<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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.)
26707 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 Securities Exchange Act of
1934 during the preceding twelve 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
September 30, 1997, was 42,767,424.
1
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XYLAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- September 30,
1997 and December 31, 1996 3
Condensed Consolidated Income Statements --
Three Months Ended September 30, 1997, June 30,
1997 and September 30, 1996 4
Condensed Consolidated Income Statements --
Nine Months Ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risks N/A
PART II Other Information
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 27
Exhibit Index 28
</TABLE>
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
XYLAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................. $ 34,572 $ 62,483
Short-term investments.................................................... 44,463 50,498
Accounts receivable, net.................................................. 42,828 26,956
Inventories............................................................... 11,371 11,578
Deferred income taxes..................................................... 6,594 1,766
Prepaid expenses and other current assets................................. 3,390 2,247
-------- --------
Total current assets..................................................... 143,218 155,528
Investments................................................................ 59,875 27,785
Note receivable............................................................ 7,500 6,000
Property and equipment, net................................................ 20,099 16,665
Other assets............................................................... 4,889 1,273
-------- --------
Total assets............................................................ $235,581 $207,251
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................... $ 21,019 $ 17,760
Current installments of capital lease obligations........................ 223 303
Deferred revenue......................................................... 4,494 2,838
Income taxes payable..................................................... 871 12
-------- --------
Total current liabilities............................................... 26,607 20,913
Capital lease obligations, less current installments..................... 48 206
Deferred revenue......................................................... 539 494
-------- --------
Total liabilities....................................................... 27,194 21,613
-------- --------
Shareholders' equity:
Common stock and additional paid-in capital.............................. 189,623 184,439
Retained earnings........................................................ 18,764 1,199
-------- --------
Shareholders' equity.................................................... 208,387 185,638
-------- --------
Total shareholders' equity.............................................. $235,581 $207,251
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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XYLAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------
September 30, June 30, September 30,
1997 1997 1996
------------- -------- -------------
<S> <C> <C> <C>
Revenue.............................. $53,517 $45,122 $35,425
Cost of revenue...................... 23,718 20,255 15,904
------- ------- -------
Gross profit...................... 29,799 24,867 19,521
------- ------- -------
Operating expenses:
Research and development........... 6,778 6,079 4,255
Sales and marketing................ 15,688 13,925 8,594
General and administrative......... 1,791 1,601 1,017
------- ------- -------
Total operating expenses............. 24,257 21,605 13,866
------- ------- -------
Operating income.................. 5,542 3,262 5,655
Interest income, net................. 1,550 1,812 1,861
------- ------- -------
Income before income taxes........... 7,092 5,074 7,516
Income tax benefit (expense)......... (2,485) 2,016 (2,886)
------- ------- -------
Net income......................... $ 4,607 $ 7,090 $ 4,630
======= ======= =======
Net income per share................. $ .10 $ .15 $ .10
======= ======= =======
Weighted average common and common
equivalent shares outstanding....... 47,269 46,267 47,451
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Revenue.................................... $146,647 $87,004
Cost of revenue............................ 64,636 39,952
-------- -------
Gross profit....................... 82,011 47,052
-------- -------
Operating expenses:
Research and development................ 18,363 10,933
Sales and marketing..................... 42,234 21,433
General and administrative.............. 4,969 3,087
-------- -------
Total operating expenses................... 65,566 35,453
-------- -------
Operating income................... 16,445 11,599
Interest income, net....................... 5,190 3,359
-------- -------
Income before income taxes................. 21,635 14,958
Income tax expense......................... 4,070 4,744
-------- -------
Net income.............................. $ 17,565 $10,214
======== =======
Net income per share....................... $ .38 $ .22
======== =======
Weighted average common and common
equivalent shares outstanding.......... 46,822 46,320
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................... $ 17,565 $ 10,214
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................... 5,470 2,283
Deferred income taxes....................................... (4,828) --
Expense related to warrants................................. (274) --
Unearned compensation amortization.......................... 343 385
Change in:
Accounts receivable........................................ (15,871) (10,558)
Inventories................................................ 207 (8,646)
Prepaid expenses and other current assets.................. (1,143) (1,617)
Other assets............................................... (3,617) (784)
Accounts payable and accrued expenses...................... 3,259 2,659
Deferred revenue........................................... 1,701 3,352
Income taxes payable....................................... 2,809 4,664
-------- --------
Net cash provided by operating activities................. 5,621 1,952
-------- --------
Cash flows from investing activities:
Purchases of property and equipment.......................... (8,904) (9,950)
Note receivable.............................................. (1,500) (6,000)
Net purchases of investments.............................. (26,055) (81,212)
-------- --------
Net cash used in investing activities..................... (36,459) (97,162)
-------- --------
Cash flows from financing activities:
Proceeds from issuances of common stock...................... 3,165 144,053
Principal payments under capital lease obligations........... (238) (243)
-------- --------
Net cash provided by financing activities.................. 2,927 143,810
-------- --------
Net increase (decrease) in cash and cash equivalents...... (27,911) 48,600
Cash and cash equivalents at beginning of period.............. 62,483 6,034
-------- --------
Cash and cash equivalents at end of period.................... $ 34,572 $ 54,634
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 26 $ 36
Cash paid during the period for taxes..................... $ 5,914 $ --
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Income tax benefit resulting from exercise of employee
stock options............................................ $ 1,950 $ 4,664
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<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 and nine month periods ending September 30, 1997 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") Form 10-K.
NOTE 2. Investments
Investments at September 30, 1997 and December 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 held to maturity securities. The market value of these
securities at September 30, 1997, approximated cost.
NOTE 3. Inventories
Inventories, primarily component parts, are stated at the lower of cost or
market, cost being determined using the first-in, first-out method.
NOTE 4. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
<S> <C> <C>
Accounts payable.................................... $ 8,029 $ 9,336
Accrued payroll and related costs................... 6,261 4,281
Accrued warranty.................................... 1,379 1,535
Other accrued expenses.............................. 5,350 2,608
------- -------
Total accounts payable and accrued expenses........ $21,019 $17,760
======= =======
</TABLE>
7
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NOTE 5. Shareholder's Equity
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 September 30,
1997, the Company has issued 2,213,414 shares of common stock under the 1993
Plan and options to purchase 5,049,427 shares of common stock are 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 representing 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
September 30, 1997, June 30, 1997 and September 30, 1996, the Company recorded
$114,000, $115,000 and $114,000 of compensation expense, respectively.
The Company has a 1996 Stock Option Plan. Under the 1996 Stock Option Plan,
5,000,000 shares of the Company's authorized but unissued common stock are
reserved for option grants. As of September 30, 1997 the Company has issued
22,391 shares of common stock under this plan and options to purchase 3,992,327
shares of common stock are outstanding.
The Company has a 1996 Directors' Stock Option Plan. Under the 1996
Directors' Stock Option Plan, 150,000 shares of the Company's authorized but
unissued common stock are reserved for option grants. As of September 30, 1997
the Company has not issued any shares of common stock under this plan and
options to purchase 45,000 shares of common stock are outstanding.
The Company has a 1996 Employee Stock Purchase Plan, which reserves
1,500,000 shares of common stock for issuance under the plan. As of September
30, 1997, the Company issued 81,051 shares under this plan.
In July 1996, the Company and IBM entered into an alliance in the field of
campus networking switching products. The Company committed to grant IBM
warrants to purchase up to 2,350,000 shares of Xylan common stock based on the
achievement of specific business goals. The exercise price of the warrants was
to be at a 25% premium over the Xylan closing stock price when earned. In
connection with the signing of a Master Agreement between Xylan and IBM, all
commitments to grant IBM warrants were cancelled.
NOTE 6. Income Taxes
For the three months ended September 30, 1997, the Company recorded an
effective tax rate of 35%. The effective tax rate reduction from the previous
quarters of 38%, before the recognition of the $4 million income tax benefit
discussed below, resulted from the Company earning more tax-exempt interest
income in the quarter ended September 30, 1997. For the three months ended June
30, 1997, the Company recorded an effective tax rate of approximately 38% and a
$4 million income tax benefit for the recognition of deferred tax assets. The
realization of the deferred tax assets resulted from the reversal of the
valuation allowance based on management's assessment that it is more likely than
not that the net deferred tax assets will be realized based on carryback
potential, existing temporary differences and expectations of future taxable
income levels. For the three months ended September 30, 1996, the Company
recorded an effective tax rate of 38%.
For the nine months ended September 30, 1997, the Company recorded an
effective tax rate of approximately 37% and a $4 million income tax benefit for
the recognition of deferred tax assets, discussed above. For the nine months
ended September 30, 1996 the Company recorded an effective tax rate of
approximately 32% due to the utilization of net operating loss carryforwards
during the quarter ended March 31, 1996. The utilization of net operating loss
carryforwards reduced the effective tax rate to 3% for the quarter ended March
31, 1996.
8
<PAGE>
For the quarters ended September 30, 1997, June 30, 1997 and September 30,
1996 the Company realized an income tax benefit of $866,000, $485,000 and $2.9
million, respectively, for certain stock option transactions. For the nine
months ended September 30, 1997 and 1996 the income tax benefit for certain
stock option transactions was $2.0 million and $4.7 million, respectively. This
benefit is used to reduce taxable income prior to the utilization of net
operating loss carryforwards, and results in a decrease in current income taxes
payable and an increase in additional paid-in capital.
As of December 31, 1996, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $7.7 million, which are
available to offset future taxable income, if any, through 2010. Additionally,
the Company had research and development tax credit carryforwards for Federal
and state income tax purposes of $936,000 and $421,000, respectively, which are
available to offset future income taxes, if any, through 2011.
NOTE 7. Computation Of Net Income Per Share
Net income per 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. The difference between primary and fully
diluted net income per share is immaterial for all periods presented. Shares
used in the net income per share calculation are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------
September 30, June 30, September 30,
1997 1997 1996
------------- -------- -------------
<S> <C> <C> <C>
Weighted average common stock outstanding.......... 42,647 42,278 41,837
Weighted average common stock equivalents.......... 4,622 3,989 5,614
------ ------ ------
Shares used in net income per share calculation... 47,269 46,267 47,451
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Weighted average common stock outstanding.......... 42,398 40,332
Weighted average common stock equivalents.......... 4,424 5,988
------ ------
Shares used in net income per share calculation... 46,822 46,320
====== ======
</TABLE>
9
<PAGE>
NOTE 8. Segment Information
For the quarter ended September 30, 1997, IBM and Alcatel accounted for 17%
and 10%, respectively, of revenue. For the quarter ended June 30, 1997, IBM and
Alcatel accounted for 21% and 12%, respectively, of revenue. For the quarter
ended September 30, 1996, IBM, Hitachi Computer Products and Optical Data
Systems accounted for 15%, 11% and 11%, respectively, of revenue.
For the nine months ended September 30, 1997, IBM and Alcatel accounted for
21% and 10%, respectively, of revenue. For the nine months ended September 30,
1996, Hitachi Computer Products and NTT PC Communications, Inc. accounted for
17% and 13%, respectively, of revenue.
Sales to customers outside of North America accounted for 54%, 54% and 39%
of the Company's revenue in the quarters ended September 30, 1997, June 30,
1997, and September 30, 1996, respectively. Sales to customers outside of North
America accounted for 54% and 55% of the Company's revenue in the nine months
ended September 30, 1997 and 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.
10
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ITEM 2. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
This quarterly report on Form 10-Q may consist of forward looking
statements that involve risks and uncertainties. These statements may differ
materially from actual future events or results. Readers are referred to the
"Factors Affecting Future Results" section of this Management's Discussion and
Analysis of Financial Condition and Results of Operations which identify
important risk factors that could cause actual results to differ from those
contained in the forward looking statements. The Company undertakes no
obligation to update the information, including the forward looking statements,
in this Report on Form 10-Q.
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. Since then, revenue has
increased signifiantly on a yearly basis to an aggregate of $128.5 million in
fiscal year 1996 from $29.7 million in fiscal year 1995. On a quarterly basis
revenue increased to $53.5 million in the quarter ended September 30, 1997 from
$35.4 million in the quarter ended September 30, 1996. The increases in revenue
reflect substantial growth of the LAN switching market, the continued
introduction by the Company of additional features and enhancements to its
OmniSwitch product family and the introduction of the PizzaSwitch product, all
of which expanded the portion of the market addressed by Xylan's Products. The
increase in revenue was also the result of continued market acceptance of the
Company's LAN switching products, and investment in sales and marketing efforts,
including significant expansion of the Company's domestic and international
product distribution network. The Company markets its products worldwide through
OEM partners, system integrators and its own sales force and first achieved
profitability in the fourth quarter of 1995. As of September 30, 1997, the
Company had retained earnings of $18.8 million.
The Company intends to increase significantly its investments in research
and development, sales and marketing and related infrastructure. Such increases
will be 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 generally experienced
revenue growth since revenue was first recognized, such growth rates may not be
sustainable and are not indicative of future operating results. There can be no
assurance that the Company will sustain profitability.
Results Of Operations
Revenue
Revenue for the quarter ended September 30, 1997 was $53.5 million compared
to $45.1 million for the quarter ended June 30, 1997, an increase of 19%.
Revenue for the quarter ended September 30, 1996 was $35.4 million. Comparing
revenue for the quarter ended September 30, 1997 to the quarter ended September
30, 1996, revenue increased 51%. Revenue for the nine months ended September 30,
1997 was $146.6 million compared to $87.0 million for the nine months ended
September 30, 1996. The increases in revenue were 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, the introduction of the PizzaSwitch product family,
continued market acceptance of the Company's LAN switching products, the
addition of IBM as an OEM in July 1996 and the Company's investment in
11
<PAGE>
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.
Under an agreement with IBM and the Company, IBM has the right to
manufacture certain Company products after a specified period of time and pay a
royalty to Xylan. As of September 30, 1997, the Company has earned no royalties.
Product revenue could be adversely impacted if IBM elects to manufacture the
Company's products.
The Company markets its products worldwide through OEM partners, system
integrators and a direct sales force. The following table sets forth the
Company's revenue by sales channel and geographic region as a percentage of
total revenue:
<TABLE>
<CAPTION>
Three Months ended
----------------------------------
Sept. 30, June 30, Sept. 30,
1997 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Channel:
OEM partners 30% 35% 47%
System Integrators 41% 40% 37%
Direct Sales (1) 29% 25% 16%
== == ==
Region(2):
North America 46% 46% 61%
International 54% 54% 39%
== == ==
<CAPTION>
Nine Months ended Sept. 30,
---------------------------
1997 1996
---- ----
<S> <C> <C>
Channel:
OEM partners 36% 46%
System Integrators 40% 41%
Direct Sales (1) 24% 13%
== ==
Region(2):
North America 46% 45%
International 54% 55%
== ==
</TABLE>
(1) Direct sales also include sales to the government and carriers.
(2) 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.
For the quarter ended September 30, 1997, IBM and Alcatel accounted for 17%
and 10%, respectively, of revenue. For the quarter ended June 30, 1997, IBM and
Alcatel accounted for 21% and 12%, respectively, of revenue. For the quarter
ended September 30, 1996, IBM, Hitachi Computer Products and Optical Data
Systems accounted for 15%, 11% and 11%, respectively, of revenue.
For the nine months ended September 30, 1997, IBM and Alcatel accounted for
21% and 10%, respectively, of revenue. For the nine months ended September 30,
1996, Hitachi Computer Products and NTT PC Communications, Inc. accounted for
17% and 13%, respectively, of revenue.
12
<PAGE>
Gross Profit
Gross margins were 55.7%, 55.1% and 55.1% for the quarters ended September
30, 1997, June 30, 1997 and September 30, 1996, respectively. Gross margins were
55.9% and 54.1% for the nine months ended September 30, 1997 and 1996,
respectively. The increase in gross margins when comparing the quarter ended
June 30, 1997, to the quarter ended September 30, 1997, and the nine months
ended September 30, 1996, to the nine months ended September 30, 1997 resulted
from channel mix, component cost reductions due to increased manufacturing
volume, the use of application specific integrated circuits ("ASICs") and design
improvements. The Company's gross margins in the future will be affected by a
number of factors, including competitive market pricing and discount levels,
product mix, 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 and
ASICs 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 system integrators. The Company
has entered into an agreement with IBM and may in the future enter into
additional OEM agreements, which could adversely affect its gross margins.
Research And Development Expenses
Research and development expenses were $6.8 million, $6.1 million and $4.3
million for the quarters ended September 30, 1997, June 30, 1997 and September
30, 1996, respectively. This represents an increase of 11% from the second
quarter of 1997 to the third quarter of 1997and an increase of 59% from the
third quarter of 1996 to the third quarter of 1997. Research and development
expenses were $18.4 million and $10.9 million for the nine months ended
September 30, 1997 and 1996, respectively. This represents an increase of 68%.
These increases were primarily due to the hiring of additional engineers and an
increase in prototype material costs for new product development. As a
percentage of revenue, research and development expenses were 13%, 14% and 12%
for the quarters ended September 30, 1997, June 30, 1997 and September 30, 1996,
respectively. For the nine months ended September 30, 1997 and 1996, research
and development expenses as a percentage of revenues were 13%.
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 impact Xylan's existing product offerings. 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 in research and development and anticipates that research and
development spending will continue to increase throughout 1997. To date, the
Company has not capitalized any development costs and does not anticipate
capitalizing any such costs in the foreseeable future.
Sales And Marketing Expenses
Sales and marketing expenses were $15.7 million, $13.9 million and $8.6
million for the quarters ended September 30, 1997, June 30, 1997 and September
30, 1996, respectively. For the nine months ended September 30, 1997 and 1996,
sales and marketing expenses were $42.2 million and $21.4 million, respectively.
This represents an increase of 13% from the second quarter of 1997 to the third
quarter of 1997, an increase of 83% from the third quarter of 1996 to the third
quarter of 1997 and an increase of 97% from the nine months ended September 30,
1996 to the nine months ended September 30, 1997. These increases were
primarily due to expenses related to the addition of direct sales personnel
throughout
13
<PAGE>
the United States, Europe and Asia, advertising and promotional campaigns in
support of the Company's direct sales and system integrator channels and
increased commission expenses on higher revenues. 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 1997 in absolute
dollars.
As a percentage of revenue, sales and marketing expenses were 29%, 31% and
24% for the quarters ended September 30, 1997, June 30, 1997 and September 30,
1996, respectively. For the nine months ended September 30, 1997 and 1996, sales
and marketing expenses as a percentage of revenues were 29% and 25%,
respectively. The increase of sales and marketing expenses as a percent of
revenue when comparing the three and nine months ended September 30, 1997 to the
same periods in the prior year is due to the percentage increase in
expenditures, as discussed above, being greater than the percentage increase in
revenue.
General And Administrative Expenses
General and administrative expenses were $1.8 million, $1.6 million and
$1.0 million for the quarters ended September 30, 1997, June 30, 1997 and
September 30, 1996, respectively. For the nine months ended September 30, 1997
and 1996, general and administrative expenses were $5.0 million and $3.1
million, respectively. As a percentage of revenue, general and administrative
expenses were 3.3%, 3.5% and 2.9% for the quarters ended September 30, 1997,
June 30, 1997 and September 30, 1996, respectively. For the nine months ended
September 30, 1997 and 1996, general and administrative expenses as a percentage
of revenues were 3.4% and 3.5%, respectively. As the Company continues to add
personnel and introduce new products and enhancements to its existing products,
it expects that general and administrative expenses will continue to increase in
1997 in absolute dollars.
Interest Income
Interest income, net, was $1.6 million, $1.8 million and $1.9 million for
the quarters ended September 30, 1997, June 30, 1997 and September 30, 1996,
respectively. For the nine months ended September 30, 1997 and 1996, interest
income was $5.2 million and $3.4 million, respectively. The decrease in interest
income from the three months ended June 30, 1997, to the three months ended
September 30, 1997, resulted from the Company earning more interest on tax-
exempt investments which have a lower pre-tax yield but higher after-tax yield
than taxable investments. The increase from the nine months ended September 30,
1996 as compared to the respective period of the current year is the result of
interest income earned on the net proceeds of $87.4 million and $56.2 million
from the Company's initial public offering in March 1996 and the Company's
secondary public offering in May 1996, respectively.
Provision For Income Taxes
For the three months ended September 30, 1997, the Company recorded an
effective tax rate of 35%. The effective tax rate reduction from the previous
quarters of 38%, before the recognition of the $4 million income tax benefit
discussed below, resulted from the Company earning more tax-exempt interest
income in the quarter ended September 30, 1997. For the three months ended June
30, 1997, the Company recorded an effective tax rate of approximately 38% and a
$4 million income tax benefit for the recognition of deferred tax assets. The
realization of the deferred tax assets resulted from the reversal of the
valuation allowance based on management's assessment that it is more likely than
not that the net deferred tax assets will be realized based on carryback
potential, existing temporary differences and expectations of future taxable
income levels. For the three months ended September 30, 1996, the Company
recorded an effective tax rate of 38%.
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For the nine months ended September 30, 1997, the Company recorded an
effective tax rate of approximately 37% and a $4 million income tax benefit for
the recognition of deferred tax assets, discussed above. For the nine months
ended September 30, 1996 the Company recorded an effective tax rate of
approximately 32% due to the utilization of net operating loss carryforwards
during the quarter ended March 31, 1996. The utilization of net operating loss
carryforwards reduced the effective tax rate to 3% for the quarter ended March
31, 1996.
For the quarters ended September 30, 1997, June 30, 1997 and September 30,
1996 the Company realized an income tax benefit of $866,000, $485,000 and $2.9
million, respectively, for certain stock option transactions. For the nine
months ended September 30, 1997 and 1996 the income tax benefit for certain
stock option transactions was $2.0 million and $4.7 million, respectively. This
benefit is used to reduce taxable income prior to the utilization of net
operating loss carryforwards, and results in a decrease in current income taxes
payable and an increase in additional paid-in capital.
As of December 31, 1996, the Company had net operating loss carryforwards
for Federal income tax purposes of approximately $7.7 million, which are
available to offset future taxable income, if any, through 2010. Additionally,
the Company had research and development tax credit carryforwards for Federal
and state income tax purposes of $936,000 and $421,000, respectively, which are
available to offset future income taxes, if any, through 2011.
Liquidity And Capital Resources
The Company's principal source of liquidity as of September 30, 1997,
consisted of $35 million in cash and cash equivalents, $44 million in short-term
investments and a $6 million bank credit facility. Additionally, the Company has
$60 million in long term investments. For the nine months ended September 30,
1997 and 1996 cash provided by operating activities was $5.6 million, and $2.0
million, respectively. 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 twelve
months.
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.
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 LAN switching products. Accordingly, the Company has
only a limited operating history upon which an evaluation of the Company and its
prospects can be based. The Company has generally experienced 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. In fiscal 1997, the Company intends to continue to increase
significantly 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 revenue 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
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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 system integrators, (ii) the
Company's success in developing, introducing and shipping product enhancements,
ASICs 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
(including ASICs), (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 (ix) mix of
products manufactured or purchased by IBM and (x) general economic conditions.
See "Dependence on OEM Partners and System Integrators; IBM; 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". For
example, the Company's revenue in the quarter ended June 30, 1997 declined as
compared to the immediately preceding quarter primarily due to lower than
expected orders from a large OEM customer, material availability for the
Company's ATM switch product, and lower than expected shipments of the Company's
new Ethernet/Fast Ethernet products.
The Company's revenue in any period is highly dependent upon the sales
efforts and success of Xylan's OEM partners (including IBM) and system
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 system integrators. Accordingly, if the Company's OEM
partners and system integrators were to account for an increased portion of the
Company's revenue, gross margins would decline. In addition, if IBM elects to
manufacture products using technology licensed from the Company, the Company's
product revenue and product gross margin will be adversely affected. New
products may have different gross margins than existing products. A significant
portion of the Company's expenses, such as rent, headcount and lease expenses,
are relatively fixed in advance, based in large part on the Company's forecasts
of future revenue. If revenues are below expectations in any given period, the
adverse effect of a shortfall in revenue 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. In addition, due in part to the timing of product
release dates, purchase orders and product availability, significant volume
shipments of products have occurred and may continue to occur at the end of the
Company's fiscal quarter. Failure to ship such products by the end of a quarter
may adversely affect the Company's operating results. 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 revenue, an increase in
discounts offered to the Company's OEM partners or system 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, the Company's operating results have and
may in the future be below the expectations of public market
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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, significant price reductions, 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. Recent consolidations in the industry have resulted in competitors that
may have broader product lines, greater access to capital or greater research
and development resources which could adversely affect the ability of the
Company to compete. 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. In addition,
certain of the Company's OEMs may sell competitive products using the Company's
technology. 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 "Dependence on Proprietary Technology, Intellectual Property
Litigation."
Substantial Increase in Manufacturing Operations; Dependence on Contract
Manufacturing. As demand for the Company's products grow, the Company will
increase its flow of materials, contract manufacturing capacity and internal
test and quality functions to respond to such customer demand and to reduce its
order lead times. Any inability or delay in 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. During 1996, the Company leased 40,000 square feet of
space, a portion of which is being used for manufacturing. Any interruption or
delay in the normal flow of production, or defaults or financial insolvency of
the contract manufacturer could have a material adverse effect on the Company's
business, operating results and financial condition. The Company may also
require additional manufacturing space and there can be no assurance that such
additional space, if required, will be available in a timely manner or on
commercially reasonable terms, if at all.
Xylan's operational strategy relies on outsourcing of manufacturing. The
Company currently subcontracts component procurement and printed circuit board
assembly to a single company. The Company also subcontracts assembly of chasis
to a number of companies, each of which specialize in the particular services
provided. 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 manufacturers, 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. During 1996, the
Company agreed to loan up to $10 million to its contract manufacturer that
performs circuit board assembly. The loan, which assists the contract
manufacturer to meet the Company's increasing production requirements, is non-
interest bearing,
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does not have a defined due date and is secured by raw materials and electronic
components purchased by the contract manufacturer. At August 6, 1997, the note
had an outstanding balance of $7.5 million. Also, during 1996 and 1997, the
Company guaranteed up to $5.0 million of such contract manufacturer's debt for
certain raw material and electronic component purchases. Any additional loans or
guaranties to the Company's contract manufacturer, or defaults or financial
insolvency of the contract manufacturer, could have an adverse effect upon the
Company's business, operating results and financial condition. 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 1997 and 1998, 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 on-time 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 ASICs, processors, selected
integrated circuits, programmable integrated circuits, cables and custom-tooled
sheet metal; and limited-sourced components include flash memories, dynamic
random access memories ("DRAMs"), and printed circuit boards. 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. As stated above, many of these ASICs are initially being
manufactured by a single source, LSI Logic Corporation in most cases, and
accordingly the risks of relying on sole sources is expected to increase. Any
interruption or delay 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, which could have a material adverse effect on
the Company's financial condition. From time to time the Company has
experienced shortages and allocations of certain components, delays in filling
orders while waiting to obtain the necessary components and delays in
prototyping of its ASICs. 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 allocations and delays are likely to occur in the future and could
have a material adverse effect on the Company's business, operating results and
financial condition.
Dependence on OEM Partners and System Integrators; IBM; Customer
Concentration. The Company pursues a sales and marketing strategy focused on
developing three channels of distribution for its products: worldwide OEM
partners, system integrators and direct sales. The Company has established OEM
partnerships with leading communications and networking companies, including
IBM, and Alcatel N.V. ("Alcatel"). In November 1996, the Company entered into
an OEM agreement with Samsung Electronics Company Ltd. ("Samsung") and also
signed a licensing agreement with Samsung under which the Company will modify
its OmniVision network management software to control Samsung's ATM switches, in
addition to Xylan's LAN switches. Samsung will also be combining Samsung's ATM
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switching technology, Xylan's LAN switching technology and the new integrated
network management system to provide a complete solution to the needs of
Samsung's customers.
In the field of campus network switching products, IBM and Xylan are
offering the other company's campus switch products for resale. For the quarter
ended September 30, 1997, sales to IBM comprised 17% of the Company's revenue.
There is no assurance that IBM will continue to purchase the Company's products.
In addition, the Company has limited information as to the sell-through of its
products by IBM. There is no assurance that even if IBM does purchase such
products, that IBM will sell such products to its customers. Both companies have
the right to manufacture and sell certain of each other's campus switching
products in exchange for a royalty. As of September 30, 1997, no royalties have
been earned by either company. However, sales by IBM of IBM manufactured or
other campus switch products could have a material adverse effect on the
Company's product revenues. In addition, the parties have formed a joint
development organization to develop new products using certain of the other
company's LAN technology. Any reduction or delay in sales of the Company's
products by IBM could have a material adverse effect on the Company's business,
financial condition and results of operations.
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 system integrators account, and are
expected to continue to account, for a substantial portion of the Company's net
revenue. As a percentage of revenue, aggregate sales to OEM partners and system
integrators accounted for 30% and 42%, respectively, for the quarter ended
September 30, 1997, and 47% and 37%, respectively, for the quarter ended
September 30, 1996. Each of the Company's OEM partners and system 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 system 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.
Certain of the Company's OEM agreements provide for limited exclusivity.
Certain of the Company's OEM partners have developed and may continue to 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 system
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 system 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 system integrators will
continue to offer the Company's products. For example, in July 1997, IBM
announced that it had also formed an alliance with 3Com, a competitor of the
Company. In addition, Xylan's OEM partners and system integrators could sell
competitive products to the Company's existing customers, which could have a
material adverse effect on the Company's business, operating results and
financial condition. Any reduction or delay in sales of the Company's products
by its OEM partners and system 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 system
integrators or that it will be able to recruit additional or replacement OEM
partners or system integrators. The loss of one or more of the Company's OEM
partners or system 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 system integrators. Accordingly, if the Company's OEM
partners and system integrators were to account for an increased portion of the
Company's revenue, its gross margin would decline.
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 continuing increase in the
level of responsibility for both existing and new management personnel. The
Company recently has implemented and continues to implement new and enhanced
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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
the Company experienced each of these problems in the past. The occurrence or
recurrence of any of these events could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 or acquisition 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, support or acquire 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. Such delays have, and any
future delays could have, a material adverse effect on the Company's business,
operating results and financial condition. 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 switching 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. However, ASICs are
generally complex and may contain undetected errors. 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 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 system 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
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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 expense, diversion of engineering and other resources from the
Company's product development efforts and the loss of credibility with Xylan's
OEM partners, system 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. While
the court dismissed Ascom Timeplex's charges with prejudice in connection with
the settlement, there can be no assurance that future disputes will not arise
between the parties with respect to the settlement or otherwise.
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. These
claims may be asserted against the Company directly in a lawsuit naming the
Company as a defendant, or may be asserted against the Company indirectly in a
lawsuit naming as a defendant one or more customers or resellers of the Company
which the Company is contractually obligated to indemnify in the event of a
lawsuit alleging that products purchased from the Company infringe third party
intellectual property rights. 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
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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 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 Product 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. Sales to customers outside of North America
accounted for approximately 54% and 39% of the Company's revenue for the
quarters ended September 30, 1997 and 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. The Company's international sales are conducted
primarily through its OEM partners and independent territory-specific system
integrators. Failure of the Company's OEM partners and system 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. These international factors
could have a material
22
<PAGE>
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 and investment balances, together with its line of credit and cash flow
expected to be generated from future operations, will be sufficient to meet the
Company's capital requirements through at least the next twelve months, although
the Company could be required, or could elect, to seek to raise additional
capital. 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 International Telecommunication
Union. 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. In addition, on April 17, 1997,
the Company's Board of Direcotrs declared a dividend of one right (a "Right") to
purchase 1/1000th of a share of Series A Participating Preferred Stock (the
"Series A Preferred") on each share of Common Stock. The Rights will become
exercisable only if a person or group acquires 15.0% or more of the Company's
Common Stock (in the case of Steve Y. Kim, Yuri Pikover, John L. Walecka or
Brentwood Associates VI, L.P., this threshold only applies to shares acquired
after April 17, 1997 and if such acquisition is not approved by the Board of
Directors) or announces a tender or exchange offer, the consummation of which
would result in ownership by a person or a group of 15.0% or more of the
Company's Common Stock. Each Right has an exercise price of $75.00 for each
1/1000th of a share of Series A Preferred.
23
<PAGE>
The rights of the holders of the Company's Common Stock will be subject to,
and may be adversely affected by, the existence of the Rights and the rights of
the holders of any Preferred Stock that may be issued in the future. The Rights
and any future 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.
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 affect the market price
of the Company's Common Stock.
In October 1996, Steve Kim and Yuri Pikover, executive officers and members
of the Board of Directors of the Company, entered into a program of periodic
sales of shares of their Xylan Common Stock through a blind trust for the
purpose of diversifying their personal holdings. At the beginning of each
calendar quarter, Steve Kim and Yuri Pikover will deliver 125,000 and 55,000
shares, respectively, to their blind trust for sale within the quarter,
provided, however, the amount of shares delivered by Mr. Kim will be reduced to
80,000 shares commencing with the second quarter of 1998. Furthermore, the trust
for Steve Kim's children will sell 25,000 shares and Yuri Pikover's trusts will
sell 20,000 shares within each quarter. In addition, certain of the venture
capital partnerships that invested in the Company have begun to distribute
portions of their holdings to their general and limited partners, who in turn
have begun to resell such shares on the open market. Any such sales by insiders
or distributions by large investors may also have an adverse effect on the
market price of the Company's Common Stock. In addition, recent changes in the
rules regarding resales of restricted securities pursuant to Rule 144 of the
Securities Act of 1933, as amended, may result in a greater number of shares of
the Company's Stock becoming available for resale sooner than anticipated, and
could have an adverse effect on the market price of the Company's Stock.
24
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
ITEM 2. Changes in Securities and Use of Proceeds
None.
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission Of Matters To A Vote Of Security Holders
None.
ITEM 5. Other Information
None.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
5.1 Opinion of Venture Law Group, A Professional Corporation.(1)
10.1 Form of Indemnification Agreement.(1)
10.2 1993 Stock Incentive Plan.(1)
10.3 Form of 1996 Employee Stock Purchase Plan and related agreements.(1)
10.4 Form of 1996 Directors' Option Plan and related agreements.(1)
10.5 Form of 1996 Stock Plan and related agreements.(1)
10.6 Fourth Restated Registration Rights Agreement among the Registrant
and certain securityholders of the Registrant, dated as of December
11, 1995.(1)
10.7 Lease Agreement between the Registrant and Malibu Canyon Office
Partners, L.P. dated as of April 14, 1994, as amended November 3,
1994, January 2, 1995, and April 25, 1995. (1)
10.8 Security and Loan Agreement dated September 1, 1995 between the
Registrant and Imperial Bank.(1)
10.9 Master Lease Agreement dated as of May 31, 1994, as amended between
the Registrant and Dominion Ventures, Inc.(1)
10.10 Master Lease Agreement dated as of June 9, 1995 between the
Registrant and Copelco Capital, Inc.(1)
10.11 Value-Added Product Sales Agreement dated as of July 1, 1995 between
the Registrant and Hamilton Hallmark, a division of Avnet, Inc.(1)
</TABLE>
25
<PAGE>
<TABLE>
<C> <S>
10.12 401(k) Plan.(1)
10.13 Series C Preferred Stock Agreement dated as of March 13, 1995 between
the Registrant and Alcatel Data Networks S.A.(1)
10.14 International Distributor Agreement between the Registrant and
Alcatel N.V., dated as of March 13, 1995.(1)
10.15 Product and Technology Agreement between the Registrant and Alcatel
N.V. dated as of March 13, 1995.(1)
10.16+ Original Equipment Manufacturer Agreement dated as of June 14, 1995
between the Registrant and Hitachi Computer Products (America),
Inc.(1)
10.17 Original Equipment Manufacturer Agreement dated as of April 12, 1995
between the Registrant and Digital Equipment Corporation.(1)
10.18+ Manufacturing and Purchase Agreement dated as of March 28, 1996
between the Registrant and Victron, Inc. Incorporated by reference to
exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for the
period ended March 31, 1996.
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan and
Victron, Inc. dated as of December 30, 1996.(2)
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(2)
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendments thereto (File No. 333-03623), which
became effective on May 29, 1996.
(2) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K for the period ended December 31,
1996.
+ The Company has received confidential treatment for certain portions of
this exhibit filed with the Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Xylan during the quarter ended
September 30, 1997.
26
<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
By: /s/ Dale J. Bartos
------------------
Date: November 12, 1997 Dale J. Bartos
Vice President and Chief Financial
Officer (Principal Financial and
Chief Accounting Officer)
27
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.(1)
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(1)
4.1 Form of Common Stock Certificate.(1)
5.1 Opinion of Venture Law Group, A Professional Corporation.(1)
10.1 Form of Indemnification Agreement.(1)
10.2 1993 Stock Incentive Plan.(1)
10.3 Form of 1996 Employee Stock Purchase Plan and related agreements.(1)
10.4 Form of 1996 Directors' Option Plan and related agreements.(1)
10.5 Form of 1996 Stock Plan and related agreements.(1)
10.6 Fourth Restated Registration Rights Agreement among the Registrant
and certain securityholders of the Registrant, dated as of December
11, 1995.(1)
10.7 Lease Agreement between the Registrant and Malibu Canyon Office
Partners, L.P. dated as of April 14, 1994, as amended November 3,
1994, January 2, 1995, and April 25, 1995.(1)
10.8 Security and Loan Agreement dated September 1, 1995 between the
Registrant and Imperial Bank.(1)
10.9 Master Lease Agreement dated as of May 31, 1994, as amended between
the Registrant and Dominion Ventures, Inc.(1)
10.10 Master Lease Agreement dated as of June 9, 1995 between the
Registrant and Copelco Capital, Inc.(1)
10.11 Value-Added Product Sales Agreement dated as of July 1, 1995 between
the Registrant and Hamilton Hallmark, a division of Avnet, Inc.(1)
10.12 401(k) Plan.(1)
10.13 Series C Preferred Stock Agreement dated as of March 13, 1995
between the Registrant and Alcatel Data Networks S.A.(1)
10.14 International Distributor Agreement between the Registrant and
Alcatel N.V., dated as of March 13, 1995.(1)
10.15 Product and Technology Agreement between the Registrant and Alcatel
N.V. dated as of March 13, 1995.(1)
10.16+ Original Equipment Manufacturer Agreement dated as of June 14, 1995
between the Registrant and Hitachi Computer Products (America),
Inc.(1)
10.17 Original Equipment Manufacturer Agreement dated as of April 12,
1995 between the Registrant and Digital Equipment Corporation.(1)
10.18+ Manufacturing and Purchase Agreement dated as of March 28, 1996
between the Registrant and Victron, Inc. Incorporated by reference
to exhibit 10.18 to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 1996.
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan
and Victron, Inc. dated as of December 30, 1996.(2)
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(2)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
11.1 Statement of Computation of Earnings Per Share.
27.1 Financial Data Schedule.
</TABLE>
- --------
(1) Incorporated by reference to identically numbered exhibits filed in
response to Item 16(a), "Exhibits," of the Registrant's Registration
Statement on Form S-1 and Amendments thereto (File No. 333-03623), which
became effective on May 29, 1996.
(2) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K for the period ended December 31,
1996.
+ The Company has received confidential treatment for certain portions of
this exhibit filed with the Commission.
29
<PAGE>
EXHIBIT 11.1
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
Sept. 30, June 30, Sept. 30,
1997 1997 1996
--------- -------- ---------
<S> <C> <C> <C>
Net income....................................... $ 4,607 $ 7,090 $ 4,630
========= ======== =======
Weighted average common shares outstanding....... 42,647 42,278 41,837
Weighted average common stock equivalents - Stock
options determined using the treasury stock
method......................................... 4,622 3,989 5,614
--------- -------- -------
Weighted average common and common
equivalent shares outstanding.................. 47,269 46,267 47,451
========= ======== =======
Net income per share............................. $ .10 $ .15 $ .10
========= ======== =======
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Net income....................................... $17,565 $10,214
======= =======
Weighted average common shares outstanding....... 42,398 40,332
Weighted average common stock equivalents - Stock
options determined using the treasury stock
method......................................... 4,424 5,988
------- -------
Weighted average common and common
equivalent shares outstanding.................. 46,822 46,320
======= =======
Net income per share............................. $ .38 $ .22
======= =======
</TABLE>
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 34,572
<SECURITIES> 44,463
<RECEIVABLES> 50,598
<ALLOWANCES> 270
<INVENTORY> 11,371
<CURRENT-ASSETS> 143,217
<PP&E> 30,200
<DEPRECIATION> 10,101
<TOTAL-ASSETS> 235,581
<CURRENT-LIABILITIES> 26,607
<BONDS> 0
0
0
<COMMON> 73
<OTHER-SE> 208,314
<TOTAL-LIABILITY-AND-EQUITY> 235,581
<SALES> 53,517
<TOTAL-REVENUES> 53,517
<CGS> 23,718
<TOTAL-COSTS> 23,718
<OTHER-EXPENSES> 24,257
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26
<INCOME-PRETAX> 7,092
<INCOME-TAX> 2,485
<INCOME-CONTINUING> 4,607
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,607
<EPS-PRIMARY> 0.10
<EPS-DILUTED> 0.10
</TABLE>
