<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, 1998
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 November
2, 1998, was 42,276,454.
<PAGE>
XYLAN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1998
INDEX
Page
----
PART I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- September 30,
1998 and December 31, 1997 3
Condensed Consolidated Income Statements --
Three Months Ended September 30, 1998, June 30,
1998 and September 30, 1997 4
Condensed Consolidated Income Statements --
Nine months ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows --
Nine Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risks N/A
PART II Other Information
Item 1. Legal Proceedings 24
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
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
XYLAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 29,202 $ 35,917
Short-term investments............................ 16,227 43,171
Accounts receivable, net.......................... 61,351 53,013
Inventories, net.................................. 23,833 17,731
Deferred income taxes, net........................ 8,600 6,100
Prepaid expenses and other current assets......... 3,930 2,892
-------- --------
Total current assets............................ 143,143 158,824
Investments........................................... 77,299 59,382
Note receivable....................................... 7,500 7,500
Property and equipment, net........................... 27,279 20,894
Other assets.......................................... 5,556 4,306
-------- --------
Total assets................................... $260,777 $250,906
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 33,620 $ 26,382
Current installments of capital lease obligations.... 62 189
Deferred revenue..................................... 9,676 4,317
Income taxes payable................................. 2,364 3,002
-------- --------
Total current liabilities........................... 45,722 33,890
Capital lease obligations, less current installment... -- 17
Deferred revenue...................................... 2,757 899
-------- --------
Total liabilities................................... 48,479 34,806
Total shareholders' equity:
Common stock and additional paid-in capital.......... 158,546 190,774
Retained earnings.................................... 53,752 25,326
-------- --------
Total shareholders' equity......................... 212,298 216,100
-------- --------
Total liabilities and shareholders' equity.......... $260,777 $250,906
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
XYLAN CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
September 30, June 30, September 30,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue................................ $91,133 $83,678 $53,517
Cost of revenue........................ 39,425 36,128 23,718
------- ------- -------
Gross profit................... 51,708 47,550 29,799
------- ------- -------
Operating expenses:
Research and development............ 10,849 9,886 6,778
Sales and marketing................. 23,784 21,769 15,688
General and administrative.......... 2,443 2,295 1,791
------- ------- -------
Total operating expenses............... 37,076 33,950 24,257
------- ------- -------
Operating income............... 14,632 13,600 5,542
Interest income, net................... 1,190 1,363 1,550
------- ------- -------
Income before income taxes............. 15,822 14,963 7,092
Income tax expense.................. 5,384 5,360 2,485
------- ------- -------
Net income..................... $10,438 $ 9,603 $ 4,607
======= ======= =======
Net income per share:
Basic............................... $.24 $.22 $.11
Diluted............................. $.22 $.20 $.10
======= ======= =======
Shares used in per share calculations:
Basic............................... 42,921 43,159 42,647
Diluted............................. 46,956 48,246 47,269
======= ======= =======
</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, September 30,
1998 1997
---- ----
<S> <C> <C>
Revenue.................................. $250,181 $146,647
Cost of revenue.......................... 108,205 64,636
-------- --------
Gross profit..................... 141,976 82,011
-------- --------
Operating expenses:
Research and development.............. 29,522 18,363
Sales and marketing................... 65,661 42,234
General and administrative............ 6,975 4,969
-------- --------
Total operating expenses................. 102,158 65,566
-------- --------
Operating income................. 39,818 16,445
Interest income, net..................... 4,044 5,190
-------- --------
Income before income taxes............... 43,862 21,635
Income tax expense.................... 15,436 4,070
-------- --------
Net income....................... $ 28,426 $ 17,565
======== ========
Net income per share:
Basic................................. $.66 $.41
Diluted............................... $.60 $.38
======== ========
Shares used in per share calculations:
Basic................................. 43,063 42,398
Diluted............................... 47,593 46,822
======== ========
</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, September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income..................................................... $ 28,426 $ 17,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................ 8,086 5,470
Deferred income taxes........................................ (2,500) (4,828)
Expense related to warrants.................................. -- (274)
Unearned compensation amortization........................... 254 343
Change in:
Accounts receivable......................................... (8,338) (15,871)
Inventories................................................. (6,102) 207
Prepaid expenses and other current assets................... (1,037) (1,143)
Other assets................................................ (1,250) (3,617)
Accounts payable and accrued expenses....................... 7,238 3,259
Deferred revenue............................................ 7,217 1,701
Income taxes payable........................................ 5,916 2,809
-------- --------
Net cash provided by operating activities................. 37,910 5,621
-------- --------
Cash flows from investing activities:
Purchases of property and equipment........................... (14,471) (8,904)
Note receivable............................................... -- (1,500)
Sale (purchases) of investments............................... 9,027 (26,055)
-------- --------
Net cash used in investing activities...................... (5,444) (36,459)
-------- --------
Cash flows from financing activities:
Common stock issued........................................... 9,729 3,165
Common stock repurchased...................................... (48,766) --
Principal payments under capital lease obligations............ (144) (238)
-------- --------
Net cash provided by (used in) financing activities.......... (39,181) 2,927
-------- --------
Net decrease in cash and cash equivalents.................. (6,715) (27,911)
Cash and cash equivalents at beginning of period................ 35,917 62,483
-------- --------
Cash and cash equivalents at end of period...................... $ 29,202 $ 34,572
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................... $ 14 $ 26
Cash paid during the period for taxes...................... $ 11,950 $ 5,914
======== ========
Supplemental disclosure of noncash investing and
financing activities:
Income tax benefit resulting from exercise of
employee stock options................................... $ 6,555 $ 1,950
======== ========
</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, six and nine month periods ending September 30, 1998,
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, 1998, and December 31, 1997, consist of corporate
and municipal debt, U.S. Treasuries and Federal Government Agency debt. 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, 1998, and
December 31, 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 (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Accounts payable.............................. $15,523 $10,926
Accrued payroll and related costs............. 9,312 7,890
Accrued warranty.............................. 1,261 1,256
Other accrued expenses........................ 7,524 6,310
------- -------
Total accounts payable and accrued expenses. $33,620 $26,382
======= =======
</TABLE>
NOTE 5. Shareholder's Equity
In January 1998 and September 1998, the Company's Board of Directors
authorized the Company to repurchase up to 2,000,000 and 1,000,000 shares of the
Company's common stock, respectively, to offset the dilutive effect of new
issuances of common stock under the Company's stock option and stock purchase
plans. During the three months ended September 30, 1998, the Company
repurchased 1,454,500 shares of its common stock for $28,054,000. During the
nine months ended September 30, 1998, the Company repurchased 2,240,000 shares
of common stock for $48,766,000.
7
<PAGE>
The Company has a 1993 Stock Incentive Plan which reserves 8,000,000 shares
of the Company's authorized but unissued common stock for option or stock
purchase grants. As of September 30, 1998, the Company has issued 3,356,228
shares of common stock under this plan and options to purchase 4,426,425 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 $2,045,000 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, 1998, June 30, 1998, and September
30, 1997, the Company recorded $26,000, $114,000 and $114,000, respectively, of
compensation expense. For the nine months ended September 30, 1998 and 1997,
the Company recorded $254,000 and $343,000, respectively, of compensation
expense.
The Company has a 1996 Stock Plan which reserves 8,000,000 shares of the
Company's authorized but unissued common stock for option grants. As of
September 30, 1998, the Company has issued 343,402 shares of common stock under
this plan and options to purchase 6,078,612 shares of common stock are
outstanding.
The Company has a 1996 Directors' Stock Option Plan which reserves 150,000
shares of the Company's authorized but unissued common stock for option grants.
As of September 30, 1998, the Company has not issued any shares of common stock
under this plan and options to purchase 65,000 shares of common stock are
outstanding.
The Company has a 1996 Employee Stock Purchase Plan which reserves
1,500,000 shares of authorized but unissued common stock for issuance. As of
September 30, 1998, the Company has issued 176,408 shares of common stock under
this plan.
The Company has a 1998 Employee Stock Option Plan which reserves 1,000,000
shares of the Company's authorized but unissued common stock for option grants.
As of September 30, 1998, the Company has issued 3,929 shares of common stock
under this plan and options to purchase 934,613 shares of common stock are
outstanding.
In September 1998 and July 1997, the Board of Directors approved the
repricing of approximately 8.5 million and 4.1 million employee stock options
granted with an exercise price in excess of $10.50 and $15.81, respectively.
In 1996, the Company and IBM entered into an agreement whereby Xylan
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. During 1996,
the Company recognized $274,000 of expense related to these warrants. In 1997,
the commitment to grant warrants to IBM was cancelled and the $274,000 of
expense was reversed.
NOTE 6. Income Taxes
The Company's quarterly provision for income taxes is based upon the
Company's estimate of the effective tax rate for the respective fiscal year. For
the three and nine months ended September 30, 1998, the Company recorded an
effective tax rate of approximately 34% and 35%, respectively. For the three and
nine months ended September 30, 1997, the Company recorded an effective tax rate
of approximately 35% and 37%, respectively 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 remainder
of 1998, the Company expects to record a 34% provision for income taxes.
For the quarters ended September 30, 1998, June 30, 1998 and September 30,
1997 the Company realized an income tax benefit of $1.0 million, $4.0 million
and $866,000, respectively, for certain stock option transactions. For the nine
months ended September 30, 1998 and 1997 the income tax benefit for certain
stock option transactions was $6.6 million and $2.0 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.
8
<PAGE>
NOTE 7. Computation of Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share." SFAS No. 128 replaced the previously reported primary
and fully diluted earnings per share with basic and diluted earnings per share
and became effective for both interim and annual periods ending after December
15, 1997. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of options and convertible securities. Diluted earnings
per share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been restated to
conform to the SFAS No. 128 requirements.
The following table sets forth the computation of basic and diluted net income
per share (In thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------
September 30, June 30, September 30,
1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Numerator for basic and diluted per share computations:
Net income available to common shareholders................. $10,438 $ 9,603 $ 4,607
======= ======= =======
Denominator:
Shares used for basic per share computations
weighted average shares outstanding........................ 42,921 43,159 42,647
Effect of dilutive securities stock options................. 4,035 5,087 4,622
------- ------- -------
Shares used for diluted per share computations............ 46,956 48,246 47,269
======= ======= =======
Net income per share:
Basic........................................................ $ .24 $ .22 $ .11
Diluted...................................................... $ .22 $ .20 $ .10
======= ======= =======
</TABLE>
Weighted average options to purchase 1,949,000, 322,000 and 953,000 shares
of Common Stock that were outstanding for the quarters ended September 30, 1998,
June 30, 1998 and September 30, 1997, respectively, were not included in the
above computation of diluted net income per share for the respective periods
because the exercise price of the options was greater than the average market
price of the common shares and therefore, the effect would be antidilutive.
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
September 30, September. 30,
1998 1997
---- ----
<S> <C> <C>
Numerator for basic and diluted per share computations:
Net income available to common shareholders........... $28,426 $17,565
======= =======
Denominator:
Shares used for basic per share computations
weighted average shares outstanding................ 43,063 42,398
Effect of dilutive securities stock options........... 4,530 4,424
------- -------
Shares used for diluted per share computations........ 47,593 46,822
======= =======
Net income per share:
Basic................................................... $ .66 $ .41
Diluted................................................. $ .60 $ .38
======= =======
</TABLE>
9
<PAGE>
Weighted average options to purchase 990,000 and 2,471,000 shares of Common
Stock that were outstanding for the nine months ended September 30, 1998 and
1997, respectively, were not included in the above computation of diluted net
income per share for the respective periods because the exercise price of the
options was greater than the average market price of the common shares and
therefore, the effect would be antidilutive.
NOTE 8. Recently Adopted Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. The Company
adopted SFAS No. 130 effective January 1, 1998. Under the provisions of SFAS
No. 130 no amounts are required to be disclosed as they are either not
applicable or immaterial.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information" effective
for financial statements for periods beginning after December 15, 1997. SFAS No.
131 establishes standards for the way that public business enterprises report
financial and descriptive information about reportable operating segments. The
Company adopted SFAS No. 131 effective January 1, 1998. The disclosures
regarding operating segments are not applicable as the Company only has one
operating segment. Substantially all of the Company's long-lived assets are
located in the United States. Disclosure regarding the Company's revenue by
sales channel, geographic region, product line and significant customers in
dollars and as a percentage of total revenue is on page 12.
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 identifies
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 to an aggregate of $210.5 million in fiscal year 1997
from $29.7 million in fiscal year 1995. On a quarterly basis revenue increased
to $91.1 million in the quarter ended September 30, 1998 from $53.5 million in
the quarter ended September 30, 1997. The increases in revenue are discussed
below. 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, 1998, the Company had retained
earnings of $53.8 million.
The Company intends to continue 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 experienced revenue growth in all but one quarter 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.
10
<PAGE>
Results Of Operations
Revenue
Revenue for the quarter ended September 30, 1998, was $91.1 million
compared to $53.5 million for the quarter ended September 30, 1997, an increase
of $37.6 million or 70%. Revenue for the quarter ended June 30, 1998, was $83.7
million. Comparing revenue for the quarter ended September 30, 1998, to the
quarter ended June 30, 1998, revenue increased $7.4 million or 9%. Revenue for
the nine months ended September 30, 1998, was $250.2 million compared to $146.6
million for the nine months ended September 30, 1997, an increase of $103.6
million or 71%. The increases in revenue were due to a number of factors,
including the increased sales of the Company's new OmniStack product family
which was introduced in the first quarter of 1998, substantial growth of the LAN
switching market, continued introduction by the Company of additional features
and functions to its OmniSwitch product family, and the Company's investment in
sales and marketing resources. The relative contribution of the factors that can
be quantified are in the tables below. While the Company achieved revenue growth
of 70% and 71% when comparing the three and nine month periods ended September
30, 1998, to September 30, 1997, respectively, the Company cannot insure these
rates of sequential growth if at all in future periods.
North America sales increased 26% from the quarter ended June 30, 1998 to
the quarter ended September 30, 1998. North America sales represented 54% of
total sales in the third quarter of 1998 as compared to 46% in the second
quarter of 1998. The increase in North American sales resulted from the strong
growth in System Integrator and Direct customers. European sales decreased 6%
from the quarter ended June 30, 1998, to the quarter ended September 30, 1998.
European sales represented 30% of total sales in the third quarter of 1998 as
compared to 35% in the second quarter of 1998. The decrease in European sales
was due primarily to the decrease in sales to Alcatel and to normal seasonality
as a result of the July and August holidays. Asia Pacific sales remained flat
from the quarter ended June 30, 1998 to the quarter ended September 30, 1998.
Asia Pacific sales represented 13% of the total sales in the third quarter of
1998 as compared to 14% in the second quarter of 1998. Latin America sales
decreased from $4 million for the quarter ended June 30, 1998 to $2.5 million
for the quarter ended September 30, 1998. Latin America sales represented 3% of
total sales in the third quarter of 1998 as compared to 5% in the second quarter
of 1998. The decrease in Latin America sales is primarily attributable to the
decrease in OEM sales in the third quarter of 1998.
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, 1998, the Company has earned no royalties.
Product revenue could be adversely impacted if IBM elects to manufacture the
Company's products.
11
<PAGE>
The following table sets forth the Company's revenue by sales channel,
geographic region, product line and significant customers in dollars and as a
percentage of total revenue (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended Months Ended
------------------------------- ------------------------------
Sept. 30, June 30, Sept. 30, Sept. 30, June 30, Sept. 30,
1998 1998 1997 1998 1998 1997
--------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Channel:
OEM $28.8 $34.2 $15.8 32% 41% 30%
System Integrator and Direct $62.3 $49.5 $37.7 68% 59% 70%
===== ===== ===== == == ==
Region(1):
North America (2) $49.2 $38.8 $24.6 54% 46% 46%
Europe $27.3 $28.9 $14.5 30% 35% 27%
Asia Pacific $12.1 $11.9 $13.2 13% 14% 25%
Latin America $ 2.5 $ 4.0 $ 1.2 3% 5% 2%
===== ===== ===== == == ==
Product Line:
OmniSwitch $71.6 $72.4 $49.2 78% 86% 92%
OmniStack $18.1 $ 9.1 $ 0.0 20% 11% 0%
PizzaSwitch $ 1.4 $ 2.2 $ 4.3 2% 3% 8%
===== ===== ===== == == ==
Significant Customers:
IBM $15.7 $17.8 $ 9.0 17% 21% 17%
Alcatel $13.2 $15.0 $ 5.1 14% 18% 10%
===== ===== ===== == == ==
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
--------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Channel:
OEM $ 94.9 $ 52.5 38% 36%
System Integrator and Direct $155.3 $ 94.1 62% 64%
====== ====== == ==
Region(1):
North America (2) $121.9 $ 67.3 49% 46%
Europe $ 83.3 $ 40.6 33% 28%
Asia Pacific $ 35.9 $ 34.6 14% 23%
Latin America $ 9.1 $ 4.1 4% 3%
====== ====== == ==
Product Line:
OmniSwitch $211.8 $130.7 85% 89%
OmniStack $ 31.4 $ 0.0 12% 0%
PizzaSwitch $ 7.0 $ 15.9 3% 11%
====== ====== == ==
Significant Customers:
IBM $ 50.3 $ 30.7 20% 21%
Alcatel $ 42.9 $ 15.2 17% 10%
====== ===== == ==
</TABLE>
(1) IBM and Alcatel revenues are attributed to regions based on "point of
sale" information. All other revenues are attributed to regions based
on the location of the customer.
(2) North America primarily consists of the United States.
12
<PAGE>
Gross Profit
Gross margins were 56.7%, 56.8% and 55.7% for the quarters ended September 30,
1998, June 30, 1998 and September 30, 1997, respectively. For the nine months
ended September 30, 1998 and 1997, gross margins were 56.7% and 55.9%,
respectively. The increases in gross margins when comparing the three and nine
month periods, resulted from a number of factors, including reductions in
component costs, sales channel mix and manufacturing efficiencies, which were
offset by product mix (the Company's OmniStack products generally have lower
gross margins than the OmniSwitch products), and competitive market pricing and
discount levels. 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 expects fourth quarter of 1998 gross margins
to be comparable to third quarter of 1998 although there is no assurance that
gross margins may not decline.
Research and Development Expenses
Research and development expenses were $10.8 million, $9.9 million and $6.8
million for the quarters ended September 30, 1998, June 30, 1998 and September
30, 1997, respectively. This represents an increase of 10% from the second
quarter of 1998 to the third quarter of 1998 and an increase of 60% from the
third quarter of 1997 to the third quarter of 1998. Research and development
expenses were $29.5 million and $18.4 million for the nine months ended
September 30, 1998 and 1997, respectively. This represents an increase of 61%.
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 12%, 12% and 13%
for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997,
respectively. For the nine months ended September 30, 1998 and 1997, research
and development expenses as a percentage of revenues were 12% and 13%
respectively.
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 expenses will continue to increase in 1998 in absolute dollars. 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 $23.8 million, $21.8 million and $15.7
million for the quarters ended September 30, 1998, June 30, 1998 and September
30, 1997, respectively. For the nine months ended September 30, 1998 and 1997,
sales and marketing expenses were $65.7 million and $42.2 million, respectively.
This represents an increase of 9% from the second quarter of 1998 to the third
quarter of 1998, an increase of 52% from the third quarter of 1997 to the third
quarter of 1998 and an increase of 55% from the nine months ended September 30,
1997 to the nine months ended September 30, 1998. These increases were
primarily due to the addition of direct sales personnel throughout 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 1998 in absolute dollars.
As a percentage of revenue, sales and marketing expenses were 26%, 26% and 29%
for the quarters ended September 30, 1998, June 30, 1998 and September 30, 1997,
respectively. For the nine months ended September 30, 1998 and 1997, sales and
marketing expenses as a percentage of revenues were 26% and 29%, respectively.
The decrease of sales and marketing expenses as a percent of revenue when
comparing the three and nine months ended September 30, 1998 to the same periods
in the prior year is due to the percentage increase in expenditures, as
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discussed above, being lower than the percentage increase in revenue. As the
Company continues to add personnel and grow, it expects sales and marketing
expenses will continue to increase in 1998 in absolute dollars.
General And Administrative Expenses
General and administrative expenses were $2.4 million, $2.3 million and $1.8
million for the quarters ended September 30, 1998, June 30, 1998 and September
30, 1997, respectively. For the nine months ended September 30, 1998 and 1997,
general and administrative expenses were $7.0 million and $5.0 million,
respectively. As a percentage of revenue, general and administrative expenses
were 2.7%, 2.7% and 3.3% for the quarters ended September 30, 1998, June 30,
1998 and September 30, 1997, respectively. For the nine months ended September
30, 1998 and 1997, general and administrative expenses as a percentage of
revenues were 2.8% and 3.4%, 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
1998 in absolute dollars.
Interest Income
Interest income, net, was $1.2 million, $1.4 million and $1.6 million for the
quarters ended September 30, 1998, June 30, 1998 and September 30, 1997,
respectively. For the nine months ended September 30, 1998 and 1997, interest
income was $4.0 million and $5.2 million, respectively. The decrease in
interest income from the three and nine months ended September 30, 1997, to the
respective periods in 1998, resulted from the Company repurchasing $28.1 and
$20.7 million of its Common Stock during the three months ended September 30,
1998, and the six months ended June 30, 1998, respectively. The decrease also
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.
Provision For Income Taxes
The Company's quarterly provision for income taxes is based upon the Company's
estimate of the effective tax rate for the respective fiscal year. For the
three and nine months ended September 30, 1998, the Company recorded an
effective tax rate of approximately 34% and 35%, respectively. For the three
and nine months ended September 30, 1997, the Company recorded an effective tax
rate of approximately 35% and 37%, respectively 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 remainder
of 1998, the Company expects to record a 34% provision for income taxes,
although such percentage may vary depending on several factors, including the
international component of the Company's business.
For the quarters ended September 30, 1998, June 30, 1998 and September 30,
1997 the Company realized an income tax benefit of $1 million, $4 million and
$866,000, respectively, for certain stock option transactions. For the nine
months ended September 30, 1998 and 1997 the income tax benefit for certain
stock option transactions was $6.6 million and $2 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.
Liquidity and Capital Resources
The Company's principal source of liquidity as of September 30, 1998,
consisted of $29.2 million in cash and cash equivalents, $16.2 million in short-
term investments and a $6 million bank credit facility. Additionally, the
Company has $77.3 million in long-term investments. For the nine months ended
September 30, 1998 and 1997, cash provided by operating activities was $37.9
million and $5.6 million, respectively. Accounts receivable and inventories
increased from December 31, 1997 to September 30, 1998 due to the increases in
revenue. Days sales outstanding at September 30, 1998 and June 30, 1998 was 61
days. Inventory days on hand improved to 54 days at September 30, 1998, from 59
days at June 30, 1998.
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The Company used $5.4 million in cash in its investing activities during the
nine month period ended September 30, 1998. Sales of investments provided $9.0
million of cash. Capital expenditures during the nine month period ended
September 30, 1998 were $14.5 million. These capital expenditures were for
equipment for research and development, equipment to support the increased
headcount and information systems hardware and software.
The Company has entered into a ten year lease for a 129,000 square-foot
building near its current headquarters. The Company intends to occupy the new
building by the end of the first quarter of 1999. The lease has annual rental
payments of approximately one million dollars. The Company will also spend
approximately six million dollars for tenant improvements on the new building.
The Company is in the process of subleasing a portion of its current
headquarters.
During the nine months ended September 30, 1998, the Company used $39.2
million in cash for financing activities; used $48.8 million repurchase Xylan
Common Stock and had proceeds of $9.7 million from the sale of stock under the
Company's stock plans. 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.
In January 1998 and September 1998, the Company's Board of Directors
authorized the Company to repurchase up to 2,000,000 and 1,000,000 shares of the
Company's common stock, respectively, to offset the dilutive effect of new
issuances of common stock under the Company's stock option and stock purchase
plans. During the three months ended September 30, 1998, the Company
repurchased 1,454,500 shares of its common stock for $28,054,000. During the
nine months ended September 30, 1998, the Company repurchased 2,240,000 shares
of common stock for $48,766,000. Additional repurchases, if any, of the
Company's common stock will be funded from the Company's existing cash and
investment balances.
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.
Year 2000 Issues
The Company is currently conducting a company-wide Year 2000 readiness program
("Y2K Program"). The Y2K Program is addressing the issue of computer programs
and embedded computer chips being unable to distinguish between the year 1900
and the year 2000. Therefore, some computer hardware and software will need to
be modified prior to the Year 2000 in order to remain functional. The Company
anticipates that Year 2000 compliance will be substantially complete by June
1999.
The Company's Y2K Program is divided into four major sections --Xylan
manufactured equipment and products, internal information ("IT") systems, non-IT
systems, and third-party suppliers and customers. The general phases common to
all sections are: (1) inventorying Year 2000 items; (2) assessing the Year 2000
compliance of items determined to be material to the company; and (3) repairing
or replacing material items that are determined not to be Year 2000 compliant.
The Company has completed the review of all Xylan manufactured equipment and
products for Year 2000 compliance purposes. The Company believes that its
products are either Year 2000 compliant or at the election of the customer can
be upgraded to be Year 2000 compliant.
The Company is currently evaluating and addressing Year 2000 issues associated
with its internal IT computer systems. Most of the Company's IT computer systems
are already Year 2000 compliant. The Company expects to finish the evaluation
by the end of 1998. Other internal IT computer systems that have been
identified as non-compliant will be upgraded to be Year 2000 compliant by June
1999.
The Company is currently evaluating and addressing Year 2000 issues associated
with its non-IT systems. Most of these systems are already Year 2000 compliant.
The Company expects to finish the evaluation by the end of 1998. Those non-IT
systems that are not Year 2000 compliant will be repaired or replaced by June
1999.
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The Company is currently assessing the possible effects on the Company's
operations of the Year 2000 readiness of its key suppliers and contract
manufacturers. See "-Substantial Increase in Manufacturing Operations;
Dependence on Contract Manufacturing." The Company expects this assessment will
be completed no later than April 1999. The Company's reliance on suppliers and
contract manufacturers and, therefore, on the proper functioning of their
information systems and software, means that failure to address Year 2000 issues
could have a material impact on the Company's operations and financial results.
However, the potential impact and related costs are not known at this time.
Through September 30, 1998, the Company has spent less than $50,000 to
implement the Year 2000 compliance program. That amount has been expensed as
incurred. The Company estimates that it may spend up to an additional $200,000
for other replacements or upgrades and for communicating with key suppliers and
customers. That amount will also be expensed as incurred.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Y2K Program is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material key suppliers and customers. The Company believes that, with the
implementation of new business systems and completion of the Y2K Program as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
The Company does not yet have a contingency plan to address the Y2000 problem,
but it is expected to create one by June, 1999 if it appears that the Company or
its key suppliers and customers will not be Year 2000 compliant and that such
non-compliance is expected to have a material adverse impact on the Company's
operations.
Factors Affecting Future Results
Certain Risk Factors
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 Company's ability to support its current and new products,
(iv) the ability to obtain sufficient supplies of sole or limited source
components for the Company's products, (v) the ability to attain and maintain
production volumes and quality levels for its products (including ASICs), (vi)
the mix of distribution channels and products, (vii) new product introductions
by the Company's competitors, (viii) pricing actions by the Company or its
competitors, (ix) changes in material costs, (x) mix of products manufactured or
purchased by IBM and Alcatel, and (xi) general economic conditions. See
"Dependence on OEM Partners and System Integrators; IBM and Alcatel; 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 September 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 Alcatel) 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
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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 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., Nortel 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."
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Dependence on OEM Partners and System Integrators; IBM and Alcatel; Customer
Concentration. The Company pursues a sales and marketing strategy focused on
developing two channels of distribution for its products: worldwide OEM partners
and non-OEM sales. The Company has established OEM partnerships with leading
communications and networking companies, including IBM and Alcatel N.V.
("Alcatel").
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, 1998, 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, 1998, neither company
has earned any royalties. 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 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 accounted for 32% for the
quarter ended September 30, 1998, and 30% for the quarter ended September 30,
1997. Each of the Company's OEM partners can cease (or reduce purchases for
reasons such as inventory levels) 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 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 and in October 1998, Alcatel agreed to
buy Packet Engines Inc., 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 non-OEM
sales than on sales through its OEM partners. Accordingly, if the Company's OEM
partners were to account for an increased portion of the Company's revenue, its
gross margin would decline.
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. 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
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condition. The Company also requires 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 two companies. The Company also subcontracts assembly of chassis to
a number of companies, each of which specializes 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 one of its contract manufacturers
that performs circuit board assembly. The loan, which assists the contract
manufacturer to meet the Company's increasing production requirements, is non-
interest bearing, does not have a defined due date and is secured by raw
materials and electronic components purchased by the contract manufacturer. At
September 30, 1998, the note had an outstanding balance of $7.5 million. Also,
the Company has 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 contract manufacturer, or defaults or
financial insolvency of such 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. 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 1998 and 1999, 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, certain 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.
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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 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 OmniStack products. The Company introduced its OmniStack series
of products in March of 1998. The Company expects that revenue from these
products will account for a substantial portion of the Company's revenue through
1999. 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 and support 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
acceptance would have a material adverse effect on the Company's business,
operating results and financial condition.
Product and System 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. In addition, end
users use the Company's products in complex systems or networks with products
from multiple vendors. As a result, the Company's products must successfully
interoperate with products from other vendors and at times, a system problem (if
one exists) may be difficult to identify the source of the problem. 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
20
<PAGE>
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.
Uncertain Future Profitability. In fiscal 1998 and 1999, 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 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.
Management of Growth. The Company's 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 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 the
Company's 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.
Dependence on Proprietary Technology; Intellectual Property Litigation. The
Company's success and its ability to compete are dependent, in part, upon its
proprietary technology. The Company holds only one issued patent 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.
21
<PAGE>
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. The communications industry is characterized by
vigorous protection and pursuit of intellectual property rights. The Company
has, from time to time, received claims from third parties alleging infringement
of such third parties' intellectual property rights. The Company currently
believes that none of the current claims against the Company would result in a
material liability. Although such claims have not resulted in material
litigation to date, any litigation or other resolution of such claims could have
a material adverse effect on the Company's business, financial condition and
results of operations.
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 46% and 54% of the Company's revenue for the
quarters ended September 30, 1998 and September 30, 1997, respectively. 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. The Company's international business is subject to risks customarily
encountered in foreign operations, including changes in a specific country's or
region's political or economic conditions, trade protection measures, import or
export licensing requirements, the overlap of different tax
22
<PAGE>
structures, unexpected changes in regulatory requirements and natural disasters.
For example, due to the recent financial turmoil in Asia, the Company's revenues
from Asia declined from 25% of total revenues in the third quarter of 1997 to
13% in the third quarter of fiscal 1998. 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. The Company's operating results could
also be adversely affected by seasonality of international sales. These
international factors could have a material adverse effect on future sales of
the Company's products to international end-users and, consequently, the
Company's business, operating results and financial condition.
Year 2000. The dates on which the Company believes the Year 2000 Readiness
Program ("Y2K Program") will be completed are based on Management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third-party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the implementation of the Y2K Program.
Specific factors that might cause differences between the estimates and actual
results include, but are not limited to, the availability and cost of personnel
trained in these areas, the ability to locate and correct all relevant computer
code, timely responses to and corrections by third-parties and suppliers and
similar uncertainties. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-parties and the interconnection of global businesses, the Company cannot
ensure its ability to timely and cost-effectively resolve problems associated
with the Year 2000 issue that may affect its operations and business, or expose
it to third-party liability.
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, the Company's Board of Directors are divided between
two
23
<PAGE>
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. In October of 1997, the Company's Board of Directors approved
acceleration of vesting of stock options held by the Company's Executive
Officers and certain key employees in the event of a change of control, which
could also make a change in control or management of the Company more difficult.
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
Directors 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.
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 to be delivered by Mr. Kim was 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 distributed 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.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
None.
24
<PAGE>
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
The Securities and Exchange Commission has recently amended Rule 14a-4(c)(1)
promulgated under the Securities and Exchange Act of 1934. As amended, Rule
14a-4(c)(1) provides that if a proponent fails to notify the Company of a
proposal at least 45 days prior to the month and day of mailing of the prior
year's proxy statement, then management would be allowed to use its
discretionary voting authority without any discussion of the matter in the proxy
statement, when the proposal is raised at the Annual Meeting. The proxy
statement for the Company's 1998 Annual Meeting of Shareholders was mailed to
shareholders on April 10, 1998. Accordingly, if a proponent does not notify the
Company on or before February 24, 1999 of a proposal for the 1999 Annual Meeting
of Shareholders, management may use its discretionary voting authority to vote
on such proposal, even if the matter is not discussed in the proxy statement for
the 1999 Annual Meeting of Shareholders.
In September 1998 and July 1997, the Board of Directors approved the
repricing of approximately 8.5 million and 4.1 million employee stock options
granted with an exercise price excess of $10.50 and $15.81, respectively.
ITEM 6. Exhibits And Reports On Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(6)
4.1 Form of Common Stock Certificate.(1)
4.2 Preferred Shares Rights agreement dated as of April 17, 1997 between the
Registrant and the First National Bank of Boston, including Certificate of
Determination of Rights, Preferences and Privileges of Series A
Participating Preferred Stock, the Form of Rights Certificate and Summary
of rights attached thereto as Exhibits A, B and C, respectively.(2)
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 amended 1996 Stock Plan.(4)
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)
25
<PAGE>
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.(1)
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan and
Victron, Inc. dated as of December 30, 1996.(3)
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(3)
10.21 Form of 1998 Employee Stock Option Plan and related Agreements.(4)
10.22 Form of Change of Control Agreement.(4)
10.23 Industrial Real Estate Lease between Cypress Land Company and Registrant
dated as of June 1, 1998.(5)
27.1 Financial Data Schedule (Current) 3 and 9 months ended September 30,
1998.(6)
_________
(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 Exhibit 1 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on August 24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1997.
(4) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1998.
(5) Incorporated by reference to identically numbered exhibits filed in the
Company's Form 10-Q filed on August 12, 1998.
(6) Filed herewith.
(b) Reports on Form 8-K
None.
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 13, 1998 Dale J. Bartos
Vice President and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Thomas S. Burns
----------------------
Thomas S. Burns
Vice President of Finance
(Chief Accounting Officer)
27
<PAGE>
INDEX TO EXHIBITS
Exhibit Description
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of Registrant.(1)
3.2 Amended and Restated Bylaws of Registrant.(6)
4.1 Form of Common Stock Certificate.(1)
4.2 Preferred Shares Rights agreement dated as of April 17, 1997 between the
Registrant and the First National Bank of Boston, including Certificate
of Determination of Rights, Preferences and Privileges of Series A
Participating Preferred Stock, the Form of Rights Certificate and Summary
of rights attached thereto as Exhibits A, B and C, respectively.(2)
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 amended 1996 Stock Plan.(4)
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.(1)
10.19 Amendment to Manufacturing and Purchase Agreement between Xylan and
Victron, Inc. dated as of December 30, 1996.(3)
10.20 Dale Bartos Employment Agreement dated as of January 4, 1997.(3)
10.21 Form of 1998 Employee Stock Option Plan and related Agreements.(4)
28
<PAGE>
10.22 Form of Change of Control Agreement.(4)
10.23 Industrial Real Estate Lease between Cypress Land Company and Registrant
dated as of June 1, 1998.(5)
27.1 Financial Data Schedule (Current) 3 and 9 months ended September 30,
1998.(6)
_________
(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 Exhibit 1 of the Registrant's Registration
Statement on Form 8-A filed with the Commission on August 24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1997.
(4) Incorporated by reference to identically numbered exhibits filed in the
Company's Annual Report on Form 10-K filed on March 31, 1998.
(5) Incorporated by reference to identically numbered exhibits filed in the
Company's Form 10-Q filed on August 12, 1998.
(6) Filed herewith.
29
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
XYLAN CORPORATION
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
XYLAN CORPORATION
TABLE OF CONTENTS
-----------------
Page
----
ARTICLE I - CORPORATE OFFICES.......................................... 1
1.1 PRINCIPAL OFFICE......................................... 1
1.2 OTHER OFFICES............................................ 1
ARTICLE II - MEETINGS OF SHAREHOLDERS................................... 1
2.1 PLACE OF MEETINGS........................................ 1
2.2 ANNUAL MEETING........................................... 1
2.3 SPECIAL MEETING.......................................... 3
2.4 NOTICE OF SHAREHOLDERS' MEETINGS......................... 4
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES................... 4
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE............. 5
2.7 QUORUM................................................... 6
2.8 ADJOURNED MEETING; NOTICE................................ 6
2.9 VOTING................................................... 6
2.10 CUMULATIVE VOTING........................................ 7
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.. 7
2.12 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT........ 7
2.13 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING............... 8
2.14 PROXIES.................................................. 8
2.15 INSPECTORS OF ELECTION................................... 9
ARTICLE III - DIRECTORS.................................................. 9
3.1 POWERS................................................... 9
3.2 NUMBER OF DIRECTORS...................................... 10
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS................. 10
3.4 RESIGNATION AND VACANCIES................................ 10
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE................. 12
3.6 REGULAR MEETINGS......................................... 12
3.7 SPECIAL MEETINGS; NOTICE................................. 12
3.8 QUORUM................................................... 12
3.9 WAIVER OF NOTICE......................................... 13
3.10 ADJOURNMENT.............................................. 13
3.11 NOTICE OF ADJOURNMENT.................................... 13
<PAGE>
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........ 13
3.13 FEES AND COMPENSATION OF DIRECTORS....................... 13
3.14 APPROVAL OF LOANS TO OFFICERS*........................... 14
ARTICLE IV - COMMITTEES................................................ 14
4.1 COMMITTEES OF DIRECTORS.................................. 14
4.2 MEETINGS AND ACTION OF COMMITTEES........................ 15
ARTICLE V - OFFICERS.................................................. 15
5.1 OFFICERS................................................. 15
5.2 ELECTION OF OFFICERS..................................... 15
5.3 SUBORDINATE OFFICERS..................................... 16
5.4 REMOVAL AND RESIGNATION OF OFFICERS...................... 16
5.5 VACANCIES IN OFFICES.................................... 16
5.6 CHAIRMAN OF THE BOARD.................................... 16
5.7 PRESIDENT................................................ 16
5.8 VICE PRESIDENTS.......................................... 17
5.9 SECRETARY................................................ 17
5.10 CHIEF FINANCIAL OFFICER.................................. 17
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND
OTHER AGENTS............................................................. 18
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS................ 18
6.2 INDEMNIFICATION OF OTHERS................................ 18
6.3 PAYMENT OF EXPENSES IN ADVANCE........................... 18
6.4 INDEMNITY NOT EXCLUSIVE.................................. 19
6.5 INSURANCE INDEMNIFICATION................................ 19
6.6 CONFLICTS................................................ 19
ARTICLE VII - RECORDS AND REPORTS....................................... 19
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER............. 19
7.2 MAINTENANCE AND INSPECTION OF BYLAWS..................... 20
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS.... 20
7.4 INSPECTION BY DIRECTORS.................................. 21
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER.................... 21
7.6 FINANCIAL STATEMENTS..................................... 21
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........... 22
ARTICLE VIII - GENERAL MATTERS........................................... 22
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING.... 22
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS................ 23
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED........ 23
8.4 CERTIFICATES FOR SHARES.................................. 23
8.5 LOST CERTIFICATES........................................ 23
<PAGE>
8.6 CONSTRUCTION; DEFINITIONS................................ 24
ARTICLE IX - AMENDMENTS.................................................. 24
9.1 AMENDMENT BY SHAREHOLDERS................................ 24
9.2 AMENDMENT BY DIRECTORS................................... 24
<PAGE>
AMENDED AND RESTATED BYLAWS
---------------------------
OF
--
XYLAN CORPORATION
-----------------
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 PRINCIPAL OFFICE
----------------
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place within or outside the
State of California designated by the board of directors. In the absence of any
such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
(a) The annual meeting of shareholders shall be held each year on a date
and at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the third
Wednesday of March in each year at 10:00 a.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
(b) Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be transacted by the shareholders
may be made at an annual meeting of shareholders (i) pursuant to the
corporation's notice with respect to such meeting, (ii)
<PAGE>
by or at the direction of the board of directors or (iii) by any shareholder of
the corporation who was a shareholder of record at the time of giving of the
notice provided for in this Section 2.2, who is entitled to vote at the meeting
and who has complied with the notice procedures set forth in this Section 2.2.
(c) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (iii) of paragraph (b) of
this Section 2.2, the shareholder must have given timely notice thereof in
writing to the secretary of the corporation and such business must be a proper
matter for shareholder action under the Corporations Code of California (the
"Code"). To be timely, a shareholder's notice shall be delivered to the
secretary at the principal executive offices of the corporation not less than
ninety (90) days prior to the first anniversary of the preceding year's annual
meeting of shareholders; provided, however, that in the event that the date of
the annual meeting is more than thirty (30) days prior to or more than sixty
(60) days after such anniversary date, notice by the shareholder to be timely
must be so delivered not later than the ninetieth (90th) day prior to such
annual meeting. Such shareholder's notice shall set forth (i) as to each person
whom the shareholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") (including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected); (ii) as to any other business that the shareholder
proposes to bring before the meeting, a brief description of such business, the
reasons for conducting such business at the meeting and any material interest in
such business of such shareholder and the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the shareholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made (A) the name and address of such shareholder, as they appear on the
corporation's books, and of such beneficial owner and (B) the class and number
of shares of the corporation which are owned beneficially and of record by such
shareholder and such beneficial owner.
(d) Only persons nominated in accordance with the procedures set forth in
this Section 2.2 shall be eligible to serve as directors and only such business
shall be conducted at an annual meeting of shareholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 2.2. The chairman of the meeting shall determine whether a nomination
or any business proposed to be transacted by the shareholders has been properly
brought before the meeting and, if any proposed nomination or business has not
been properly brought before the meeting, the chairman shall declare that such
proposed business or nomination shall not be presented for shareholder action at
the meeting.
(e) For purposes of this Section 2.2, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable national news service.
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<PAGE>
(f) Nothing in this Section 2.2 shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
2.3 SPECIAL MEETING
---------------
(a) A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
(b) If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the shareholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws,
that a meeting will be held at the time requested by the person or persons
calling the meeting, so long as that time is not less than thirty-five (35) nor
more than sixty (60) days after the receipt of the request. If the notice is
not given within twenty (20) days after receipt of the request, then the person
or persons requesting the meeting may give the notice. Nothing contained in
this paragraph of this Section 2.3 shall be construed as limiting, fixing or
affecting the time when a meeting of shareholders called by action of the board
of directors may be held.
(c) Only such business shall be conducted at a special meeting of
shareholders as shall have been brought before the meeting pursuant to the
notice of meeting given in accordance with the provisions of Section 2.3(b).
Nominations of persons for election to the board of directors may be made at a
special meeting of shareholders at which directors are to be selected pursuant
to such notice of meeting (i) by or at the direction of the board of directors
or (ii) by any shareholder of the corporation who is a shareholder of record at
the time of giving of notice provided for in this Section 2.3(c), who shall be
entitled to vote at the meeting and who complies with the notice procedures set
forth in this Section 2.3(c). Nominations by shareholders of persons for
election to the board of directors may be made at such a special meeting of
shareholders if the shareholder's notice required by Section 2.2(c) shall be
delivered to the secretary at the principal executive offices of the corporation
not earlier than the ninetieth (90th) day prior to such special meeting and not
later than the close of business on the later of the twentieth (20th) day prior
to such special meeting or the tenth (10th) day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the board of directors to be selected at such meeting.
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<PAGE>
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings of shareholders shall be sent or otherwise given in
accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent
by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor
more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Code, (ii) an amendment of the articles
of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of
the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary
dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a
distribution in dissolution other than in accordance with the rights of
outstanding preferred shares, pursuant to Section 2007 of the Code, then the
notice shall also state the general nature of that proposal.
2.5 ADVANCE NOTICE OF SHAREHOLDER NOMINEES
--------------------------------------
Only persons who are nominated in accordance with the procedures set forth
in this Section 2.5 shall be eligible for election as directors. Nominations of
persons for election to the board of directors of the corporation may be made at
a meeting of shareholders by or at the direction of the board of directors or by
any shareholder of the corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 2.5. Such nominations, other than those made by or at the
direction of the board of directors, shall be made pursuant to timely notice in
writing to the secretary of the corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the corporation not less than twenty (20) days nor more than ninety
(90) days prior to the meeting; provided, however, that in the event that less
than thirty (30) days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. Such shareholder's notice shall set forth (a)
as to each person whom the shareholder proposes to nominate for election or re-
election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the corporation which are
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<PAGE>
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (including,
without limitation, such person's written consent to being named in the proxy
statement as a nominee and to serving as a director if elected); and (b) as to
the shareholder giving the notice (1) the name and address, as they appear on
the corporation's books, of such shareholder and (2) the class and number of
shares of the corporation which are beneficially owned by such shareholder. At
the request of the board of directors any person nominated by the board of
directors for election as a director shall furnish to the secretary of the
corporation that information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this Section 2.5. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
Bylaws, and if he or she should so determine, he or she shall so declare to the
meeting and the defective nomination shall be disregarded.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, then
all future notices or reports shall be deemed to have been duly given without
further mailing if the same shall be available to the shareholder on written
demand of the shareholder at the principal executive office of the corporation
for a period of one (1) year from the date of the giving of the notice.
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<PAGE>
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the
absence of a quorum, no other business may be transacted at that meeting except
as provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at the meeting at which the adjournment is taken.
However, if a new record date for the adjourned meeting is fixed or if the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation
may transact any business which might have been transacted at the original
meeting.
2.9 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.10 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as may be otherwise provided in the articles of incorporation, each
outstanding share, regardless of class, shall be entitled to one vote on each
matter submitted to a vote of the
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<PAGE>
shareholders. Any shareholder entitled to vote on any matter may vote part of
the shares in favor of the proposal and refrain from voting the remaining shares
or, except when the matter is the election of directors, may vote them against
the proposal; but, if the shareholder fails to specify the number of shares
which the shareholder is voting affirmatively, it will be conclusively presumed
that the shareholder's approving vote is with respect to all shares which the
shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the shares
represented and voting at a duly held meeting (which shares voting affirmatively
also constitute at least a majority of the required quorum) shall be the act of
the shareholders, unless the vote of a greater number or a vote by classes is
required by the Code or by the articles of incorporation.
2.10 CUMULATIVE VOTING
-----------------
Shareholders shall not be entitled to cumulate votes for the election of
directors of this corporation.
This Article shall become effective only when the corporation becomes, and
only for so long as the corporation remains, a listed corporation within the
meaning of Section 301.5 of the California Corporations Code.
2.11 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
No action shall be taken by the shareholders of the corporation other than
at an annual or special meeting of the shareholders, upon due notice and in
accordance with the other provisions of these Bylaws.
2.12 VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT
-------------------------------------------------
The transactions of any meeting of shareholders, either annual or special,
however called and noticed, and wherever held, shall be as valid as though they
had been taken at a meeting duly held after regular call and notice, if a quorum
be present either in person or by proxy, and if, either before or after the
meeting, each person entitled to vote, who was not present in person or by
proxy, signs a written waiver of notice or a consent to the holding of the
meeting or an approval of the minutes thereof. The waiver of notice or consent
or approval need not specify either the business to be transacted or the purpose
of any annual or special meeting of shareholders, except that if action is taken
or proposed to be taken for approval of any of those matters specified in the
second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent
or approval shall state the general nature of the proposal. All such waivers,
consents, and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
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<PAGE>
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.13 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not be more than sixty (60) days nor less than ten (10) days
before the date of any such meeting, and in such event only shareholders of
record on the date so fixed are entitled to notice and to vote, notwithstanding
any transfer of any shares on the books of the corporation after the record
date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date the record date for
determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the business day next
preceding the day on which notice is given or, if notice is waived, at the close
of business on the business day next preceding the day on which the meeting is
held; and
The record date for any other purpose shall be as provided in Article VIII
of these bylaws.
2.14 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation. A proxy shall be deemed signed if the shareholder's name is placed
on the proxy (whether by manual signature, typewriting, telegraphic transmission
or otherwise) by the shareholder or the shareholder's attorney-in-fact. A
validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) the person who executed the proxy
revokes it prior to the time of voting by delivering a writing to the
corporation stating that the proxy is revoked or by executing a subsequent proxy
and presenting it to the meeting or by voting in person at the meeting, or (ii)
written notice of the death or incapacity of the maker of that proxy is received
by the corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date of the proxy, unless otherwise provided in the proxy. The dates
contained on the forms of proxy presumptively determine the order of execution,
regardless of the postmark dates on the envelopes in which they are mailed. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Code.
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<PAGE>
2.15 INSPECTORS OF ELECTION
----------------------
Before any meeting of shareholders, the board of directors may appoint an
inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The
number of inspectors shall be either one (1) or three (3). If inspectors are
appointed at a meeting pursuant to the request of one (1) or more shareholders
or proxies, then the holders of a majority of shares or their proxies present at
the meeting shall determine whether one (1) or three (3) inspectors are to be
appointed. If any person appointed as inspector fails to appear or fails or
refuses to act, then the chairman of the meeting may, and upon the request of
any shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election or
vote with fairness to all shareholders.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Code and any limitations in the articles
of incorporation and these bylaws relating to actions required to be approved by
the shareholders or by the outstanding shares, the business and affairs of the
corporation shall be managed and all corporate powers shall be exercised by or
under the direction of the board of directors.
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<PAGE>
3.2 NUMBER OF DIRECTORS
-------------------
The number of directors of the corporation shall be not less than four (4)
nor more than seven (7). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number, by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
The board of directors shall be divided into two classes, as nearly equal
in number as possible. The term of office of the first class shall expire at
the 1997 annual meeting of shareholders or any special meeting in lieu thereof
and the term of office of the second class shall expire at the 1998 annual
meeting of shareholders or any special meeting in lieu thereof. At each annual
meeting of shareholders or special meeting in lieu thereof following such
initial classification, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the second succeeding
annual meeting of shareholders or special meeting in lieu thereof after their
election and until their successors are duly elected and qualified. The
foregoing provisions shall become effective only when the corporation becomes a
listed corporation within the meaning of Section 301.5 of the California
Corporations Code. Directors need not be shareholders unless so required by the
articles of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
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<PAGE>
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote of
the shareholders or by court order may be filled only by the affirmative vote of
a majority of the shares represented and voting at a duly held meeting at which
a quorum is present (which shares voting affirmatively also constitute a
majority of the required quorum). Each director so elected shall hold office
for a term expiring at the annual meeting of shareholders at which the term of
office of the class to which they have been elected expires, if applicable, and
if no such classes shall have been established, at the next annual meeting of
the shareholders and until a successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to exist
(i) in the event of the death, resignation or removal of any director, (ii) if
the board of directors by resolution declares vacant the office of a director
who has been declared of unsound mind by an order of court or convicted of a
felony, (iii) if the authorized number of directors is increased, or (iv) if the
shareholders fail, at any meeting of shareholders at which any director or
directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors, but any such election other
than to fill a vacancy created by
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<PAGE>
removal shall require the consent of the holders of a majority of the
outstanding shares entitled to vote thereon.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of California that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or if there is no notice, at the principal executive office
of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act
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or decision done or made by a majority of the directors present at a duly held
meeting at which a quorum is present shall be regarded as the act of the board
of directors, subject to the provisions of Section 310 of the Code (as to
approval of contracts or transactions in which a director has a direct or
indirect material financial interest), Section 311 of the Code (as to
appointment of committees), Section 317(e) of the Code (as to indemnification of
directors), the articles of incorporation, and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such director. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote of the board of
directors. Such written consent and any counterparts thereof shall be filed
with the minutes of the proceedings of the board.
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3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS*
-----------------------------
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also requires
shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
______________________________
* This section is effective only if it has been approved by the shareholders
in accordance with Sections 315(b) and 152 of the Code.
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(c) the fixing of compensation of the directors for serving on the
board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of new
bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the board of
directors; or
(g) the appointment of any other committees of the board of directors
or the members of such committees.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
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<PAGE>
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment. Any contract of employment with an officer shall be
unenforceable unless in writing and specifically authorized by the board of
directors.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
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<PAGE>
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
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<PAGE>
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI,
a "director" or "officer" of the corporation includes any person (i) who is or
was a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code), arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation
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(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or agent
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.3 PAYMENT OF EXPENSES IN ADVANCE
------------------------------
Expenses incurred in defending any civil or criminal action or proceeding
for which indemnification is required pursuant to Section 6.1 or for which
indemnification is permitted pursuant to Section 6.2 following authorization
thereof by the board of directors shall be paid by the corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the indemnified party to repay such amount if it
shall ultimately be determined that the indemnified party is not entitled to be
indemnified as authorized in this Article VI.
6.4 INDEMNITY NOT EXCLUSIVE
-----------------------
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the articles of
incorporation.
6.5 INSURANCE INDEMNIFICATION
-------------------------
The corporation shall have the power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
corporation against any liability asserted against or incurred by such person in
such capacity or arising out of such person's status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.6 CONFLICTS
---------
No indemnification or advance shall be made under this Article VI, except
where such indemnification or advance is mandated by law or the order, judgment
or decree of any court of competent jurisdiction, in any circumstance where it
appears:
(1) That it would be inconsistent with a provision of the articles of
incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
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(2) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
ARTICLE VII
RECORDS AND REPORTS
--------------------
7.1 MAINTENANCE AND INSPECTION OF SHARE REGISTER
--------------------------------------------
The corporation shall keep either at its principal executive office or at
the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate.
Any inspection and copying under this Section 7.1 may be made in person or
by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 MAINTENANCE AND INSPECTION OF BYLAWS
------------------------------------
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
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corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS
-----------------------------------------------------
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 INSPECTION BY DIRECTORS
-----------------------
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER
-------------------------------------
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
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The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 FINANCIAL STATEMENTS
--------------------
If no annual report for the fiscal year has been sent to shareholders, then
the corporation shall, upon the written request of any shareholder made more
than one hundred twenty (120) days after the close of such fiscal year, deliver
or mail to the person making the request, within thirty (30) days thereafter, a
copy of a balance sheet as of the end of such fiscal year and an income
statement and statement of changes in financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
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ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the shareholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED
-------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 CERTIFICATES FOR SHARES
-----------------------
A certificate or certificates for shares of the corporation shall be issued
to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total
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amount of the consideration to be paid for them and the amount actually paid.
All certificates shall be signed in the name of the corporation by the chairman
of the board or the vice chairman of the board or the president or a vice
president and by the chief financial officer or an assistant treasurer or the
secretary or an assistant secretary, certifying the number of shares and the
class or series of shares owned by the shareholder. Any or all of the signatures
on the certificate may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENT BY SHAREHOLDERS
-------------------------
New bylaws may be adopted or these bylaws may be amended or repealed by the
vote of holders of a majority of the outstanding shares entitled to vote;
provided, however, that if the articles of incorporation of the corporation set
forth the number of authorized directors of the corporation, then the authorized
number of directors may be changed only by an amendment of the articles of
incorporation.
-24-
<PAGE>
9.2 AMENDMENT BY DIRECTORS
----------------------
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
-25-
<PAGE>
CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS
OF
XYLAN CORPORATION
Certificate by Secretary of Adoption
------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Xylan Corporation, and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Amended and Restated
Bylaws of the corporation on _____________, 1996.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ____ day of _______________, 1996.
___________________________________________
Tae Hea Nahm, Secretary
-26-
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