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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
Commission file number: 0-27764
XYLAN CORPORATION
(Exact name of Registrant as specified in its Articles of Incorporation)
CALIFORNIA 95-4433911
(State of Incorporation) I.R.S. Employer Identification No)
26801 WEST AGOURA ROAD, CALABASAS, CA 91301
(Address of principal executive offices)
(818) 880-3500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.001 PAR VALUE
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $588,584,194 as of February 23, 1999, based
upon the closing sale price on the Nasdaq National Market reported for such
date. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were 42,486,382 shares of Registrant's Common Stock issued and
outstanding as of February 23, 1999.
ITEMS OMITTED FROM THIS REPORT
Certain information called for by items 5, 6, 7, 7A, 8 and 14 to this
Annual Report on Form 10-K cannot be obtained on a timely basis by the
Registrant without unreasonable effort or expense and is the subject of a Form
12b-25 filing made by the Registrant.
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XYLAN CORPORATION
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
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ITEM 1. BUSINESS.................................................. 3
ITEM 2. PROPERTIES................................................ 10
ITEM 3. LEGAL PROCEEDINGS......................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 11
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 12
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 12
ITEM 11. EXECUTIVE COMPENSATION.................................... 14
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT..................................... 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 18
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INTRODUCTORY STATEMENT
Except for the historical information contained in this Annual Report
on Form 10-K, the matters discussed herein may include forward-looking
statements that are subject to certain risks and uncertainties that could cause
the actual results to differ materially from those projected. Xylan Corporation
("Xylan" or the "Company") assumes no obligation to update any forward-looking
statements contained herein.
Xylan was incorporated in California in July 1993. The Company's
executive offices are located at 26801 West Agoura Road, Calabasas, California
91301, and its telephone number at that location is (818) 880-3500.
References made in this Annual Report on Form 10-K to "Xylan
Corporation" or the "Company" refer to Xylan Corporation and its subsidiaries.
The following Xylan Corporation trademarks are mentioned in this Annual Report:
Xylan(R), PizzaSwitch(R), OmniSwitch(R), and OmniStack(R) are registered
trademarks of the Company, and AutoTracker(TM), X-Vision(TM),
OmniSwitch/Router(TM), OmniS/R(TM), and X-Cell(TM) are trademarks of the
Company.
PART I
ITEM 1. BUSINESS
OVERVIEW
Xylan is a leading provider of high-bandwidth switching systems that
enhance the performance of existing local area networks ("LAN") and facilitate
migration to next-generation networking technologies such as Asynchronous
Transfer Mode ("ATM"). Current hub and router- based networks are facing
performance degradation due to the continued growth in the size of networks,
increasing demands of high-performance personal computers and workstations, and
emergence of graphical applications, such as Intranet/Java applications,
document image processing, desktop video, medical imaging, modeling and
simulation, and the World Wide Web. To address these issues, a new generation of
switched technologies has emerged, including LAN switching, ATM switching, and
layer-three switching.
Xylan offers the OmniSwitch, OmniStack, OmniSwitch/Router and
PizzaSwitch product families, which support all popular LAN types with
"any-to-any" MAC-layer translation, and allow the use of LAN switches in place
of shared-media hubs. The Company's switches are based on a distributed,
modular, multiprocessor architecture that currently combines LAN switching,
virtual LANs, ATM switching, wide area access, security, and layer-three
switching in a single product, and which allows switching performance to
increase in linear proportion to the number of ports. The Company has developed
and continues to develop custom chips (ASICs, or application-specific integrated
circuits) providing important feature differentiation for integration into its
product line.
Xylan has strategic OEM partnerships with leading communications and
networking companies, including Alcatel and IBM, that have significant customer
relationships already in place. Xylan pursues direct sales to organizations in
North America with large networking requirements and employs network integrators
to target customers worldwide. The Company's products have been deployed by a
broad range of organizations, ranging from companies in the telecommunications,
manufacturing, medical, computer services, media and finance/insurance
industries to educational institutions and the federal government.
MERGER
Xylan and Alcatel, a French corporation ("Alcatel"), and Zeus
Acquisition Corp., a California corporation and a wholly owned subsidiary of
Alcatel ("Sub"), entered into an Agreement and Plan of Merger dated as of March
1, 1999 (the "Merger Agreement"), pursuant to which and subject to the
conditions thereof, Xylan will become a wholly owned subsidiary of Alcatel
through the merger of Sub with and into Xylan (the "Merger").
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The acquisition of Xylan by Alcatel will be made by a cash tender offer
for all outstanding shares. The tender offer commenced on March 8, 1999 and is
scheduled to expire 20 business days thereafter. Completion of the acquisition
is subject to 90% of the shares being tendered, the expiration or termination of
applicable waiting periods under applicable antitrust laws, and other customary
conditions. All shares not purchased in the tender offer will be acquired by
merger for cash at the same price per share. The transaction is expected to be
completed in April 1999. The Boards of Directors of both companies have
unanimously approved the acquisition, and the Xylan Board of Directors has
recommended that Xylan's shareholders accept Alcatel's offer.
XYLAN SOLUTION
Xylan was founded to provide high-bandwidth switching systems that
enhance the performance of existing LANs and facilitate migration to next
generation networking technologies such as ATM. The Company's products
accomplish these goals by: providing "any-to-any" MAC-layer translation;
supporting widely used LAN types such as Ethernet, Fast Ethernet, token ring,
ATM, and Fiber Distributed Data Interface ("FDDI"); and enabling the customer to
replace shared-media hubs with LAN switches. Xylan's AutoTracker product is
designed to support powerful, flexible virtual LANs and to simplify network
management.
Xylan has designed its product architecture specifically to support LAN
switching, ATM switching, virtual LANs, security, and routing. The Company's
switches are based on a distributed, modular, multiprocessor architecture. This
architecture allows switching performance to increase in linear proportion to
the number of ports, unlike many other switches based on a central switching
engine, which generally cannot increase performance as ports are added. The
Company's virtual LAN capability is integrated directly into its hardware
architecture and controlled by distributed reduced instruction set computing
("RISC") processors and ASICs to achieve high throughput and flexibility.
Xylan's products can switch within virtual LANs and route between them, and can
establish security firewalls between them. The Company has also developed a
substantial number of LAN interface modules, enabling the customer to tailor the
product to a particular application. The Company continues to develop ASICs to
provide unique functionality, increase system performance and reduce costs.
PRODUCTS AND TECHNOLOGY
Xylan offers a family of products that are designed to serve as a
complete switching system for a building or campus. The Company's OmniSwitch,
OmniStack, OmniS/R, and PizzaSwitch products provide flexible high-end LAN
switching, virtual LANs, high-speed routing, ATM switching, layer-three
switching, wide-area access and comprehensive network management capabilities.
The Company's X-Vision software provides a graphical network management
capability designed to be compatible with the user's network environment.
OmniSwitch
The OmniSwitch is a modular, chassis-based switch that provides high
performance LAN switching, routing, layer-three switching, and ATM switching.
The OmniSwitch supports a variety of LAN types, interconnecting Ethernet, Fast
Ethernet, Gigabit Ethernet, token ring, FDDI, frame relay, and ATM with
any-to-any MAC-layer protocol translation. The Company offers the OmniSwitch in
three-slot, five-slot, and nine-slot enclosures, which can be configured with a
mix of switching modules to meet a customer's specific needs. All three
enclosures use the same hardware and software and offer redundant, load-sharing
power supplies with separate AC or DC inputs. The OmniSwitch is designed to be
located either in the customer's wiring closet or in the computer room. The list
price for a fully configured OmniSwitch typically ranges from $10,000 to
$100,000, depending on the configuration necessary to meet the needs of a
specific customer. A network could use one OmniSwitch or could use hundreds,
depending on network size and the extent to which switching is deployed.
The Xylan OmniSwitch family of products is based on a distributed,
modular, multiprocessor, and multi-ASIC switching architecture. This distributed
architecture eliminates the traditional central switching engine, enabling data
to move more quickly through the Company's switching modules. In addition, users
can increase the processing capacity of an OmniSwitch by simply adding switching
modules.
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The OmniSwitch serves as a platform for a broad array of LAN, ATM, and
wide area switching modules. Each module not only provides connections for user
equipment, but also acts as an independent switching engine, communicating
directly with other modules in the OmniSwitch.
OmniStack
The Company announced its OmniStack series of products in March of
1998. The OmniStack is designed to be more cost effective in smaller
configurations. The OmniStack is based on the same system architecture and
incorporates many of the same LAN switching and software capabilities as the
OmniSwitch. Consequently, the OmniStack units incorporate many of the features
and functionality of the OmniSwitch that are lacking in traditional small
switches, making the OmniStack suitable for a wider range of customers and
applications. The OmniStack units may be used alone in a small network or in
combination with multiple OmniSwitch and/or OmniStack devices in a larger
network. While the OmniSwitch is fully modular, the OmniStack units combine a
number of Ethernet or 10/100 (Ethernet / Fast Ethernet) ports with a small
number of modular high-speed ports, which are scheduled to be Fast Ethernet,
Gigabit Ethernet, ATM or various wide area interfaces. The OmniStack is designed
to be located either in the customer's wiring closet or in the computer room.
The list price for a fully configured OmniStack typically ranges from $3,350 to
$37,000, depending on the configuration necessary to meet the needs of a
specific customer.
PizzaSwitch
The Company's PizzaSwitch product, which was introduced during the
first quarter of 1996, is based on the same system architecture and incorporates
many of the same LAN switching and software capabilities as the OmniSwitch. The
PizzaSwitch will be used in applications which require a small access switch
with FDDI uplinks.
Omni Switch/Router
The Omni Switch/Router, or OmniS/R, is a modular, chassis-based switch
that provides high performance LAN switching, routing, layer-three switching,
and ATM uplinks. The OmniS/R supports a variety of LAN types, interconnecting
Ethernet, Fast Ethernet, Gigabit Ethernet, token ring, FDDI, frame relay, and
ATM with any-to-any MAC-layer protocol translation. The Company offers the
OmniS/R in five-slot and nine-slot enclosures, which can be configured with a
mix of switching modules to meet a customer's specific needs. Both enclosures
use the same hardware and software and offer redundant, load-sharing power
supplies with separate AC or DC inputs. The OmniS/R is designed to be located
either in the customer's wiring closet or in the computer room. The list price
for a fully configured OmniS/R typically ranges from $10,000 to $100,000,
depending on the configuration necessary to meet the needs of a specific
customer. A network could use one OmniS/R or could use hundreds, depending on
network size and the extent to which switching is deployed.
AutoTracker-Virtual LANs
The OmniSwitch and OmniStack hardware and software architectures were
designed to support flexible virtual LANs. The Company's AutoTracker capability
allows a network manager to group devices logically, rather than physically,
using policy-based management. Workstation movements can be automatically
tracked for the network manager through the network. Virtual LAN processing is
integrated into the OmniSwitch and OmniStack hardware and software architecture
in order to maintain switching performance. A virtual LAN supported by
AutoTracker can include any combination of LAN types supported by the OmniSwitch
and the OmniStack. For example, a single virtual LAN could include Ethernet and
token ring workstations as well as FDDI and ATM servers. Virtual LANs supported
by AutoTracker can span multiple switches, across FDDI, Fast Ethernet, Gigabit
Ethernet, and/or ATM backbones. Any given workstation or server can belong to as
many as 31 virtual LANs. AutoTracker also allows workstations attached to a
single hub to be assigned to different virtual LANs.
Vision Network Management
Xylan's X-Vision network management software operates within a customer's
existing network management environment. It supports the OmniSwitch, OmniStack
and PizzaSwitch products with a graphical interface which operates on industry-
standard applications for both Windows (Hewlett-Packard's OpenView) and UNIX
(OpenView, SunSoft's
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SunNet Manager and IBM's NetView for AIX). Network managers can also control
the OmniSwitch, OmniStack and PizzaSwitch with an ASCII menu-driven interface.
ATM Switching Technology
Xylan has incorporated ATM switching capability into the OmniSwitch.
The Company believes that its ATM switching architecture, Distributed Input
Buffering with Output Control, allows both data-based and real-time traffic to
be handled with minimal cell loss even under heavy loads. Video streams and
other real-time traffic are also supported. The ATM switching capability, known
as X-Cell, supports large cell buffers, offers intelligent cell discard
mechanisms, and supports a number of important ATM Forum standards.
PRODUCT DEVELOPMENT
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. Xylan intends to make substantial investments
in product development and to participate in the development of industry
standards. The Company monitors changing customer needs and works closely with
its OEM partners, network integrators, end-user customers and market research
organizations to track changes in the marketplace, including emerging industry
standards and local area networking protocols.
The Company's products are developed using a distributed architecture
that allows multiple development teams to work in parallel. The Company believes
that this accelerates the product development cycle and reduces the time to
bring new products and features to market. Xylan intends to continue to use this
approach to develop and introduce additional products and enhancements in the
future.
The Company is focusing development efforts on expanding the LAN and
ATM interfaces and routing protocol capabilities of its products, supporting
carrier services and additional industry standards, adding higher capacity
platforms and expanding the Company's network management capabilities. In
addition, Xylan has devoted and continues to devote significant resources to the
design, simulation and fabrication of ASICs to provide differentiated
functionality, reduce costs and increase the performance of its products. No
assurances can be given that the Company will be able to introduce any or all of
these products, or any future products, on a timely basis, if at all.
Furthermore, there can be no assurance that the Company will be able to
identify, develop, manufacture, market, or support new products, or enhancements
to its existing 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.
The Company's research and development expenditures totaled $41.3
million, $25.9 million and $15.8 million for the years ended December 31, 1998,
1997, and 1996, respectively. At December 31, 1998, the Company employed 292
employees in research and product development. The Company performs its research
and product development activities at its headquarters and in offices located in
Irvine, CA; San Diego, CA; San Jose, CA; Acton, MA; Raleigh, NC; Minneapolis,
MN; and Salt Lake City, UT. The Company is seeking to hire additional skilled
development engineers. The Company's business, operating results and financial
condition could be adversely affected if it encounters delays in hiring required
engineers.
SALES AND MARKETING
The Company's sales and marketing strategy is focused on three channels
of distribution: worldwide OEM partners, network integrators in North America
and overseas, and direct sales. In general, the Company's resale agreements with
its OEM partners and system integrators are not exclusive and each of the
Company's OEM partners and system integrators can cease marketing the Company's
products at their option with limited notice and with little or no penalty. In
addition, these agreements generally provide for discounts based on expected or
actual volumes of products purchased or resold by the reseller and OEM in a
given period and do not require minimum purchases. Certain of these agreements
provide manufacturing rights and access to source code upon the occurrence of
specified conditions or defaults.
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OEM Partners
The Company has established OEM partnerships with leading
communications and networking companies, including Alcatel and IBM. For the year
ended December 31, 1998, IBM and Alcatel accounted for approximately 19% and 16%
of revenue, respectively. Each of the Company's OEM partners resells the
Company's products under its own name. Certain of them have also agreed to
supply Xylan with technology to be incorporated into the OmniSwitch. Each of
Xylan's OEM partners is a major system integrator, as well as a manufacturer.
The Company believes that its OEM partnerships enhance its ability to sell to
large organizations because these resellers have long-term supplier
relationships with these potential customers, and because certain end user
organizations prefer to do business with very large suppliers. Since OEM
partners provide support to their customers, Xylan is also able to focus its
support efforts on its direct customers, and on training and high-level backup
support to OEM partners and system integrators.
System Integrators
The Company also currently sells its products through more than 200
system integrators worldwide. The Company's system integrators supplement the
direct and OEM channels. System integrators generally are responsible for system
installation, technical support, and follow-on services to customers in their
respective territories. No individual network integrator accounted for more than
10% of the Company's revenue in 1998.
Direct Sales in North America
Xylan conducts direct sales to end users in North America to focus on
major account sales, promote the Company's products, and ensure direct contact
with the Company's current and potential customers. Xylan's sales organization
also provides support to OEM partners and system integrators, assists end user
customers in addressing complex switching problems, and promotes the features
and capabilities of the Company's products. In addition, the Company believes
that direct sales help the Company to monitor changing customer requirements.
Xylan's International Sales Organization
The Company has designed its products and established its marketing and
sales channels to address the global market opportunities for switching
products. The Company's international sales are conducted primarily through its
OEM partners, worldwide network integrators and territory-specific network
integrators. The Company believes that there is a strong international market
for its products. Sales to customers outside of North America accounted for
approximately 50% of the Company's revenue for the year ended December 31, 1998,
with approximately 15%, 22% and 3% of 1998 revenue being attributable to sales
to customers in Asia-Pacific, Europe and Latin America, respectively. However,
these percentages may understate sales of the Company's products to
international end users because certain of the Company's U.S.-based OEM partners
market the Company's products abroad. The Company's international sales
organization provides support to OEM partners and system integrators and
promotes the features and capabilities of the Company's products.
End Users
The Company's products have been deployed by a broad range of
organizations, ranging from companies in the telecommunications, manufacturing,
medical, computer services, media and finance/insurance industries to
educational institutions and the federal government.
Marketing
The Company has a number of marketing programs to support the sale and
distribution of its products. The objective of these programs is to inform OEM
partners, system integrators, and prospective end user customers about the
capabilities and benefits of the Company's products. Marketing programs include
participation in industry tradeshows, technical conferences and technology
seminars; preparation of competitive analyses; sales training; publication of
technical and educational articles in industry journals; presentation of
Xylan-specific seminars; maintenance of Xylan's World Wide Web site;
advertising; public relations; and direct mail distribution of Company
literature.
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CUSTOMER SERVICE AND SUPPORT ENGINEERING
Xylan's customer service and support organization installs, maintains
and supports products sold in North America directly to end users by the
Company, and provides technical support to the Company's OEM partners and
network integrators. The Company's OEM partners and system integrators generally
provide installation, maintenance and support services to their customers, with
the Company providing backup support.
The Company offers maintenance programs in North America that provide
seven days a week and 24 hours a day technical phone support; software updates;
and on-site hardware replacement through a network of service delivery partners.
Xylan employs systems engineers who work closely with the Company's OEM
partners, system integrators, and sales personnel to assist end users with
pre-and post-sales support. These systems engineers provide input to the product
development process based on their experiences in the field.
Xylan typically provides its system integrators with a one-year
hardware warranty and a three-month software warranty, commencing on product
shipment. Warranty terms for OEM partners are negotiated individually.
MANUFACTURING
Xylan's manufacturing operations consist primarily of material planning
and procurement, final assembly, software loading, test and quality assurance.
Xylan's operational strategy relies on outsourcing of manufacturing to reduce
fixed costs and to provide flexibility in meeting market demand. The Company
currently subcontracts component procurement and kitting and printed circuit
board assembly to three companies that specialize in these services. The printed
circuit board-based modules produced by its contract manufacturers are inserted
into product enclosures in combination with Xylan's software to meet the needs
of individual customers.
In connection with its outsourcing 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 quality, quantity
and on-time delivery. In addition, the Company may in the future experience
pricing pressures from its contract manufacturers. To date, the Company has had
only limited experience with the use of contract manufacturers. There can be no
assurance that the Company will effectively manage its contract manufacturers or
that these contract 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 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 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 on the
Company's business, operating results and financial condition.
The Company uses a rolling six-month forecast based on anticipated
product orders to determine its general materials and component 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. Currently, the Company
acquires materials and completes certain standard subassemblies based on the
Company's forecast. Upon receipt of firm orders from customers, the Company
assembles fully-configured systems and subjects them to a number of tests before
shipment. If orders do not match forecasts, the Company may have excess or
inadequate inventory of certain materials and components. The Company continues
to implement new and enhanced financial and management information systems and
controls and to train its personnel to operate such systems. Any difficulty in
the operation of such new and enhanced systems and controls or the training of
personnel, or any disruptions in the transition to such new and 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 and to accurately record and control inventory levels, and to
record and report financial and management information on a timely and accurate
basis.
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Although the Company generally uses standard parts and components for
its products, many 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 ASIC's, certain processors,
programmable integrated circuits, selected other integrated circuits, cables,
and custom-tooled sheet metal; and limited-sourced components include flash
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 additional ASICs in many of its
products. Each of these ASICs is initially being manufactured only by a single
source, particularly LSI Logic Corporation and, accordingly, the risks of
relying on sole sources is expected to increase. Any interruption in the supply
of any of these components, or the inability of the Company to procure these
components from alternate sources at acceptable prices and within a reasonable
time, could have a material adverse effect upon the Company's business,
operating results, and financial condition. Qualifying additional suppliers is
time-consuming and expensive, and the likelihood of errors is greater with new
suppliers. From time to time, the Company has experienced shortages and
allocations of certain components and has experienced delays in fulfilling
orders while waiting to receive the necessary components. Given current
worldwide demand for integrated circuits and certain other components used by
the Company, such shortages and allocations are likely to occur again in the
future and could have a material adverse effect on the Company's business,
operating results, and financial condition.
COMPETITION
The market for network switching products is intensely competitive and
subject to frequent product introductions with improved price/performance
characteristics, rapid technological change and continued emergence of new
industry standards. Many networking companies, including Cabletron Systems,
Inc., Cisco Systems, Inc., FORE Systems, Inc. and 3Com Corporation have
introduced, or have announced their intention to develop, network switching
products that are or will be competitive with the Company's products. In
addition, many of the Company's large competitors offer customers a broader
product line which provides a more comprehensive networking solution than the
Company currently offers. Recent consolidations in the industry have resulted in
competitors that may have broader product lines, greater access to capital, or
greater research and development resources which could adversely affect the
ability of the Company to compete. Xylan expects that other companies will also
enter markets in which the Company competes. In addition to competition from
providers of network switching products, the Company expects to face competition
from other vendors in the networking market who may incorporate switching
functionality into their products or provide alternative network solutions.
Furthermore, the Company's OEM partners may in the future develop competitive
products and may then decide to terminate their relationships with the Company.
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.
Xylan believes that the principal competitive factors in its market
are: (i) expertise and familiarity with LAN and ATM protocols, LAN and ATM
switching, and network management; (ii) product performance, features,
functionality, and reliability; (iii) price/performance; (iv) timeliness of new
product introductions; (v) adoption of emerging industry standards; (vi)
customer service and support; (vii) size and scope of distribution network;
(viii) access to customers; (ix) size of installed customer base; and (x)
corporate operating history and financial resources. The Company believes that
it is competitive with respect to the first seven of these factors and intends
to become competitive with respect to the remaining factors.
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 structures,
unexpected changes in regulatory requirements and natural disasters.
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EMPLOYEES
As of December 31, 1998, the Company employed 1,044 persons, including
292 in research and product development, 525 in sales and marketing, 163 in
operations and 64 in finance and administration. None of the Company's employees
is represented by a labor union. The Company has experienced no work stoppages
and believes that its relationship with its employees is good.
Competition for qualified personnel in the computer networking and
communications industry is intense. There can be no assurance that the Company
will be successful in retaining its key employees or that it can attract the
additional skilled personnel required for the Company's future growth. 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 one action brought four years ago and subsequently
settled, 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.
ITEM 2. PROPERTIES
During 1998, the Company entered into a ten (10) year lease agreement
for a 129,000 square foot facility located in Calabasas, California. The
facility was completed in January 1999 and the Company has relocated its
corporate headquarters. The Company leases a total of approximately 224,000
square feet of office, development and manufacturing space (including the above
described facility), all in Calabasas. The Company is currently in the process
of subleasing some portion of the space. The Company also has approximately 100
sales and support offices worldwide. The Company believes that the current space
is sufficient to meet its requirements for 1999.
ITEM 3. LEGAL PROCEEDINGS
On March 2, 1999, an action entitled Daniel W. Krasner v. Xylan
Corporation et. al. was filed, on March 5, 1999, an action entitled Jay Gentile
v. Xylan Corporation et. al. was filed, and on March 9, 1999, an action entitled
Marilyn Mandel v. Xylan Corporation et. al. was filed, each in the Superior
Court of the State of California for the County of Los Angeles, in which the
respective plaintiffs named as defendants the Company, the directors of the
Company and Alcatel. The complaints purport to assert claims on behalf of all
public shareholders of the Company. The complaints allege that Alcatel and the
members of the Company's Board of Directors have breached their fiduciary duties
to the Company and that Alcatel used its relationship with the Company and the
Company's Board of Directors to force the Company's Board of Directors to accept
an inadequate proposal.
The complaints seek class certification and other equitable and
monetary relief, including enjoining the tender offer and the merger with
Alcatel, or awarding damages. The Company believes that the allegations are
without merit and intends to vigorously contest these actions. There can be no
assurance that the defendants will be successful.
The Company may in the future be a party to litigation arising in the
course of its business. There can be no assurance that the Company's insurance
coverage will be adequate to cover all liabilities arising out of any such
claims or that any claim will be covered by the Company's insurance.
The Company's success and its ability to compete is 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 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.
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
10
<PAGE> 11
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 Company infringe third party intellectual
property rights.
Xylan has, from time to time, received claims, directly or indirectly,
from third parties alleging infringement of such third parties' intellectual
property rights. Lucent Technologies, Inc. ("Lucent") has notified Xylan of the
existence of certain data networking patents that it holds and that Xylan's
activities may infringe such patents. Lucent has proposed that Xylan accept a
royalty-based license under such patents. Although Lucent's claim has not
resulted in litigation to date, there can be no assurance that this claim will
not generate material litigation or that any material litigation would be
resolved favorably to Xylan. The Company believes that no other current claim
against the Company would result in material liability if successful, although
there can be no assurance to that effect.
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 any 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Report.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information responsive to this Item cannot be obtained on a timely basis
by the Registrant without unreasonable effort or expense and is the subject of a
Form 12b-25 filing made by the Registrant. The Registrant intends to supply this
information under cover of a Form 10-KA amendment to this Form 10-K shortly.
ITEM 6. SELECTED FINANCIAL DATA
Information responsive to this Item cannot be obtained on a timely basis
by the Registrant without unreasonable effort or expense and is the subject of a
Form 12b-25 filing made by the Registrant. The Registrant intends to supply this
information under cover of a Form 10-KA amendment to this Form 10-K shortly.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Information responsive to this Item cannot be obtained on a timely basis
by the Registrant without unreasonable effort or expense and is the subject of a
Form 12b-25 filing made by the Registrant. The Registrant intends to supply this
information under cover of a Form 10-KA amendment to this Form 10-K shortly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Information responsive to this Item cannot be obtained on a timely basis
by the Registrant without unreasonable effort or expense and is the subject of a
Form 12b-25 filing made by the Registrant. The Registrant intends to supply this
information under cover of a Form 10-KA amendment to this Form 10-K shortly.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information responsive to this Item cannot be obtained on a timely basis
by the Registrant without unreasonable effort or expense and is the subject of a
Form 12b-25 filing made by the Registrant. The Registrant intends to supply this
information under cover of a Form 10-KA amendment to this Form 10-K shortly.
11
<PAGE> 12
PART II
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
<TABLE>
<CAPTION>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE CLASS POSITIONS(1)
- ---- --- ----- ------------
<S> <C> <C> <C>
Steve Y. Kim..................... 49 I President, Chief Executive Officer and Chairman of
the Board of Directors
Yuri Pikover.................... 37 II Executive Vice President of Business Development
and Director
John L. Walecka................. 38 I Director
Robert C. Hawk.................. 59 II Director
Trude Taylor..................... 77 II Director
John Bailey....................... 41 Vice President of Product Development
Dale J. Bartos.................... 48 Vice President and Chief Financial Officer
Douglas Hill...................... 46 Vice President of Corporate Communications
Rene Arvin........................ 39 Vice President of Worldwide Sales
- ----------------
</TABLE>
(1) The Company Board is divided into two classes as nearly equal in number
as possible, and the members of each class are elected for a term of
two years. The officers of the Company are appointed annually by the
Company Board of Directors and serve at the discretion of the Company
Board. There are no family relationships among the directors or
officers of the Company.
Mr. Kim, a co-founder of the Company, has served as the Company's
President and Chief Executive Officer and Chairman of the Board of Directors
since the Company's inception in July 1993. Prior to co-founding the Company,
Mr. Kim founded and served as President and Chief Executive Officer of Fibermux
Corporation ("Fibermux"), a networking company, from November 1984 to June 1993.
Mr. Pikover, a co-founder of the Company, has served in various sales
and management positions and as a member of the Board of Directors since the
Company's inception in July 1993, most recently as Executive Vice President of
Business Development. Mr. Pikover served as the Company's Vice President of
Worldwide Sales from July 1993 to September 1997.
Mr. Walecka has served as a member of the Company Board since February
1994. Mr. Walecka has been a General Partner of certain venture capital funds
associated with Brentwood Venture Capital since January 1990. Mr. Walecka also
serves as a director of Documentum, Inc. and several privately held companies.
Mr. Hawk has served as a member of the Company Board since July 1995.
Mr. Hawk retired in April 1997 as President and Chief Executive Officer of U.S.
West Multimedia Group, a position he held since May 1996. Mr. Hawk served as
President of the Carrier Division of U.S. West from September 1990 to May 1996,
and has been employed in the telecommunications field for over 25 years. Mr.
Hawk also serves as a director of Premisys Communications, Pairgain
Technologies, Concord Communications and Radcom.
12
<PAGE> 13
Mr. Taylor has served as a member of the Company Board since August
1993. Mr. Taylor has been a principal with TC Associates, a consulting firm,
since May 1986. Mr. Taylor serves as a director of Plantronics, Inc., Densepac
Microsystems, Inc. and several privately held companies.
Mr. Bailey joined the Company in January 1994 and has served in various
engineering management positions, most recently as Vice President, Chief
Technology Officer and General Manager of Enterprise Division. Prior to joining
the Company, Mr. Bailey was an Assistant Vice President for LAN Internetworking
Technology at Ascom Timplex, a networking company, from September 1992 to
January 1994.
Mr. Bartos joined the Company in January 1997 as the Company's Vice
President and Chief Financial Officer. Prior to joining the Company, Mr. Bartos
was the Chief Financial Officer at ADFlex Solutions, Inc. from May 1996 to
January 1997. Prior to that, Mr. Bartos served as the Chief Financial Officer at
Integral Peripherals, Inc. from March 1995 to May 1996, and Micropolis
Corporation from December 1989 to March 1995. Mr. Bartos is a certified public
accountant.
Mr. Hill joined the Company in January 1994 and has served in various
marketing management positions, most recently as Vice President of Corporate
Marketing. Prior to joining the Company, Mr. Hill was Senior Consultant at
Western Data Group, a network integration company, from October 1989 to January
1994.
Mr. Arvin joined the Company in February 1996 and has served in various
sales and management positions, most recently as Vice President of Worldwide
Sales. Prior to joining the Company, Mr. Arvin was Director of Worldwide Sales
for NetEdge Corporation, a data communications company, from September 1994 to
February 1996. Mr. Arvin also served as Area Director, Northern Europe for
Synoptics Corporation, a networking company, from December 1989 to September
1994.
13
<PAGE> 14
ITEM 11. EXECUTIVE COMPENSATION
The following table illustrates the compensation received by (a) the
individual who served as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1998, (b) the four other most highly compensated
individuals who served as an executive officer of the Company during the fiscal
year ended December 31, 1998 (the "Named Executive Officers"), and (c) the
compensation received by each such individual for the two preceding fiscal
years.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------------------ ---------------------------------
Other
Annual Securities All Other
Name and Principal Salary Bonus Compensa- Underlying Compen-
Position Year ($)(1) ($)(2) tion ($)(3) Options sation($)
- ------------------ ---- ------ ------ ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Steve Y. Kim ............... 1998 236,321 39,325 -- 300,000(4) 30,827(5)
Chief Executive 1997 203,944 1,000 16,002 -- 45,753(6)
Officer, President and 1996 160,416 -- 134,123 -- 49,902(7)
Chairman of the Board
Yuri Pikover ............... 1998 197,000 28,875 -- 150,000(8) --
Executive Vice 1997 146,251 11,760 -- -- 11,760(9)
President, Business 1996 132,083 9,750 -- -- 7,200(9)
Development
John Bailey ................ 1998 175,896 29,496 -- 200,000(10) --
Vice President/CTO and 1997 143,559 15,735 -- -- --
General Manager, 1996 132,083 11,378 -- -- --
Enterprise Div
Rene Arvin ................. 1998 135,759 66,670 131,793 320,000(11) 47,808(12)
Vice President of 1997 128,309 20,175 71,917 300,000(13) --
Worldwide Sales 1996 93,534 -- 29,301 110,000 --
Dale J. Bartos ............. 1998 214,984 40,915 -- 158,000(14) --
Vice President and 1997 178,496 35,979 -- 120,000(15) 23,594(16)
Chief Financial Officer 1996 -- -- -- -- --
</TABLE>
(1) Includes amounts deferred under the Company's 401(k) plan.
(2) Includes bonuses earned in the year indicated and paid in the subsequent
year. Excludes bonuses paid in the year indicated but earned in the
preceding year.
(3) Represents amounts paid in commissions.
(4) Mr. Kim was granted 300,000 options on January 13, 1998 at an exercise
price of $15.25, the closing price of Common Stock on such date. In
connection with the Company's repricing program, on September 21, 1998,
such options were repriced at $10.50, the closing price of Common Stock on
such date.
(5) Includes $19,549 as reimbursement for country club expenses and $11,278 as
reimbursement for automobile payments.
(6) Includes $20,832 as reimbursement for tax and estate planning expenses,
$12,321 as reimbursement for country club expenses and $12,600 as
reimbursement for automobile payments.
(7) Includes $18,509 as reimbursement for tax and estate planning expenses and
$15,242 as reimbursement for country club expenses.
14
<PAGE> 15
(8) Mr. Pikover was granted 150,000 options on January 13, 1998 at an exercise
price of $15.25, the closing price of Common Stock on such date. In
connection with the Company's repricing program, on September 21, 1998,
such options were repriced at $10.50, the closing price of Common Stock on
such date.
(9) Represents a reimbursement for tax and estate planning expenses.
(10) Mr. Bailey was granted 150,000 options on January 13, 1998 at an exercise
price of $15.25, the closing price of Common Stock on such date. In
connection with the Company's repricing program, on September 21, 1998,
such options were repriced at $10.50, the closing price of Common Stock on
such date. Mr. Bailey was also granted 50,000 options on October 13, 1998
at an exercise price of $10.6875, the closing price of Common Stock on such
date.
(11) In connection with the Company's repricing program, on September 21, 1998,
all of Mr. Arvin's 300,000 outstanding options on such date were repriced
at $10.50, the closing price of Common Stock on such date. Mr. Arvin was
also granted 20,000 options on October 13, 1998 at an exercise price of
$10.6875, the closing price of Common Stock on such date.
(12) Includes $45,833 for housing allowance and $1,975 for taxable relocation
assistance.
(13) Mr. Arvin was granted 110,000 options on February 21, 1996 and 20,500 on
April 2, 1997 at exercise prices of $20.00 and $16.13, respectively, the
closing price of the Company's Common Stock on such dates. In connection
with the Company's repricing program, on July 23, 1997, such options were
repriced at $15.8125, the closing price of the Company's Common Stock on
such date. Mr. Arvin was also granted 169,500 options on October 27, 1997
at an exercise price of $14.50, the closing price of the Company's Common
Stock on such date.
(14) Mr. Bartos was granted 30,000 options on April 14, 1998 at an exercise
price of $26.625, the closing price of the Company's Common Stock on such
date. In connection with the Company's repricing program, on September 21,
1998, all of Mr. Bartos' 138,000 outstanding options on such date were
repriced at $10.50, the closing price of the Company's Common Stock on such
date. Mr. Bartos was also granted 20,000 options on October 13, 1998 at an
exercise price of $10.6875, the closing price of the Company's Common Stock
on such date.
(15) Mr. Bartos was granted 100,000 options on January 27, 1997 and 20,000 on
April 2, 1997 at exercise prices of $28.12 and $16.13, respectively. In
connection with the Company's repricing program, on July 23, 1997, such
options were repriced at $15.8125, the closing price of the Company's
Common Stock on such date.
(16) Includes $12,722 paid as reimbursement for relocation expenses, and $10,872
paid as reimbursement for loss of certain benefits.
15
<PAGE> 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the
Company's Common Stock as of February 23, 1999 as to (i) each person who is
known by the Company to beneficially own more than five percent of the Company's
Common Stock, (ii) each of the Company's directors, (iii) each of the executive
officers named in the Summary Compensation Table of this Statement and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
Name (1) Common Stock Beneficially Owned
- --------------------------------------- -------------------------------
Number Percent (2)
-------------------------------
<S> <C> <C>
Alcatel Data Networks S.A ..................... 2,814,244(3) 6.6%
12 rue de la Baume
Paris, France 75008
Amerindo Investment Advisors, Inc.............. 2,370,750(4) 5.6%
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
Franklin Resources Inc......................... 2,223,700(5) 5.2%
777 Mariners Island Blvd
San Mateo, CA 94494
Pilgrim Baxter & Associates, Ltd............... 2,728,100(6) 6.4%
825 Duportail Road
Wayne, PA 19087
Steve Y. Kim................................... 3,007,000(7) 7.0%
Chairman of the Board, CEO & President
Yuri Pikover................................... 2,086,251(8) 4.9%
Executive VP, Business Development
Robert C. Hawk, Director....................... 60,758(9) *
Trude C. Taylor, Director...................... 573,264(10) 1.4%
John L. Walecka, Director...................... 173,205(11) *
John Bailey.................................... 153,081(12) *
VP/CTO and General Manager, Enterprise Div.
Rene Arvin..................................... 152,622(13) *
VP of Worldwide Sales
Dale J. Bartos................................. 54,425(14) *
VP and CFO
All directors and executive officers as a group 6,438,463(15) 15%
(10 persons)
- ---------------
* Less than 1%.
</TABLE>
16
<PAGE> 17
(1) The persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable and except as
indicated. Beneficial ownership is determined in accordance with the rules
of the Securities and Exchange Commission (the "Commission). In computing
the number of shares beneficially owned by a person and the percentage
ownership of that person, shares of Common Stock subject to options or
warrants held by that person that are currently exercisable or exercisable
within 60 days after February 23, 1999 are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(2) As of February 23, 1999, 42,486,382 shares were issued and outstanding.
(3) This information is based on information in Alcatel's Schedule 14D-1 filed
on March 8, 1999.
(4) This information is based on a Schedule 13G/A filed by Amerindo Investments
Advisors, Inc. on February 12, 1999. Amerindo Investments Advisors, Inc.
refers herein to the following persons: Amerindo Investment Advisors, Inc.,
a California corporation, Amerindo Investment Advisors, Inc., a Panama
corporation, the Amerindo Investment Advisors Inc. Profit Sharing Trust
(the "Profit Sharing Trust"), the Amerindo Investment Advisors Inc. Money
Purchase Plan (together with the Profit Sharing Trust, the "Plans"), the
Amerindo Advisors (UK) Limited Retirement Benefits Scheme, Alberto W.
Vilar, Gary A. Tanaka, James P.F. Stableford and Renata Le Port. Messrs.
Vilar and Tanaka, as the sole shareholders and directors of the entities,
share with each other investment and dispositive power as to all of the
shares shown as owned by the entities, who otherwise have sole investment
and dispositive power with respect thereto, except that each client of the
entities has the unilateral right to terminate the advisory agreement with
the entity in question on notice which typically need not exceed 30 days.
Mr. Vilar is sole trustee of the Plans, and Messrs. Vilar, Tananka,
Stableford and Ms. Le Port are joint trustees of the Amerindo Advisors (UK)
Limited Retirement Benefits Scheme.
(5) This information is based on a Schedule 13G filed by Franklin Resources,
Inc. on February 20, 1999. Franklin Resources, Inc. refers herein to the
following persons: Charles B. Johnson, Franklin Advisors, Inc., Franklin
Resources, Inc., and Rupert H. Johnson, Jr.
(6) This information is based on Schedule 13G filed by Pilgrim Baxter &
Associates, Ltd., on February 9, 1999.
(7) Includes 805,000 shares of Common Stock held by the Kim Irrevocable
Children's Trust dated September 15, 1995, 1,957,500 shares held by Steve
Y. Kim Living Trust and 244,500 shares of Common Stock issuable upon
exercise of options exercisable within 60 days of February 23, 1999.
Excludes 20,000 shares of Common Stock held by The Kim Blind Trust, as to
which Mr. Kim disclaims voting or investment power. Does not include
100,000 shares of Common Stock issuable upon exercise of options which
exercise date will be accelerated to the date immediately prior to the
consummation of the Merger.
(8) Includes 220,000 shares of Common Stock held by the Pikover Irrevocable
Children's Trust dated September 15, 1995, 10,000 shares of Common Stock
held by the Pikover 1995 Irrevocable Trust dated September 15, 1995,
1,825,000 shares held by the Pikover Trust dated May 18, 1996 and 31,251
shares of Common Stock issuable upon exercise of options exercisable within
60 days of February 23, 1999. Excludes 15,000 shares of Common Stock held
by the Pikover Blind Trust, as to which Mr. Pikover disclaims voting or
investment power. Does not include 50,000 shares of Common Stock issuable
upon exercise of options which exercise date will be accelerated to the
date immediately prior to the consummation of the Merger.
(9) Includes 5,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999. Does not include 10,000
shares of Common Stock issuable upon exercise of unvested options under the
1996 Directors' Stock Option Plan (the "Directors' Plan) which exercise
date will be accelerated to the date immediately prior to the consummation
of the Merger.
(10) Includes 90,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999. Does not include 10,000
shares of Common Stock issuable upon exercise of unvested options under the
Directors' Plan which exercise date will be accelerated to the date
immediately prior to the consummation of the Merger.
(11) Includes 47,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999. Does not include 10,000
shares of Common Stock issuable upon exercise of unvested options under the
Directors' Plan which exercise date will be accelerated to the date
immediately prior to the consummation of the Merger.
(12) Includes 150,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999.
17
<PAGE> 18
(13) Includes 151,368 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999.
(14) Includes 53,834 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999.
(15) Includes an aggregate of 842,702 shares of Common Stock held by directors
and executive officers which are issuable upon exercise of options
exercisable within 60 days of February 23, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In October 1997, the Company Board approved acceleration of vesting of
stock options held by executive officers and certain key employees of the
Company in the event such individuals are terminated in connection with a change
in the Company's control through Change of Control Agreements. In such event,
each stock option to purchase the Company's Common Stock and held by such
individuals on the date of termination becomes immediately vested on the date of
termination as to that number of shares that would have vested in accordance
with the terms of their respective option grants for: (i) two years after the
date of change of control if such individual had been employed by the Company
for at least two years as of the change of control, or (ii) one year after the
date of change of control if such individual had been so employed for less than
two years as of the change of control.
During fiscal 1997, the Company advanced Dale J. Bartos, the Company's
Vice President and Chief Financial Officer, a total of $350,000 to assist Mr.
Bartos in financing the purchase of a home in California. Mr. Bartos previously
resided in Arizona, and upon the sale of Mr. Bartos' home in Arizona, the loan
will be repaid to the Company. The loan was subsequently repaid.
Except as described above, to date, the Company has made no loans to
officers, directors, principal shareholders or other affiliates or other than
advances of reimbursable expenses. All future transactions, including loans (if
any), between the Company and its officers, directors and principal shareholders
and their affiliates will be approved by a majority of the Board of Directors,
including a majority of the independent and disinterested outside directors of
the Board of Directors, and will be on terms no less favorable to the Company
than could have been obtained from unaffiliated third parties.
The Company has entered into indemnification agreements with its
officers and directors containing provisions which may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
In connection with the Merger Agreement, Messrs. Kim, Pikover and
Walecka entered into Shareholder Agreements and Mr. Kim entered into an
Employment Agreement effective as of the closing of the Merger with Alcatel. As
a condition of the Merger and as part of the Shareholder Agreements, Messrs. Kim
and Pikover have agreed to terminate their Change of Control Agreements and
waive the benefits thereof upon the closing of the Merger.
In February 1999, the Board of Directors of the Company agreed (i) to
accelerate the vesting of certain performance-milestone based option grants to
Messrs. Kim and Pikover for 100,000 and 50,000 shares, respectively, upon the
closing of the merger, (ii) to accelerate the vesting of all option grants under
the Company's Directors' Plan, and (iii) to have the Company pay the reasonable
legal fees and expenses for Messrs. Kim and Pikover in connection with the
negotiation of their Shareholder Agreements and Mr. Kim's Employment Agreement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Information responsive to this Item cannot be obtained on a timely
basis by the Registrant without unreasonable effort or expense and is the
subject of a Form 12b-25 filing made by the Registrant. The Registrant intends
to supply this information under cover of a Form 10-KA amendment to this Form
10-K shortly.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
XYLAN CORPORATION
Date: March 31, 1999 By /S/ Dale J. Bartos
------------------------------------------
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)
19
<PAGE> 20
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Steve Y. Kim and Dale J. Bartos, his
attorneys-in-fact, each with the power of substitution, for him in any and all
capacities, to sign any amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection therewith with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutes may do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------- ----------------------------------------------- --------------
<S> <C> <C>
/s/ STEVE Y. KIM President, Chief Executive Officer and Chairman March 31, 1999
- -----------------------
(STEVE Y. KIM)
/s/ DALE J. BARTOS Vice President of Finance and Administration March 31, 1999
- -----------------------
(DALE J. BARTOS) and Chief Financial Officer (Principal Financial Officer)
/s/ THOMAS S. BURNS Vice President of Finance (Chief Accounting Officer) March 31, 1999
- -----------------------
(THOMAS S. BURNS)
/s/ YURI PIKOVER Executive Vice President and Director March 31, 1999
- -----------------------
(YURI PIKOVER)
/s/ ROBERT C. HAWK Director March 31, 1999
- -----------------------
(ROBERT C. HAWK)
/s/ TRUDE C. TAYLOR Director March 31, 1999
- -----------------------
(TRUDE C. TAYLOR)
/s/ JOHN L. WALECKA Director March 31, 1999
- -----------------------
(JOHN L. WALECKA)
</TABLE>
20
