<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27764
______________________________
XYLAN CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4433911
- --------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26679 WEST AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(Address of principal executive offices)
TELEPHONE: (818) 880-3500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filled by Section 13 or 15(d) of the Securites Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X]* No [_]
The number of shares outstanding of the registrant's Common Stock as of March
31, 1996, was 40,243,427.
This amendment to quarterly report on Form 10-Q contains a total of 63 pages, of
which this page is page 1.
* The Registrant has been subject to such filing requirements since March 11,
1996, the effective date of its Registration Statement on Form 8-A.
1
<PAGE>
XYLAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1996
INDEX
<TABLE>
<CAPTION>
PAGE
----------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- December 31,
1995 and March 31, 1996 3
Condensed Consolidated Statements of Operations --
Three Months Ended March 31, 1995, December 31,
1995 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows --
Three Months Ended March 31, 1995, December 31,
1995 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults in Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
Exhibit Index 27
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XYLAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
----------- ------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,034 $ 56,180
Short-term investments.................................... -- 25,472
Accounts receivable, net.................................. 13,142 19,731
Inventories............................................... 2,128 4,646
Prepaid expenses and other current assets................. 383 1,440
----------- -----------
Total current assets.................................. 21,687 107,469
Investments................................................... -- 7,023
Property and equipment, net................................... 5,073 7,314
Other assets.................................................. 488 440
----------- -----------
$ 27,248 $122,246
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of capital lease obligations......... $ 329 $ 337
Accounts payable.......................................... 7,371 9,778
Accrued expenses.......................................... 2,258 4,254
Deferred revenue.......................................... 599 707
--------- ---------
Total current liabilities............................. 10,557 15,076
Capital lease obligations, less current installments...... 509 423
Deferred revenue.......................................... 77 356
--------- ---------
Total liabilities..................................... 11,143 15,855
--------- ---------
Shareholders' equity:
Convertible preferred stock............................... 26 --
Common stock and additional paid-in capital............... 31,012 119,879
Unearned compensation..................................... (887) (2,125)
Accumulated deficit....................................... (14,046) (11,363)
--------- ---------
Net shareholders' equity.............................. 16,105 106,391
--------- ---------
$ 27,248 $122,246
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1995 1995 1996
-------- --------- ---------
<S> <C> <C> <C>
Revenue................................. $ 1,397 $ 15,522 $ 23,392
Cost of revenue......................... 961 7,412 10,823
-------- --------- ---------
Gross profit....................... 436 8,110 12,569
-------- --------- ---------
Operating expenses:
Research and development.............. 1,039 2,429 3,194
Sales and marketing................... 2,088 3,808 5,800
General and administrative............ 350 1,422 989
-------- --------- ---------
Total operating expenses................ 3,477 7,659 9,983
-------- --------- ---------
Operating income (loss)............ (3,041) 451 2,586
Interest income (expense), net.......... 71 (14) 177
-------- --------- ---------
Income (loss) before income taxes....... (2,970) 437 2,763
Income tax expense...................... -- -- 80
-------- --------- ---------
Net income (loss).................. $(2,970) $ 437 $ 2,683
======== ========= =========
Net income (loss) per share............. $ (.14) $ .01 $ .06
========= ========= =========
Weighted average common and common equivalent
shares outstanding 21,151 43,096 43,957
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1995 1995 1996
--------- ------------ ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................. $(2,970) $ 437 $ 2,683
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization................................... 93 413 524
Consulting expense paid in common stock......................... 6 53 --
Unearned compensation amortization.............................. -- 54 157
Changes in operating assets and liabilities:
Accounts receivable........................................... (1,052) (5,264) (6,589)
Inventories................................................... (1,815) (1,258) (2,518)
Prepaid expenses and other current assets..................... 56 46 (1,057)
Other assets.................................................. (49) (235) 48
Accounts payable.............................................. 1,284 3,381 2,407
Accrued expenses.............................................. 305 (160) 1,996
Deferred revenue.............................................. 19 66 388
------- ------- --------
Net cash used in operating activities........................ (4,123) (2,467) (1,961)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............................... (699) (1,554) (2,765)
Sales (purchases) of investments.................................. (5,821) 11 (32,495)
------- ------- --------
Net cash used in investing activities........................ (6,520) (1,543) (35,260)
------- ------- --------
Cash flows from financing activities:
Proceeds from issuances of common stock and common stock warrants -- 3 87,446
Proceeds from issuances of convertible preferred stock............ 9,986 10,028 --
Repayments of debt................................................ -- (1,000) (79)
------- ------- --------
Net cash provided by financing activities.................... 9,986 9,031 87,367
------- ------- --------
Net increase (decrease) in cash and cash equivalents......... (657) 5,021 50,146
Cash and cash equivalents at beginning of period................... 694 1,013 6,034
------- ------- --------
Cash and cash equivalents at end of period......................... $ 37 $ 6,034 $ 56,180
======= ======= ========
Supplemental disclosure of cash flow information--cash paid during
the period for interest............................................ $ 10 $ 57 $ 58
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
XYLAN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments, consisting of normal and recurring adjustments, considered
necessary for a fair presentation of results for such periods. The results of
operations for the three month period ending March 31, 1996 are not necessarily
indicative of results which may be achieved for the full fiscal year or for any
future period. The unaudited consolidated interim financial statements should be
read in conjunction with the financial statements and notes thereto contained in
Xylan Corporation's ("Xylan" or the "Company") Registration Statement on Form
S-1, File No. 333-00574, declared effective by the Securities and Exchange
Commission on March 11, 1996.
NOTE 2. INVESTMENTS
Investments at March 31, 1996 consist of corporate and government debt
securities. In accordance with the provisions of Statement of Financial
Accounting Standards Board No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," the Company classifies its investments as available-
for-sale securities. The market value of these securities at March 31, 1996,
approximated cost.
NOTE 3. ACCOUNTS RECEIVABLE
During the three months ended March 31, 1996, the Company shipped certain
products for which the earnings process was not complete. Accordingly, the
Company deferred recognition of the related revenue and cost of revenue and
recorded as of March 31, 1996 approximately $2.4 million as a decrease in
inventory and approximately $2.4 million as an increase in accounts receivable.
NOTE 4. INVENTORIES
Inventories, primarily component parts, are stated at the lower of cost or
market, cost being determined using the first-in, first-out method.
6
<PAGE>
NOTE 5. SHAREHOLDERS' EQUITY
On March 12, 1996, the Company completed its initial public offering of a
total of 4,830,000 shares of common stock, including the underwriter's over-
allotment of 630,000 shares. Of the total, 3,680,000 shares of common stock were
sold by the Company, and 1,150,000 shares were sold by a selling shareholder.
Aggregate net proceeds to the Company were approximately $87.4 million.
Upon the effectiveness of the initial public offering, all of the
25,698,676 outstanding shares of preferred stock were converted into the same
number of shares of common stock. Additionally, a warrant containing an
automatic net exercise provision was converted into 185,725 shares of common
stock.
The Company has a 1993 Stock Incentive Plan (the "1993 Plan"). Under the
1993 Plan, 8,000,000 shares of the Company's authorized but unissued common
stock are reserved for options or stock purchase grants. As of March 31, 1996,
the Company has issued 679,026 shares of common stock and 6,811,300 granted
options are still outstanding. In connection with the grant of stock options,
for financial statement presentation purposes, the Company has recorded unearned
compensation, net of cancellations, of $2,336,000 for the difference between the
grant price and the deemed fair market value. This amount will be recorded as
compensation expense ratably over the vesting period for each option. For the
quarters ended December 31, 1995 and March 31, 1996, the Company recorded
$54,000 and $157,000 of compensation expense, respectively.
On January 22, 1996, the Board of Directors:
- Approved a two-for-one stock split of the Company's capital stock, which
became effective as of February 28, 1996. Accordingly, all references to
the number of shares and per share information for all periods presented
have been adjusted to give effect to the stock split.
- Approved an increase in the number of authorized shares of common stock
to 200,000,000 and authorized 5,000,000 shares of undesignated preferred
stock.
- Adopted certain technical amendments to the 1993 Plan.
- Adopted the 1996 Stock Option Plan (the "1996 Plan") which reserves
3,000,000 shares of common stock for issuance under this plan.
- Adopted the 1996 Employee Stock Purchase Plan (the "Purchase Plan")
which reserves 1,500,000 shares of Common Stock for issuance.
- Adopted the 1996 Directors Stock Option Plan (the "Directors' Plan")
which reserves 150,000 shares of common stock for issuance related to
nonstatutory stock options to nonemployee directors of the Company.
NOTE 6. INCOME TAXES
The Company's provision for income taxes for the three months ended March 31,
1996 is based upon the Company's estimate of the effective tax rate for fiscal
1996.
7
<PAGE>
NOTE 7. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per common and common equivalent share has been computed
using the weighted average number of common and common equivalent shares
outstanding using the treasury stock method, as adjusted for the two-for-one
common stock split, effective as of February 28, 1996, for all periods
presented. Shares used in the net income (loss) per share calculation are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
1995 1995 1996
--------- -------------- ---------
<S> <C> <C> <C>
Weighted average common stock outstanding..................... 10,320 10,320 37,364
Weighted average common stock equivalents outstanding......... 10,831 32,776 6,593
------ ------ ------
Shares used in net income (loss) per share calculation........ 21,151 43,096 43,957
====== ====== ======
</TABLE>
Pursuant to the requirements of the Securities and Exchange Commission,
common stock, stock options, warrants and convertible preferred stock issued by
the Company during the twelve months immediately preceding the initial public
offering date have been included in the calculation of the weighted average
shares outstanding for all periods presented using the treasury stock method.
Stock options, warrants and convertible preferred stock issued prior to 1995 are
excluded from the computation for the quarter ended March 31, 1995, as their
inclusion would be antidilutive.
NOTE 8. NEWLY ADOPTED FINANCIAL ACCOUNTING STANDARDS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of". This statement provides
guidelines for recognition of impairment losses related to long-term assets. The
adoption of this new standard did not have a material effect on the Company's
consolidated financial statements.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
("Statement No. 123"). This statement encourages, but does not require, a fair
value based method of accounting for employee stock options. The Company
elected to continue to measure compensation costs under APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and to comply with the pro forma
disclosure requirements of Statement No. 123. The adoption of this standard had
no impact on the Company's consolidated financial statements.
8
<PAGE>
NOTE 9. SEGMENT INFORMATION
For the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, the Company's three largest customers in each quarter accounted for 42%,
58% and 59% of revenue, respectively. The Company's three largest customers in
the first quarter of 1996, accounted for 34.4%, 12.8% and 11.9% of revenue,
respectively. Sales to customers outside of North America accounted for
approximately 55%, 54% and 67% of the Company's revenue in the quarters ended
March 31, 1995, December 31, 1995, and March 31, 1996, respectively. However,
these percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S.-based OEM partners
sell the Company's products abroad.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for the historical information contained herein, the matters
discussed in this report are forward looking statements that involve certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements. Potential risks and uncertainties
include, without limitation, those mentioned in this report and, in particular
the factors described below under the heading "Factors Affecting Future
Results," and those mentioned in the Company's prospectus dated March 11, 1996,
under the heading "Risk Factors."
OVERVIEW
Xylan is a leading provider of high-bandwidth switching systems that
enhance the performance of existing local area networks ("LANs") and facilitate
migration to next-generation networking technologies such as asynchronous
transfer mode ("ATM"). From inception (July 9, 1993) to December 31, 1994, the
Company was primarily engaged in product research and development and in the
development of systems and operations. The Company began commercial shipments of
its initial OmniSwitch products in January 1995 and introduced the PizzaSwitch
product family in March 1996. The Company first achieved profitability in the
fourth quarter of 1995. As of March 31, 1996, the Company had an accumulated
deficit of $11.4 million.
The Company markets its products worldwide through OEM partners, network
integrators and its own direct sales force. Aggregate sales to OEM partners and
network integrators accounted for 25% and 69%, respectively, of the Company's
revenue for the quarter ended March 31, 1995, 71% and 27%, respectively, of the
Company's revenue for the quarter ended December 31, 1995, and 42% and 56%,
respectively, for the quarter ended March 31, 1996.
The Company intends to continue to significantly increase its investments
in research and development, sales and marketing and related infrastructure. Any
such increases will be highly dependent on factors including the continued
growth of the Company's revenues and the rate thereof, success in hiring the
appropriate personnel and market acceptance of the Company's products. Due to
the anticipated increases in the Company's operating expenses, the Company's
operating results will be materially and adversely affected if revenue does not
increase. Xylan's limited operating history makes the prediction of future
annual or quarterly operating results difficult or impossible. Although the
Company has experienced revenue growth in all quarters since revenue was first
recognized, such growth rates will not be sustainable and are not indicative of
future operating results. There can be no assurance that the Company will
sustain profitability.
As Xylan only began commercial shipments of its OmniSwitch products in
January 1995, and due to the significant growth in both revenues and operating
expenses for the quarter ended March 31, 1996, versus the same quarter in 1995,
the Company believes that the comparison of the operating results for the
quarter ended March 31, 1996, versus the quarter ended December 31, 1995, is
more meaningful than the comparison of the quarter ended March 31, 1996, versus
the quarter ended March 31, 1995.
RESULTS OF OPERATIONS
REVENUE
Revenue for the quarter ended March 31, 1995, the first quarter in which
products were shipped, was $1.4 million. Revenue for the quarter ended December
31, 1995 was $15.5 million and increased 51% to $23.4 million for the
quarter ended March 31, 1996. The increase in revenue was due to a number of
factors, including substantial growth of the LAN switching market, continued
introduction by the Company of additional features and functions to its
OmniSwitch product family and the introduction of the PizzaSwitch product family
in March 1996, significant shipments to end users in Japan, market acceptance of
the Company's LAN switching products, and the Company's investment in sales and
marketing efforts. The relative contribution of most of these factors cannot be
quantified, and future changes in an individual factor therefore cannot be used
to predict future revenue growth. While the Company has achieved quarter-
10
<PAGE>
to-quarter revenue growth in previous quarters, the Company does not expect to
sustain this rate of sequential quarterly revenue growth in future periods.
For the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, the Company's three largest customers accounted for 42%, 58% and 59%,
respectively, of revenue. Of the three largest customers in the first quarter of
1996, one customer, a network integrator in Japan accounted for in excess of 30%
of revenue. The Company anticipates that this customer will not constitute a
similar proportion of the Company's revenue in future periods. Sales to
customers outside of North America accounted for approximately 55%, 54% and 67%,
of the Company's revenue in the quarters ended March 31, 1995, December 31,
1995, and March 31, 1996, respectively. However, these percentages may
understate sales of the Company's products to international end users because
certain of the Company's U.S.-based OEM partners sell the Company's products
abroad.
GROSS PROFIT
Gross margins were approximately 31%, 52% and 54% for the quarters ended
March 31, 1995, December 31, 1995 and March 31, 1996, respectively. The lower
gross margins in the first quarter of 1995 resulted from allocating fixed costs
over a smaller revenue base, costs associated with tooling charges and smaller
lot sizes during the early months of the Company's initial product introduction.
The increase from the fourth quarter of 1995 to the first quarter of 1996
resulted primarily from increased sales to network integrators, relative to
sales to the Company's OEMs that are typically made at lower margins. This
increase was partially offset by lower margins from PizzaSwitch product sales.
The Company's gross margins in the future will be affected by a number of
factors, including product mix, competitive market pricing and discount levels,
manufacturing volumes and fluctuations in component costs. After initial
product introduction, the Company's strategy is to seek to reduce component
costs, particularly by integrating newly-developed ASICs into such products. In
addition, the timing and execution of new product introductions may impact gross
margins and result in excess or obsolete inventories. The Company's gross
margins may also fluctuate due to the mix of distribution channels employed. The
Company expects to realize higher gross margins on direct sales than on sales
through its OEM partners and network integrators. Although gross margins may
vary from quarter to quarter, the Company does not anticipate improvements in
gross margins during the remainder of 1996.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses were $1.0 million, $2.4 million and $3.2
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This represents an increase of 220% from the first quarter
of 1995 to the first quarter of 1996, and an increase of 33% from the fourth
quarter of 1995 to the first quarter of 1996. These increases were primarily due
to a significant increase in the number of development personnel, additional
product development expenses incurred in connection with ongoing development of
new products and enhancements to the OmniSwitch and PizzaSwitch product family
as well as significant prototyping and tooling costs related to the final
development and test phases of new products. From December 31, 1995 to March
31, 1996, the number of development personnel increased by approximately 22%.
As a percentage of revenue, research and development expenses were 74%, 16%
and 14% for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This decline was due to the significant increases in
revenue.
The market for the Company's products is characterized by frequent new
product introductions and rapidly changing technology and industry standards,
any of which can render Xylan's existing products obsolete. As a result, the
Company's success will depend to a substantial degree upon its ability to
develop and introduce in a timely fashion new products and enhancements to its
existing products that meet changing customer requirements and emerging industry
standards. Accordingly, the Company expects to continue to make substantial
investments
11
<PAGE>
in research and development and anticipates that research and development
expenses will continue to increase in 1996 in absolute dollars.
SALES AND MARKETING EXPENSES
Sales and marketing expenses were $2.1 million, $3.8 million and $5.8
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. This represents an increase of 176% from the first quarter
of 1995 to the first quarter of 1996, and an increase of 53% from the fourth
quarter of 1995 to the first quarter of 1996. These increases were primarily due
to expenses related to the addition of direct sales personnel throughout the
United States, Europe and Asia, increased commission expenses resulting from
higher sales, and advertising and promotional campaigns in support of the
Company's direct and network integrator channels. The company incurred
additional sales and marketing expenses in connection with the launch of the
PizzaSwitch, the introduction of additional features and enhancements to the
OmniSwitch product family and demonstration equipment used for customer trials.
From December 31, 1995 to March 31, 1996, the number of sales and marketing
personnel increased by approximately 25%.
As a percentage of revenue, sales and marketing expenses were 150%, 25% and
25% for the quarters ended March 31, 1995, December 31, 1995 and March 31, 1996,
respectively. The decline was due to the significant increases in revenue.
As the Company continues to expand its direct sales force, adding personnel
and offices worldwide, and to introduce new products and enhancements to its
existing products, it expects that sales and marketing expenses will continue
to increase in 1996 in absolute dollars.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $350,000, $1.4 million and $1.0
million for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. The increase in the first quarter of 1995 to the first
quarter of 1996 primarily reflects the addition of personnel and systems to
support the growth of Xylan's business. The decrease from the fourth quarter of
1995 to the first quarter of 1996 is primarily due to a reduction in legal
expenses associated with the Ascom Timeplex litigation, and relocation costs
and severance payments for certain employees that were incurred in the quarter
ended December 31, 1995.
As a percentage of revenue, general and administrative expenses were 25%,
9% and 4% for the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, respectively. These declines were due to the significant increases in
revenue.
As the Company continues to expand its direct sales force, add personnel
and offices worldwide, and introduce new products and enhancements to its
existing products, it expects that general and administrative expenses will
continue to increase in 1996 in absolute dollars.
INTEREST INCOME (EXPENSE)
Interest income (expense), net was $71,000, $(14,000) and $177,000 for the
quarters ended March 31, 1995, December 31, 1995 and March 31, 1996,
respectively. The increase in the first quarter of 1996 over the prior quarters
is primarily the result of interest income earned on the net proceeds of $87.4
million from the Company's initial public offering.
PROVISION FOR INCOME TAXES
As a result of net operating losses, no provision for income taxes was
recorded for 1995. The Company's provision for income taxes for the quarter
ended March 31, 1996 was 3% of pretax income, reflecting the use of net
operating loss carryforwards. For the remainder of 1996, the Company expects to
continue to record a 3% provision for income taxes, although such percentage may
vary depending on several factors, including tax benefits associated with
disqualifying dispositions of shares acquired under incentive stock options, the
availability of research and development tax credits and the international
component of the Company's
12
<PAGE>
business. As of December 31, 1995, the Company had available net operating loss
carryforwards for federal and state tax purposes of approximately $12.4 million
and $6.2 million, respectively, to offset future United States tax obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations and capital
expenditures through the sale of Common Stock and Preferred Stock, for aggregate
proceeds of approximately $117 million, and capital lease and other debt
financing. For the quarters ended March 31, 1995, December 31, 1995 and March
31, 1996, cash utilized by operating activities was $4.1 million, $2.5 million
and $2.0 million, respectively. The decrease in cash utilized from the fourth
quarter of 1995 to the first quarter of 1996 is the result of the increase in
net income partially offset by increased working capital necessary to fund the
significantly expanded operations and the resulting inventories and accounts
receivable.
For the quarters ended March 31, 1995, December 31, 1995 and March 31,
1996, capital expenditures aggregated $700,000, $1.6 million and $2.8 million,
respectively. The Company expects capital expenditures to total approximately
$13 million in 1996. The Company does not anticipate material capital
expenditures to be made for additional manufacturing space in 1996.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivables and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of revenue growth, the timing and extent of spending
to support product development efforts and expansion of sales and marketing, the
timing of introductions of new products and enhancements to existing products,
and market acceptance of the Company's products. There can be no assurance that
additional equity or debt financing, if required, will be available on
acceptable terms or at all.
The Company's principal source of liquidity as of March 31, 1996, consisted
of $56.2 million in cash and cash equivalents, $25.5 million in short-term
investments and a $7.5 million bank credit facility. The Company believes that
existing cash and investment balances and cash flow expected to be generated
from future operations, will be sufficient to meet the Company's requirements
for at least the next 12 months.
13
<PAGE>
FACTORS AFFECTING FUTURE RESULTS
Limited Operating History; Recent Profitability; Uncertain Future
Profitability. The Company was organized in July 1993 and began shipping its
first LAN switching products in volume in the first quarter of 1995. The
Company's initial products offered limited interfaces and, in September 1995,
the Company began offering fully-featured products. Accordingly, the Company
has only a limited operating history upon which an evaluation of the Company
and its prospects can be based. As of March 31, 1996, the Company had an
accumulated deficit of $11.4 million. The Company has experienced substantial
revenue growth since January 1995, and first achieved profitability in the
fourth quarter of 1995. Due to the Company's limited operating history, there
can be no assurance of revenue growth and profitability on a quarterly or
annual basis in the future. While the Company achieved significant quarter-to-
quarter revenue growth since it introduced its products in 1995, the Company
does not expect to sustain the same rate of sequential quarterly revenue
growth in future periods. The Company intends to increase significantly its
investments in 1996 in research and development, sales and marketing and
related infrastructure. Any such increases will be highly dependent on factors
including the continued growth of the Company's revenues and the rate thereof,
success in hiring the appropriate personnel and market acceptance of the
Company's products. Due to the anticipated increases in the Company's
operating expenses, the Company's operating results will be adversely affected
if revenue does not increase. The Company's prospects must be considered in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in
rapidly evolving markets. To address these risks, the Company must, among
other things, successfully increase the scope of its operations, respond to
competitive developments, continue to attract, retain and motivate qualified
personnel and continue to commercialize products incorporating advanced
technologies. There can be no assurance that the Company will be successful in
addressing such risks.
Fluctuations in Operating Results. The Company's revenue and operating
results may fluctuate from quarter to quarter and from year to year due to a
combination of factors, including (i) the timing and amount of significant
orders from the Company's OEM partners and network integrators, (ii) the
Company's success in developing, introducing and shipping product enhancements
and new products, (iii) the ability to obtain sufficient supplies of sole or
limited source components for the Company's products, (iv) the ability to
attain and maintain production volumes and quality levels for its products,
(v) the mix of distribution channels and products, (vi) new product
introductions by the Company's competitors, (vii) pricing actions by the
Company or its competitors, (viii) changes in material costs and (ix) general
economic conditions. See "Factors Affecting Future Results--Dependence on OEM
Partners and Network Integrators; Customer Concentration," "--Dependence on Sole
and Limited Source Suppliers and Availability of Components," "--Substantial
Increase in Manufacturing Operations; Dependence on Contract Manufacturing,"
"--Competition," "--Rapid Technological Change; New Products and Evolving
Markets," "--Uncertain Market Acceptance of the Company's Products; Product
Concentration" and "--Product Complexity."
The Company's revenue in any period is highly dependent upon the sales
efforts and success of Xylan's OEM partners and network integrators, which are
not within the control of the Company. The Company generally realizes a higher
gross margin on direct sales than on sales through its OEM partners and
network integrators. Accordingly, if the Company's OEM partners and network
integrators were to account for an increased portion of the Company's revenue,
gross margins would decline. In addition, new products may have different
gross margins than existing products. In particular, the Company's
PizzaSwitch, introduced in the first quarter of 1996, currently has a lower
gross margin than the OmniSwitch. A significant portion of the Company's
14
<PAGE>
expenses, such as rent, headcount and capital lease expenses, are relatively
fixed in advance, based in large part on the Company's forecasts of future
sales. If sales are below expectations in any given period, the adverse effect
of a shortfall in sales on the Company's operating results may be magnified by
the Company's inability to adjust spending to compensate for such shortfall.
The Company's backlog at the beginning of each quarter typically is not
sufficient to achieve expected revenue for that quarter. To achieve its
revenue objectives, the Company is dependent upon obtaining orders in a
quarter for shipment in that quarter. Furthermore, the Company's agreements
with its customers typically provide that they may change delivery schedules
and cancel orders within specified timeframes without significant penalty. The
Company's industry is characterized by short product life cycles and declining
prices of existing products, which requires continual improvement of
manufacturing efficiencies and introduction of new products and enhancements
to existing products to maintain gross margins. Moreover, in response to
competitive pressures or to pursue new product or market opportunities, the
Company may take certain pricing or marketing actions that could materially
and adversely affect the Company's operating results. For example, a reduction
in prices of the Company's products could result in lower revenues, an
increase in discounts offered to the Company's OEM partners or network
integrators would adversely affect the Company's operating margins, and a
substantial targeted marketing campaign could significantly increase marketing
expense and result in decreased profitability. As a result of all of the
foregoing, there can be no assurance that the Company will be able to achieve
or sustain profitability on a quarterly or annual basis. In addition, it is
possible that in some future quarter the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock would likely be materially and
adversely affected.
Competition. The market for network switching products is intensely
competitive and subject to frequent product introductions with improved
price/performance characteristics, rapid technological change and continued
emergence of new industry standards. Many networking companies, including Bay
Networks, Inc., Cabletron Systems, Inc., Cisco Systems, Inc., FORE Systems,
Inc. and 3Com Corporation, have introduced, or have announced their intention
to develop, network switching products that are or will be competitive with
the Company's products. In addition, many of the Company's large competitors
offer customers a broader product line which provides a more comprehensive
networking solution than the Company currently offers. Xylan expects that
other companies will also enter markets in which the Company competes. In
addition to competition from providers of network switching products, the
Company expects to face competition from other vendors in the networking
market who may incorporate switching functionality into their products or
provide alternative network solutions. Furthermore, the Company's OEM partners
may in the future develop competitive products and may then decide to
terminate their relationships with the Company. Many of the Company's current
and potential competitors have longer operating histories and substantially
greater financial, technical, sales, marketing and other resources, as well as
greater name recognition and a larger installed customer base, 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. In addition, competitors with a larger installed customer
base may have a competitive advantage over the Company when selling similar
products or alternative networking solutions to such customers. Increased
competition could result in significant price competition, reduced profit
margins or loss of market share, any of which could have a material adverse
effect on the Company's business, operating results and financial condition.
There can be no assurance that the Company will be able to compete
successfully against either current or potential competitors in the future.
See "Risk Factors--Dependence on Proprietary Technology; Intellectual Property
Litigation."
Substantial Increase in Manufacturing Operations; Dependence on Contract
Manufacturing. The Company is in the process of substantially increasing its
flow of materials, contract manufacturing capacity and internal test and
quality functions to respond to customer demand and reduce its order lead
times. Any inability or delay in increasing product flow would limit the
Company's revenue, could adversely affect the Company's competitive position
and could result in late fees or cancellation of orders under agreements with
the Company's OEM partners, although these have not occurred to date. The
Company currently requires additional manufacturing space and is in the
process of leasing an additional 40,000 square feet of space (a portion of
which will be used for manufacturing) that is scheduled to be occupied during
July 1996. Any delay in leasing or
15
<PAGE>
occupying this additional space, or interruption in the normal flow of
production as the Company expands manufacturing activities to this new
facility, could have a material adverse effect on the Company's business,
operating results and financial condition. The Company may also require
manufacturing space beyond this 40,000 square foot facility in 1996 or
thereafter. There can be no assurance that such additional space, if required,
will be available in a timely manner or on commercially reasonable terms.
Xylan's operational strategy relies on outsourcing of manufacturing. The
Company currently subcontracts component procurement and kitting to a small
number of companies, and printed circuit board assembly to a single company
(Victron, Inc.), that specialize in those services. In connection with its
operational strategy, the Company is seeking to secure additional sources of
supply, including additional contract manufacturers. The Company has
experienced in the past, and may in the future experience, problems with its
contract manufacturer, such as inferior quality, insufficient quantities and
late delivery of product. While such problems have not resulted in any
material liabilities from the Company to its customers or end-users to date,
there can be no assurance that such problems will not generate material
liabilities for the Company or adversely impact the Company's relations with
its customers and end-users in the future. In addition, the Company may in the
future experience pricing pressure from its contract manufacturers. To date,
the Company has had only limited experience with the use of contract
manufacturers. There can be no assurance that the Company will effectively
manage its contract manufacturers or that these manufacturers will meet the
Company's future requirements for timely delivery of products of sufficient
quality and quantity. The Company intends to introduce a number of new
products and product enhancements in 1996 and 1997, which will require that
the Company rapidly achieve volume production by coordinating its efforts with
those of its suppliers and contract manufacturers. Certain of the Company's
products in development will require contract manufacturers to adopt or
develop advanced manufacturing techniques, which could inhibit volume
manufacturing of those products. The inability of Xylan's contract
manufacturers to provide it with adequate supplies of high-quality products or
the loss of any of the Company's contract manufacturers could cause a delay in
Xylan's ability to fulfill orders while the Company identifies a replacement
manufacturer and could have a material adverse effect upon the Company's
business, operating results and financial condition.
Dependence on Sole and Limited Source Suppliers and Availability of
Components. Several key components used in the manufacture of the Company's
products are currently purchased only from single or limited sources. At
present, single-sourced components include programmable integrated circuits,
selected integrated circuits and cables and custom-tooled sheet metal; and
limited-sourced components include flash memories, dynamic random access
memories ("DRAMs"), printed circuit boards and ASICs. The Company generally
does not have long-term agreements with any of these single or limited sources
of supply. The Company is in the process of incorporating ASICs in many of its
products. Each of these ASICs is initially being manufactured only by a single
source, particularly LSI Logic Corporation, and accordingly the risks of
relying on sole sources is expected to increase. Any interruption in the
supply of any of these components, or the inability of the Company to procure
these components from alternate sources at acceptable prices and within a
reasonable time, could have a material adverse effect upon the Company's
business, operating results and financial condition. Qualifying additional
suppliers is time consuming and expensive and the likelihood of errors is
greater with new suppliers. The Company uses a rolling six-month forecast
based on anticipated product orders to determine its general materials and
components requirements. Lead times for materials and components ordered by
the Company vary significantly, and depend on factors such as the specific
supplier, contract terms and demand for a component at a given time. If orders
do not match forecasts, the Company may have excess or inadequate inventory of
certain materials and components. From time to time the Company has
experienced shortages and allocations of certain components and has
experienced delays in filling orders while waiting to obtain the necessary
components. Given current worldwide demand for integrated circuits and certain
other components used by the Company and the complexity and yield problems in
manufacturing such integrated circuits and components, such shortages and
allocations are likely to occur in the future and could have a material
adverse effect on the Company's business, operating results and financial
condition.
Management of Growth. The Company's recent growth has placed a significant
strain on the Company's financial and management personnel and information
systems and controls. This growth has resulted in a
16
<PAGE>
continuing increase in the level of responsibility for both existing and new
management personnel. The Company recently implemented new and enhanced
financial and management information systems and controls and is training its
personnel to operate such systems. Any difficulty in the operation of such new
and enhanced systems or the training of personnel, or any disruptions in the
transition to such new or enhanced systems and controls, could adversely
affect the Company's ability to accurately forecast sales demand and calibrate
manufacturing to such demand, to calibrate purchasing levels, to accurately
record and control inventory levels, and to record and report financial and
management information on a timely and accurate basis. Due to its rapid growth
and the fact that such systems and controls had not been implemented, the
Company experienced each of these problems in 1995. The occurrence of the
Company's problems with forecasting sales demands did not result in shortfalls
in projected revenues in 1995. However, the occurrence of any of these events
in the future could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on OEM Partners and Network Integrators; Customer
Concentration. The Company is pursuing a sales and marketing strategy focused
on developing three channels of distribution for its products: worldwide OEM
partners, network integrators in North America and overseas and direct sales.
The Company has established OEM partnerships with leading communications and
networking companies, including Alcatel N.V. ("Alcatel"), Digital Equipment
Corporation ("Digital"), Hitachi Computer Products (America), Inc.
("Hitachi"), and Network Systems Corporation. Although there is a large number
of end-users of Xylan's products, the Company's customer base is highly
concentrated and a relatively small number of customers have accounted for a
significant portion of the Company's revenue to date. The Company's OEM
partners and network integrators account, and are expected to continue to
account, for a substantial portion of the Company's net revenue. Aggregate
sales to OEM partners accounted for approximately 60% and 42% of Xylan's
revenue in 1995 and the first quarter of 1996, respectively. Sales to three of
the Company's OEM partners, Hitachi, Digital and Alcatel, accounted for 17.6%,
17.2% and 10.5%, respectively, of revenue in 1995. Network integrators
accounted for approximately 33% and 56% of Xylan's revenue in 1995 and the
first quarter of 1996, respectively. During the first quarter of 1996, one of
the Company's network integrators in Japan accounted for in excess of 30% of
the Company's revenue for the quarter. However, the Company anticipates that
this network integrator will not constitute a similar portion of the Company's
revenue in future periods. Each of the Company's OEM partners and network
integrators can cease marketing the Company's products with limited notice to
Xylan and with little or no penalty. In addition, the Company's agreements
with its OEM partners and network integrators generally provide for discounts
based on expected or actual volumes of products purchased or resold by the
reseller in a given period and do not require minimum purchases. Certain of
these agreements provide manufacturing rights and access to source code upon
the occurrence of specified conditions or defaults. The Company's agreement
with Alcatel limits the number of additional network integrators Xylan may
appoint in certain European countries and restricts the Company's ability to
sell directly to end users in such countries. The Company expects that certain
of its OEM partners will in the future develop competitive products and, if
they do so, they may decide to terminate their relationship with the Company.
In addition, many of the Company's resellers offer competitive products
manufactured either by third parties or by themselves. Furthermore, certain of
the Company's OEM partners and network integrators offer alternative
networking solutions, designed by themselves or third parties, or have pre-
existing relationships with current or potential competitors of the Company.
There can be no assurance that the Company's OEM partners and network
integrators will give a high priority to the marketing of the Company's
products as compared to competitive products or alternative networking
solutions or that Xylan's OEM partners and network integrators will continue
to offer the Company's products. Any reduction or delay in sales of the
Company's products by its OEM partners and network integrators could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will retain
its current OEM partners or network integrators or that it will be able to
recruit additional or replacement OEM partners or network integrators. The
loss of one or more of the Company's OEM partners or network integrators could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company generally realizes a higher gross margin
on direct sales than on sales through its OEM partners and network
integrators. Accordingly, if the Company's OEM partners and network
integrators were to account for an increased portion of the Company's
17
<PAGE>
revenue, its gross margin would decline.
Rapid Technological Change; New Products and Evolving Markets. The market
for the Company's products is characterized by frequent new product
introductions, rapidly changing technology and continued emergence of new
industry standards, any of which could render Xylan's existing products
obsolete. The Company's success will depend to a substantial degree upon its
ability to develop and introduce in a timely fashion new products and
enhancements to its existing products that meet changing customer requirements
and emerging industry standards. The development of new, technologically
advanced products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. There can be no assurance that the Company will be able to identify,
develop, manufacture, market or support new or enhanced products successfully
or on a timely basis, that new Company products will gain market acceptance or
that the Company will be able to respond effectively to product announcements
by competitors, technological changes or emerging industry standards. In
addition, the Company has on occasion experienced delays in the introduction
of new products and product enhancements. Furthermore, from time to time, the
Company may announce new products or product enhancements, capabilities or
technologies that have the potential to replace or shorten the life cycle of
the Company's existing product offerings and that may cause customers to defer
purchasing existing Company products or cause resellers to return products to
the Company. The market for LAN switch products is evolving and the Company
believes its ability to compete successfully in this market is dependent upon
the continued compatibility and interoperability of its products with products
and architectures offered by various vendors, including workstation and
personal computer architectures and computer and network operating systems.
There can be no assurance that the Company will be able to effectively address
the compatibility and interoperability issues raised by technological changes
or evolving industry standards. A key element of the Company's strategy is the
development of multiple ASICs to increase system performance and reduce
manufacturing costs, thereby enhancing the price/performance of the Company's
products. Any failure to continue to introduce new products or product
enhancements and develop and incorporate ASICs effectively and on a timely
basis, customer delays in purchasing products in anticipation of new product
introductions or any inability of the Company to respond effectively to
product announcements by competitors, technological changes or emerging
industry standards could have a material adverse effect on the Company's
business, operating results and financial condition.
Uncertain Market Acceptance of the Company's Products; Product
Concentration. The Company currently derives substantially all of its revenue
from its OmniSwitch and PizzaSwitch products and the Company expects that
revenue from these products will continue to account for a substantial portion
of the Company's revenue at least through 1997. Broad market acceptance of
these products is, therefore, critical to the Company's future success.
Factors that may affect the market acceptance of the Company's products
include market acceptance of network switching products, the availability and
price of competing products and technologies and the success of the sales
efforts of the Company and its OEM partners and network integrators. Moreover,
the Company's operating history in the network switching market and its
resources are limited relative to those of certain of its current and
potential competitors. The Company's future performance will also depend in
part on the successful development, introduction and market acceptance of new
and enhanced products. Failure of the Company's products to achieve market
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition.
Product Complexity. Products as complex as those offered by the Company
frequently contain undetected software or hardware errors when first
introduced or as new versions are released. As is common among participants in
the Company's industry, the Company has experienced such errors in the past in
connection with product upgrades and new products. Despite testing by the
Company and by current and potential customers, Xylan expects that such errors
will be found from time to time in new or enhanced products after commencement
of commercial shipments. The Company believes it has addressed these errors
when they have occurred through software and hardware revisions. However, the
occurrence of such errors could, and the inability to correct such errors
would, result in the delay or loss of market acceptance of the Company's
products, additional warranty
18
<PAGE>
expense, diversion of engineering and other resources from the Company's
product development efforts and the loss of credibility with Xylan's OEM
partners, network integrators and end users, any of which would have a
material adverse effect on the Company's business, operating results and
financial condition.
Dependence on Proprietary Technology; Intellectual Property Litigation. The
Company's success and its ability to compete is dependent, in part, upon its
proprietary technology. The Company does not hold any issued patents and
currently relies on a combination of contractual rights, trade secrets and
copyright laws to establish and protect its proprietary rights in its
products. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
of its technology or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In the event that protective measures are not
successful, the Company's business, operating results and financial condition
could be materially and adversely affected. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights to the same
extent as do the laws of the United States.
The Company is also subject to the risk of adverse claims and litigation
alleging infringement of intellectual property rights of others. On June 8,
1995, a suit alleging misappropriation of trade secrets, infringement of U.S.
Patent No. 5,394,402 and improper hiring of employees was brought against
Xylan by Ascom Timeplex Inc. ("Ascom Timeplex") in the U.S. District Court for
the Central District of California in Los Angeles, California, seeking
injunctive relief and unspecified monetary damages. The Company and Ascom
Timeplex have signed a binding memorandum of understanding to settle this
litigation and dismiss all of Ascom Timeplex's charges against the Company and
against Steve Y. Kim, John Bailey and another employee named in Ascom Timeplex's
complaint, and otherwise release the parties from all claims. The settlement
also involves a royalty-free license to the Company of Ascom Timeplex's virtual
LAN technology covered by the patent and a royalty-free license to Ascom
Timeplex of certain technology embodied in the Company's currently available
products for use in and in connection with Ascom Timeplex's Synchrony product
family. These licenses are not assignable other than to a successor-in-interest
to Ascom Timeplex. The Company also undertakes to transfer a copy of the
licensed technology to Ascom Timeplex and for a specified time not to hire Ascom
Timeplex employees. The release by Ascom Timeplex is conditioned on transfer of
this technology. The parties are preparing a definitive agreement for this
settlement.
Since patent applications in the United States are not publicly disclosed
until the patent issues, applications may have been filed which, if issued as
patents, would relate to the Company's products. In addition, the Company has
not conducted a comprehensive patent search relating to the technology used in
its products. The Company is subject to the risk of claims and litigation
alleging infringement of the intellectual property rights of others. In
addition to the claims of Ascom Timeplex, Xylan has, from time to time,
received claims from third parties alleging infringement of such third
parties' intellectual property rights. The Company believes that none of the
current claims against the Company would result in material liability if
successful. Although such claims have not resulted in material litigation to
date, there can be no assurances that such claims will not be successful or
generate material litigation in the future. Furthermore, there can be no
assurance that third parties will not assert infringement claims against the
Company in the future based on patents or trade secrets or that such claims
will not be successful. The Company could incur substantial costs in defending
itself and its customers against any such claims, regardless of the merits of
such claims. Parties making such claims may be able to obtain injunctive or
other equitable relief which could effectively block the Company's ability to
sell its products in the United States and abroad, and could result in an
award of substantial damages. In the event of a successful claim of
infringement, the Company, its customers and end-users may be required to
obtain one or more licenses from third parties. There can be no assurance that
the Company or its customers could obtain necessary licenses from third
parties at a reasonable cost or at all. The defense of any lawsuit could
result in time-consuming and expensive litigation, damages, license fees,
royalty payments and restrictions on the Company's ability to sell its
products, any of which could have a material adverse effect on the Company's
business, financial condition and
19
<PAGE>
results of operations.
Dependence on Key Personnel and Hiring of Additional Personnel. The
Company's success depends to a significant degree upon the continued
contributions of its key management, engineering, sales and marketing and
manufacturing personnel, many of whom would be difficult to replace. In
particular, the Company believes that its future success is highly dependent
on Steve Y. Kim, Chairman, President and Chief Executive Officer and John
Bailey, Vice President of Development. The Company does not have employment
contracts with, and does not currently maintain key man life insurance
covering, its key personnel. The Company believes its future success will also
depend in large part upon its ability to attract and retain highly skilled
managerial, engineering, sales and marketing, finance and manufacturing
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting and retaining such
personnel. The loss of the services of any of the key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers and sales personnel, could have a
material adverse effect on the Company's business, operating results or
financial condition. In addition, companies in the networking industry whose
employees accept positions with competitive companies frequently claim that
their competitors have engaged in unfair hiring practices. Xylan has, from
time to time, received such claims from other companies and, although claims
to date have not resulted in material litigation other than in connection with
Ascom Timeplex, there can be no assurance that the Company will not receive
additional claims in the future as it seeks to hire qualified personnel or
that such claims will not result in material litigation involving the Company.
The Company could incur substantial costs in defending itself against any such
claims, regardless of the merits of such claims. To date, the Company has not
lost any employees as a result of such claims.
International Operations. The Company's sales to customers outside of the
United States accounted for approximately 49% and 67% of the Company's revenue
in 1995 and the first quarter of 1996, respectively. However, these
percentages may understate sales of the Company's products to international
end-users because certain of the Company's U.S.-based OEM partners market the
Company's products abroad. The Company's international sales are conducted
primarily through its OEM partners and independent territory-specific network
integrators. Failure of the Company's OEM partners and network integrators to
effectively market the Company's products internationally or the loss of any
of these resellers could have a material adverse effect on the Company's
business, operating results and financial condition. A number of additional
risks are inherent in international operations. The Company's international
sales currently are U.S. dollar-denominated. As a result, an increase in the
value of the U.S. dollar relative to foreign currencies could make the
Company's products less competitive in international markets. International
sales may also be limited or disrupted by the imposition of governmental
controls, export license requirements, restrictions on the export of critical
technology, currency exchange fluctuations, political instability, trade
restrictions and changes in tariffs. The Company's operating results could
also be adversely affected by seasonality of international sales, with
industry sales typically being lower in Asia in the first calendar quarter and
in Europe in the third calendar quarter. These international factors could
have a material adverse effect on future sales of the Company's products to
international end-users and, consequently, the Company's business, operating
results and financial condition.
Market for Network Switches; General Economic Conditions. Demand for the
Company's products depends in large part on overall demand for network
switching products, which may in the future fluctuate significantly based on
numerous factors, including adoption of alternative technologies, capital
spending levels and general economic conditions. While certain analysts
believe that there is a significant market for network switches, there can be
no assurance as to the rate or extent of the growth of this market. There can
be no assurance that the Company will not experience a decline in demand for
its products, which would have a material adverse effect on the Company's
business, operating results and financial condition.
Need for Additional Capital. The Company requires substantial working
capital to fund its business, particularly to finance inventories and accounts
receivable and for capital expenditures. The Company believes that its existing
cash balances, together with its line of credit and cash flow
20
<PAGE>
expected to be generated from future operations, will be sufficient to meet
the Company's capital requirements through at least the end of 1996, although
the Company could be required, or could elect, to seek to raise additional
capital during 1996. The Company's future capital requirements will depend on
many factors, including the rate of revenue growth, the timing and extent of
spending to support product development efforts and expansion of sales and
marketing, the timing of introductions of new products and enhancements to
existing products, and market acceptance of the Company's products. The
Company expects that it may need to raise additional equity or debt financing
in the future. There can be no assurance that additional equity or debt
financing, if required, will be available on acceptable terms or at all.
Regulatory Matters. The Company's products must meet industry standards and
receive certification for connection to certain public telecommunications
networks prior to their sale. In the United States, the Company's products
must comply with various regulations defined by the Federal Communications
Commission and Underwriters Laboratories. Internationally, the Company's
products must comply with standards established by telecommunications
authorities in various countries as well as with recommendations of the
Consultative Committee on International Telegraph and Telephony. Although the
Company's products have not been denied any regulatory approvals or
certifications to date, any future inability to obtain on a timely basis or
retain domestic or foreign regulatory approvals or certifications or to comply
with existing or evolving industry standards could have a material adverse
effect on the Company's business, operating results and financial condition.
Anti-Takeover Provisions. Certain provisions of the Company's charter
documents, including provisions eliminating the ability of shareholders to
take action by written consent and limiting the ability of shareholders to
raise matters at a meeting of shareholders without giving advance notice, may
have the effect of delaying or preventing changes in control or management of
the Company, which could have an adverse effect on the market price of the
Company's Common Stock. In addition, effective upon qualification of the
Company as a "listed corporation," as defined in Section 301.5(d) of the
California Corporations Code (the "California Code"), the Company's charter
documents will eliminate cumulative voting and provide that the Company's
Board of Directors will be divided into two classes, each of which serves for
a staggered two-year term, which may make it more difficult for a third party
to gain control of the Company's Board of Directors. The Board of Directors
has authority to issue up to 5,000,000 shares of Preferred Stock and to fix
the rights, preferences, privileges and restrictions, including voting rights,
of these shares without any further vote or action by the shareholders. The
rights of the holders of the Company's Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value
of the Common Stock. The Company has no present plan to issue shares of
Preferred Stock.
21
<PAGE>
Possible Volatility of Stock Price. The market price of the shares of Common
Stock has been and is likely to continue to be highly volatile and may be
significantly affected by factors such as actual or anticipated fluctuations
in the Company's operating results, announcement of technological innovations
or new product introductions by the Company or its competitors, changes of
estimates of the Company's future operating results by securities analysts,
developments with respect to copyrights or proprietary rights, general market
conditions and other factors. In addition, the stock market has from time to
time experienced significant price and volume fluctuations that have
particularly affected the market prices for the Common Stocks of technology
companies. These broad market fluctuations may adversely effect the market
price of the Company's Common Stock.
22
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 8, 1995, a suit alleging misappropriation of trade secrets,
infringement of U.S. Patent No. 5,394,402 and improper hiring of employees was
brought against Xylan by Ascom Timeplex Inc. ("Ascom Timeplex") in the U.S.
District Court for the Central District of California in Los Angeles, California
seeking injunctive relief and unspecified monetary damages. The Company and
Ascom Timeplex have signed a binding memorandum of understanding to settle this
litigation and dismiss all of Ascom Timeplex's charges against the Company and
against Steve Y. Kim, John Bailey and another employee named in Ascom Timeplex's
complaint, and otherwise release the parties from all claims. The settlement
also involves a royalty-free license to the Company of Ascom Timeplex's virtual
LAN technology covered by the patent and a royalty-free license to Ascom
Timeplex of certain technology embodied in the Company's currently available
products for use in connection with Ascom Timeplex's Synchrony product family.
These licenses are not assignable other than to a successor-in-interest to Ascom
Timeplex. The Company also undertakes to transfer a copy of the licensed
technology to Ascom Timeplex and for a specified time not to hire Ascom Timeplex
employees. The release by Ascom Timeplex is conditioned on transfer of this
technology The parties are preparing a definitive agreement for this settlement.
ITEM 2. CHANGES IN SECURITIES
On February 28, 1996, the Company effected a 2-for-1 share forward stock
split pursuant to which each share of the Company's Common Stock and Preferred
Stock was automatically converted into two shares of the like class and series
of Company's capital stock.
Pursuant to the terms of the Company's Articles of Incorporation, each
outstanding share of the Company's Preferred Stock was automatically converted
into one share of the Company's Common Stock upon the consummation of the
Company's initial public offering of securities (the "IPO") on March 15, 1996.
ITEM 3. DEFAULTS IN SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1996 Annual Meeting of Shareholders of Xylan Corporation was held on
February 28, 1996, at which the following actions were taken by the Company's
shareholders:
1. The vote for nominated directors was as follows:
<TABLE>
<CAPTION>
NOMINEE FOR WITHHELD ABSTAIN
<S> <C> <C> <C>
Steve Y. Kim 32,074,978 0 8,000
Kevin G. Hall 32,074,978 0 8,000
Robert C. Hawk 32,074,978 0 8,000
Yuri Pikover 32,074,978 0 8,000
Trude C. Taylor 32,074,978 0 8,000
John L. Walecka 32,074,978 0 8,000
</TABLE>
2. The following actions were ratified and approved:
23
<PAGE>
a. The amendment and restatement of the Company's Articles of Incorporation
to effect a two-for-one forward stock split, to be filed and become
effective February 28, 1996 (note: all share numbers set forth under this
Item and elsewhere in this Report are reflected in post-split figures).
FOR AGAINST ABSTAIN
32,074,978 0 8,000
b. The further amendment and restatement of the Company's Articles of
Incorporation upon the closing of the IPO to (i) delete all reference to
prior series of Preferred Stock, (ii) provide for 200,000,000 shares of
Common Stock and 5,000,000 shares of undesignated Preferred Stock, (iii)
eliminate the ability of shareholders to take action by written consent,
(iv) provide for a classified Board of Directors and (v) eliminate the
right of shareholders to cumulate votes for the election of directors.
FOR AGAINST ABSTAIN
32,074,978 0 8,000
c. The amendment and restatement of the Company's Bylaws to (i) eliminate the
ability of shareholders to take action by written consent, (ii) provide
for a classified Board of Directors, and (iii) eliminate cumulative voting
as provided by the Company's Amended and Restated Articles of
Incorporation, again to become effective upon the closing of the IPO.
FOR AGAINST ABSTAIN
32,074,978 0 8,000
d. Certain amendments to the Company's 1993 Stock Incentive, permitting
acceleration of options in the event of a change in control of the Company
and such other amendments to comply with Rule 16b-3 of the Securities
Exchange Act of 1934, as amended.
FOR AGAINST ABSTAIN
32,043,868 0 39,110
e. The adoption of the Company's 1996 Employee Stock Purchase Plan and the
reservation of 1,500,000 shares of Common Stock for issuance thereunder,
contingent and effective upon the closing of the IPO.
FOR AGAINST ABSTAIN
32,043,868 0 39,110
f. The adoption of the Company's 1996 Stock Option Plan and the reservation
of 3,000,000 Common Stock for issuance thereunder, contingent and
effective upon the closing of the IPO.
FOR AGAINST ABSTAIN
32,063,868 0 19,110
g. The adoption of the Company's 1996 Directors' Stock Option Plan and the
reservation of 150,000 shares of Common Stock for issuance thereunder,
contingent and effective upon the closing of the IPO.
FOR AGAINST ABSTAIN
32,054,978 0 28,000
24
<PAGE>
h. The selection of KPMG Peat Marwick LLP as independent auditors for the
corporation for the fiscal year ending December 31, 1996.
FOR AGAINST ABSTAIN
32,054,978 0 28,000
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.18+ Manufacturing and Purchase Agreement dated as of March 28,
1996 between the Registrant and Victron, Inc.
11.1* Statement of Computation of Earnings Per Share.
27.1* Financial Data Schedule
</TABLE>
______________
+ Confidential treatment requested with respect to portions of this
exhibit.
* Previously filed.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Xylan during the quarter ended
March 31, 1996.
25
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
XYLAN CORPORATION
Date: May 28, 1996 By:/s/C. Stephen Cordial
---------------------
C. Stephen Cordial
Vice President and Chief Financial Officer
(Principal Financial and Chief Accounting
Officer)
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
------- -----------
<S> <C>
10.18+ Manufacturing and Purchase Agreement dated as of March 28,
1996 between the Registrant and Victron, Inc.
</TABLE>
27
<PAGE>
EXHIBIT 10.18
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
MANUFACTURING AND PURCHASE AGREEMENT
THIS AGREEMENT is made and entered into as of March 28, 1996 (the
"EFFECTIVE DATE"), by and between:
XYLAN Corporation, with its principal place of business at 26679 West
Agoura Road, Calabasas, CA 91302 (hereinafter referred to as "XYLAN"), and
VICTRON, Inc., with its principal place of business at 2530 Zanker Road,
San Jose, CA 95131 (hereinafter referred to as the "VICTRON").
In their mutual best interest, and in consideration of the mutual covenants
set forth below, XYLAN and VICTRON agree as follows:
I. MANUFACTURE
A. During the Term of this Agreement, VICTRON agrees to sell to XYLAN, and
XYLAN agrees to purchase from VICTRON, the products set forth in Exhibit A
("Products"). VICTRON shall at all times maintain sufficient (but not less than
one) Priority Surface Mount Line(s) (as defined in Section III.C.) to
--------
manufacture Products for XYLAN. Such Products shall be manufactured in
accordance with [****] and a listing of XYLAN's Product
Specifications, attached hereto as Exhibit B.
B. XYLAN reserves the right to purchase Products from other suppliers.
II. MATERIAL MANAGEMENT
A. VICTRON shall plan, purchase, and maintain as inventory all necessary
raw materials ("Materials") to manufacture Products for XYLAN. Materials shall
be invoiced to XYLAN at the time that Products are shipped to XYLAN (the
"Product Invoice") in an amount equal to [****]. In the event that VICTRON
purchases Materials at [****], an adjustment shall be made to the [****]
as set forth below.
B. All Materials costs in excess of or less than Standard Cost (i.e.
freight, NRE, PPV, tape & reel charge, cancellation charge, restocking charge,
etc.), as well as attrition costs, non-returnable obsolete inventory cost,
Standard Cost adjustment reconciliation, and Management Fee (as defined below)
will be summarized and invoiced on a monthly Material Overhead and Adjustment
invoice. VICTRON will deliver to XYLAN in writing such Material Overhead and
Adjustment within 15 days of the last day of the month in which such costs are
*CONFIDENTIAL TREATMENT REQUESTED
-1-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
incurred, and XYLAN agrees to pay such Material Overhead and Adjustment charges
before the last day of the month following the month in which such costs are
incurred.
C. XYLAN agrees to pay a Monthly Material Management fee in an amount per
month which is the greater of (i) [****] of the purchase price of the Material
received during such month or (ii) [****] For purposes of this Paragraph II.C.,
the purchase price of Material received during a month may be measured, at
XYLAN'S sole discretion, as either the [****] or the [****]
For purposes of this Section II, Attrition shall mean Production Scrapage
and Inventory Shrinkage. Production Scrapage shall not include scrapage
resulting from: (i) engineering or design problems created by XYLAN, provided
the Products are manufactured by VICTRON according to VICTRON's best process
standards and XYLAN's Product Specification, (ii) XYLAN-supplied material, (iii)
XYLAN-requested rework due to XYLAN product changes, and (iv) inventory
obsolescence due to XYLAN changes in product or schedule. Product Attrition up
to [****] of total dollar usage per twelve month period ("Standard Attrition")
may be incurred by VICTRON at no cost to VICTRON. If actual Product Attrition
incurred in any twelve month period exceeds Standard Attrition, VICTRON shall
bear the costs of such excess attrition. If Attrition actually incurred is less
than the Standard Attrition, then XYLAN shall pay [****] of the difference
between Standard Attrition and Attrition actually incurred to VICTRON (in
addition to any Management Fee).
III. FORECASTS, PURCHASE ORDERS, AND DELIVERY SCHEDULES
A. On or before the 10th day of each month, XYLAN will provide VICTRON
with a nonbinding [****] month rolling forecast of XYLAN's projected purchases
of Products from VICTRON. The forecast is intended for VICTRON's use in
planning of production capacity and procurement of long lead-time components,
and shall not be construed as a binding purchase order by XYLAN. Purchase
orders for Products shall be issued by XYLAN as set forth in Section III.B.
B. XYLAN shall issue written purchase orders to VICTRON for Products at
least [****] days in advance of the specified delivery
date. Purchase orders shall specify (i) the Product (including assembly number
and revision), (ii) the quantity of Product(s), (iii) the delivery date, (iv)
the unit price and setup charge, if applicable, as listed on Exhibit A or as
otherwise mutually agreed upon by the parties in writing, and (v) shipping
destination.
C. Priority Surface Mount Line means a manufacturing line that would
enable VICTRON to deliver 95% of the Products requested by XYLAN for a
particular month no later than the [****] day of such month. VICTRON will
manufacture all Products for XYLAN on the Priority Surface Mount Line, and will
make every reasonable effort to deliver Products on
*CONFIDENTIAL TREATMENT REQUESTED
-2-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
XYLAN's specified delivery date, but in no event later that the [***] day of the
month for which such Products are requested. XYLAN agrees to allow a reasonable
delay of the delivery date for Products as a result of emergency engineering
change orders made at XYLAN'S direction. VICTRON will notify XYLAN immediately
of any changes or potential changes in delivery schedules. VICTRON recognizes
that XYLAN is a fast growing company in a dynamic marketplace and that XYLAN is
contractually obligated to deliver its own products to its customers within
[****] from order date.
D. VICTRON recognizes that XYLAN may increase, decrease or otherwise
modify the quantity of Product specified on a Purchase Order subsequent to the
date of such Purchase Order, and that XYLAN will be continually adding new
Products to the released product schedule. VICTRON will make every reasonable
effort to accommodate changes in XYLAN's quantity and delivery requirements.
Any change orders issued by XYLAN will specify a new delivery date for the
Product or Products affected by such change; VICTRON will confirm acceptance of
the changed terms and conditions, to the extent VICTRON is able to comply with
such changed terms and conditions (which compliance shall not unreasonably be
withheld), by signing and returning such change orders to XYLAN within five days
of receipt thereof. XYLAN recognizes that VICTRON, from time to time, may need
assistance from XYLAN in locating Material to meet changing Product demands and
delivery schedules and XYLAN agrees to use reasonable efforts to provide
assistance to VICTRON on a timely basis.
E. XYLAN will use reasonable efforts to notify VICTRON on a monthly basis
of delivery date priorities and minimum essential quantities of Products.
VICTRON will manufacture Products according to such priorities and minimums and
notify XYLAN of the expected delivery dates for each Product. VICTRON will
provide XYLAN with a written status of kitting, WIP, Material shortages, line
issues, and shipment activities on a daily basis.
F. XYLAN reserves the right to (i) directly contact VICTRON suppliers
associated with the supply of Materials and to expedite VICTRON orders, (ii)
negotiate better pricing for Materials from VICTRON suppliers, and, (iii) in
general, monitor performance of VICTRON suppliers. XYLAN may negotiate more
favorable pricing and delivery terms with such suppliers, but may not make
commitments to such suppliers on behalf of VICTRON. XYLAN agrees to promptly
notify VICTRON in writing of any negotiated changes or information regarding
pricing, availability, delivery schedule, and specifications of Materials with
respect to such suppliers. VICTRON shall promptly thereafter place proper
change orders with suppliers to reflect such changes, and VICTRON shall be bound
by such changed terms and conditions, provided that such changed terms and
conditions do not result in an increase in administrative cost or monetary
expense to VICTRON in excess of [****] of the prior month's Monthly
Material Management fee (defined in Section II.C. above).
G. VICTRON agrees to provide to XYLAN, in writing, detailed and timely
information regarding purchase orders placed, suppliers, supplier commit dates,
Materials, WIP and inventory status and other relevant information regarding
XYLAN Material status on a weekly basis (the "Weekly Inventory Schedule"), and
as XYLAN may request from time to time.
*CONFIDENTIAL TREATMENT REQUESTED
-3-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
IV. PURCHASE PRICE
The purchase prices for the Products are as set forth on the Exhibit A
(subject to change by mutual agreement of the parties hereto). Prices set
forth on Exhibit A are net of all taxes, customs duties, import and export fees,
and other similar charges. XYLAN shall pay all sales, use, delivery, port,
excise, and other taxes, duties, charges or fees payable on the Products, and
XYLAN shall reimburse VICTRON for any such charges paid on its behalf upon
presentation of a written receipt from the taxing or other authority of such
payment made on XYLAN's behalf. As set forth in Section II.A., Materials shall
be invoiced at Standard Cost of Material plus assembly labor and test labor
costs, at the time that Products are shipped to XYLAN. All other costs and
charges set forth herein shall be invoiced monthly, and set forth on the Monthly
Overhead and Adjustment Invoice.
V. PAYMENT TERMS
Except for payments with respect to the Monthly Overhead and Adjustment
Invoice, all payment called for under this Agreement shall be net thirty (30)
days from invoice date. All payments must be paid in United States dollars, or
according to such other payment terms as may be established in writing by mutual
agreement of XYLAN and VICTRON from time to time. The invoice date for Products
shall be no earlier than such Product(s) ship date. Except as set forth in
Section VIII herein, payments for invoices shall not be subject to any offset.
At its option, VICTRON may impose an interest charge on all amounts past due by
more than five (5) days at the prime rate published in The Wall Street Journal
for the date on which such payment was due. Acceptance by VICTRON of less than
full payment shall not be construed as a waiver of its right to collect any
remaining amounts owing. VICTRON and XYLAN mutually agree to negotiate in good
faith to resolve any billing disputes.
VI. RAW MATERIAL ORDER POLICY
A. Purchase From Approved Sources (AVL):
VICTRON shall procure Materials from XYLAN-approved sources, including
vendors listed on XYLAN'S Approved Vendor List ("AVL"). All non-approved or
non-AVL suppliers must be approved in advance by XYLAN in writing.
B. Purchase From [****] Sources (Excluding PCB and XYLAN
supplied ASICs):
VICTRON shall classify Materials supplied by parties other than
[***] according to the categories set forth below (the "ABC CODE") and
with respect to the unit cost of each component. Components with unit cost
greater than or equal to [****] greater than or equal to [****] but less than
[****] and less than [****] are classified as A1, B1, and C1 class,
*CONFIDENTIAL TREATMENT REQUESTED
-4-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
respectively. Dollar usage method may be used to determine ABC code when usage
becomes more stable and predictable.
VICTRON will plan and procure Materials supplied by parties other than
[****] according to the nonbinding forecast provided by XYLAN and within
the following time periods prior to expected delivery date:
<TABLE>
<CAPTION>
ABC Code Materials On Hand Materials On Order
- ---------- ----------------- ------------------
<S> <C> <C>
A1 [*] month [****] months
B1 [*] months [****] months
C1 [*] months [****] months
</TABLE>
C. Purchase From [****]
VICTRON will classify Materials supplied by [****] according
to the ABC Code and with respect to the unit cost of each component. Components
with unit cost greater than or equal to [****] greater than or equal to [****]
but less than [****] and less than [****] are classified A2, B2, and C2 class,
respectively. Dollar usage method may be used to determine ABC code when usage
becomes more stable and predictable.
VICTRON will plan and procure Materials supplied by Hamilton/Avnet
according to the nonbinding forecast provided by XYLAN and within the following
time periods prior to delivery date:
<TABLE>
<CAPTION>
ABC Code Materials On Hand Material [***] Materials On Order
- ---------- ----------------- ---------------------- ------------------
<S> <C> <C> <C>
A2 [*] month [*] month [****] months
B2 [*] month [*] months [****] months
C2 [*] months [*] months [****] months
</TABLE>
D. Purchase of [****] or XYLAN Programmed Devices:
VICTRON will plan and procure programmed devices supplied by
[****] or XYLAN according to the forecast provided by XYLAN. No more
than [****] month's requirements for programmed devices shall be maintained in
inventory. A sufficient number of unprogrammed devices shall be on order from
specified sources upon mutual agreement of XYLAN and VICTRON. Before VICTRON
enters into a binding commitment to purchase the Programmed Devices, VICTRON
shall verify in writing with XYLAN the proper revision level for the Programmed
Devices.
E. Purchase of Printed Circuit Boards (PCB):
*CONFIDENTIAL TREATMENT REQUESTED
-5-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
VICTRON will plan and procure printed circuit boards ("PCBs")
according to the forecast provided by XYLAN and within the following time
periods prior to expected delivery date:
PCB Materials On Hand = Assembly Month's Requirement
---------------------
PCB Materials On Order = [**] months requirement to reserve capacity
----------------------
Before VICTRON enters into a binding commitment to purchase the PCBs, VICTRON
shall verify in writing with XYLAN the proper revision level for the PCB fab
drawings.
F. Material Delivery:
VICTRON will obtain and accept delivery of Materials no later than
[****] weeks before the start of the XYLAN requirement period. The
Materials requirement quantity may include additional amounts for Attrition and
minimum and incremental order quantity. In addition, long lead-time components
may be ordered prior to the period stated on the above schedules. Both XYLAN and
VICTRON recognize that requirement fluctuation due to forecast or engineering
changes may cause the on hand and on order balance to vary from the schedule.
G. PPV and Standard Cost Adjustment:
All Purchase Price Variances will be summarized and reported to XYLAN
on a monthly basis. If the Purchase Price Variance for a purchase order
reflecting a purchase price in excess of Standard Cost is greater than either
[****]% of Standard Cost or $[****], VICTRON shall obtain a written
authorization from XYLAN to place such purchase order. VICTRON may, without
authorization from XYLAN, place purchase orders (i) with purchase prices that do
not exceed Standard Cost by the greater of [****]% or $[****], and (ii) with
purchase prices less than Standard Cost. The Standard Cost for Material shall be
reviewed and adjusted by XYLAN on a quarterly basis.
VII. Inventory Funding
A. XYLAN will provide VICTRON with funds ("Funds"), according to the terms
of a Credit Agreement attached hereto as Exhibit C, to purchase Materials and to
pay for related direct expenses. XYLAN agrees to provide funds for all required
Materials and related direct expenses, and agrees to promptly fund additional
amounts in the event such Materials prices or direct expenses increase after the
Credit Agreement is executed. VICTRON shall pay to XYLAN [****] percent [****]
of all interest earned on the Funds, if any.
B. VICTRON shall deliver to XYLAN as soon as available but in any event 30
days after the end of each monthly accounting period in each fiscal year,
unaudited statements of income and cash flows of VICTRON (and each subsidiary,
if any) for such monthly period and for the period from the beginning of the
fiscal year to the end of such month, and balance sheets of
*CONFIDENTIAL TREATMENT REQUESTED
-6-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
VICTRON as of the end of such monthly period, and all such statements shall be
prepared in accordance with generally accepted accounting principles,
consistently applied, subject to the absence of footnote disclosures and to
normal year-end adjustments. XYLAN shall not disclose to any person or entity,
other than those employees of XYLAN who have a need to know, any VICTRON
Confidential Information, as such term is defined in Section XIV.C. herein,
whether written or oral, which XYLAN may obtain from VICTRON.
VIII. Inventory Indemnification
A. VICTRON will purchase Materials to manufacture Products based on
XYLAN's Purchase Orders and may also purchase long-lead time components based on
XYLAN's nonbinding forecast.
B. Vendor Purchase Orders. Promptly upon issuance of notice of
termination of this Agreement, whether for cause or convenience, by either
party, XYLAN and VICTRON shall review all outstanding purchase orders placed by
VICTRON to its suppliers. XYLAN and VICTRON will mutually agree with respect to
each such purchase order to either cancel such order or substitute XYLAN as the
purchasing party under such order at XYLAN'S sole cost and expense.
C. WIP Build Schedule. Promptly upon issuance of notice of termination of
this Agreement, whether for cause or convenience, by either party, XYLAN and
VICTRON shall review all Work In Process ("WIP") under XYLAN'S Purchase Orders
to VICTRON, and XYLAN shall determine, in its sole discretion, whether VICTRON
shall complete and deliver all or part of such WIP.
1. WIP that XYLAN chooses not to have VICTRON complete and deliver
("Incomplete WIP") shall be paid for pursuant to paragraph D below.
2. WIP that is completed by VICTRON at the request of XYLAN shall be
delivered F.O.B. VICTRON dock, and paid for C.O.D.
D. Upon the request of XYLAN, VICTRON will use reasonable efforts to use
the Products, Incomplete WIP, and Materials to fill the purchase orders of its
other customers and/or return the components in inventory to supplier. XYLAN
shall reimburse VICTRON for any costs reasonably incurred in returning the
components to suppliers. The purchase price to XYLAN for the Termination
Inventory shall be: (i) for Materials, VICTRON'S Standard Cost; (ii) for
Incomplete WIP, a reasonable pro-rata percentage of the Product purchase price,
and (iii) for Products, the purchase price in effect at the
termination/cancellation of the Agreement or purchase order.
E. Termination for Convenience. In the event of termination for
convenience, (i) VICTRON shall provide to XYLAN, within one week of VICTRON
receiving the WIP build schedule pursuant to Section C above, a detailed written
schedule of the Termination Inventory/Materials, the amount owed for such
Termination Inventory/Materials and how such
*CONFIDENTIAL TREATMENT REQUESTED
-7-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
amount was calculated (the "Materials Schedule"), and (ii) XYLAN shall conduct
an inspection of the Termination Inventory/Materials. Delivery of the
Termination Inventory/Materials described in this Section VIII.E. shall be
F.O.B. VICTRON dock, and paid for C.O.D. The parties may mutually agree to
arrange an additional delivery of the Products to XYLAN by VICTRON, as set forth
in Section IX.
On the effective date of termination of this Agreement for convenience,
which shall be deemed a "Reconciliation Date," (i) XYLAN shall take delivery of
and pay for the Termination Inventory/Materials that have been reviewed and
accepted by XYLAN, which acceptance shall not unreasonably be withheld, (ii) all
principal and interest owing to XYLAN under the Credit Agreement shall be
immediately due and payable in full to XYLAN, (iii) all Monthly Material
Management fees and amounts owed for Product Invoices shall be immediately due
and payable by XYLAN to VICTRON, and (iv) all other fees, invoice amounts, and
amounts owing between the parties shall be paid in full by the owing party to
the owed party.
F. Termination for Cause. The "Transition Period" will begin on the
effective date of termination for cause and will terminate fifteen (15) days
thereafter (also known as a "Reconciliation Date"). During the Transition
Period, (i) VICTRON shall provide to XYLAN, within one week of VICTRON
receiving the WIP build schedule pursuant to Section C above, a detailed written
schedule of the Termination Inventory/Materials, the amount owed for such
Termination Inventory/Materials and how such amount was calculated (the
"Materials Schedule"), (ii) XYLAN shall conduct an inspection of the
Termination Inventory/Materials, and (iii) VICTRON will, at the request of
XYLAN, transfer the Termination Inventory/Materials to XYLAN.
On the Reconciliation Date pursuant to a termination for cause, (i) XYLAN
shall take delivery of and pay for the Termination Inventory/Materials that have
been reviewed and accepted by XYLAN, which acceptance shall not unreasonably be
withheld, (ii) all principal and interest owing to XYLAN under the Credit
Agreement shall be immediately due and payable in full to XYLAN, (iii) all
Monthly Material Management fees and amounts owed for Product Invoices shall be
immediately due and payable by XYLAN to VICTRON, and (iv) all other fees,
invoice amounts, and amounts owing between the parties shall be paid in full by
the owing party to the owed party.
Delivery of the Termination Inventory/Materials described in this Section
VIII.F., and delivered on or after the Reconciliation Date, shall be F.O.B.
VICTRON dock, and paid for C.O.D. The parties may mutually agree to arrange an
additional delivery of the Products to XYLAN by VICTRON, as set forth in Section
IX.
G. Termination Inventory/Materials. "Termination Inventory/Materials"
shall be defined herein as (i) all components rendered excess/obsolete as a
result of XYLAN-requested engineering changes, Purchase Order changes, or
changes to the Product specifications, minimum buy quantities and reel
quantities, (ii) Materials, (iii) WIP and (iv) finished Products not yet
delivered to XYLAN; provided such components, minimum buy and reel quantities,
Materials,
*CONFIDENTIAL TREATMENT REQUESTED
-8-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
WIP and finished Products not yet delivered appear on the Weekly Inventory
Schedule delivered by VICTRON to XYLAN and are attributable to XYLAN by a
written purchase order.
H. Survival. The terms of this Section VIII shall survive termination of
this Agreement.
IX. Delivery
Delivery of Products shall be FOB XYLAN dock, Calabasas, CA. VICTRON shall
package and deliver the Products to XYLAN in accordance with standards and
instructions mutually agreed to, or, if there are none, in accordance with
reasonable commercial standards. VICTRON will send a delivery truck twice each
week (on Tuesday and Thursday, or the following day if such delivery day is a
legal holiday). XYLAN shall pay [****] per month for deliveries, net thirty (30)
days from the last day of the month in which such deliveries occurred.
Additional truck deliveries may be arranged at a cost to XYLAN of [****] per
trip. Special deliveries other than by regular VICTRON truck shall be F.O.B.
VICTRON dock.
X. Warranty and Limitation of Warranty
A. VICTRON represents and warrants that each Product shall be free from
defects in workmanship for one (1) year from date of manufacture of the Product
and free from defects in material for a period equal to the respective component
supplier's warranty period (the "Product Warranty"). Such warranty does not
cover failures caused by design incompatibility and design defects, provided
such incompatibility or defect is not a result of VICTRON'S product process. In
addition, VICTRON warrants and represents that each Product shall comply with
[*****] and XYLAN's Product Specifications. The Product Warranty shall not apply
to any Product that has been abused, damaged, altered or misused or that becomes
defective as a result of causes external to the Product and not caused by
VICTRON. The Product Warranty is the only warranty given by VICTRON either
expressed or implied. VICTRON makes no warranty that the products will (1) meet
any specifications not made known to and agreed by VICTRON, or (2) receive the
approval of or be certified by Underwriters Laboratory, any federal, state,
local, or foreign government agency (including but not limited to the Federal
Communications Commission) or any other person or entity, and VICTRON assumes no
responsibility of obtaining such approvals or certifications or meeting such
specifications.
B. VICTRON shall provide return material authorizations ("RMAS") within
one (1) business day. In addition, VICTRON shall provide repair or replacement
of any returned Products, at XYLAN's discretion, within a reasonable period of
time as mutually agreed upon by the parties, but in no event later than forty-
five (45) days from the date of the request, provided that such Products have
not been discontinued by VICTRON. In the event VICTRON has discontinued the
manufacture of such Products, VICTRON shall procure such Products from an
alternative source or provide a functionally equivalent substitute product,
within a reasonable period of time, but in no event later than forty-five (45)
days from the date of the request.
*CONFIDENTIAL TREATMENT REQUESTED
-9-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
VICTRON shall be obligated to comply with this Section X.B. to the extent that
necessary Materials are reasonably available to VICTRON.
XI. Liability and Limitation of Liability
Each of the undersigned parties shall indemnify the other against any and
all liability, damage, loss, cost or expense (including reasonable attorney's
fees) resulting from any third party claims made or suits brought against the
indemnified party to the extent such claims arise from or are related to or
result from the indemnifying party's actions in the performance of or pursuant
to the terms of this Agreement. In no event shall VICTRON or XYLAN be liable
for any special, indirect, incidental, consequential, exemplary or punitive
damages, whether based upon contract, tort or any other legal theory (including
but not limited to lost profits and opportunity).
XII. Xylan Program Manager
VICTRON may remove or replace the VICTRON employee serving as the Material
Manager or the VICTRON employee serving as the XYLAN Program Manager only upon
prior mutual agreement and consent of XYLAN.
XIII. Terms and Termination
A. Agreement Term:
The initial term of this Agreement shall begin on the Effective Date
and continue for one (1) year and automatically renew each year for four (4)
years, unless otherwise terminated earlier according to the terms herein.
B. Termination for Convenience:
During the first [****] of the initial term, neither XYLAN nor VICTRON
may terminate this agreement for convenience. During the final [****] of the
initial term, or at any time during any subsequent one year term, either party
may terminate this agreement by sending a written notice to the other party
ninety (90) calendar days prior to the effective date of such termination.
C. Termination for Cause (XYLAN):
Upon the occurrence of any of the following events (each of which is a
"material breach"), and subsequent failure to cure such material breach within
thirty (30) days after VICTRON'S receipt of written notice of such breach from
XYLAN, XYLAN shall have the right to terminate the Agreement ("XYLAN
Termination Right"), and all purchase orders forthwith for cause, and shall no
longer be obligated to pay the Monthly Fee and Delivery Fee incurred after the
effective date of termination described herein; provided, however, that all
rights
*CONFIDENTIAL TREATMENT REQUESTED
-10-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
and obligations of each party hereunder shall terminate except those under
provisions of this Agreement that expressly provide for their survival on
termination. Termination shall be effective upon written notice to VICTRON
pursuant to Section XIX herein. If this XYLAN Termination Right is not exercised
within sixty (60) days of the date of written notice of the event of material
breach, then this XYLAN Termination Right shall be deemed to have expired with
respect to such written notice, and XYLAN shall be required to issue a new
written notice of material breach and thirty (30) day cure period to terminate
this Agreement.
1. The failure of VICTRON to comply with any term or condition of
this Agreement or other agreements contemplated hereunder, including but not
limited to the Notes.
2. The attempt by VICTRON to assign this Agreement, or any rights or
obligations hereunder, without the prior written consent of XYLAN.
3. The occurrence of a change in the control, or change in any of the
following officers: Chief Executive Officer, President, Executive Vice
President, Secretary, Chief Financial Officer, or Treasurer.
4. The cessation of VICTRON to do business as a going concern.
5. VICTRON becomes subject to the insolvency, receivership or
bankruptcy laws of any jurisdiction.
6. There occurs any willful misconduct, wrongful act, neglect or bad
faith on the part of VICTRON or any of its officers, agents or employees.
7. Except with respect to payment due according to the terms of the
Credit Agreement, the failure of VICTRON to make any payment due to XYLAN within
thirty (30) days after written notice.
D. Termination for Cause (VICTRON):
1. Upon the occurrence of any of the following events (each of which
is a "material breach"), and subsequent failure to cure such material breach
within thirty (30) days after XYLAN'S receipt of written notice of such breach
from VICTRON, VICTRON shall have the right to terminate the Agreement for cause
("VICTRON Termination Right"); provided, however, that all rights and
obligations of each party hereunder shall terminate except those under
provisions of this Agreement that expressly provide for their survival on
termination. Termination shall be effective upon written notice to XYLAN
pursuant to Section XIX herein. If this VICTRON Termination Right is not
exercised within sixty (60) days of the date of written notice of the event of
material breach, then this VICTRON Termination Right shall be deemed to have
expired with respect to such written notice, and VICTRON shall be required to
issue a new written notice of material breach and thirty (30) day cure period to
terminate this Agreement.
(i) The failure of XYLAN to comply with any term or condition
of this Agreement.
*CONFIDENTIAL TREATMENT REQUESTED
-11-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
(ii) The attempt by XYLAN to assign this Agreement, or any
rights or obligations hereunder, without the prior written consent of VICTRON.
(iii) The cessation of XYLAN to do business as a going concern.
(iv) XYLAN becomes subject to the insolvency, receivership or
bankruptcy laws of any jurisdiction.
(v) There occurs any willful misconduct, wrongful act, neglect
or bad faith on the part of XYLAN or any of its officers, agents, or employees.
(vi) The failure of XYLAN to make any payment due to VICTRON
within thirty (30) days after written notice.
2. In the event that VICTRON terminates this Agreement for cause,
and subject to the terms of Section VIII herein, each Purchase Order issued by
XYLAN to VICTRON prior to such date of termination shall be filled by VICTRON
according to its terms, including the delivery dates and Product prices set
forth in such Purchase Order.
XIV. Proprietary Information
A. VICTRON shall not disclose to any person or entity, other than those
employees of VICTRON who have a need to know, any XYLAN confidential
information, whether written or oral, which VICTRON may obtain from XYLAN or
otherwise, discover. As used in this paragraph, the term "XYLAN confidential
information" shall include, without limitation:
1. All information or data concerning or related to XYLAN's products
(including the discovery, invention, research, improvement, development,
manufacture, or sale of XYLAN products) or business operations (including sales
costs, profits, pricing methods, organizations, employee or customer lists, and
processes);
2. All forecasts for production, support, or service requirements
submitted by XYLAN pursuant to this Agreement ("forecasts"), whether oral,
written, or communicated in computer-readable format; and
3. All XYLAN Property of a confidential nature.
B. Without limiting the generality of paragraph above, VICTRON shall
maintain all XYLAN confidential information in strict confidence. VICTRON shall
take all reasonable steps to ensure that no unauthorized person or entity has
access to XYLAN confidential information, and that all authorized persons having
access to XYLAN confidential information refrain from any unauthorized
disclosure.
C. XYLAN shall not disclose to any person or entity, other than those
employees of XYLAN who have a need to know, any VICTRON confidential
information, whether written or
*CONFIDENTIAL TREATMENT REQUESTED
-12-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
oral, which XYLAN may obtain from VICTRON or otherwise, discover. As used in
this paragraph, the term "VICTRON confidential information" shall include,
without limitation: all information or data concerning or related to VICTRON'S
financial information, pricing, and costing mechanisms;
D. Without limiting the generality of paragraph above, XYLAN shall
maintain all VICTRON confidential information in strict confidence. XYLAN shall
take all reasonable steps to ensure that no unauthorized person or entity has
access to VICTRON confidential information, and that all authorized persons
having access to VICTRON confidential information refrain from any unauthorized
disclosure.
E. All Forecasts (as set forth in Section III above) are provided by XYLAN
as an accommodation to VICTRON, and shall not constitute a commitment of any
type by XYLAN. Upon request, any oral Forecasts shall be reduced by XYLAN to
writing or computer-readable format within fifteen days of disclosure to
VICTRON.
F. The provisions of this Section shall not apply to any information that:
1. Is rightfully known to either party prior to disclosure by the
other party;
2. Is rightfully obtained by either party from any third party
without any obligation of confidentiality;
3. Is made available by the party seeking protection of its
confidential information to the public without restrictions; or
4. Is disclosed by either party with the prior written approval of
the party seeking protection of its confidential information.
G. This provision shall survive termination of this Agreement for a period
of five (5) years from the date of termination. Upon request, VICTRON shall
sign XYLAN's standard Non-Disclosure Agreement (NDA).
XV. AGREEMENT MODIFICATIONS
No amendment or modification of this Agreement will be binding unless in
writing and properly executed by authorized representatives of both parties.
XVI. GOVERNING LAW AND INTERPRETATION
This Agreement is deemed to have been entered into in the State of
California, United States of America, and its interpretation, construction and
the remedies for its enforcement of breach shall be according to the laws of the
State of California, United States of America, without regard to any conflict of
law provisions therein. If any portion or provision of this Agreement
*CONFIDENTIAL TREATMENT REQUESTED
-13-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
shall be held by any court of jurisdiction to be void or unenforceable, the
remaining portions and provisions shall, notwithstanding, remain in full force
and effect.
XVII. Intellectual Property Rights
A. VICTRON shall defend, indemnify, and hold harmless XYLAN and its
affiliates, subsidiaries, assigns, subcontractors, and customers from and
against all claims, losses, demands, fees, damages, liabilities, costs,
expenses, obligations, causes of action, suits, or injuries, of any kind or
nature, arising from, related to or resulting from:
1. Any actual or claimed infringement of patents, trademarks, service
marks, trade secrets, mask work rights, or copyrights with respect to or arising
from or related to or resulting from the manufacturing process used by VICTRON
in producing the Products (the "VICTRON Intellectual Property"); or
2. VICTRON's failure to comply with the requirements of paragraph C.
below.
B. XYLAN shall promptly provide information and assistance, at VICTRON's
expense, for any defense of XYLAN as required pursuant to paragraph A above.
C. In addition to the requirements of paragraphs A and B above, if the
use by XYLAN or its affiliates, subsidiaries, assigns, subcontractors, or
customers of any Product is enjoined with respect to or arising from or related
to or resulting from the manufacturing process used by VICTRON in producing the
Products (such enjoined Product to be deemed an "Infringing Product"), VICTRON
shall at its expense use its best efforts to procure the right to continue using
the infringing Product. If VICTRON is unable to do so, VICTRON shall at its
expense:
1. Replace the Infringing Product with a non-infringing Product;
2. Modify the Infringing Product to be non-infringing; or
3. If unable to replace or modify the Infringing Product, refund in
full all costs paid by XYLAN for the Infringing Product (without any deductions
by VICTRON).
D. VICTRON shall be relieved of its obligations under this Section to the
extent that the actual or claimed infringement arises out of compliance with
XYLAN's written specifications. XYLAN shall defend, indemnify, and hold
harmless VICTRON and its affiliates, subsidiaries, and assigns from and against
all claims, losses, demands, fees, damages, liabilities, costs, expenses,
obligations, causes of action, suits, or injuries, of any kind or nature, to the
extent such claims arise from any actual or claimed infringement of patents,
trademarks, service marks, trade secrets, mask work rights, or copyrights with
respect to the Products that arise out of, relate to or result from compliance
with XYLAN'S written specifications.
*CONFIDENTIAL TREATMENT REQUESTED
-14-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
E. VICTRON shall remove from all Products rejected, returned, or not
purchased by XYLAN, XYLAN's name or any of XYLAN's trademarks, trade names,
insignia, part numbers, symbols, or decorative designs, prior to any other sale,
use, or disposition of such Products by VICTRON.
XVIII. Nonassignment
Except for XYLAN's right to assign as permitted under the Credit Agreement,
neither VICTRON nor XYLAN shall delegate any duties or assign any rights or
claims under this Agreement. Any such attempted delegation or assignment shall
be void and unenforceable.
XIX. Notices
All notices to be given hereunder shall be in writing and shall be deemed
adequately served if mailed certified mail to the party at the address furnished
for such party in the introductory clause of this Agreement. Unless otherwise
provided in said notice, the effective date of notice will be the date mailed.
XX. Entire Agreement
This Agreement contains the entire understanding between the parties hereto
with respect to the subject matter hereof. This Agreement cancels and supersedes
any and all other previous arrangements or agreements between XYLAN and VICTRON.
It is understood by both parties hereto that this Agreement constitutes a
contract between XYLAN and VICTRON, and shall not be transferable by VICTRON to
any other person, firm, or corporation.
XXI. Arbitration
In the event that a dispute or claim in law or in equity arises out of this
Agreement, it will be decided by arbitration which shall be final and binding on
all parties. The undersigned parties shall endeavor to agree upon a procedure
for arbitrating the dispute at the time of the dispute. In the absence of such
an agreement, the Commercial Rules of the American Arbitration Association shall
be applied. The Arbitrators shall be one or more Arbitrators appointed in
accordance with the Commercial Rules of the American Arbitration Association and
shall have had substantial experience in legal issues relating to the
electronics hardware manufacturing industry and the California Evidence Code.
Such rules of evidence shall be applied to the conduct of an arbitration
proceeding under this paragraph, and the arbitration shall be subject to C.C.P.
section 1283.05 and section 1282.6.
All documents and agreements relative to any such dispute shall be read,
interpreted, and construed from the English versions thereof, and in accordance
with California law. Venue for
*CONFIDENTIAL TREATMENT REQUESTED
-15-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
the arbitration shall be Santa Clara County, California. Judgment upon the award
may be entered in any court having jurisdiction, or application may be made to
such court for judicial acceptance of the award and/or an order of enforcement.
The prevailing party shall entitled, in addition to an award, to reasonable fees
and costs (including reasonable fees and costs of attorneys and including filing
fees and witness fees associated with the proceeding).
The arbitration shall be conducted by a single neutral arbitrator, agreed
to by both parties. If the parties cannot agree to a single arbitrator within
ten (10) business days after notice is given of submission of an issue to
arbitration, then there shall be three (3) arbitrators in the proceeding. Within
fifteen (15) business days after notice of submission of an issue to
arbitration, and an inability to agree upon a single arbitrator, each party
shall designate an arbitrator who, together, shall choose a third arbitrator.
This arbitration clause shall not be deemed waived despite the filing of a
judicial action for injunctions or other provisional remedies or equitable
relief pending assignment to arbitration.
XXII. Force Majeur
Neither party to this Agreement shall be liable for its failure to perform
any of its obligations hereunder during any period in which such performance is
delayed by fire, flood, embargo, strike, riot, earthquake, or the intervention
of any government authority, provided that the party suffering such delay
immediately notifies the other party of the delay. If, however, VICTRON'S
performance is delayed for reasons defined above, for a cumulative period of
thirty (30) days or more from the date of VICTRON'S notification to XYLAN, then
XYLAN, notwithstanding any other provision of this Agreement to the contrary,
may terminate this Agreement without further notice. In the event of such
termination, and subject to the terms of Section VIII herein, XYLAN'S sole
liability hereunder will be for the payment to VICTRON of any balance due and
owing for Product delivered by VICTRON prior to VICTRON'S notification to XYLAN
and which is subsequently accepted by XYLAN.
*CONFIDENTIAL TREATMENT REQUESTED
-16-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
XXIII. Counterparts
This Agreement may be executed in any number of counterparts, and by
each party in separate counterparts, each of which shall be an original, but
all of which shall together constitute one and the same agreement.
Accepted and Agreed by:
VICTRON XYLAN
By: /s/ Todd Yun By: /s/ C. Stephen Cordial
------------------------- -----------------------------
Mr. Todd Yun Mr. C. Stephen Cordial
President Vice President
Victron, Inc. Xylan Corporation
Date: 3/28/96 Date: 3/28/96
---------- -----------
*CONFIDENTIAL TREATMENT REQUESTED
-17-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
Exhibit A
---------
PRODUCTS AND PRICES LIST
Effective Date: ___________
THIS AGREEMENT COVERS: The Products covered by this Manufacturing and
Purchase Agreement ("Products") are those Products designed by XYLAN and
manufactured by VICTRON for XYLAN and identified by the following XYLAN Part
Numbers and incorporated by reference herein:
<TABLE>
<CAPTION>
====================================================================================================
PCBA PCBA Xylan Revision Material Labor ICT Set-Up
Description Part Number Level Cost ($) /1/ Cost ($) /2/ Cost ($) /3/ Charge ($) /4/
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BP-5 [****] B [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
PIM5 [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
BP-5SC [****] N/R -
- ----------------------------------------------------------------------------------------------------
BP-9 [****] C [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
PIM9 [****] C [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
PIM9/2 [****] A
- ----------------------------------------------------------------------------------------------------
BP-9SC [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
PizzaSwitch [****] C1 [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ODS Pizza [****] N/R
- ----------------------------------------------------------------------------------------------------
FDDI-M [****] C1 [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
FDDI-S [****] B
- ----------------------------------------------------------------------------------------------------
CDDI [****] E [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ATM-155FM [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ATM-155FM-E [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ATM-155FS [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ATM-155FS-E [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
ATM-155C [****] N/R
- ----------------------------------------------------------------------------------------------------
ATM-155C-E N/R
- ----------------------------------------------------------------------------------------------------
ATM-DS3 [****] A [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
HSM [****] M [****] [****] [****] [****]
- ----------------------------------------------------------------------------------------------------
</TABLE>
- -------------------
/1/ Standard Material Cost for each PCBA shipped meeting Product Specifications.
/2/ Standard Labor Cost for each PCBA shipped meeting Product Specificatons.
/3/ Standard ICT (In Circuit Testing) Testing Cost for each PCBA shipped meeting
Product Specificatons.
/4/ Set-Up Charge to process a released quantity of boards. Usually a monthly
charge per PCBA assembly requested to run in a month unless Xylan requests
multiple runs of PCBAs in the same month.
*CONFIDENTIAL TREATMENT REQUESTED
-18-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
HSM-II [****] B [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
MPM-II [****] C2 [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-C-8 [****] F [****] [****] 2.60 [****]
- ----------------------------------------------------------------------------------------------------
ESM-C-12 [****] D1 [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-U-6 [****] E/F * [****] [****] 2.60 [****]
- ----------------------------------------------------------------------------------------------------
ESM-AB-AT [****] B [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-AB-FL [****] E [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-AB-T [****] A [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-AB-B [****] C [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-T-12 [****] N/R - B1 [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
ESM-F-8 [****] N/R - 1 [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
100BaseT/E FESM [****] C4 [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
Copper Token Ring [****] D [****] [****] N/A [****]
- ----------------------------------------------------------------------------------------------------
TSM-F-6 [****] B
====================================================================================================
</TABLE>
*CONFIDENTIAL TREATMENT REQUESTED
-19-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
Exhibit B
---------
XYLAN'S Product Specifications
------------------------------
<TABLE>
<CAPTION>
====================================================================================================================================
PCBA PCBA Xylan PCBA Assembly Assembly Schematic Schematic ICT ICT
Description Part Number Revision Drawing Drawing Number Revision Number Revision
Level Number Revision
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BP-5 05000200 B 05000200 A 05000400 A
- ------------------------------------------------------------------------------------------------------------------------------------
PIM5 05002000 A 05002000 A 05002200 A
- ------------------------------------------------------------------------------------------------------------------------------------
BP-5SC 05011906 N/R -
- ------------------------------------------------------------------------------------------------------------------------------------
BP-9 05005600 C 05005600 B 05005800 B
- ------------------------------------------------------------------------------------------------------------------------------------
PIM9 05006200 C 05006106 B 05006100 C
- ------------------------------------------------------------------------------------------------------------------------------------
PIM9/2 05011406 A 05011406 A 05011400 A
- ------------------------------------------------------------------------------------------------------------------------------------
BP-9SC 05010706 A1 05010706 A 05010700 A
- ------------------------------------------------------------------------------------------------------------------------------------
PizzaSwitch 05010306 C1 05010306 C 05010300 C1
- ------------------------------------------------------------------------------------------------------------------------------------
ODS Pizza 05012806 N/R 05012806 N/R 05012800 N/R
- ------------------------------------------------------------------------------------------------------------------------------------
FDDI-M 05010806 C1 05010806 B 05010800 B
- ------------------------------------------------------------------------------------------------------------------------------------
FDDI-S 05010813 B 05010813 B 05010800 B
- ------------------------------------------------------------------------------------------------------------------------------------
CDDI 05007306 E 05007306 A 05007300 A
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155FM 05011626 A 05011626 A 05011600 A
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155FM-E 05011624 A 05011624 A 05011600 A
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155FS 05011627 A 05011627 A 05011600 A
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155FS-E 05011625 A 05011625 A 05011600 A
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155C 05011506 N/R
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-155C-E N/R
- ------------------------------------------------------------------------------------------------------------------------------------
ATM-DS3 05010406 A 05010406 A 05010400 A
- ------------------------------------------------------------------------------------------------------------------------------------
HSM 05003106 M 05003106 D 05003400 D
- ------------------------------------------------------------------------------------------------------------------------------------
HSM-II 05011006 B 05011006 B 05011000 B
- ------------------------------------------------------------------------------------------------------------------------------------
MPM-II 05012006 C2 05012006 B 05012000 B
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-C-8 05001400 F 05001400 A 05001600 A
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-C-12 05011206 D1 05011206 D 05011200 D
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*CONFIDENTIAL TREATMENT REQUESTED
-20-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-U-6 05006706 E/F * 05006706 B 05006700 C
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-AB-AT 05007906 B 05007906 B 05007900 B
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-AB-FL 05008506 E 05008506 B 05008500 B
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-AB-T 05009106 A 05009106 A 05009100 A
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-AB-B 05009706 C 05009706 B 05009700 B
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-T-12 05010506 N/R - B1 05010506 B 05010500 B
- ------------------------------------------------------------------------------------------------------------------------------------
ESM-F-8 05011806 N/R - A 05011806 1 05011800 N/R
- ------------------------------------------------------------------------------------------------------------------------------------
100BaseT/E FESM 05010906 C5 05010906 C 05010900 C1
- ------------------------------------------------------------------------------------------------------------------------------------
Copper Token Ring 05004906 D 05004906 A 05004900 A
- ------------------------------------------------------------------------------------------------------------------------------------
TSM-F-6 05011106 B 05011106 A 05011100 A
====================================================================================================================================
</TABLE>
All Product must be supplied meeting and conforming to Victron Quality
Requirements, Xylan Document Number: 02701000.
*CONFIDENTIAL TREATMENT REQUESTED
-21-
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
Exhibit C
---------
Credit Agreement
----------------
*CONFIDENTIAL TREATMENT REQUESTED
1
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
LOAN AND SECURITY AGREEMENT
---------------------------
This LOAN AND SECURITY AGREEMENT (the "Agreement") is made as of March
---------
__, 1996 by and between VICTRON, INC. (the "Seller") and XYLAN CORPORATION (the
------
"Buyer").
-----
RECITALS
--------
A. WHEREAS, Seller and Buyer have contracted for Seller's special
order manufacture and sale to Buyer of the products set forth in the attached
Exhibit A (the "Products"), pursuant to the Manufacturing and Purchase Agreement
- --------- --------
of even date hereof by and between Seller and Buyer, a copy of which is attached
hereto as Exhibit B and related documents (collectively, the "Manufacturing
--------- -------------
Contract");
- --------
B. WHEREAS, Seller has requested that Buyer provide it with the
financing needed to acquire the raw materials and electronic components that are
to be used in the manufacture of the Products; and
C. WHEREAS, Buyer is willing to provide such financing on the terms
set forth in the Manufacturing Contract and this Agreement, provided that Seller
enters into and acts in accordance with the terms of this Agreement;
NOW THEREFORE, IT IS AGREED THAT:
A. Definitions and Construction.
----------------------------
*CONFIDENTIAL TREATMENT REQUESTED
2
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
1.1 Definitions. As used in this Agreement, the following terms shall have
-----------
the following definitions:
"Business Day" means any day that is not a Saturday, Sunday, or other day
on which is a national holiday.
"Collateral" means the property described on Exhibit C attached hereto.
---------
"Closing Date" means the date of this Agreement.
"Inspection Date" has the meaning set forth in Section VIII of the
Manufacturing Contract.
"Loan or Loans" means any loan or extension of credit made or provided to
Seller as set forth in Section 2.1 hereof for the purchase of any of the
Collateral in accordance with the Manufacturing Contract.
"Maturity Date" means the Reconciliation Date.
"Manufacturing Contract" has the meaning set forth in recital paragraph A
herein.
"Obligations" means all debt, principal, interest, and other amounts owed
to Buyer by Seller pursuant to this Agreement or any other agreement, including
without limitation the Manufacturing Contract, whether absolute or contingent,
due or to become due, now existing or hereafter arising, including any interest
that accrues after the commencement of an insolvency proceeding.
"Prime Rate" means the variable rate of interest, per annum, most recently
published in The Wall Street Journal, as the "prime rate," whether or not such
-----------------------
published rate is the lowest rate available from financial institutions.
"Products" has the meaning set forth in recital paragraph A herein.
"Reconciliation Date" has the meaning set forth in the Manufacturing
Contract.
"Seller's Books" means all of Seller's books and records relating to the
Collateral.
2. Loan and Terms of Payment.
-------------------------
*CONFIDENTIAL TREATMENT REQUESTED
3
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
2.1 Loans. Subject to and upon the terms and conditions of this
-----
Agreement, at any time from the date hereof through the date of termination of
the Manufacturing Contract (the "Loan Availability Date"), Buyer agrees to make
----------------------
Loans to Seller in an aggregate amount not to exceed [****]. The Loans shall be
used to finance the acquisition of raw materials and electronic components in
accordance with the terms of the Manufacturing Contract. Each Loan will be due
on the Reconciliation Date. In addition, Seller will repay to Buyer, at Buyer's
request, the uncommitted funds, which is defined as any excess of (i) the
aggregate amount of Loans over (ii) the aggregate amount of invoices than
outstanding to be paid by Seller for the Materials (as defined in the
Manufacturing Contract); provided, however, that Seller may retain [****]
-------- -------
as the outstanding Loan balance.
2.2 Interest Rates, Payments, and Calculations.
------------------------------------------
(a) Interest Rate. Except as set forth in Section 2.2(b), Loans shall
-------------
not bear interest.
(b) Default Rate. All Obligations shall bear interest, from and after
------------
the Reconciliation Date, at a rate equal to the Prime Rate, which interest rate
shall change as the Prime Rate changes, without notice to Seller. All such
interest shall be due on demand on the Reconciliation Date.
2.3 Crediting Payments. Prior to the Reconciliation Date, Buyer
------------------
shall credit a wire transfer of funds, check or other item of payment to the
Obligations. After the Reconciliation Date, the receipt by Buyer of any wire
transfer of funds, check, or other item of payment shall be immediately applied
to conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Buyer after 5:00 p.m. California time shall be
deemed to have been received by Buyer as of the opening of business on the
immediately following Business Day.
2.4 Overadvances. If, at any time or for any reason, the amount of
------------
Obligations owed by Seller to Buyer pursuant to Section 2.1 of this Agreement is
greater than [****], Seller shall immediately pay to Buyer, in cash, the amount
of such excess, unless authorized in writing by Buyer not to make such payment.
2.5 Term. This Agreement shall become effective on the Closing Date
----
and shall continue in full force for a term ending on the Maturity Date, at
which time all Obligations
*CONFIDENTIAL TREATMENT REQUESTED
4
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
shall be immediately due and payable. Notwithstanding the foregoing, Buyer shall
have the right to terminate its obligation to make Loans under this Agreement
immediately and without notice upon the Reconciliation Date.
3. Conditions Precedent to Initial Loan. The obligation of Buyer to make
------------------------------------
the initial Loan is subject to the condition precedent that Buyer shall have
received, in form and substance satisfactory to Buyer, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Seller with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement in substantially the form of Exhibit D hereto;
---------
(c) financing statements (Forms UCC-1); and
(d) such other documents, and completion of such other matters,
as Buyer may reasonably deem necessary or appropriate.
4. Security Agreement.
------------------
(a) Grant of Security Interest. The Loans are advances for the
--------------------------
purchase of the raw materials and electronic components as specified in the
Manufacturing Contract. To secure repayment of such Loans, Seller hereby grants
to Buyer a security interest in the Collateral.
(b) Perfection of Security Interest. Seller agrees to take all
-------------------------------
actions reasonably required to perfect Buyer's security interest in the
Collateral granted under this section, including, but not limited to, executing
UCC-1 Financing Statements which are to be filed with the appropriate government
offices.
(c) Rights and Remedies. On and after the Reconciliation Date, Buyer
-------------------
shall have the right to exercise all rights and remedies with respect to the
Collateral under the Uniform Commercial Code and other applicable law.
5. Entry of Seller's Premises. Seller irrevocably authorizes Buyer (and
--------------------------
each of Buyer's officers, employees or agents designated by Buyer) to enter
Seller's premises at any time or from time to time upon 24 hours notice to
Seller on or after the Reconciliation Date for the purpose of taking possession
of the Collateral, whether for the purpose of exercising its rights and remedies
as a secured party under Section 4 hereof or otherwise. If Seller leases any of
the premises at which the Collateral are stored and/or used, then Seller agrees
to promptly obtain
*CONFIDENTIAL TREATMENT REQUESTED
5
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
from the landlord for such premises a consent to Buyer's entry of the premises
in accordance with this section, in form and substance reasonably satisfactory
to Buyer.
6. Seller Bankruptcy. If Seller becomes subject to proceedings, either
-----------------
voluntarily or involuntarily, under the United States Bankruptcy Code (the
"Bankruptcy Code"), Seller irrevocably agrees either to (i) enter into a
---------------
stipulation, which stipulation shall be subject to Bankruptcy Court approval,
for immediate relief from the automatic stay of Bankruptcy Code (S) 362, and/or
(ii) file a statement of no opposition to Buyer's request for relief from the
automatic stay of Bankruptcy Code (S) 362 to take possession of the Collateral.
7. Remedies; Waivers.
-----------------
(a) Buyer's Liability for Collateral. Buyer shall not in any way or
--------------------------------
manner be liable or responsible for: (i) the safekeeping of the Collateral;
(ii) any loss or damage thereto occurring or arising in any manner or fashion
from any cause; (iii) any diminution in the value thereof, except as
contemplated in the Manufacturing Contract; or (iv) any act or default of any
carrier, warehouseman, bailee, forwarding agency, or other person whomsoever.
Seller shall bear all risk of loss, damage or destruction of the Collateral.
(b) Remedies Cumulative. Buyer's rights and remedies under this
-------------------
Agreement, the Manufacturing Contract, and all other agreements shall be
cumulative. Buyer shall have all other rights and remedies not inconsistent
herewith as provided by law or in equity. Subject to applicable law, no
exercise by Buyer of one right or remedy shall be deemed an election, and no
waiver by Buyer of any event of default on Seller's part shall be deemed a
continuing waiver. No delay by Buyer shall constitute a waiver, election, or
acquiescence by it. No waiver by Buyer shall be effective unless made in a
written document signed on behalf of Buyer and then shall be effective only in
the specific instance and for the specific purpose for which it was given.
(c) Demand; Protest. Except as contemplated in the Manufacturing
---------------
Contract, Seller waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default, nonpayment at
maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees at any time held by Buyer
on which Seller may in any way be liable.
8. Power of Attorney. Seller hereby irrevocably makes, constitutes and
-----------------
appoints Buyer (and each of Buyer's officers, employees or agents designated by
Buyer), with full power of substitution by Buyer, as Seller's true and lawful
attorney with power to sign the name of Seller on any UCC-1 Financing Statements
and similar documents which need to be executed, recorded and/or filed to
perfect Buyer's security interest in the Collateral granted hereunder.
*CONFIDENTIAL TREATMENT REQUESTED
6
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
9. Enforcement Costs. If Buyer or Seller seeks to enforce its rights
-----------------
hereunder by legal proceedings or otherwise, then the prevailing party shall pay
all reasonable costs and expenses incurred by the other party, including,
without limitation, all reasonable attorneys' fees.
10. Choice of Law; Arbitration.
--------------------------
(a) Choice of Law. This Agreement shall be governed by, and construed
-------------
in accordance with, the internal laws of the State of California, without regard
to principles of conflicts of law.
(b) Arbitration. The Arbitration Clause set forth in the
-----------
Manufacturing Contract is incorporated herein by this reference.
11. Miscellaneous Provisions.
------------------------
(a) Successors and Assigns. This Agreement shall bind and inure to
----------------------
the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that Seller may not assign its rights hereunder
-------- -------
without Buyer's prior written consent, which consent shall not unreasonably be
withheld.
(b) Entire Agreement; Amendment. This Agreement, along with the
---------------------------
Manufacturing Contract, constitutes the entire agreement between the parties
relating to the subject matter hereof. Any prior agreements, promises,
negotiations, or representations not expressly set forth in this Agreement or
the Manufacturing Contract are of no force and effect, except as provided
herein. Any amendment to this Agreement shall be of no force and effect unless
it is in writing and signed by Buyer and Seller.
(c) Captions. Section headings and numbers have been set forth herein
--------
for convenience only. Unless the contrary is compelled by the context,
everything contained in each section applies equally to this entire Agreement.
(d) Severability. If, in any action before any court or agency
------------
legally empowered to enforce any term, any term is found to be unenforceable,
then it shall be deemed modified to the extent necessary to make it enforceable
by such court or agency. If any term is not so curable, its unenforceability
shall not affect the other provisions of this Agreement but this Agreement shall
be construed as if such unenforceable term had never been contained herein.
(e) Time. Time is of the essence for this Agreement.
----
*CONFIDENTIAL TREATMENT REQUESTED
7
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts, and by each party in separate counterparts, each of which shall be
an original, but all of which shall together constitute one and the same
agreement.
*CONFIDENTIAL TREATMENT REQUESTED
8
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
XYLAN CORPORATION
By: /s/ C. Stephen Cordial
----------------------------
Title:
--------------------------
VICTRON, INC.
By: /s/ Todd Yun
----------------------------
Title:
--------------------------
*CONFIDENTIAL TREATMENT REQUESTED
9
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
EXHIBIT A
---------
The Products
------------
[included herein]
*CONFIDENTIAL TREATMENT REQUESTED
10
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
EXHIBIT B
---------
Manufacturing and Purchase Agreement
------------------------------------
[included herein]
*CONFIDENTIAL TREATMENT REQUESTED
11
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
EXHIBIT C
---------
The Collateral shall consist of all right, title and interest of Seller in and
to the following:
All inventory and materials acquired by Seller for purposes of performing its
obligations under the Manufacturing Contract and all finished or unfinished
products manufactured therefrom pursuant to the Manufacturing Contract, now
owned or hereafter acquired, including, without limitation, all merchandise, raw
materials, electronic components, parts, supplies, packing and shipping
materials, work in process and finished products including such inventory as is
temporarily out of Seller's custody or possession or in transit and including
any returns upon any accounts or other proceeds, including insurance proceeds,
resulting from the sale or disposition of any of the foregoing and any documents
of title representing any of the above, and Seller's Books relating to any of
the foregoing; and, all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
*CONFIDENTIAL TREATMENT REQUESTED
12
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
EXHIBIT D
CORPORATE RESOLUTIONS TO BORROW
Borrower: VICTRON, INC.
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Victron, Inc. (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of California.
-----------
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
- ----- --------- -----------------
<S> <C> <C>
Todd D. Yun President /s/ Todd Yun
Chris Y. Lee Secretary /s/ Chris Lee
</TABLE>
acting for and on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Xylan Corporation ("Xylan")
on such terms as may be agreed upon between the officers, employees, or agents
and Xylan, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain Loan
and Security Agreement dated as of March ___, 1996 (the "Loan Agreement").
Execute Notes. To execute and deliver to Xylan the promissory note or notes
of the Corporation, on Lender's forms, at such rates of interest and on such
terms as may be agreed
*CONFIDENTIAL TREATMENT REQUESTED
13
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
upon, evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Xylan, and also to execute and deliver to Lender one or more
renewals, extensions, modifications, refinancings, consolidations, or
substitutions for one or more of the notes, or any portion of the notes.
Grant Security. To grant a security interest to Xylan in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
Negotiate Items. To draw, endorse, and discount with Xylan all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Xylan, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
Further Acts. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Xylan may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Xylan. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are
duly elected, appointed, or employed by or for the Corporation, as the case may
be, and occupy the positions set forth opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are in full force and effect and have not been modified or
revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on March ___, 1996 and
attest that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ Chris Y. Lee
*CONFIDENTIAL TREATMENT REQUESTED
14
<PAGE>
Manufacturing and Purchase Agreement Between XYLAN and VICTRON
Dated: March 28, 1996
- --------------------------------------------------------------------------------
*CONFIDENTIAL TREATMENT REQUESTED
15
