rate 34 % 35 % 35 %
Increase (decrease) in tax resulting from-
State tax provision, net of federal benefit 6 5 3
Research and development tax credits - (2) (3)
Nondeductible acquired in-process research and
development - - 4
Other - 2 2
-------- ------- -------
Effective tax rate 40 % 40 % 41 %
-------- ------- -------
-------- ------- -------
</TABLE>
The approximate income tax effect of each type of temporary difference
composing the net deferred tax asset (current and long-term) at December
27, 1997 and December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Difference in inventory accounting method $ (778) $ (512)
Nondeductible reserves 2,185 2,544
Nondeductible accruals 3,736 4,023
Depreciation and amortization - 1,392
Credit carryforwards - 869
Other temporary differences (36) 135
------------ ------------
Net deferred tax asset $ 5,107 $ 8,451
------------ ------------
------------ ------------
</TABLE>
(10) STOCKHOLDERS' EQUITY
(a) COMMON STOCK
The Company has authorized 100,000,000 shares of common stock, par
value of $.01 per share. At December 31, 1998, there were
13,076,907 shares of common stock reserved for future issuance
under the Company's stock plans.
In November 1997, the Company completed an initial public offering
of 4,500,000 shares of common stock at a per share price of $21.
The Company received proceeds of approximately $87.1 million, net
of underwriting discounts and commissions and offering expenses of
approximately $7.4 million.
F-15
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(b) PREFERRED STOCK
The Company has 10,000,000 shares of $.01 par value preferred
stock authorized. The Board of Directors has the authority to
issue such shares in one or more series and to fix the relative
rights and preferences without further vote or action by the
stockholders. Currently, the Board of Directors has no plans to
issue any shares of preferred stock.
(11) STOCK OPTION PLANS
Stock options are generally exercisable within 10 years of the original
date of grant and vest over a period of up to five years from the date of
grant. In some instances, options have been granted at exercise prices
below the fair market value on the date of grant. The difference, if any,
between the fair market value of shares of the Company's common stock and
the exercise price of the option is recognized as compensation expense
over the vesting term. During 1996, 1997 and 1998, the Company recognized
net compensation expense of approximately $60,000, $125,000 and $189,000,
respectively.
The Company has the following stock option and stock purchase plans:
(a) STOCK OPTION PROGRAM
The Company has granted nonqualified stock options to purchase
shares of its common stock at exercise prices generally determined
to be at fair market value by the Company's Board of Directors on
the date of grant. In November 1997, this program was terminated.
There are 9,472,545 options outstanding under this program as of
December 31, 1998.
(b) 1997 STOCK OPTION PLAN
Under the terms of the 1997 Stock Option Plan (1997 Plan),
incentive and nonqualified stock options may be granted to
employees and consultants to purchase an aggregate of 3,000,000
shares of common stock. During 1998, the Company granted 1,567,200
options under the 1997 Plan, of which 1,557,800 options were
outstanding at December 31, 1998.
(c) DIRECTOR OPTION PLAN
The Company's Non-Employee Director Stock Option Plan (Director
Option Plan) provides for the grant of options to purchase an
aggregate 225,000 shares of common stock to nonemployee directors
of the Company. Each such director will be granted an option to
purchase 30,000 shares upon election to the Board of Directors. In
addition, each such director will be automatically granted an
option to purchase 15,000 shares in each of the two years
following the date such person becomes a director. These options
will vest 1/3 on grant date, 1/3 one year from grant date and 1/3
two years from grant date. During 1997 and 1998, the Company
granted
F-16
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
a total of 120,000 options under the Director Option Plan, of
which 100,000 options were outstanding at December 31, 1998.
(d) STOCK OPTION ACTIVITY
Stock option activity under all option plans for the three years
in the period ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF SHARES EXERCISE PRICE
<S> <C> <C>
Outstanding, December 31, 1995 7,890,840 $ 0.084
Granted 1,997,500 4.250
Forfeited (30,000) 0.333
-------------- -------------
Outstanding, December 28, 1996 9,858,340 0.927
Granted 1,574,100 9.471
Exercised (2,400) 1.000
Forfeited (124,200) 4.035
-------------- -------------
Outstanding, December 27, 1997 11,305,840 2.083
Granted 1,597,200 19.821
Exercised (1,407,805) 1.089
Forfeited (364,890) 8.409
-------------- -------------
Outstanding, December 31, 1998 11,130,345 $ 4.546
-------------- -------------
-------------- -------------
</TABLE>
F-17
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
REMAINING NUMBER AVERAGE
RANGE OF EXERCISE PRICES NUMBER OUTSTANDING CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C>
$ 0.002 - $0.002 4,814,005 5.2 4,814,005 $ 0.002
0.167 - 0.167 562,770 5.9 471,570 0.167
0.333 - 0.333 1,201,250 6.7 795,050 0.333
1.000 - 2.340 314,000 7.5 114,800 2.333
4.500 - 6.000 1,927,933 7.8 400,373 5.003
7.000 - 10.500 372,927 8.3 61,647 7.351
11.500 - 17.250 314,760 8.8 55,980 14.192
18.000 - 27.000 1,598,000 9.7 54,440 20.986
38.000 - 38.000 24,700 10.0 - -
-------------- ------------- -----------
11,130,345 6,767,865 $ 0.741
-------------- ------------- -----------
-------------- ------------- -----------
Exercisable, December 27, 1997 7,179,990 $ 0.307
------------- -----------
------------- -----------
Exercisable, December 28, 1996 6,356,940 $ 0.046
------------- -----------
------------- -----------
</TABLE>
(e) FAIR VALUE OF STOCK OPTIONS
Statement of Financial Accounting Standards (SFAS) No. 123,
ACCOUNTING FOR STOCK-BASED Compensation, requires the measurement
of the fair value of stock options to be included in the statement
of income or disclosed in the notes to financial statements. The
Company has determined that it will continue to account for
stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and elect the disclosure-only alternative under SFAS No. 123.
F-18
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates, as
prescribed in SFAS No. 123, the Company's net income would have
been as follows:
<TABLE>
<CAPTION>
1996 1997 1998
Net income (in thousands)-
<S> <C> <C> <C>
As reported $ 7,901 $ 18,616 $ 21,690
Pro forma 7,456 16,712 19,157
Diluted earnings per share-
As reported $ .24 $ .54 $ .55
Pro forma .23 .49 .50
</TABLE>
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions used for grants during the applicable
period:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Dividend yield - - -
Volatility 56.6% 56.6% 70.5%
Risk-free interest rate 5.9%-6.8% 5.0%-6.6% 4.5%-5.6%
Expected option term 7.5 years 5.0 years 5.0 years
Weighted average fair value per
share of options granted $ 5.64 $ 5.28 $12.55
</TABLE>
(f) 1997 EMPLOYEE STOCK PURCHASE PLAN
The 1997 Employee Stock Purchase Plan provides for the sale of up
to 400,000 shares of common stock to participating employees
semiannually. The purchase price is equal to 85% of the fair
market value at either the beginning or the end of the semiannual
period, as defined. During 1998, 20,238 shares of common stock
were issued under this plan.
F-19
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
(12) SEGMENT AND ENTERPRISE-WIDE REPORTING
The Company currently operates in one operating segment as a provider of
programmable switches. This segment derives its revenues from the sale
and support of a family of open, programmable, carrier-class switches
that address the complex enhanced services and wireless and wireline
infrastructure needs of network providers.
The Company derives substantially all of its revenue from the sale and
support of one group of similar products and services. Substantially all
of the Company's assets are located within the United States. During
1996, 1997 and 1998, the Company derived its revenues from the following
geographic regions (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
United States $ 81,524 $ 81,524 $ 109,493
Other 1,842 7,203 13,765
------------- ------------- -------------
$ 62,050 $ 88,727 $ 123,258
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
During 1996, 1997 and 1998, the Company derived a portion of its revenues
from sales to single customers that exceeded 10 percent of total
revenues, as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Significant customer A * 10% 20%
Significant customer B 37% 26% *
</TABLE>
*Revenue derived from this customer was less than 10% of the Company's
total revenue during the period
(13) COMMITMENTS
The Company leases certain equipment and office facilities under
noncancelable operating leases, which expire at various dates through
November 2001. Future minimum lease payments required under these leases
at December 31, 1998 are approximately as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
<S> <C>
1999 $ 1,098
2000 477
2001 367
------------
$ 1,942
------------
------------
</TABLE>
F-20
<PAGE>
EXCEL SWITCHING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Continued)
Total rent expense under these agreements for 1996, 1997 and 1998 was
approximately $1.1 million, $1.2 million and $1.1 million,
respectively.
During 1998, the Company began construction of a $7.0 million building
addition. As of December 31, 1998, the Company had incurred approximately
$1.0 million of land acquisition and construction costs related to this
building addition.
(14) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) retirement savings plan covering all
employees. Under this plan, participants may elect to defer a portion of
their compensation, subject to certain limitations. In addition, the
Company, at the discretion of the Board of Directors, may make profit
sharing contributions into the plan. For fiscal years 1996, 1997 and
1998, the Company made contributions of approximately $534,000, $898,000
and $1,180,000, respectively.
(15) ACCRUED EXPENSES
Accrued expenses at December 27, 1997 and December 31, 1998 consist of
the following (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accrued sales returns and allowances $ 4,397 $ 4,708
Accrued payroll and benefits 2,297 6,889
Accrued post-sales support and warranty 1,690 2,470
Accrued marketing 1,166 703
Accrued professional fees 737 923
Accrued other 869 1,181
------------ ------------
$ 11,156 $ 16,874
------------ ------------
------------ ------------
</TABLE>
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Excel Switching Corporation:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Excel Switching Corporation and
subsidiaries included in this Form 10-K and have issued our report thereon dated
January 26, 1999. Our audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The schedule
listed in Item 14(a)(2) is the responsibility of the Company's management and is
presented for the purpose of complying with Securities and Exchange Commission's
rules and is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic consolidated 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 consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 26, 1999
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance
Beginning of Charged to Cost Deductions Balance
Period Or Expense (Write-offs) Recoveries End of Period
------ ---------- ------------ ---------- --------------
Allowance for
Doubtful Accounts
- -----------------------------
<S> <C> <C> <C> <C> <C>
1996 653,000 497,000 (171,000) 0 979,000
1997 979,000 555,000 (184,000) 0 1,350,000
1998 1,350,000 650,000 (0) 0 2,000,000
Accrued Sales Returns and
Allowances
- -----------------------------
1996 578,000 3,094,000 (2,429,000) 0 1,243,000
1997 1,243,000 5,053,000 (2,046,000) 147,000 4,397,000
1998 4,397,000 3,623,000 (3,312,000) 0 4,708,000
</TABLE>
S-1
<PAGE>
Exhibit 3.2
EXCEL SWITCHING CORPORATION
****************
AMENDED AND RESTATED
BY-LAWS
****************
ARTICLE I
Stockholders
1. Annual Meeting. The annual meeting of stockholders shall be held on the
second Friday in May of each year (or if that be a legal holiday in the place
where the meeting is to be held, on the next succeeding full business day) at
10:00 A.M., or such other time, place and date as may be fixed by the Directors
and stated in the notice of the meeting. The purposes for which the annual
meeting is to be held, in addition to those prescribed by law, by the Articles
of Organization of the corporation (the "Articles of Organization") or by these
By-laws, may be specified by the Directors or the President. In the event an
annual meeting has not been held on the date fixed in these By-laws, a special
meeting in lieu of the annual meeting may be held with all the force and effect
of an annual meeting.
2. Special Meetings. Special meetings of stockholders may be called by the
President or by the Directors. Upon written application of one or more
stockholders who hold at least 10% in interest of the capital stock entitled to
vote at a meeting, a special meeting shall be called by the Clerk, or in the
case of the death, absence, incapacity or refusal of the Clerk, by another
officer. Notwithstanding the immediately preceding sentence, if the corporation
has a class of voting stock registered under the Securities Exchange Act of
1934, as amended, upon written application of one or more stockholders who hold
at least 40% in interest of the capital stock entitled to vote at a meeting, a
special meeting shall be called by the Clerk, or in case of the death, absence,
incapacity or refusal of the Clerk, by any other officer.
3. Place of Meetings. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
4. Notice of Meetings. A written notice of the place, date and hour of all
meetings of stockholders stating the purpose of the meeting shall be given by
the Clerk or an Assistant Clerk or by the person calling the meeting at least
seven days before the meeting or such longer period as is required by law to
each stockholder entitled to vote thereat and to each stockholder who under the
law, under the Articles of Organization or under these By-laws, is entitled to
such notice, by leaving such notice with such stockholder or at his or her
residence or usual place of business, or by mailing it, postage prepaid, and
addressed to such stockholder at his or her address as it appears in the records
of the corporation. Whenever notice of a meeting is required to be given a
stockholder under any provision of the Massachusetts Business Corporation Law or
of the Articles of Organization or these By-laws, a written waiver thereof,
executed before or after the meeting by such stockholder or his or her attorney
thereunto authorized and filed with the records of the meeting, shall be deemed
equivalent to such notice.
<PAGE>
-2-
5. Notice of Stockholder Business. The following provisions of this
Section 5 shall apply to the conduct of business at any meeting of the
stockholders. (As used in this Section 5, the term annual meeting shall include
a special meeting in lieu of annual meeting.)
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in paragraph (b) of this
Section 5, who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in paragraph (b) of this Section 5.
(b) For business to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this
By-law, the stockholder must have given timely notice thereof in writing to the
Clerk of the corporation. To be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the corporation
(i) in the case of any annual meeting, not less than ninety (90) days nor more
than 120 days prior to the date specified in Section 1 above for such annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that if a special meeting in lieu of
annual meeting of stockholders is to be held on a date prior to the date
specified in Section 1 above, and if less than seventy (70) days' notice or
prior public disclosure of the date of such special meeting in lieu of annual
meeting is given or made, notice by the stockholder to be timely must be so
delivered or received not later than the close of business on the tenth day
following the earlier of the date on which notice of the date of such special
meeting in lieu of annual meeting was mailed or the day on which public
disclosure was made of the date of such special meeting in lieu of annual
meeting; and (ii) in the case of a special meeting (other than a special meeting
in lieu of an annual meeting), not later than the tenth day following the
earlier of the day on which notice of the date of the scheduled meeting was
mailed or the day on which public disclosure was made of the date of the
scheduled meeting. A stockholder's notice to the Clerk shall set forth as to
each matter the stockholder proposes to bring before the meeting, (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address,
as they appear on the corporation's books, of the stockholder proposing such
business, the name and address of the beneficial owner, if any, on whose behalf
the proposal is made, and the name and address of any other stockholders or
beneficial owners known by such stockholder to be supporting such proposal,
(iii) the class and number of shares of the corporation which are owned
beneficially and of record by the stockholder proposing such business, by the
beneficial owner, if any, on whose behalf the proposal is made, and by any other
stockholders or beneficial owners known by such stockholder to be supporting
such proposal and (iv) any material interest in such proposed business of the
stockholder proposing such business, any material interest in such proposed
business of the beneficial owner, if any, on whose behalf the proposal is made,
and any material interest of any other stockholders or beneficial owners known
by such stockholder to be supporting such proposal in such proposed business, to
the extent known by such stockholder.
(c) Notwithstanding anything in these By-laws to the contrary, no
business shall be conducted at a meeting except in accordance with the
procedures set forth in these By-laws. The person presiding at the meeting
shall, if the facts warrant, determine that business was not properly brought
before the meeting and in accordance with the procedures prescribed by these
By-laws, and if he should so determine, he shall so declare at the meeting and
any such business not properly brought before the meeting shall not be
transacted. Notwithstanding the foregoing provision of this By-law, a
stockholder shall also comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended
<PAGE>
-3-
(or any successor provision), and the rules and regulations thereunder with
respect to the matters set forth in this By-law.
(d) This provision shall not prevent the consideration and approval
or disapproval at the meeting of reports of officers, Directors and committees
of the Board of Directors, but, in connection with such reports, no new business
shall be acted upon at such meeting unless properly brought before the meeting
as herein provided.
6. Quorum. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that, if two or more classes of stock are outstanding and entitled to
vote as separate classes, then in the case of each such class, a quorum shall
consist of the holders of a majority in interest of the stock of that class
issued, outstanding and entitled to vote.
7. Voting and Proxies. Each stockholder shall have one vote for each share
of stock entitled to vote owned by him or her and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization in
the case that the corporation has two or more classes or series of stock.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy. Proxies shall be filed with the clerk of the meeting, or of
any adjournment thereof, before being voted. No proxy dated more than six months
before the date named therein shall be valid and no proxy shall be valid after
the final adjournment of such meeting. Notwithstanding the provisions of the
preceding sentence, a proxy coupled with an interest sufficient in law to
support an irrevocable power, including, without limitation, an interest in
shares or in the corporation generally, may be made irrevocable if it so
provides, need not specify the meeting to which it relates, and shall be valid
and enforceable until the interest terminates, or for such shorter period as may
be specified in the proxy. Except as otherwise limited therein, proxies shall
entitle the persons named therein to vote at any adjournment of such meeting but
shall not be valid after final adjournment of such meeting. A proxy with respect
to stock held in the name of two or more persons shall be valid if executed by
any one of them unless at or prior to exercise of the proxy the corporation
receives a specific written notice to the contrary from any one of them. A proxy
purporting to be executed by or on behalf of a stockholder shall be deemed valid
unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.
8. Action at Meeting. When a quorum is present, the holders of a majority
of the stock present or represented and voting on a matter (or if there are two
or more classes of stock entitled to vote as separate classes, then in the case
of each such class, the holders of a majority of the stock of that class present
or represented and voting on a matter), except where a larger or different vote
is required by law, the Articles of Organization or these By-laws, shall decide
any matter to be voted on by the stockholders. Broker non-votes will be counted
for purposes of determining whether a quorum is present on any matter, but will
not be counted as having been voted on any matter for which voting authority is
withheld. Any election of Directors or officers by the stockholders shall be
determined by a plurality of the votes cast by stockholders entitled to vote at
the election. Any such elections shall be by ballot if so requested by any
stockholder entitled to vote thereon. The corporation shall not directly or
indirectly vote any share of its own stock.
<PAGE>
-4-
ARTICLE II
Directors
1. Powers. The business of the corporation shall be managed by a Board of
Directors who may exercise all the powers of the corporation except as otherwise
provided by law, by the Articles of Organization or by these By-laws. In the
event of vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
2. Number, Election and Qualification. A Board of Directors (the "Board")
shall be elected by the stockholders at the annual meeting. The number of
Directors shall be fixed by the stockholders (except as that number may be
enlarged by the Board of Directors acting pursuant to Section 4 of this
Article), but shall be not less than three, except that whenever there shall be
only two stockholders the number of directors shall be not less than two and
whenever there shall be only one stockholder or prior to the issuance of any
stock, there shall be at least one director, and shall be not more than nine.
3. Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from the enlargement of the Board, may be filled
by the stockholders or, in the absence of stockholder action, by the Directors.
Each such successor shall hold office for the unexpired term of his or her
predecessor and until his or her successor is chosen and qualified or until his
or her earlier death, resignation or removal.
4. Enlargement of the Board. The Board of Directors may be enlarged by the
stockholders at any meeting or by vote of a majority of the Directors then in
office.
5. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, Directors shall hold office until the next
annual meeting of stockholders and until their successors are chosen and
qualified. Any Director may resign by delivering his or her written resignation
to the corporation at its principal office or to the President, Clerk or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
6. Removal. A Director may be removed from office (a) with or without
cause by the vote of the holders of a majority of the shares entitled to vote in
the election of Directors, provided that the Directors of a class elected by a
particular class of stockholders may be removed only by the vote of the holders
of a majority of the shares of the particular class of stockholders entitled to
vote for the election of such Directors; or (b) for cause by vote of a majority
of the Directors then in office. A Director may be removed for cause only after
a reasonable notice and opportunity to be heard before the body proposing to
remove him or her.
7. Meetings. Regular meetings of the Directors may be held without call or
notice at such places and at such times as the Directors may from time to time
determine, provided that any Director who is absent when such determination is
made shall be given notice of the determination. A regular meeting of the
Directors may be held without a call or notice at the same place as the annual
meeting of stockholders. Special meetings of the Directors may be held at any
time and place designated in a call by the President or two or more Directors.
8. Telephone Conference Meetings. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by
<PAGE>
-5-
means of which all persons participating in the meeting can hear each other at
the same time and participation by such means shall constitute presence in
person at a meeting.
9. Notice of Meetings. Notice of all special meetings of the Directors
shall be given to each Director by the President, Secretary, or Assistant
Secretary, or if there is no Secretary or Assistant Secretary, by the Clerk, or
Assistant Clerk, or in case of the death, absence, incapacity or refusal of such
persons, by the officer or one of the Directors calling the meeting. Notice
shall be given to each Director in person or by e-mail or by telephone, telegram
or facsimile sent to his or her business or home address at least twenty-four
hours in advance of the meeting, or by written notice mailed to his or her
business or home address at least forty-eight hours in advance of the meeting.
Notice of a meeting need not be given to any Director if a written waiver of
notice, executed by such Director before or after the meeting, is filed with the
records of the meeting, or to any Director who attends the meeting without
protesting prior thereto or at its commencement the lack of notice to him or
her. A notice or waiver of notice of a Directors' meeting need not specify the
purposes of the meeting.
10. Quorum. At any meeting of the Directors, a majority of the Directors
then in office shall constitute a quorum. Less than a quorum may adjourn any
meeting from time to time without further notice.
11. Action at Meeting. At any meeting of the Directors at which a quorum
is present, a majority of the Directors present may take any action on behalf of
the Board except to the extent that a larger number is required by law or the
Articles of Organization or these By-laws.
12. Action by Consent. Any action required or permitted to be taken at any
meeting of the Directors may be taken without a meeting, if all the Directors
consent to the action in writing and the written consents are filed with the
records of the meetings of Directors. Such consents shall be treated for all
purposes as a vote at a meeting.
13. Committees. The Directors may, by vote of a majority of the Directors
then in office, elect from their number an executive or other committees and may
by like vote delegate thereto some or all of their powers except those which by
law, the Articles of Organization or these By-laws they are prohibited from
delegating to such committee. Except as the Directors may otherwise determine,
any such committee may make rules for the conduct of its business, but unless
otherwise provided by the Directors or in such rules, its business shall be
conducted as nearly as may be in the same manner as is provided by these By-laws
for the Directors.
ARTICLE III
Officers
1. Enumeration. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one or more Vice-Presidents, Assistant Treasurers,
Assistant Clerks, Secretary and Assistant Secretaries as the Directors may
determine.
2. Election. The President, Treasurer and Clerk shall be elected annually
by the Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Directors at such meeting or
at any other meeting.
<PAGE>
-6-
3. Qualification. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person. The Clerk shall be a resident of Massachusetts unless the corporation
has a resident agent appointed for the purpose of service of process. Any
officer may be required by the Directors to give bond for the faithful
performance of his or her duties to the corporation in such amount and with such
sureties as the Directors may determine.
4. Tenure. Except as otherwise provided by law, by the Articles of
Organization or by these By-laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his or her written
resignation to the corporation at its principal office or to the President,
Clerk or Secretary, and such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
5. Removal. The Directors may remove any officer with or without cause by
vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. President, Chairman of the Board, and Vice-President. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
have general supervision and control of its business. Unless otherwise provided
by the Directors he or she shall preside, when present, at all meetings of
stockholders and, unless a Chairman of the Board has been elected and is
present, of the Directors. If a Chairman of the Board of Directors is elected he
or she shall preside at all meetings of the Board of Directors at which he or
she is present. The Chairman shall have such other powers as the Directors may
from time to time designate. Any Vice-President shall have such powers as the
Directors may from time to time designate.
7. Treasurer and Assistant Treasurers. The Treasurer shall, subject to the
direction of the Directors, have general charge of the financial affairs of the
corporation and shall cause accurate books of account to be kept. He or she
shall have custody of all funds, securities, and valuable documents of the
corporation, except as the Directors may otherwise provide. Any Assistant
Treasurer shall have such powers as the Directors may from time to time
designate.
8. Clerk and Assistant Clerks. The Clerk shall record all proceedings of
the stockholders in a book to be kept therefor. Unless a transfer agent is
appointed, the Clerk shall keep or cause to be kept in Massachusetts, at the
principal office of the corporation or at his or her office, the stock and
transfer records of the corporation, in which are contained the names of all
stockholders and the record address and the amount of stock held by each. In
case a Secretary is not elected, the Clerk shall record all proceedings of the
Directors in a book to be kept therefor. In the absence of the Clerk from any
meeting of the stockholders, an Assistant Clerk, if one be elected, otherwise a
Temporary Clerk designated by the person presiding at the meeting, shall perform
the duties of the Clerk. Any Assistant Clerk shall have such additional powers
as the Directors may from time to time designate.
9. Secretary and Assistant Secretaries. If a Secretary is elected, he or
she shall keep a record of the meetings of the Directors and in his or her
absence, an Assistant Secretary, if one be elected, otherwise a Temporary
Secretary designated by the person presiding at the meeting, shall keep a record
<PAGE>
-7-
of the meetings of the Directors. Any Assistant Secretary shall have such
additional powers as the Directors may from time to time designate.
10. Other Powers and Duties. Each officer shall, subject to these By-laws,
have in addition to the duties and powers specifically set forth in these
By-laws, such duties and powers as are customarily incident to his or her
office, and such duties and powers as the Directors may from time to time
designate.
ARTICLE IV
Capital Stock
1. Certificates of Stock. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-President,
and by the Treasurer or an Assistant Treasurer; provided, however, such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he or she were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares
are subject to any restriction on transfer pursuant to the Articles of
Organization, these By-laws or any agreement to which the corporation is a party
shall have the restriction noted conspicuously on the certificate and shall also
set forth on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction and a statement
that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge. Every stock certificate
issued by the corporation at a time when it is authorized to issue more than one
class or series of stock shall set forth upon the face or back of the
certificate either the full text of the preferences, voting powers,
qualifications and special and relative rights of the shares of each class and
series, if any, authorized to be issued, as set forth in the Articles of
Organization, or a statement of the existence of such preferences, powers,
qualifications, and rights, and a statement that the corporation will furnish a
copy thereof to the holder of such certificate upon written request and without
charge.
2. Stockholder Open Accounts. The corporation may maintain or caused to be
maintained stockholder open accounts in which may be recorded all stockholders'
ownership of stock and all changes therein. Certificates need not be issued for
shares so recorded in a stockholder open account unless requested by the
stockholder.
3. Transfers. Subject to the restrictions, if any, stated or noted on the
stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof,
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regardless of any transfer, pledge or other disposition of such stock, until the
shares have been transferred on the books of the corporation in accordance with
the requirements of these By-laws.
It shall be the duty of each stockholder to notify the corporation of his
or her post office address.
4. Record Date. The Directors may fix in advance a time which shall be not
more than sixty (60) days before the date of any meeting of stockholders or the
date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution or the
right to give such consent or dissent. In such case only stockholders of record
on such record date shall have such right, notwithstanding any transfer of stock
on the books of the corporation after the record date. Without fixing such
record date the Directors may for any of such purposes close the transfer books
for all or any part of such period.
If no record date is fixed and the transfer books are not closed, the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be at the close of business on the day
next preceding the day on which notice is given, and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors acts with respect thereto.
5. Replacement of Certificates. In case of the alleged loss, mutilation or
destruction of a certificate of stock, a duplicate certificate may be issued in
place thereof, upon such terms and conditions as the Directors may prescribe.
6. Issue of Capital Stock. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. Reacquisition of Stock. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization.
ARTICLE V
Provisions Relative to Directors,
Officers, Stockholders and Employees
1. Certain Contracts and Transactions. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the
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meeting of the Directors (or any authorized committee thereof) or stockholders
at which such contract or transaction was authorized and/or that the vote of
such Director or stockholder was necessary for the adoption of such contract or
transaction, provided that if said interest was material, it shall have been
known or disclosed to the Directors or stockholders voting at said meeting on
said contract or transaction. A general notice to any person voting on said
contract or transaction that an officer, Director, stockholder or employee has a
material interest in any corporation, organization or other concern shall be
sufficient disclosure as to such officer, Director, stockholder or employee with
respect to all contracts and transactions with such corporation, organization or
other concern. This section shall be subject to amendment or repeal only by
action of the stockholders.
2. Indemnification. Each Director and officer of the corporation, and any
person who, at the request of the corporation, serves as a director or officer
of another organization shall be indemnified by the corporation against any
cost, expense (including attorneys' fees), judgment, liability and/or amount
paid in settlement reasonably incurred by or imposed upon him or her in
connection with any action, suit or proceeding (including any proceeding before
any administrative or legislative body or agency), to which he or she may be
made a party or otherwise involved or with which he or she shall be threatened,
by reason of his or her being, or related to his or her status as, a Director or
officer of the corporation or of any other organization, which other
organization he or she serves or has served as director or officer at the
request of the corporation (whether or not he or she continues to be an officer
or Director of the corporation or such other organization at the time such
action, suit or proceeding is brought or threatened), unless such
indemnification is prohibited by the Business Corporation Law of the
Commonwealth of Massachusetts. The foregoing right of indemnification shall be
in addition to any rights to which any such person may otherwise be entitled and
shall inure to the benefit of the executors or administrators of each such
person. The corporation may pay the expenses incurred by any such person in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit, or proceeding, upon receipt of an undertaking
by such person to repay such payment if it is determined that such person is not
entitled to indemnification hereunder. This section shall not affect any rights
to indemnification to which corporate personnel other than Directors and
officers may be entitled by contract or otherwise under law. This section shall
be subject to amendment or repeal only by action of the stockholders, and any
such amendment or repeal shall not affect the rights arising hereunder prior to
the effective date of the amendment or repeal.
ARTICLE VI
Miscellaneous Provisions
1. Fiscal Year. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall be the twelve month period
ending on the 31st day of December of each year or as otherwise selected by the
Board of Directors from time to time. Following any change in the fiscal year
previously adopted, a certificate of such change, signed under the penalties of
perjury by the Clerk or an Assistant Clerk, shall be filed forthwith with the
state secretary.
2. Seal. The seal of this corporation shall, subject to alteration by the
Directors, bear its name, the word "Massachusetts", and the year of its
incorporation.
3. Execution of Instruments. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President, any Vice
President or the Treasurer except as the Directors may generally or in
particular cases otherwise determine.
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4. Voting of Securities. Except as the Directors may otherwise designate,
the President or Treasurer may waive notice of, and appoint any person or
persons to act as proxy or attorney in fact for this corporation (with or
without power of substitution) at any meeting of stockholders or shareholders of
any other corporation or organization, the securities of which may be held by
the corporation.
5. Corporate Records. The original, or attested copies, of the Articles of
Organization, By-laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation or at
an office of its transfer agent or of the Clerk or of its resident agent. Said
copies and records need not all be kept in the same office. They shall be
available at all reasonable times to the inspection of any stockholder for any
proper purpose but not to secure a list of stockholders or other information for
the purpose of selling said list or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
6. Articles of Organization. All references in these By-laws to the
Articles of Organization shall be deemed to refer to the Restated Articles of
Organization of the corporation, as amended and in effect from time to time.
7. Amendments. These By-laws, to the extent provided in these By-laws, may
be amended or repealed, in whole or in part, and new By-laws adopted either (a)
by the stockholders at any meeting of the stockholders by the affirmative vote
of the holders of at least a majority in interest of the capital stock present
and entitled to vote, provided that notice of the proposed amendment or repeal
or of the proposed making of new By-laws shall have been given in the notice of
such meeting, or (b) if so authorized by the Restated Articles of Organization,
by the Board of Directors at any meeting of the Board by the affirmative vote of
a majority of the Directors then in office, but no amendment or repeal of a
By-law shall be voted by the Board of Directors and no new By-law shall be made
by the Board of Directors which alters the provisions of these By-laws with
respect to removal of Directors, or the election of committees by Directors and
the delegation of powers thereto, nor shall the Board of Directors make, amend
or repeal any provision of the By-laws which by law, the Restated Articles of
Organization or the By-laws requires action by the stockholders. Not later than
the time of giving notice of the meeting of stockholders next following the
making, amending, or repealing by the Directors of any By-law, notice thereof
stating the substance of such change shall be given to all stockholders entitled
to vote on amending the By-laws. Any By-law or amendment of a By-law made the
Board of Directors may be amended or repealed by the stockholders by affirmative
vote as above provided in this Section 7.
8. 1987 Massachusetts Control Share Acquisition Act. The 1987
Massachusetts Control Share Acquisition Act, Chapter 110D of the Massachusetts
General Laws, as it may be amended from time to time, shall not apply to the
corporation.
9. Massachusetts General Laws, Chapter 110F. Chapter 110F of the
Massachusetts General Laws, as it may be amended from time to time, shall not
apply to the corporation.
<PAGE>
EXHIBIT 10.1
EXCEL SWITCHING CORPORATION
AMENDED AND RESTATED 1997 STOCK OPTION PLAN
1. PURPOSE. This Amended and Restated 1997 Stock Option Plan (the
"Plan") is intended to provide incentives: (a) to the officers and other
employees of Excel Switching Corporation (the "Company"), any present or future
parent and any present or future subsidiaries of the Company (collectively,
"Related Corporations") by providing them with opportunities to purchase stock
in the Company pursuant to options granted hereunder which qualify as "incentive
stock options" ("ISO" or "ISOs") under Section 422(b) of the Internal Revenue
Code of 1986, as amended (the "Code"); (b) to directors, officers, employees and
consultants of the Company and Related Corporations by providing them with
opportunities to purchase stock in the Company pursuant to options granted
hereunder which do not qualify as ISOs ("Non-Qualified Option" or "Non-Qualified
Options"); (c) to directors, officers, employees and consultants of the Company
and Related Corporations by providing them with awards of stock in the Company
("Awards"); and (d) to directors, officers, employees and consultants of the
Company and Related Corporations by providing them with opportunities to make
direct purchases of stock in the Company ("Purchases"). Both ISOs and
Non-Qualified Options are referred to hereafter individually as an "Option" and
collectively as "Options". Options, Awards and authorizations to make Purchases
are referred to hereafter collectively as "Stock Rights". As used herein, the
terms "parent" and "subsidiary" mean "parent corporation" and "subsidiary
corporation", respectively, as those terms are defined in Section 424 of the
Code.
2. ADMINISTRATION OF THE PLAN.
A. BOARD OR COMMITTEE ADMINISTRATION. The Plan shall be
administered by the Board of Directors of the Company (the "Board") or, subject
to paragraph 2(d) (relating to compliance with Section 162(m) of the Code), by a
committee appointed by the Board (the "Committee"). Hereinafter, all references
in this Plan to the "Committee" shall mean the Board if no Committee has been
appointed. Subject to ratification of the grant or authorization of each Stock
Right by the Board (if so required by applicable state law), and subject to the
terms of the Plan, the Committee shall have the authority to (i) determine the
employees of the Company and Related Corporations (from among the class of
employees eligible under paragraph 3 to receive ISOs) to whom ISOs may be
granted, and to determine (from among the class of individuals and entities
eligible under paragraph 3 to receive Non-Qualified Options and Awards and to
make Purchases) to whom Non-Qualified Options, Awards and authorizations to make
Purchases may be granted; (ii) determine the time or times at which Options or
Awards may be granted or Purchases made; (iii) determine the exercise price per
share subject to each Option, which price shall not be less than the minimum
price specified in paragraph 6, and the purchase price of shares subject to each
Purchase; (iv) determine whether each Option granted shall be an ISO or a
Non-Qualified Option; (v) determine (subject to paragraph 7) the time or times
when each Option shall become exercisable and the duration of the exercise
period; (vi) extend the period
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during which outstanding Options may be exercised; (vii) determine whether
restrictions such as repurchase options are to be imposed on shares subject to
Options, Awards and Purchases and the nature of such restrictions, if any;
(viii) interpret the Plan and prescribe and rescind rules and regulations
relating to it; and (ix) authorize executive officers of the Company to (a)
execute option agreements with individuals hired as employees of the Company
during the periods between Committee meetings, not including individuals hired
as executive officers, and (b) determine the number of Options to be issued to
such employee, subject to the specific limitations set forth by the Committee in
its grant of authority to such executive officer. If the Committee determines to
issue a Non-Qualified Option, it shall take whatever actions it deems necessary,
under Section 422 of the Code and the regulations promulgated thereunder, to
ensure that such Option is not treated as an ISO. The interpretation and
construction by the Committee of any provisions of the Plan or of any Stock
Right granted under it shall be final unless otherwise determined by the Board.
The Committee may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem best. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Stock Right granted under it.
B. COMMITTEE ACTION. The Committee may select one of its
members as its chairman, and shall hold meetings at such time and places as it
may determine. Acts by a majority of the Committee, or acts reduced to or
approved in writing by a majority of the members of the Committee, shall be the
valid acts of the Committee. From time to time the Board may increase the size
of the Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan.
C. GRANT OF STOCK RIGHTS TO BOARD MEMBERS. Stock Rights may be
granted to members of the Board. All grants of Stock Rights to members of the
Board shall in all other respects be made in accordance with the provisions of
this Plan applicable to other eligible persons. Members of the Board who are
either (i) eligible for Stock Rights pursuant to the Plan or (ii) have been
granted Stock Rights may vote on any matters affecting the administration of the
Plan or the grant of any Stock Rights pursuant to the Plan, except that no such
member shall act upon the granting to himself of Stock Rights, but any such
member may be counted in determining the existence of a quorum at any meeting of
the Board during which action is taken with respect to the granting to him of
Stock Rights.
D. PERFORMANCE-BASED COMPENSATION. The Board, in its
discretion, may take such action as may be necessary to ensure that Stock Rights
granted under the Plan qualify as "qualified performance-based compensation"
within the meaning of Section 162(m) of the Code and applicable regulations
promulgated thereunder ("Performance-Based Compensation"). Such action may
include, in the Board's discretion, some or all of the following (i) if the
Board determines that Stock Rights granted under the Plan generally shall
constitute Performance-Based Compensation, by a committee consisting solely of
two or more "outside directors (as defined in applicable regulations promulgated
under Section 162(m) of the Code), (ii) if any Non-Qualified Options with an
exercise price less than the fair market value per share of
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Common Stock are granted under the Plan and the Board determines that such
Options should constitute Performance-Based Compensation, such options shall be
made exercisable only upon the attainment of a pre-established, objective
performance goal established by the Committee, and such grant shall be submitted
for, and shall be contingent upon shareholder approval and (iii) Stock Rights
granted under the Plan may be subject to such other terms and conditions as are
necessary for compensation recognized in connection with the exercise or
disposition of such Stock Right or the disposition of Common Stock acquired
pursuant to such Stock Right, to constitute Performance-Based Compensation.
3. ELIGIBLE EMPLOYEES AND OTHERS. ISOs may be granted only to employees
of the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any director (whether or not
an employee), officer, employee or consultant of the Company or any Related
Corporation. The Committee may take into consideration a recipient's individual
circumstances in determining whether to grant an ISO, a Non-Qualified Option or
an authorization to make a Purchase. Granting of any Stock Right to any
individual or entity shall neither entitle that individual or entity to, nor
disqualify him from, participation in any other grant of Stock Rights.
4. STOCK. The stock subject to Options, Awards and Purchases shall be
authorized but unissued shares of Common Stock of the Company, par value $.01
per share (the "Common Stock"), or shares of Common Stock reacquired by the
Company in any manner. The aggregate number of shares which may be issued
pursuant to the Plan is 5,000,000 shares, subject to adjustment as provided in
paragraph 13. If any Option granted under the Plan shall expire or terminate for
any reason without having been exercised in full or shall cease for any reason
to be exercisable in whole or in part, the shares subject to such Options shall
again be available for grants of Stock Rights under the Plan. No employee of the
Company or any Related Corporation may be granted Options to acquire, in the
aggregate, more than 3,500,000 shares of Common Stock under the Plan during any
fiscal year of the Company, subject to adjustment as provided in paragraph 13.
The following provision shall be effective only on and after the date
of the initial public offering of shares of Common Stock of the Company pursuant
to the Securities Act of 1933, as amended. If any Option granted under the Plan
shall expire or terminate for any reason without having been exercised in full
or shall cease for any reason to be exercisable in whole or in part or shall be
repurchased by the Company, the shares subject to such Option shall be included
in the determination of the aggregate number of shares of Common Stock deemed to
have been granted to such employee under the Plan.
5. GRANTING OF STOCK RIGHTS. Stock Rights may be granted under the Plan
at any time on or after September 16, 1997 and prior to September 15, 2007. The
date of grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.
6. MINIMUM OPTION PRICE; ISO LIMITATIONS.
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A. PRICE FOR NON-QUALIFIED OPTIONS, AWARDS, AND PURCHASES.
Subject to paragraph 2(d) (relating to compliance with Section 162(m) of the
Code), the exercise price per share specified in the agreement relating to each
Non-Qualified Option granted and the purchase price per share of stock granted
in any Award or authorized as a Purchase under the Plan shall in no event be
less than the minimum legal consideration required therefor under the laws of
any jurisdiction in which the Company or its successors in interest may be
organized.
B. PRICE FOR ISOS. The exercise price per share specified in
the agreement relating to each ISO granted under the Plan shall not be less than
the fair market value per share of Common Stock on the date of such grant. In
the case of an ISO to be granted to an employee owning stock possessing more
than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or any Related Corporation, the price per share specified
in the agreement relating to such ISO shall not be less than one hundred ten
percent (110%) of the fair market value per share of Common Stock on the date of
grant. For purposes of determining stock ownership under this paragraph, the
rules of Section 424(d) of the Code shall apply.
C. $100,000 ANNUAL LIMITATION ON ISO VESTING. Each eligible
employee may be granted options treated as ISOs only to the extent that, in the
aggregate under this Plan and all incentive stock option plans of the Company
and any Related Corporation, such ISOs do not become exercisable for the first
time by such employee during any calendar year in a manner which would entitle
the employee to purchase more than $100,000 in fair market value (determined at
the time the ISOs were granted) of Common Stock in that year. Any options
granted to an employee in excess of such amount will be granted as Non-Qualified
Options, and the Company shall issue separate certificates to the optionee with
respect to options that are Non-Qualified Options and Options that are ISOs.
D. DETERMINATION OF FAIR MARKET VALUE. If, at the time an
Option is granted under the Plan, the Company's Common Stock is publicly traded,
"fair market value" shall be determined as of the date of grant or, if the
prices or quotes discussed in this sentence are unavailable for such date, the
last business day for which such prices or quotes are available prior to the
date such Option is granted and shall mean (i) the average (on that date) of the
high and low prices of the Common Stock on the principal national securities
exchange on which the Common Stock is traded, if the Common Stock is then traded
on a national securities exchange; or (ii) the last reported sale price (on that
date) of the Common Stock on the Nasdaq National Market, if the Common Stock is
not then traded on a national securities exchange; or (iii) the average of the
closing bid and asked prices last quoted (on that date) by an established
quotation service for over-the-counter securities, if the Common Stock is not
reported on the Nasdaq National Market. However, if the Common Stock is not
publicly traded at the time an Option is granted under the Plan, "fair market
value" shall be deemed to be the fair value of the Common Stock as determined by
the Committee after taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale and offer prices of the
Common Stock in private transactions negotiated at arm's length.
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7. OPTION DURATION. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years and one day from the date of grant in the case of Non-Qualified Options,
(ii) ten years from the date of grant in the case of ISOs generally, and (iii)
five years from the date of grant in the case of ISOs granted to an employee
owning stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Related Corporation, as
determined under paragraph 6(B). Subject to earlier termination as provided in
paragraphs 9 and 10, the term of each ISO shall be the term set forth in the
original instrument granting such ISO, except with respect to any part of such
ISO that is converted into a Non-Qualified Option pursuant to paragraph 16.
8. EXERCISE OF OPTION. Subject to the provisions of paragraphs
9 through 12, 21 and 22 each Option granted under the Plan shall be
exercisable as follows:
A. FULL VESTING OR PARTIAL VESTING. The Option shall either be
fully exercisable on the date of grant or shall become exercisable thereafter in
such installments as the Committee may specify.
B. FULL VESTING OF INSTALLMENTS. Once an installment becomes
exercisable it shall remain exercisable until expiration or termination of the
Option, unless otherwise specified by the Committee or as otherwise provided in
this Plan.
C. PARTIAL EXERCISE. Each Option or installment may be
exercised at any time or from time to time, in whole or in part, for up to the
total number of shares with respect to which it is then exercisable.
D. ACCELERATION OF VESTING. Subject to any accounting
considerations with respect to "Accounting for Business Combinations" pursuant
to Accounting Principles Board Opinion No. 16, The Committee shall have the
right to accelerate the date of exercise of any installment of any Option;
provided that the Committee shall not accelerate the exercise date of any
installment of any Option granted to any employee as an ISO (and not previously
converted into a Non-Qualified Option pursuant to paragraph 16) if such
acceleration would violate the annual vesting limitation contained in Section
422(d) of the Code, as described in paragraph 6(C).
9. TERMINATION OF EMPLOYMENT. Unless otherwise specified in the
Agreement relating to such ISO, if an ISO Optionee ceases to be employed by the
Company and all Related Corporations other than by reason of death or disability
as defined in paragraph 10, no further installments of his ISOs shall become
exercisable, and his ISOs shall terminate after the passage of ninety (90) days
from the date of termination of his employment, but in no event later than on
their specified expiration dates, except to the extent that such ISOs (or
unexercised installments thereof) have been converted into Non-Qualified Options
pursuant to paragraph 16. Employment shall be considered as continuing
uninterrupted during any bona fide leave of absence (such as those attributable
to illness, military obligations or governmental service) provided that the
period of such leave does not exceed ninety (90) days or, if longer, any period
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during which such Optionee's right to re-employment is guaranteed by statute or
by contract. A bona fide leave of absence with the written approval of the
Committee shall not be considered an interruption of employment under the Plan,
provided that such written approval contractually obligates the Company or any
Related Corporation to continue the employment of the Optionee after the
approved period of absence. ISOs granted under the Plan shall not be affected by
any change of employment within or among the Company and Related Corporations,
so long as the Optionee continues to be an employee of the Company or any
Related Corporation. Nothing in the Plan shall be deemed to give any grantee of
any Stock Right the right to be retained in employment or other service by the
Company or any Related Corporation for any period of time.
10. DEATH; DISABILITY.
A. DEATH. If an ISO Optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her death, any ISO
owned by such Optionee may be exercised, to the extent of the number of shares
with respect to which he or she could have exercised it on the date of his or
her death, by the estate, personal representative or beneficiary who has
acquired the ISO by will or by the laws of descent and distribution, at any time
prior to the earlier of (i) the specified expiration date of the ISO or (ii) 180
days from the date of the Optionee's death.
B. DISABILITY. If an ISO Optionee ceases to be employed by the
Company and all Related Corporations by reason of his or her disability, such
Optionee shall have the right to exercise any ISO held by him or her on the date
of termination of employment, to the extent of the number of shares with respect
to which he or she could have exercised it on that date, until the earlier of
(i) the specified expiration date of the ISO or (ii) 180 days from the date of
the termination of the Optionee's employment. For the purposes of the Plan, the
term "disability" shall mean "permanent and total disability" as defined in
Section 22(e)(3) of the Code or successor statute.
11. ASSIGNABILITY. During the lifetime of the optionee, each Option
shall be exercisable only by him or her and no Option shall be assignable or
transferable by the optionee EXCEPT by will or by the laws of descent and
distribution or, in the case of Non-Qualified Options, pursuant to a valid
domestic relations order or in accordance with the terms of the Optionee's
option agreement and in compliance with the provisions of the Securities Act of
1933, as amended.
12. TERMS AND CONDITIONS OF OPTIONS. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. In granting any Non-Qualified Option, the
Committee may specify that such Non-Qualified Option shall be subject to the
restrictions set forth herein with respect to ISOs, or to such other termination
and cancellation provisions as the Committee may determine. The Committee may
from time to time confer authority and responsibility on one or more of its
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own members and/or one or more officers of the Company to execute and deliver
such instruments. The proper officers of the Company are authorized and directed
to take any and all action necessary or advisable from time to time to carry out
the terms of such instruments.
13. ADJUSTMENTS. Upon the occurrence of any of the following events, an
Optionee's rights with respect to Options granted to him hereunder shall be
adjusted as hereinafter provided, unless otherwise specifically provided in the
written agreement between the Optionee and the Company relating to such Option:
A. STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common
Stock shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock dividend on
its outstanding Common Stock, the number of shares of Common Stock deliverable
upon the exercise of Options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.
B. CONSOLIDATIONS OR MERGERS. If the Company is to be
consolidated with or acquired by another entity in a merger or other
reorganization in which the holders of the outstanding voting stock of the
Company immediately preceding the consummation of such event, shall, immediately
following such event, hold as a group, less than a majority of the voting
securities of the surviving or successor entity, or in the event of a sale of
all or substantially all of the Company's assets or otherwise (an
"Acquisition"), the Committee or the board of directors of any entity assuming
the obligations of the Company hereunder (the "Successor Board"), shall, as to
outstanding Options, take one or more of the following actions: (i) make
appropriate provision for the continuation of such Options by substituting on an
equitable basis for the shares then subject to such Options the consideration
payable with respect to the outstanding shares of Common Stock in connection
with the Acquisition; or (ii) make appropriate provision for the continuation of
such Options by substituting on an equitable basis for the shares then subject
to such Options any equity securities of the successor corporation or such other
securities as the Successor Board deems appropriate, the fair market value of
which shall not materially exceed the fair market value of the shares of Common
Stock subject to such Options immediately preceding the Acquisition; or (iii)
upon written notice to the Optionees, provide that all Options must be
exercised, to the extent then exercisable, within a specified number of days of
the date of such notice, at the end of which period the Options shall terminate;
or (iv) terminate all Options in exchange for a cash payment equal to the excess
of the fair market value of the shares subject to such Options (to the extent
then exercisable) over the exercise price thereof; or (v) accelerate the date of
exercise of such Options or of any installment of any such Options; or (vi)
terminate all Options in exchange for the right to participate in any stock
option or other employee benefit plan of any successor corporation. The
foregoing actions are subject in all instances to the approval of the Board of
Directors and any accounting considerations for any acquisition which is treated
as a "pooling of interests" transaction pursuant to the Accounting Principles
Board (APB) Opinion No. 16, if any discretionary action by the Board of
Directors would otherwise violate the accounting rules for treatment of the
Acquisition as a "pooling of interests" under APB No. 16.
<PAGE>
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C. RECAPITALIZATION OR REORGANIZATION. In the event of a
recapitalization or reorganization of the Company (other than a transaction
described in subparagraph B above) pursuant to which securities of the Company
or of another corporation are issued with respect to the outstanding shares of
Common Stock, an Optionee upon exercising an Option shall be entitled to receive
for the purchase price paid upon such exercise the securities he or she would
have received if he or she had exercised his or her Option prior to such
recapitalization or reorganization.
D. MODIFICATION OF ISOS. Notwithstanding the foregoing, any
adjustments made pursuant to subparagraphs A, B or C with respect to ISOs shall
be made only after the Committee, after consulting with counsel for the Company,
determines whether such adjustments would constitute a "modification" of such
ISOs (as that term is defined in Section 424 of the Code) or would cause any
adverse tax consequences for the holders of such ISOs. If the Committee
determines that such adjustments made with respect to ISOs would constitute a
modification of such ISOs, or would cause adverse tax consequences to the
holders, it may refrain from making such adjustments.
E. DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, each Option will terminate
immediately prior to the consummation of such proposed action or at such other
time and subject to such other conditions as shall be determined by the
Committee.
F. ISSUANCES OF SECURITIES. Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares subject to Options. No adjustments shall be made for dividends paid in
cash or in property other than securities of the Company.
G. FRACTIONAL SHARES. No fractional shares shall be issued
under the Plan and the Optionee shall receive from the Company cash in lieu of
such fractional shares.
H. ADJUSTMENTS. Upon the happening of any of the foregoing
events described in subparagraphs A, B or C above, the class and aggregate
number of shares set forth in paragraph 4 hereof that are subject to Stock
Rights which previously have been or subsequently may be granted under the Plan
shall also be appropriately adjusted to reflect the events described in such
subparagraphs. The Committee or the Successor Board shall determine the specific
adjustments to be made under this paragraph 13 and, subject to paragraph 2, its
determination shall be conclusive.
If any person or entity owning restricted Common Stock obtained by exercise of a
Stock Right made hereunder receives shares or securities or cash in connection
with a corporate transaction described in subparagraphs A, B or C above as a
result of owning such restricted Common Stock, such shares or securities or cash
shall be subject to all of the conditions and restrictions applicable to the
restricted Common Stock with respect to which such shares or securities or cash
were issued, unless otherwise determined by the Committee or the Successor
Board.
<PAGE>
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14. MEANS OF EXERCISING STOCK RIGHTS. A Stock Right (or any part or
installment thereof) shall be exercised by giving written notice to the Company
at its principal office address. Such notice shall identify the Stock Right
being exercised and specify the number of shares as to which such Stock Right is
being exercised, accompanied by full payment of the purchase price therefor
either (a) in United States dollars in cash or by check, or (b) at the
discretion of the Committee, through delivery of shares of Common Stock having a
fair market value equal as of the date of the exercise to the cash exercise
price of the Stock Right, or (c) at the discretion of the Committee, by delivery
of the grantee's personal recourse note bearing interest payable not less than
annually at no less than 100% of the lowest applicable Federal rate, as defined
in Section 1274(d) of the Code, or (d) at the discretion of the Committee and
consistent with applicable law, through the delivery of an assignment to the
Company of a sufficient amount of the proceeds from the sale of the Common Stock
acquired upon exercise of the Option and an authorization to the broker or
selling agent to pay that amount to the Company, which sale shall be at the
participant's direction at the time of exercise, or (e) at the discretion of the
Committee, by any combination of (a), (b), (c) and (d) above. If the Committee
exercises its discretion to permit payment of the exercise price of an ISO by
means of the methods set forth in clauses (b), (c), (d) or (e) of the preceding
sentence, such discretion shall be exercised in writing at the time of the grant
of the ISO in question. The holder of a Stock Right shall not have the rights of
a shareholder with respect to the shares covered by his Stock Right until the
date of issuance of a stock certificate to him for such shares. Except as
expressly provided above in paragraph 13 with respect to changes in
capitalization and stock dividends, no adjustment shall be made for dividends or
similar rights for which the record date is before the date such stock
certificate is issued.
15. TERM AND AMENDMENT OF PLAN. This Plan was adopted by the Board as
of September 16, 1997 and approved by the stockholders of the Company on
September 16, 1997. The Plan shall expire at the end of the day on September 15,
2007 (except as to Options outstanding on that date). Subject to the provisions
of paragraph 5 above, Stock Rights may be granted under the Plan prior to the
date of stockholder approval of the Plan. The Board may terminate or amend the
Plan in any respect at any time, except that, without the approval of the
stockholders obtained within 12 months before or after the Board adopts a
resolution authorizing any of the following actions: (a) the total number of
shares that may be issued under the Plan may not be increased (except by
adjustment pursuant to paragraph 13); (b) the benefits accruing to participants
under the Plan may not be materially increased; (c) the requirements as to
eligibility for participation in the Plan may not be materially modified; (d)
the provisions of paragraph 3 regarding eligibility for grants of ISOs may not
be modified; (e) the provisions of paragraph 6(B) regarding the exercise price
at which shares may be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to paragraph 13); (f) the expiration date of the Plan may
not be extended; and (g) the Board may not take any action which would cause the
Plan to fail to comply with Rule 16b-3. Except as otherwise provided in this
paragraph 15 or in paragraph 23, in no event may action of the Board or
stockholders alter or impair the rights of a grantee, without his consent, under
any Stock Right previously granted to him.
<PAGE>
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16. CONVERSION OF ISOS INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOS.
Subject to paragraph 13(d), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(h)(3) of the Code). The Committee, at the
written request or with the written consent of any Optionee, may in its
discretion take such actions as may be necessary to convert such Optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the Optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
Optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any Optionee the right to have such Optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action. Upon the taking of such
action, the Company shall issue separate certificates to the Optionee with
respect to Options that are Non-Qualified Options and Options that are ISOs.
17. APPLICATION OF FUNDS. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.
18. GOVERNMENTAL REGULATION. The Company's obligation to sell and
deliver shares of the Common Stock under this Plan is subject to the approval of
any governmental authority required in connection with the authorization,
issuance or sale of such shares.
19. WITHHOLDING OF ADDITIONAL INCOME TAXES. Upon the exercise of a
Non-Qualified Option, the grant of an Award, the making of a Purchase of Common
Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 20), the making of a distribution or other
payment with respect to such stock or securities, or the vesting or transfer of
restricted Common Stock acquired on the exercise of a Stock Right hereunder, the
Company may withhold income and/or employment taxes in respect of amounts that
constitute compensation includible in gross income, or otherwise treated by law
as wages for withholding for income or employment tax purposes. The Committee in
its discretion may condition (i) the exercise of an Option, (ii) the grant of an
Award, (iii) the making of a Purchase of Common Stock for less than its fair
market value, or (iv) the vesting or transferability of restricted Common Stock
acquired by exercising a Stock Right, on the grantee's making satisfactory
arrangement for such withholding. Such arrangement may include payment by the
grantee in cash or by check of the amount of the withholding taxes or, at the
discretion of the Company, by the grantee's delivery of previously held shares
of Common Stock or the withholding from the shares of Common Stock otherwise
deliverable upon exercise of Option shares having an aggregate fair market value
equal to the amount of such withholding taxes. The
<PAGE>
-11-
use of any method of payment other than by cash or check in some cases may
require or cause additional withholding obligations.
20. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. By accepting an ISO
granted under the Plan, each ISO Optionee thereby agrees to notify the Company
in writing immediately after such Optionee makes a Disqualifying Disposition of
any Common Stock acquired pursuant to the exercise of an ISO. Generally, a
Disqualifying Disposition is any disposition (including any sale) of such Common
Stock occurring on or before the later of the date (a) two years after the date
the employee was granted the ISO, or (b) one year after the date the employee
acquired Common Stock by exercising the ISO.
21. NO EXERCISE OF OPTION IF ENGAGEMENT OR EMPLOYMENT TERMINATED FOR
CAUSE. If the employment of an Optionee that is an employee or consultant of the
Company or any Related Corporation is terminated for "Cause," such Optionee's
options shall terminate on the date of such termination and the Option shall
thereupon not be exercisable to any extent whatsoever. "Cause" is conduct, as
determined by the Board of Directors, involving one or more of the following:
(i) gross misconduct by the employee or consultant which is materially injurious
to the Company; or (ii) the commission of an act of embezzlement, fraud or
deliberate disregard of the rules or policies of the Company; or (iii) the
unauthorized disclosure or misappropriation of any trade secret or confidential
information of the Company or any third party who has a business relationship
with the Company or the violation of any noncompetition covenant or assignment
of inventions obligation with the Company; or (iv) the commission of an act
which induces any customer or prospective customer of the Company to break a
contract with the Company or to decline to do business with the Company; or (v)
the conviction of the employee or consultant of a felony involving any financial
impropriety or which would materially interfere with such Optionee's ability to
perform his or her services or otherwise be injurious to the Company; or (vi)
the failure of the employee or consultant to perform in a material respect his
or her employment obligations without proper cause. In making such
determination, the Board shall act fairly and in utmost good faith. For the
purposes of this Section 21, termination of employment shall be deemed to occur
when the employee receives notice that his employment is terminated.
22. ACCELERATION AND VESTING OF OPTION FOR BUSINESS COMBINATIONS.
Unless otherwise specifically provided in the written agreement between the
Optionee and the Company relating to such Option, upon any merger,
consolidation, sale of all (or substantially all) of the assets of the Company,
or other business combination involving the sale or transfer of all (or
substantially all) of the capital stock or assets of the Company in which the
Company is not the surviving entity, or, if it is the surviving entity, does not
survive as an operating going concern in substantially the same line of business
(an "Acquisition"), then the remaining unvested portions of any Option
outstanding to any Optionee shall, immediately prior to the consummation of any
of the foregoing events, become vested and immediately exercisable by the
Optionee according to the following formula and dependent upon the length of the
Optionee's continuous months of employment or engagement by the Company prior to
the consummation of the Acquisition, PROVIDED, HOWEVER, that this Section shall
not apply to any reincorporation of the Company in a different State pursuant to
a migratory merger:
<PAGE>
-12-
(i) If the Optionee has been employed by the Company for 36 months or
more, then the remaining unvested portion of any Option held by such Optionee
shall become fully vested and exercisable.
(ii) If the Optionee has been employed by the Company for more than 30
but less than 36 months, then 80% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(iii) If the Optionee has been employed by the Company for more than 24
but less than 30 months, then 50% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(iv) If the Optionee has been employed by the Company for more than 18
but less than 24 months, then 40% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(v) If the Optionee has been employed by the Company for more than 12
but less than 18 months, then 30% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(vi) If the Optionee has been employed by the Company for more than 6
but less than 12 months, then 20% of the remaining unvested portion of any
Option held by such Optionee shall become fully vested and exercisable.
(vii) If the Optionee has been employed by the Company for more than 1
but less than 6 months, then 10% of the remaining unvested portion of any Option
held by such Optionee shall become fully vested and exercisable.
23. POOLING-OF INTERESTS-ACCOUNTING. If the Company proposes to engage
in an Acquisition intended to be accounted for as a pooling-of-interests, and in
the event that the provisions of this Plan or of any Stock Right granted
hereunder, or any actions of the Board taken in connection with such
Acquisition, are determined by either the Company's Board, or by both the
acquiring company's board and the Company's Board, to cause such Acquisition to
fail to be accounted for as a pooling-of-interests, then such provisions or
actions shall be amended or rescinded by the Board, without the consent of any
Optionee, to be consistent with pooling-of-interests accounting treatment for
such Acquisition.
24. GOVERNING LAW; CONSTRUCTION. The validity and construction of the
Plan and the instruments evidencing Stock Rights shall be governed by the laws
of the Commonwealth of Massachusetts or the laws of any jurisdiction in which
the Company or its successors in interest may be organized. In construing this
Plan, the singular shall include the plural and the masculine gender shall
include the feminine and neuter, unless the context otherwise requires.
<PAGE>
AMENDED AND RESTATED 1997 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
EXHIBIT 10.2
EXCEL SWITCHING CORPORATION
AMENDED AND RESTATED 1997 NON-EMPLOYEE DIRECTOR
STOCK OPTION PLAN
1. PURPOSE. This Non-Qualified Stock Option Plan, to be known as the
Amended and Restated 1997 Non-Employee Director Stock Option Plan (hereinafter,
the "Plan") is intended to promote the interests of Excel Switching Corporation
(hereinafter, the "Company") by providing an inducement to obtain and retain the
services of qualified persons who are not employees or officers of the Company
to serve as members of its Board of Directors (the "Board").
2. AVAILABLE SHARES. The total number of shares of Common Stock, par
value $.01 per share, of the Company (the "Common Stock") for which options may
be granted under this Plan shall not exceed 225,000 shares, subject to
adjustment in accordance with paragraph 10 of this Plan. Shares subject to this
Plan are authorized but unissued shares or shares that were once issued and
subsequently reacquired by the Company. If any options granted under this Plan
are surrendered before exercise or lapse without exercise, in whole or in part,
the shares reserved therefor shall continue to be available under this Plan.
3. ADMINISTRATION. This Plan shall be administered by the Board or by a
committee appointed by the Board (the "Committee"). In the event the Board fails
to appoint or refrains from appointing a Committee, the Board shall have all
power and authority to administer this Plan. In such event, the word "Committee"
wherever used herein shall be deemed to mean the Board. The Committee shall,
subject to the provisions of the Plan, have the power to construe this Plan, to
determine all questions hereunder, and to adopt and amend such rules and
regulations for the administration of this Plan as it may deem desirable. No
member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to this Plan or any option granted
under it.
4. AUTOMATIC GRANT OF OPTIONS. Subject to the availability of shares
under this Plan and commencing on January 1, 2000, each person who is or becomes
a member of the Board and who is not an employee or officer of the Company (a
"Non-Employee Director") shall be automatically granted an option to purchase
1,250 shares of Common Stock of the Company on the first business day of
January, April, July and October of each fiscal year of the Company, provided
that such individual continues to be a Non-Employee Director on such date and
provided that as of such date, such individual has been a member of the Board
for at least one (1) year.
<PAGE>
2
The options to be granted under this paragraph 4 shall be the only options ever
to be granted at any time to such member under this Plan.
5. OPTION PRICE. The purchase price of the stock covered by an option
granted pursuant to this Plan shall be 100% of the fair market value of such
shares on the day the option is granted. The option price will be subject to
adjustment in accordance with the provisions of paragraph 10 of this Plan. For
purposes of this Plan, if, at the time an option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes discussed
in this sentence are available prior to the date such option is granted and
shall mean (i) the average (on that date) of the high and low prices of the
Common Stock on the principal national securities exchange on which the Common
Stock is traded, if the Common Stock is then traded on a national securities
exchange; or (ii) the last reported sale price (on that date) of the Common
Stock on the Nasdaq National Market, if the Common Stock is not then traded on a
national securities exchange; or (iii) the closing bid price (or average of bid
prices) last quoted (on that date) by an established quotation service for
over-the-counter securities, if the Common Stock is not reported on the Nasdaq
National Market List. If the Common Stock is not publicly traded at the time an
option is granted under the Plan, "fair market value" shall be deemed to be the
fair value of the Common Stock as determined by the Committee after taking into
consideration all factors which it deems appropriate, including, without
limitation, recent sale and offer prices of the Common Stock in private
transactions negotiated at arm's length. Notwithstanding the foregoing the fair
market value of the Common Stock for the grant of an option on the date of the
Company's Prospectus in connection with its initial public offering (the
"Offering") shall be equal to the price per share at which the Common Stock is
sold to the underwriters upon the Offering, without regard to any applicable
discounts or commissions provided to such underwriters.
6. PERIOD OF OPTION. Unless sooner terminated in accordance with the
provisions of paragraph 8 of this Plan, an option granted hereunder shall expire
on the date which is ten (10) years after the date of grant of the option.
7. VESTING OF SHARES AND NON-TRANSFERABILITY OF OPTIONS. (a) Options
granted under paragraph 4 of this Plan shall be fully vested and immediately
exercisable on the date such options are granted to the optionee.
The number of shares as to which options may be exercised shall be
cumulative, so that once the option shall become exercisable as to any shares it
shall continue to be exercisable as to said shares, until expiration or
termination of the option as provided in this Plan.
(b) Notwithstanding subsection (a) of this paragraph 7, if an
optionee attends less than 75% of the Board meetings held in any fiscal year (a
"Default Year"), then the optionee shall forfeit his right to receive options in
the next fiscal year in
<PAGE>
3
proportion to the percentage of Board meetings which the optionee actually
attended in the Default Year. If the optionee is required to forfeit his right
to receive future options, each successive quarterly option grant shall be
forfeited, in whole or in part, until the requisite number of options have been
forfeited. By way of illustration, if an optionee attends only 25% of the actual
meetings of the Board of Directors (whether regular or special) held in any
fiscal year, then the optionee shall forfeit the right to receive 75% of the
options to be granted in the next fiscal year (i.e., the grant of options on
January 1, April 1 and July 1 of the next fiscal year).
(c) TRANSFERABILITY. Any option granted pursuant to this Plan
shall be assignable or transferable by will, the laws of descent and
distribution, pursuant to a domestic relations order or in accordance with the
terms of the optionee's option agreement and only in compliance with the
provisions of the Securities Act of 1933, as amended.
8. TERMINATION OF OPTION RIGHTS.
(a) Subject to paragraph 8(c) below and except as may
otherwise be specified in the agreement relating to an option, in the event an
optionee ceases to be a member of the Board for any reason other than death or
permanent disability, any portion of an option which is then vested but has not
been exercised at the time the optionee so ceases to be a member of the Board
may be exercised, to the extent it is then vested, by the optionee at any time
prior to the scheduled expiration date of the option.
(b) Except as may otherwise be specified in the agreement
relating to an option, in the event that an optionee ceases to be a member of
the Board by reason of his or her death or permanent disability, any unexercised
options shall be exercisable by the optionee (or by the optionee's personal
representative, heir or legatee, in the event of death) at any time prior to the
scheduled expiration date of the option.
(c) Except as may otherwise be specified in the agreement
relating to an option, no portion of an option may be exercised if the optionee
is removed from the Board of Directors for any one of the following reasons: (i)
disloyalty, gross negligence, dishonesty or breach of fiduciary duty to the
Company; or (ii) the commission of an act of embezzlement, fraud or deliberate
disregard of the rules or policies of the Company; or (iii) the unauthorized
disclosure or misappropriation of any trade secret or confidential information
of the Company; or (iv) the commission of an act which constitutes unfair
competition with the Company or which induces any customer of the Company to
break a contract with the Company; or (v) the conduct of any activity on behalf
of any organization or entity which is a competitor of the Company (unless such
conduct is approved by a majority of the members of the Board of Directors).
9. EXERCISE OF OPTION. Subject to the terms and conditions of this Plan
and the option agreements, an option granted hereunder shall, to the extent then
exercisable,
<PAGE>
4
be exercisable in whole or in part by giving written notice to the Company by
mail, facsimile or in person addressed to Excel Switching Corporation, at its
principal executive offices, stating the number of shares with respect to which
the option is being exercised, accompanied by payment in full for such shares.
Payment may be (a) in United States dollars in cash or by check, (b) in whole or
in part in shares of the Common Stock of the Company already owned by the person
or persons exercising the option or shares subject to the option being exercised
(subject to such restrictions and guidelines as the Board may adopt from time to
time), valued at fair market value determined in accordance with the provisions
of paragraph 5 or (c) consistent with applicable law, through the delivery of an
assignment to the Company of a sufficient amount of the proceeds from the sale
of the Common Stock acquired upon exercise of the option and an authorization to
the broker or selling agent to pay that amount to the Company, which sale shall
be at the participant's direction at the time of exercise. There shall be no
such exercise at any one time as to fewer than one hundred (100) shares or all
of the remaining shares then purchasable by the person or persons exercising the
option if fewer than one hundred (100) shares. The Company's transfer agent
shall, on behalf of the Company, prepare a certificate or certificates
representing such shares acquired pursuant to exercise of the option, shall
register the optionee as the owner of such shares on the books of the Company
and shall cause the fully executed certificate(s) representing such shares to be
delivered to the optionee as soon as practicable after payment of the option
price in full. The holder of an option shall not have any rights of a
stockholder with respect to the shares covered by the option, except to the
extent that one or more certificates for such shares shall be delivered to him
or her upon the due exercise of the option.
10. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION AND OTHER EVENTS. Upon
the occurrence of any of the following events, an optionee's rights with respect
to options granted to him or her hereunder shall be adjusted as hereinafter
provided:
(a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock
shall be subdivided or combined into a greater or smaller number of shares
or if the Company shall issue any shares of Common Stock as a stock
dividend on its outstanding Common Stock, the number of shares of Common
Stock deliverable upon the exercise of options shall be appropriately
increased or decreased proportionately, and appropriate adjustments shall
be made in the purchase price per share to reflect such subdivision,
combination or stock dividend.
(b) RECAPITALIZATION ADJUSTMENTS. In the event of a reorganization,
recapitalization, merger, consolidation, or any other change in the
corporate structure or shares of the Company, to the extent permitted by
Rule 16b-3 under the Securities Exchange Act of 1934, adjustments in the
number and kind of shares authorized by this Plan and in the number and
kind of shares covered by, and in the option price of outstanding options
under this Plan necessary to maintain the proportionate interest of the
optionee and preserve, without exceeding, the value of such option, shall
be made. Notwithstanding the foregoing, no such adjustment shall be made
which would, within the meaning of any applicable provisions of the
Internal Revenue
<PAGE>
5
Code of 1986, as amended, constitute a modification, extension or renewal
of any Option or a grant of additional benefits to the holder of an
Option.
(c) ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
price of shares subject to options. No adjustments shall be made for
dividends paid in cash or in property other than securities of the
Company.
(d) ADJUSTMENTS. Upon the happening of any of the foregoing events, the
class and aggregate number of shares set forth in paragraph 2 of this Plan
that are subject to options which previously have been or subsequently may
be granted under this Plan shall also be appropriately adjusted to reflect
such events. The Board shall determine the specific adjustments to be made
under this paragraph 10 and its determination shall be conclusive.
11. RESTRICTIONS ON ISSUANCE OF SHARES. Notwithstanding the provisions
of paragraphs 4 and 9 of this Plan, the Company shall have no obligation to
deliver any certificate or certificates upon exercise of an option until one of
the following conditions shall be satisfied:
(i) The issuance of shares with respect to which the option has been
exercised is at the time of the issue of such shares effectively
registered under applicable Federal and state securities laws as now in
force or hereafter amended; or
(ii) Counsel for the Company shall have given an opinion that the
issuance of such shares is exempt from registration under Federal and
state securities laws as now in force or hereafter amended; and the
Company has complied with all applicable laws and regulations with respect
thereto, including without limitation all regulations required by any
stock exchange upon which the Company's outstanding Common Stock is then
listed.
12. LEGEND ON CERTIFICATES. The certificates representing shares issued
pursuant to the exercise of an option granted hereunder shall carry such
appropriate legend, and such written instructions shall be given to the
Company's transfer agent, as may be deemed necessary or advisable by counsel to
the Company in order to comply with the requirements of the Securities Act of
1933, as amended, or any state securities laws.
13. REPRESENTATION OF OPTIONEE. If requested by the Company, the
optionee shall deliver to the Company written representations and warranties
upon exercise of the option that are necessary to show compliance with Federal
and state securities laws, including representations and warranties to the
effect that a purchase of shares under the
<PAGE>
6
option is made for investment and not with a view to their distribution (as that
term is used in the Securities Act of 1933, as amended).
14. OPTION AGREEMENT. Each option granted under the provisions of this
Plan shall be evidenced by an option agreement, which agreement shall be duly
executed and delivered on behalf of the Company and by the optionee to whom such
option is granted. The option agreement shall contain such terms, provisions and
conditions not inconsistent with this Plan as may be determined by the officer
executing it.
15. TERMINATION AND AMENDMENT OF PLAN. Options may no longer be granted
under this Plan after September 15, 2007, and this Plan shall terminate when all
options granted or to be granted hereunder are no longer outstanding. The Board
may at any time terminate this Plan or make such modification or amendment
thereof as it deems advisable; PROVIDED, HOWEVER, that the Board may not,
without approval by the affirmative vote of the holders of a majority of the
shares of Common Stock present in person or by proxy and voting on such matter
at a meeting, (a) increase the maximum number of shares for which options may be
granted under this Plan (except by adjustment pursuant to Section 10), (b)
materially modify the requirements as to eligibility to participate in this
Plan, or (c) materially increase benefits accruing to option holders under this
Plan. Termination or any modification or amendment of this Plan shall not,
without consent of a participant, affect his or her rights under an option
previously granted to him or her.
16. WITHHOLDING OF INCOME TAXES. Upon the exercise of an option, the
Company, in accordance with Section 3402(a) of the Internal Revenue Code, may
require the optionee to pay withholding taxes in respect of amounts considered
to be compensation includible in the optionee's gross income.
17. COMPLIANCE WITH REGULATIONS. It is the Company's intent that the
Plan comply in all respects with Rule 16b-3 under the Securities Exchange Act of
1934 (or any successor or amended provision thereof) and any applicable
Securities and Exchange Commission interpretations thereof. If any provision of
this Plan is deemed not to be in compliance with Rule 16b-3, the provision shall
be null and void.
18. GOVERNING LAW. The validity and construction of this Plan and the
instruments evidencing options shall be governed by the laws of the Commonwealth
of Massachusetts, without giving effect to the principles of conflicts of law
thereof.
<PAGE>
EXHIBIT 21.1
EXCEL SWITCHING CORPORATION
SUBSIDIARIES OF THE COMPANY
1. Excel Securities Corp.
a Massachusetts Corporation
Excel Switching Corporation ownership 100%
2. Excel Switching Japan KK
a Japanese corporation
Excel Switching Corporation ownership 100%
3. Excel Switching Europe
a Belgian corporation
Excel Switching Corporation ownership 100%
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
Registration Statement on Form S-8 No. 333-51711.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EXCEL
SWITCHING CORPORATIONS 1998 CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-28-1997
<PERIOD-END> DEC-31-1998
<CASH> 62,517
<SECURITIES> 55,579
<RECEIVABLES> 30,912
<ALLOWANCES> (2,000)
<INVENTORY> 5,404
<CURRENT-ASSETS> 163,886
<PP&E> 25,671
<DEPRECIATION> (7,233)
<TOTAL-ASSETS> 198,782
<CURRENT-LIABILITIES> 32,483
<BONDS> 4,858
0
0
<COMMON> 340
<OTHER-SE> 161,101
<TOTAL-LIABILITY-AND-EQUITY> 198,782
<SALES> 123,258
<TOTAL-REVENUES> 123,258
<CGS> 35,603
<TOTAL-COSTS> 35,603
<OTHER-EXPENSES> 57,113
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (295)
<INCOME-PRETAX> 36,669
<INCOME-TAX> 14,979
<INCOME-CONTINUING> 21,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,690
<EPS-PRIMARY> .65
<EPS-DILUTED> .55
</TABLE>
