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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
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XYLAN CORPORATION
(NAME OF SUBJECT COMPANY)
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XYLAN CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(INCLUDING THE ASSOCIATED PREFERRED SHARE PURCHASE RIGHTS)
(TITLE OF CLASS OF SECURITIES)
984151 10 0
(CUSIP NUMBER OF CLASS OF SECURITIES)
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STEVE Y. KIM
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XYLAN CORPORATION
26707 WEST AGOURA ROAD, CALABASAS, CA 91302
(818) 880-3500
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED
TO RECEIVE NOTICE AND COMMUNICATIONS ON BEHALF
OF THE PERSON(S) FILING STATEMENT)
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WITH A COPY TO:
TAE HEA NAHM, ESQ.
STEVEN J. TONSFELDT, ESQ.
VENTURE LAW GROUP
A PROFESSIONAL CORPORATION
2800 SAND HILL ROAD
MENLO PARK, CALIFORNIA 94025
(650) 854-4488
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ITEM 1. SECURITY AND SUBJECT COMPANY
The name of the subject company is Xylan Corporation, a California
corporation ("Xylan" or the "Company"). The address of the principal executive
offices of the Company is 26707 West Agoura Road, Calabasas, CA 91302. The title
of the class of equity securities to which this Solicitation/Recommendation
Statement (the "Statement") relates is the Company's Common Stock, par value
$0.001 per share, including the associated Preferred Share Purchase Rights
("Common Stock" or the "Shares").
ITEM 2. TENDER OFFER OF THE BIDDER
This Statement relates to the tender offer by Alcatel, a corporation
organized and existing under the laws of France ("Parent" or "Alcatel"), and
Zeus Acquisition Corp., a California corporation and an indirect wholly owned
subsidiary of Parent (the "Purchaser") to purchase all of the Shares held by the
Company's shareholders other than Parent or its affiliates (such shareholders,
the "Public Shareholders" and such Shares, the "Publicly Held Shares") at $37.00
per Share (the "Offer Price"), net to the seller in cash (subject to applicable
withholding of taxes), without interest, upon the terms and subject to the
conditions set forth in the Purchaser's Offer to Purchase dated March 8, 1999
and in the related Letter of Transmittal (which together with the Offer to
Purchase, each as may be amended and supplemented from time to time, constitute
the "Offer"), copies of which are filed respectively as Exhibits 1 and 2 hereto
and are incorporated herein by reference. The Offer is disclosed in a Tender
Offer Statement on Schedule 14D-1 dated March 8, 1999 (the "Schedule 14D-1")
filed with the Securities and Exchange Commission (the "Commission") pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules promulgated by the Commission thereunder.
The Offer is being made by the Purchaser pursuant to the Agreement and Plan
of Merger, dated as of March 1, 1999 (the "Merger Agreement"), by and among
Parent, Purchaser and the Company. The Merger Agreement provides that, among
other things, as promptly as practicable after the purchase of Shares pursuant
to the Offer and the satisfaction or waiver of the other conditions set forth in
the Merger Agreement and in accordance with the applicable provisions of the
California General Corporation Law (the "CGCL"), Purchaser will be merged with
and into the Company (the "Merger"), the separate corporate existence of
Purchaser will cease and the Company will continue as the surviving corporation
(the "Surviving Corporation") and will be a wholly-owned indirect subsidiary of
Parent. At the effective time of the Merger (the "Effective Time"), each
remaining outstanding Share (other than Shares owned by Parent, Purchaser or any
direct or indirect wholly-owned subsidiary of the Company or Parent immediately
prior to the Effective Time (the "Ineligible Shares") and Shares held by
shareholders who properly perfect their dissenters' rights under the CGCL (the
"Dissenting Shares")) will be converted automatically into the right to receive
the Offer Price, without interest. The Merger Agreement is more fully described
in Item 3.
According to the Offer to Purchase, the address of the principal executive
offices of Parent is 54 rue La Boetie, 75008 Paris, France, and the address of
the principal executive offices of the Purchaser is 640 Bercut Drive,
Sacramento, California 95814.
ITEM 3. IDENTITY AND BACKGROUND
(a) The name and address of the Company, which is the person filing this
Statement, is set forth in Item 1 above. All information contained in this
Statement or incorporated herein by reference concerning the Purchaser or
Parent, or actions or events with respect to either of them, was provided by the
Purchaser or Parent, respectively, and the Company takes no responsibility for
such information. Information contained in this Statement with respect to the
Company and its advisors has been provided by the Company.
(b) Except as described herein, in Annex A hereto, and in the exhibits
hereto, to the knowledge of the Company, as of the date hereof there are no
material contracts, agreements, arrangements or understandings, or any potential
or actual conflicts of interest between the Company or its affiliates and (1)
the Company, its executive officers, directors or affiliates or (2) the
Purchaser, its executive officers, directors or affiliates.
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INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER
In considering the recommendations of the Board of Directors of the Company
(the "Company Board"), the Public Shareholders should be aware that certain
members of the Company Board and certain of the Company's officers have
interests in the Merger and the Offer which are described herein and in Annex A
hereto and which may present them with certain conflicts of interest. Each of
the members of the Company Board were aware of these potential conflicts and
considered them along with the other factors described in Item 4(b)(2) below.
Each of the directors and officers of the Company has entered into a
standard form of Change of Control Agreement with the Company, as set forth in
Exhibit 14 hereto. The Change of Control Agreements provide that in the event of
a change of control of the Company, 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 (2) years after the date of change of control if such individual
had been employed by the Company for at least two (2) years as of the change of
control, or (ii) one (1) year after the date of change of control if such
individual had been so employed for less than two (2) years as of the change of
control. As a condition of the Merger and as part of the Shareholder Agreements
described below, the Company's President, Chief Executive Officer and Director,
Steve Y. Kim, and the Company's Executive Vice President and Director, Yuri
Pikover, have agreed to terminate their Change of Control Agreements and waive
the benefits thereunder upon the closing of the Merger.
On February 23, 1999, the Company Board 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
1996 Directors' Stock Option 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, as described below.
SUMMARY OF EXISTING AGREEMENTS BETWEEN THE COMPANY AND ALCATEL
Commercial Agreements. Parent is a distributor of the Company's products.
Through their original equipment manufacturer partnership, Parent resells the
Company's products under its own name pursuant to the International Distributor
Agreement, dated March 13, 1995 (the "Resale Agreement"), between Alcatel N.V.
and the Company. This arrangement is not exclusive, and Parent can cease
marketing the Company's products at its option with limited notice and with
little or no penalty. In addition, the Resale Agreement generally provides for
flat discounts. Pursuant to the related Product and Technology Agreement, dated
March 13, 1995, between Alcatel Data Networks, S.A. ("ADN") and the Company,
Parent also has certain manufacturing rights and the right to purchase from the
Company certain of the Company's products. For the nine months ended September
30, 1998, Parent accounted for approximately $42.9 million, or 17%, of the
Company's total revenues. For the year ended December 31, 1997, Parent accounted
for approximately $24.5 million, or 11.6%, of the Company's total revenues. For
the year ended December 31, 1996, Parent accounted for less than 10% of the
Company's total revenues.
1995 Shareholder Agreement. On March 13, 1995, the Company entered into a
1995 Shareholder Agreement with ADN, certain other of its investors, Steve Y.
Kim and Yuri Pikover (the "1995 Shareholder Agreement"). The 1995 Shareholder
Agreement provides Alcatel with a right of first refusal on transfers of voting
stock by the investors and Messrs. Kim and Pikover to third parties, except in
cases of permitted transfers, as set forth in the 1995 Shareholder Agreement,
including transfers of voting shares to partners. The 1995 Shareholder Agreement
also provides the Company with a right of first refusal on transfers of voting
stock by ADN to third parties, except in cases of permitted transfers set forth
in the 1995 Shareholder Agreement.
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THE MERGER AGREEMENT
The following is a summary of the Merger Agreement, a copy of which is
filed as an exhibit to the Schedule 14D-1 filed by Purchaser and Parent with the
Commission in connection with the Offer. Such summary is qualified in its
entirety by reference to the Merger Agreement.
The Offer. The Merger Agreement provides for the commencement of the Offer
as promptly as reasonably practicable (but in no event later than five business
days after the public announcement of the execution of the Merger Agreement).
Purchaser has commenced the Offer in accordance with the terms of the Merger
Agreement. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE HAVING BEEN
VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER AT LEAST
90% OF THE OUTSTANDING SHARES (AFTER TAKING INTO ACCOUNT THE SHARES THEN OWNED
BY PARENT AND ITS SUBSIDIARIES) (THE "MINIMUM CONDITION") AND IS ALSO SUBJECT TO
OTHER CUSTOMARY CLOSING CONDITIONS.
Subject to the terms of the Merger Agreement and (i) the satisfaction of
the Minimum Condition and (ii) the satisfaction or waiver of certain conditions
set forth below, Purchaser will use reasonable best efforts to consummate the
Offer in accordance with its terms and to accept for payment and pay for Shares
validly tendered and not withdrawn pursuant to the Offer as soon as Purchaser is
legally permitted to do so under applicable law.
Extension or Amendment of the Offer. If on the Expiration Date (as defined
below), all conditions to the Offer will not have been satisfied or waived,
Purchaser may, from time to time, in its sole discretion, extend the Expiration
Date until a date not later than June 30, 1999. However, if the HSR/Foreign
Antitrust Condition (as defined below in "Certain Conditions of the Offer") has
not been satisfied or waived at the Expiration Date, Purchaser may extend the
Expiration Date until a date not later than September 30, 1999, and Parent and
Purchaser will exercise their reasonable best efforts to comply with any
requests of the DOJ, FTC or similar foreign governmental entity. Without
limiting these rights of Purchaser to extend the Offer, at the request of the
Company, Purchaser will, and Parent will cause Purchaser to, extend the
Expiration Date (i) in one or more periods of not more than five business days
(but in no event later than April 30, 1999), if (A) any of the conditions set
forth below under "Certain Conditions of the Offer" have not been satisfied or
waived at the Expiration Date, (B) such condition is reasonably capable of being
satisfied by the Company, (C) the Company exercises its reasonable best efforts
to cause such condition to be satisfied and (D) the Company is in compliance
with all of its covenants in the Merger Agreement, (ii) for five business days
in the event that the Minimum Condition has not been satisfied at the first
scheduled Expiration Date or (iii) until a date not later than September 30,
1999, only if the HSR/Foreign Antitrust Condition has not been satisfied or
waived at the Expiration Date and the Company exercises its reasonable best
efforts to comply with any second requests of the DOJ, FTC or similar foreign
governmental entity. In addition, Purchaser may increase the Offer Price and the
Offer may be extended to the extent required by law in connection with such
increase, in each case, without the consent of the Company.
Subject to the immediately succeeding sentence, Purchaser may not (i) amend
or waive the Minimum Condition, (ii) decrease the Offer Price, (iii) decrease
the number of Shares sought or (iv) amend any other condition of the Offer in
any manner adverse to the holders of the Shares without the written consent of
the Company (such consent to be authorized by the Company Board or a duly
authorized committee thereof). In the event the Minimum Condition is not
satisfied on any scheduled Expiration Date and the Company has not given to
Purchaser a notice to extend the Expiration Date pursuant to clause (ii) of the
immediately preceding paragraph, Purchaser may, in its sole discretion, either
(i) extend the Offer pursuant to the above paragraph or (ii) amend the Offer to
provide that, in the event (A) the Minimum Condition is not satisfied at the
next scheduled Expiration Date (without giving effect to the potential issuance
of any Shares issuable upon exercise of the Stock Option Agreement, as discussed
below) and (B) the number of Shares tendered pursuant to the Offer and not
withdrawn as of such next scheduled Expiration Date is more than 50% of the then
outstanding Shares, Purchaser will waive the Minimum Condition and amend the
Offer to reduce the number of Shares subject to the Offer to a number of Shares
that, when added to the Shares then owned by
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Purchaser, will equal the Revised Minimum Number (49.99% of the Shares then
outstanding), and, if a greater number of Shares is tendered into the Offer and
not withdrawn, purchase, on a pro rata basis, the Revised Minimum Number of
Shares (it being understood that Purchaser may, but will not in any event be
required to accept for payment, and pay for, any Shares if less than the Revised
Minimum Number of Shares is tendered pursuant to the Offer and not withdrawn at
the applicable Expiration Date). If Purchaser purchases a number of Shares equal
to the Revised Minimum Number, without the prior written consent of Purchaser
prior to the termination of the Merger Agreement, the Company may not take any
action whatsoever to increase the percentage of Shares owned by Purchaser in
excess of the Revised Minimum Number.
The term "Expiration Date" means 12:00 midnight, New York City time, on
Friday, April 2, 1999, unless and until Purchaser, in accordance with the terms
of the Merger Agreement, extends the period of time during which the Offer is
open, in which event the term "Expiration Date" will mean the latest time and
date at which the Offer, as so extended by Purchaser, will expire. Subject to
the terms and conditions of the Merger Agreement, Purchaser may extend the
period of time during which the Offer is open at any time in its sole discretion
and thereby delay acceptance for payment of, and payment for, any Shares, by
giving oral or written notice of such extension to its depositary and by making
a public announcement thereof by no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. During any
such extension, all Shares previously tendered and not withdrawn will remain
tendered pursuant to the Offer, subject to the rights of a tendering shareholder
to withdraw his Shares.
Under the CGCL, if Purchaser acquires, pursuant to the Offer, the Stock
Option Agreement or otherwise, at least 90% of the Shares then outstanding, it
will be able to approve the Merger Agreement and the transactions contemplated
thereby, including the Merger, without a vote of the shareholders. In such
event, Parent, Purchaser and the Company have agreed in the Merger Agreement to
take, subject to the satisfaction or waiver of the conditions set forth in the
Merger Agreement, all necessary and appropriate action to cause the Merger to
become effective as soon as practicable after the acceptance of and payment for
Shares by Purchaser pursuant to the Offer, without a meeting of shareholders of
the Company, in accordance with Section 1110 of the CGCL. Under the CGCL, the
Merger may not be accomplished for cash paid to the shareholders of the Company
if Purchaser or Parent owns, directly or indirectly, more than 50% but less than
90% of the then outstanding Shares, unless either all the shareholders of the
Company consent or the Commissioner of Corporations of the State of California
approves, after a hearing, the terms and conditions of the Merger and the
fairness thereof. If Purchaser does not acquire at least 90% of the Shares then
outstanding as of any scheduled expiration date of the Offer, pursuant to the
Offer, the Stock Option Agreement or otherwise, and Purchaser instead waives the
Minimum Condition and amends the Offer pursuant to the immediately preceding
paragraph, then Purchaser would own upon consummation of the Offer 49.99% of the
Shares then outstanding, and would thereafter solicit the approval of the Merger
and the Merger Agreement by a vote of the shareholders of the Company. Under
such circumstances, a significantly longer period of time will be required to
effect the Merger.
Board Representation; Directors. The Merger Agreement provides that
promptly upon the acceptance for payment by Parent or any of its subsidiaries of
Shares purchased pursuant to the Offer, and from time to time thereafter as
Shares are acquired by Parent or any of its subsidiaries, Parent will be
entitled to designate such number of directors, rounded up to the next greatest
whole number, on the Company Board as will give Parent representation on the
Company Board equal to that number of directors which equals the product of the
total number of directors on the Company Board (giving effect to the directors
appointed or elected pursuant to this sentence and including current directors
serving as officers of the Company) multiplied by the percentage that the
aggregate number of Shares beneficially owned by Purchaser, Parent or any of
their affiliates (including Shares accepted for payment pursuant to the Offer,
but excluding Shares held by the Company or any of its affiliates, which would
not include Parent, Purchaser or its affiliates) bears to the number of Shares
outstanding. However, if Purchaser has acquired the Revised Minimum Number of
Shares in the Offer, such number of directors will be rounded up to the greatest
whole number plus one to give Purchaser at least a majority of the members of
the Company Board. Furthermore, in the event that Purchaser's designees are
appointed or elected to the Company Board, until the Effective Time the Company
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Board will have at least one director who is a director on the date of the
Merger Agreement and who is not an executive officer of the Company (the
"Independent Director"). At such times, the Company will also cause (i) each
committee of the Company Board, (ii) if requested by Parent, the board of
directors of each of the Company's subsidiaries and (iii) if requested by
Parent, each committee of such subsidiaries' boards of directors include persons
designated by Parent constituting the same percentage of each such committee or
board of directors as Parent's designees are of the Company Board. The Company
will, upon request by Parent, promptly increase the size of the Company Board or
exercise its best efforts to secure the resignations of such number of
directors, or both, as is necessary to enable Parent's designees to be elected
or appointed to the Company Board and will cause Parent's designees to be so
elected or appointed.
Following the election or appointment of Parent's designees and prior to
the Effective Time, the approval of a majority of the Independent Directors will
be required to authorize (i) any amendment that would be adverse to the holders
of Shares, (ii) any termination of the Merger Agreement by the Company, (iii)
any consent by the Company to any extension of the time for performance of any
of the obligations or other acts of Parent or Purchaser, (iv) any waiver by the
Company of compliance with any of the covenants or conditions contained in the
Merger Agreement for the benefit of the Company or any other rights of the
Company under the Merger Agreement or (v) the exercise of any of the Company's
rights, remedies or benefits under the Merger Agreement.
The Merger. Following completion of the Offer, upon the terms and subject
to the conditions of the Merger Agreement, and in accordance with the CGCL, at
the Effective Time Purchaser will be merged with and into the Company. As a
result of the Merger, the separate corporate existence of Purchaser will cease
and the Company will continue as the Surviving Corporation and will be a
wholly-owned indirect subsidiary of Parent. Upon consummation of the Merger,
each Ineligible Share will be canceled and retired without payment of any
consideration thereof.
The Merger Agreement provides that the directors of Purchaser immediately
prior to the Effective Time will be the initial directors of the Surviving
Corporation and that the officers of the Company immediately prior to the
Effective Time will be the initial officers of the Surviving Corporation. The
Merger Agreement also provides that, at the Effective Time, the Articles of
Incorporation of Purchaser as in effect immediately prior to the Effective Time
will be the Articles of Incorporation of the Surviving Corporation, and further
provides that the By-Laws of Purchaser as in effect immediately prior to the
Effective Time will be the By-Laws of the Surviving Corporation.
Conversion of Securities. At the Effective Time, by virtue of the Merger:
(a) each Ineligible Share will cease to be outstanding, be canceled
and retired without payment of any consideration therefor and cease to
exist;
(b) each issued and outstanding Share, other than Dissenting Shares
and Ineligible Shares, will be converted automatically into the right to
receive the Offer Price, without interest (the "Merger Consideration"). All
such Shares, when so converted, will no longer be outstanding and will
automatically be canceled and retired and will cease to exist, and each
holder of a certificate representing any such Shares will cease to have any
rights with respect thereto, except the right to receive the Merger
Consideration upon the surrender of the certificate or certificates
evidencing such Shares;
(c) Each share of common stock, par value $0.01 per share, of
Purchaser issued and outstanding immediately prior to the Effective Time
will be converted into and exchanged for one validly issued, fully paid and
non-assessable share of common stock, par value $0.01 per share, of the
Surviving Corporation; and
(d) All other capital stock of the Company will be canceled and
retired and will cease to exist, and no Merger Consideration or other
consideration will be issued or delivered in exchange therefor.
Stock Options; Stock Purchase Plan. At the Effective Time, all options to
purchase Company Common Stock granted under the Company's 1993 Stock Incentive
Plan, as amended to date (the "1993 Plan"), the Company's 1996 Stock Plan (the
"1996 Plan"), the Company's 1998 Employee Stock Option Plan (the
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"1998 Plan") and the Company's 1996 Directors' Stock Option Plan (the
"Directors' Plan" and, together with the 1993 Plan, the 1996 Plan and the 1998
Plan, the "Stock Option Plans") or pursuant to any other arrangement adopted by
the Company Board to provide options, warrants or other rights to purchase
capital stock of the Company (in any such case, an "Option") then outstanding
will be subject to the following paragraphs.
Except as provided below, at the Effective Time, the Company's obligations
with respect to each outstanding Option, whether vested or unvested, will, by
virtue of the Merger Agreement and without any further action of the Company,
Parent, Purchaser or the holder of any Option, be assumed by Parent. Parent will
make such assumption in such manner that (i) Parent is a corporation "assuming a
stock option in a transaction to which Section 424(a) applies" within the
meaning of Section 424 of the Internal Revenue Code of 1986, as amended (the
"Code") or (ii) to the extent that Section 424 of the Code does not apply to
such Option, Parent would be such a corporation were Section 424 of the Code
applicable to such Option. After the Effective Time, all references to the
Company in the Stock Option Plans and the applicable stock option agreements
will be deemed to refer to Parent as issuer and the Company as the employer of
the holders of Options, as applicable. Each Option assumed by Parent under the
Merger Agreement will continue to have, and be subject to, the same terms and
conditions set forth in the applicable Stock Option Plan and the applicable
stock option agreement as in effect immediately prior to the Effective Time,
except that (i) such Option will be exercisable for that number of Parent
American Depositary Shares ("ADSs") equal to the product of the number of shares
of Company Common Stock that were purchasable under such Option immediately
prior to the Effective Time multiplied by the quotient determined by dividing
the Merger Consideration by the fair market value of the ADSs, rounded down to
the nearest whole number of ADSs, and (ii) the per share exercise price for the
ADSs issuable upon exercise of such assumed Option will be equal to the exercise
price per share of Company Common Stock at which such Option was exercisable
immediately prior to the Effective Time multiplied by the quotient determined by
dividing the fair market value of the ADSs by the Merger Consideration, and
rounding the resulting exercise price up to the nearest whole cent. For purposes
of the Merger Agreement, the fair market value of the ADSs is based on the
average of the closing prices per share for the five trading days immediately
following (but not including) the date on which the Effective Time occurs, as
reported in The Wall Street Journal.
As an alternative to the procedures set forth above, however, subject to
such procedures as may be established by Parent, each holder of an Option
granted under the 1993 Plan will have the right to elect to receive with regard
to such Option either of the following amounts: (i) a cash payment equal to the
product of (x) the number of Shares underlying the vested portion of such
unexercised Option and (y) the excess of the Merger Consideration over the per
share exercise price of the unexercised Option; or (ii) the number of Options
exercisable for ADSs determined under the conversion formula set forth in the
immediately preceding paragraph. In addition, each outstanding Option granted to
a director under the Directors' Plan will terminate at the Effective Time.
The Merger Agreement further provides that, with respect to the Company's
1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"), the Company will
take all actions as are necessary to cause the "exercise date" (referred to as
the last day of the "Offering Period," as such term is used in the Stock
Purchase Plan) applicable to the then current Offering Period to be the last
trading day on which the Company Common Stock is traded on Nasdaq, immediately
prior to the Effective Time (the "New Purchase Date"). Such change in the
"exercise date" will be conditioned upon the consummation of the Merger. On the
New Purchase Date, the Company will apply the funds credited as of such date
under the Stock Purchase Plan within each participant's payroll withholdings
account to the purchase of whole Shares in accordance with the terms of the
Stock Purchase Plan. The cost to each participant in the Stock Purchase Plan for
the Shares will be the lower of 95% of the closing sale price of Company Common
Stock, as reported on The Nasdaq on (i) the first day of the then current
Offering Period or (ii) the last trading day prior to the New Purchase Date.
Prior to the Effective Time, the Company will take (or cause to be taken) all
actions as are necessary or appropriate to effectuate the termination of the
Stock Purchase Plan prior to the Effective Time in accordance with its terms and
the Code, the Employee Retirement Income Security Act of 1974, as amended, and
other applicable law.
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Proxy Statement; Shareholders Meeting. The Merger Agreement provides that,
if required by applicable law in order to consummate the Merger, the Company,
acting through the Company Board, will, in accordance with applicable law:
(a) duly call, give notice of, convene and hold a special meeting of
its shareholders (the "Special Meeting") as promptly as practicable
following the acceptance for payment and purchase of Shares by Purchaser
pursuant to the Offer for the purpose of considering and taking action upon
the approval of the Merger and the adoption of the Merger Agreement;
(b) prepare and file with the SEC a preliminary proxy statement
relating to the Merger and the Merger Agreement and use its best efforts to
obtain and furnish the information required to be included by the SEC in
the proxy statement and, after consultation with Parent, to respond
promptly to any comments made by the SEC with respect to the preliminary
proxy statement and cause a definitive proxy statement to be mailed to its
shareholders;
(c) include in the proxy statement the recommendation of the Company
Board that shareholders of the Company vote in favor of the approval of the
Merger and the adoption of the Merger Agreement; and
(d) use its best efforts to solicit from holders of Shares proxies in
favor of the Merger and take all other action necessary or, in the
reasonable opinion of Parent, advisable to secure any vote or consent of
the shareholders required under California law to effect the Merger.
Under the Merger Agreement, Parent will vote, or cause to be voted, all of
the Shares then owned by it, Purchaser or any of its other subsidiaries or
affiliates controlled by Parent in favor of the approval of the Merger and the
approval and adoption of the Merger Agreement.
Nevertheless, in the event that Parent, Purchaser or any other subsidiary
of Parent acquires in the aggregate a number of the outstanding shares of each
class of capital stock of the Company pursuant to the Offer or otherwise
sufficient to enable Purchaser or the Company to cause the Merger to become
effective without a meeting of shareholders of the Company, the parties will, at
the request of Parent and subject to terms and conditions of the Merger
Agreement, take all necessary and appropriate action to cause the Merger to
become effective as soon as practicable after such acquisition without a meeting
of shareholders of the Company in accordance with Section 1110 of the CGCL.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto, including the
following representations by the Company relating to: organization and
qualification; subsidiaries; Articles of Incorporation and By-Laws;
capitalization; authority relative to the Merger Agreement; material contracts;
absence of conflicts, required filings and consents; rights plan; SEC filings;
financial statements; absence of certain changes or events; absence of
undisclosed liabilities; absence of litigation; employee benefit plans;
employment agreements; labor matters; restrictions on business activities;
taxes; environmental matters; brokers; intellectual property; vote required;
opinion of financial advisor; and year 2000 compliance.
Rights Plan. In the Merger Agreement, the Company has represented that the
Company Board has approved, and the Company and BankBoston, N.A. (f/k/a The
First National Bank of Boston), as Rights Agent, have entered into, an amendment
to the Company's Preferred Shares Rights Agreement (the "Rights Amendment").
Under the Rights Amendment, neither the execution, delivery and performance of
the Merger Agreement or the Stock Option Agreement nor the consummation of the
Offer, the Merger and the other transactions contemplated by the Merger
Agreement and the Stock Option Agreement (the "Transactions") will result in the
distribution of separate certificates representing rights or the occurrence of a
Distribution Date or a "flip-in" or "flip-over" event (as such terms are defined
in the Preferred Shares Rights Agreement).
Conduct of Business. Under the Merger Agreement, the Company has
covenanted and agreed that, during the period from the date of the Merger
Agreement and continuing until the earlier to occur of the termination of the
Merger Agreement or the Effective Time, unless Parent otherwise agrees in
writing and unless otherwise expressly permitted under the Merger Agreement, the
Company will conduct its business and will cause the businesses of its
subsidiaries to be conducted, and the Company and its subsidiaries will not take
7
<PAGE> 9
any action except, in the ordinary course of business and in a manner consistent
with past practice. The Company will also use reasonable commercial efforts to
preserve substantially intact the business organization of the Company and its
subsidiaries, to keep available the services of the present officers, employees
and consultants of the Company and its subsidiaries, and to preserve the present
relationships of the Company and its subsidiaries with customers, suppliers and
other persons with which the Company or any of its subsidiaries has significant
business relations. By way of amplification and not limitation, neither the
Company nor any of its subsidiaries will, during the period from the date of the
Merger Agreement and continuing until the earlier to occur of the termination of
the Merger Agreement or the Effective Time, directly or indirectly do, or
propose to do, any of the following without the prior written consent of Parent,
unless otherwise expressly permitted under the Merger Agreement:
(a) amend or otherwise change the Company's or any of its
subsidiaries' Articles of Incorporation or By-Laws, or other equivalent
organizational documents;
(b) issue, sell, pledge, dispose of or encumber, or authorize the
issuance, sale, pledge, disposition or encumbrance of, any shares of
capital stock of any class, or any options, warrants, convertible
securities or other rights of any kind to acquire any shares of capital
stock, or any other ownership interest (including, without limitation, any
phantom interest) of the Company, any of its subsidiaries or affiliates
(except for the issuance of Shares pursuant to the exercise of Options
under the Stock Option Plans, which Options are outstanding on the date of
the Merger Agreement);
(c) sell, pledge, dispose of or encumber any assets of the Company or
any of its subsidiaries (except for (i) sales of assets in the ordinary
course of business and in a manner consistent with past practice and (ii)
dispositions of obsolete or worthless assets);
(d) amend or change the period (or permit any acceleration, amendment
or change) of exercisability of Options granted under the Stock Option
Plans or the Stock Purchase Plan or other than as expressly provided in the
second paragraph under "Stock Options" above, authorize cash payments in
exchange for any such Options;
(e) (i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of any of its capital stock, except that a wholly-owned
subsidiary of the Company may declare and pay a dividend to its parent,
(ii) split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock or (iii) amend
the terms of, repurchase, redeem or otherwise acquire, or permit any
subsidiary to repurchase, redeem or otherwise acquire, any of its
securities or any securities of its subsidiaries, or propose to do any of
the above;
(f) sell, transfer, license, sublicense or otherwise dispose of any
material Company intellectual property (other than in the ordinary course
of business consistent with past practice) or amend or modify any existing
agreements with respect to any material Company intellectual property or
third-party intellectual property rights;
(g) (i) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof; (ii) incur any indebtedness for borrowed money or issue
any debt securities or assume, guarantee or endorse, or otherwise as an
accommodation become responsible for, the obligations of any person, or
make any loans or advances except to employees in the ordinary course
consistent with past practice; (iii) enter into or amend any contract or
agreement other than in the ordinary course of business; (iv) authorize or
make any capital expenditures or purchases of fixed assets that are not
currently budgeted and that in the aggregate exceed $500,000; (v) terminate
any material contract or amend any of its material terms (other than
amendments to existing credit arrangements designed to remedy defaults
thereunder); or (vi) enter into or amend any contract, agreement,
commitment or arrangement to effect any of the matters prohibited by this
subparagraph;
(h) increase the compensation payable or to become payable to its
employees, officers or directors or grant any severance or termination pay
to, or enter into any employment or severance agreement with,
8
<PAGE> 10
any employee, director or officer of the Company or any of its subsidiaries
or establish, adopt, enter into, terminate or amend any employee benefit
plan (except as may otherwise be required by applicable law);
(i) take any action, other than as required by United States Generally
Accepted Accounting Principles, to change accounting policies or procedures
or cash maintenance policies or procedures (including, without limitation,
procedures with respect to revenue recognition, capitalization of
development costs, payments of accounts payable and collection of accounts
receivable);
(j) make any material tax election inconsistent with past practice or
settle or compromise any material tax liability, except to the extent the
amount of any such settlement or compromise has been reserved for on the
consolidated financial statements contained in the Company's SEC reports,
or would not have a Company Material Adverse Effect. "Company Material
Adverse Effect" means any change or effect that, individually or when taken
together with all other such changes or effects that have occurred prior to
the date of determination of the occurrence of the Company Material Adverse
Effect, is materially adverse to the business, results of operations or
financial condition of the Company and its subsidiaries, taken as a whole.
In determining whether there has been a Company Material Adverse Effect,
any adverse effect attributable to the following will be disregarded: (i)
general economic or business conditions; (ii) general industry conditions;
(iii) the taking of any action permitted or required by the Merger
Agreement; (iv) a reduction in purchases of products from the Company by
International Business Machines Corporation or Parent; (v) a reduction or
delay in purchases of products from the Company as a direct result of the
public announcement or pendency of the Offer; or (vi) the breach by Parent
or Purchaser of the Merger Agreement; and in each case to the extent that
such adverse effect is attributable to such event. With respect to clause
(v) of this paragraph, the Company will bear the burden of proof (which
will be established through documentary evidence) in any proceeding with
regard to establishing that any reduction in purchases was attributable to
or results from the direct effect of the public announcement or pendency of
the Offer;
(k) pay, discharge, settle or satisfy any lawsuits, claims,
liabilities or obligations (absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or satisfaction
in the ordinary course of business and consistent with past practice of
liabilities reflected or reserved against in the financial statements of
the Company or incurred in the ordinary course of business and consistent
with past practice;
(l) except as may be required by law, take any action to terminate or
amend any employee benefit plan;
(m) permit any material increase in the number of employees of the
Company or any of its subsidiaries employed by the Company or any of its
subsidiaries, as the case may be, on the date of the Merger Agreement; or
(n) take or fail to take, or agree in writing or otherwise to take or
fail to take, any of the actions described in (a) through (m) above, or any
action which would make any of the representations or warranties of the
Company contained in the Merger Agreement untrue or incorrect or prevent
the Company from performing or cause the Company not to perform its
covenants under the Merger Agreement or result in any of the conditions to
the Merger not being satisfied.
No Solicitation. The Merger Agreement provides that the Company will not,
and will not permit or cause any of its subsidiaries or any of the officers and
directors of it or its subsidiaries to, and will direct it and its subsidiaries'
employees, agents and representatives (including any investment banker, attorney
or accountant retained by it or any of its subsidiaries) not to, directly or
indirectly, initiate, solicit, encourage, participate in or otherwise facilitate
any inquiries or the making of any proposal or offer with respect to a merger,
reorganization, share exchange, tender offer, consolidation or similar
transaction involving, or any purchase of 15% or more of the assets or any
equity securities of, the Company or any of its subsidiaries (any such proposal
or offer being hereinafter referred to as an "Acquisition Proposal"). The Merger
Agreement further provides that the Company will not, and will not permit or
cause any of its subsidiaries or any of the officers and directors of it or its
subsidiaries to, and will direct it and its subsidiaries' employees, agents and
9
<PAGE> 11
representatives (including any investment banker, attorney or accountant
retained by it or any of its subsidiaries) not to, directly or indirectly,
engage in any negotiations concerning, or provide any confidential information
or data to, or have any discussions with, any person relating to an Acquisition
Proposal, whether made before or after the date of the Merger Agreement, or
otherwise facilitate any effort or attempt to make or implement an Acquisition
Proposal. However, nothing contained in the Merger Agreement prevents the
Company or the Company Board from (i) complying with Rules 14e-2 and 14d-9
promulgated under the Exchange Act with regard to an Acquisition Proposal or
(ii) at any time prior to the earlier to occur of (x) payment for shares of
Company Common Stock pursuant to the Offer or (y) the approval of the Merger by
the requisite vote of the shareholders of the Company, (A) providing information
in response to a request by a person who has made an unsolicited bona fide
written Acquisition Proposal (so long as such proposal did not result from a
breach of the provisions of this paragraph) if the Company Board receives from
the person requesting such information an executed confidentiality agreement
with customary terms; or (B) engaging in any negotiations or discussions with
any person who has made an unsolicited bona fide written Acquisition Proposal,
if and only to the extent that (x) in each such case referred to in clause (A)
or (B) above, the Company Board determines in good faith after consultation with
outside legal counsel that such action is necessary in order for its directors
to comply with their fiduciary duties under applicable law and (y) in the case
referred to in clause (B) above, the Company Board determines in good faith
(after consultation with its financial advisor) that such Acquisition Proposal
is reasonably likely to be consummated, taking into account all legal, financial
and regulatory aspects of the proposal and the person making the proposal and
would, if consummated, result in a more favorable transaction than the
transaction contemplated by the Merger Agreement (any such more favorable
Acquisition Proposal being referred to as a "Superior Proposal"). Nevertheless,
the Company may not, except as permitted by the following paragraph, withdraw or
modify, or propose to withdraw or modify, its position with respect to the Offer
or the Merger or approve or recommend, or propose to approve or recommend, any
Acquisition Proposal or enter into any agreement with respect to any Acquisition
Proposal. The Company will immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties previously
conducted with respect to any of the above matters. The Company has agreed that
it will take the necessary steps to promptly inform the individuals or entities
referred to in the first sentence of this paragraph of the above obligations.
In addition, the Merger Agreement provides that neither the Company Board
nor any committee thereof may (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to Parent or Purchaser, the approval or
recommendation of the Offer, the Merger Agreement or the Merger, (ii) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal by a
third party or (iii) enter into a definitive agreement regarding any third-party
Acquisition Proposal unless, in the case of each of the preceding clauses, the
Company Board has (A) determined in good faith, based on the advise of outside
counsel, that such action is necessary in order for its directors to comply with
their fiduciary duties under applicable law and (B) determined in good faith,
after receiving advice from its financial advisor that the Acquisition Proposal
is superior, from a financial point of view, to the Offer and the Merger, that
such Acquisition Proposal is a Superior Proposal.
The Company will notify Parent promptly (but in any event within 24 hours)
if any such inquiries, proposals or offers are received by, any such information
requested from, or any such discussions or negotiations are sought to be
initiated or continued with, any of its representatives indicating, in
connection with such notice, the name of such person and the material terms and
conditions of any proposals or offers and thereafter will keep Parent informed,
on a current basis, on any material changes in the status and content of any
such proposals or offers and the status of any such negotiations or discussions.
The Company also will promptly request each person that has previously executed
a confidentiality agreement in connection with its consideration of an
Acquisition Proposal to return all confidential information that has been
furnished to such person by or on behalf of it or any of its subsidiaries.
Indemnification. The Merger Agreement provides that the Articles of
Incorporation of the Surviving Corporation will contain the provisions with
respect to indemnification set forth in the Articles of Incorporation and
By-Laws of the Company, which provisions may not be amended, repealed or
otherwise modified for a period of six years from the Effective Time in any
manner that would adversely affect the rights thereunder
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<PAGE> 12
of individuals who between the date of the Merger Agreement and the Effective
Time were directors or officers of the Company, unless such modification is
required by law.
After the time that Parent's designees have been elected to, and constitute
a majority of, the Company Board (the "Appointment Date"), the Surviving
Corporation will, and Parent will cause the Surviving Corporation, to the
fullest extent permitted under applicable law or under the Surviving
Corporation's Articles of Incorporation or By-Laws, to indemnify and hold
harmless each director and officer of the Company or any of its subsidiaries
(collectively, the "Indemnified Parties") against any costs or expenses
(including attorneys' fees), judgments, fines, losses, claims, damages,
liabilities and amounts paid in settlement in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal, administrative or
investigative, arising out of or pertaining to any action or omission by such
director or officer by virtue of his holding the office of director or officer
occurring at or prior to the Effective Time (including, without limitation, the
transactions contemplated by the Merger Agreement) for a period of six years
after the Effective Time. In the event of any such claim, action, suit,
proceeding or investigation (whether arising before or after the Effective
Time), (i) any counsel retained by the Indemnified Parties for any period after
the Effective Time will be reasonably satisfactory to the Surviving Corporation
and Parent and (ii) neither the Surviving Corporation nor Parent will be liable
for any settlement effected without its written consent (which consent may not
be unreasonably withheld).
Furthermore, for a period of six years after the Effective Time, Parent
will cause to be maintained in effect the current policies of directors' and
officers' liability insurance maintained by the Company (although Parent may
substitute policies with reputable and financially sound carriers of at least
the same coverage and amounts containing terms and conditions which are no less
advantageous ) with respect to claims arising from or related to facts or events
that occurred at or before the Effective Time. However, Parent will not be
obligated to make annual premium payments for such insurance to the extent such
premiums exceed 150% of the annual premiums paid as of the date of the Merger
Agreement by the Company for such insurance (such 150% amount, the "Maximum
Premium"). If such insurance coverage cannot be obtained at all, or can only be
obtained at an annual premium in excess of the Maximum Premium, Parent will
maintain the most advantageous policies of directors' and officers' insurance
obtainable for an annual premium equal to the Maximum Premium. If such insurance
coverage cannot be obtained at all, Parent will purchase all available extended
reporting periods with respect to pre-existing insurance in an amount that,
together with all other insurance purchased pursuant to this paragraph, does not
exceed the Maximum Premium. Parent agrees, and will cause the Company not to
take any action that would have the effect of limiting the aggregate amount of
insurance coverage required to be maintained for the individuals referred to in
this paragraph.
Listing of ADSs. The Merger Agreement provides that Parent will use its
best efforts to cause the shares of Parent ADSs issuable upon exercise of the
Options assumed by Parent to be approved for listing on the New York Stock
Exchange.
Expenses. The Merger Agreement provides that the Surviving Corporation
will pay all charges and expenses in connection with the conversion of
securities in the Merger. Except as otherwise provided under "Termination; Fees
and Expenses" below, all other costs and expenses incurred in connection with
the Merger Agreement, the Stock Option Agreement and the Transactions will be
paid by the party incurring such expense, except that expenses incurred in
connection with the filing fee for the proxy statement and printing and mailing
the proxy statement will be shared equally by Parent and the Company.
Conditions to the Merger. Under the Merger Agreement, the respective
obligations of each party to effect the Merger are subject to the satisfaction
at or prior to the Effective Time of each of the following conditions:
(a) The Merger Agreement, the Merger and the transactions contemplated
by the Merger Agreement have been approved and adopted by the requisite
vote of the shareholders of the Company to the extent required by the CGCL
and the Articles of Incorporation of the Company;
(b) No temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
governmental entity or other similar binding legal restraint or
11
<PAGE> 13
prohibition preventing the consummation of the Merger is in effect, and
there has not been any action taken, or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the Merger, which
makes the consummation of the Merger illegal; and
(c) Parent, Purchaser or their affiliates have purchased, or caused to
be purchased, the Shares pursuant to the Offer.
Termination; Fees and Expenses. The Merger Agreement and the Transactions
may be terminated or abandoned at any time prior to the Effective Time,
notwithstanding approval thereof by the shareholders of the Company:
(a) by mutual written consent duly authorized by the respective boards
of directors of Parent and the Company, including the Independent Director;
or
(b) by either Parent or the Company if the Merger has not been
consummated by September 1, 2000 (provided that this right to terminate the
Merger Agreement will not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of or
resulted in the failure of the Merger to occur on or before such date); or
(c) by either Parent or the Company if (i) a court of competent
jurisdiction or governmental entity has issued a non-appealable final
order, decree or ruling or taken any other action, in each case having the
effect of permanently restraining, enjoining or otherwise prohibiting the
acceptance for payment of, or payment for, Shares pursuant to the Offer or
the Merger or (ii) any action is taken or any statute, rule, regulation or
order is enacted, entered, enforced or deemed applicable to the Offer or
the Merger which makes the consummation of the Offer or the Merger illegal;
or
(d) by either Parent or the Company, if the Company Common Stock has
not been purchased pursuant to the Offer prior to June 30, 1999 (provided
that this right to terminate the Merger Agreement will not be available to
any party whose failure to fulfill any obligation under the Merger
Agreement has been the cause of or resulted in the failure to consummate
the Offer before that date). If a request for additional information is
received from a governmental entity pursuant to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or
applicable non-United States laws regulating competition, antitrust,
investment or exchange controls, such date will be extended to the 90th day
following acknowledgment by such governmental entity that Parent and the
Company have complied with such request, but in no event will such date be
extended to a date later than September 30, 1999; or
(e) as long as Company Common Stock has not been purchased pursuant to
the Offer by Parent, if any actions described in "Certain Conditions of the
Offer" below has occurred; or
(f) as long as Company Common Stock has not been purchased pursuant to
the Offer, by Parent, upon a breach of any representation, warranty,
covenant or agreement on the part of the Company set forth in the Merger
Agreement or if any representation or warranty of the Company, has become
untrue, in either case, such that the breach would give rise to the failure
of a condition set forth in "Certain Conditions of the Offer" below (a
"Terminating Breach"). Nevertheless, if such Terminating Breach is curable
prior to the expiration of 30 days from its occurrence (but in no event
later than April 30, 1999) by the Company through the exercise of its
reasonable best efforts and for so long as the Company continues to
exercise such reasonable best efforts, Parent may not terminate the Merger
Agreement until the expiration of such period without such Terminating
Breach having been cured; or
(g) by Parent, if, due to an occurrence, not involving a breach by
Parent or Purchaser of its obligations hereunder, which makes it impossible
to satisfy any of the conditions set forth in "Certain Conditions of the
Offer" below, Parent, Purchaser or any of their affiliates has failed to
commence the Offer on or prior to the fifth business day following the date
of the initial public announcement of the Offer; or
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<PAGE> 14
(h) by Parent or the Company, if the Offer has expired or has been
terminated in accordance with the terms set forth in the Merger Agreement
(including the conditions set forth in "Certain Conditions of the Offer"
below without any Company Common Stock having been purchased pursuant to
the Offer; or
(i) by the Company, if Parent or Purchaser has failed to perform or
comply in any material respect with any material obligation, agreement or
covenant to be performed or complied with by it under the Merger Agreement.
However, if such failure of performance or compliance is curable prior to
the expiration of 30 days from its occurrence (but in no event later than
June 30, 1999) by Parent or Purchaser through the exercise of their
respective reasonable best efforts, the Company may not terminate the
Merger Agreement until the expiration of such period without such failure
of performance or compliance having been cured; or
(j) by the Company to allow the Company to enter into a definitive
agreement with respect to a Superior Proposal, provided that the Company
has complied with all the provisions described under "No Solicitation"
above, including the notice provisions.
In the event of the termination of the Merger Agreement and the abandonment
of the Transactions, the Merger Agreement will become void and there will be no
liability on the part of any party (or any of its affiliates, directors,
officers, employees, agents, legal and financial advisors or other
representatives) except (i) under the provisions of the Merger Agreement
relating to fees and expenses and survival of the representations and warranties
and (ii) nothing in the Merger Agreement will relieve any party from liability
or damages resulting from any breach of the Merger Agreement.
Except as described under "Expenses" above and as set forth below, all fees
and expenses incurred in connection with the Merger Agreement and the
Transactions will be paid by the party incurring such expenses, whether or not
the Merger is consummated.
The Company has agreed to pay Parent a fee of $54,000,000 (the "Fee"), plus
actual, documented and reasonable out-of-pocket expenses of Parent, not in
excess of $3,000,000, relating to the transactions contemplated by the Merger
Agreement (including, but not limited to, fees and expenses of Parent's
counsel), upon the earliest to occur of the following events:
(i) the termination of the Merger Agreement by Parent pursuant to
clause (e) above; or
(ii) the termination of the Merger Agreement by Parent or the Company
pursuant to clause (d) or (h) above if, at the time of termination, an
Acquisition Proposal has been publicly announced and not withdrawn and,
within six months from the date of termination, the Company enters into an
agreement or letter of intent concerning a transaction that would
constitute an Acquisition Proposal and such transaction is subsequently
consummated; or
(iii) the termination of the Merger Agreement by the Company pursuant
to clause (j) above; or
(iv) the termination of the Merger Agreement by Parent pursuant to
clause (f) above upon a Terminating Breach and (A) such Terminating Breach
was other than a breach of a representation or warranty not within the
control of the Company, (B) at the time of termination an Acquisition
Proposal has been publicly announced and not withdrawn, (C) within six
months from the date of termination, the Company enters into an agreement
or letter of intent concerning a transaction that would constitute an
Acquisition Proposal and (D) such transaction is subsequently consummated.
Certain Conditions of the Offer. Notwithstanding any other provision of
the Offer and in addition to (and not in limitation of) Purchaser's rights to
extend and amend the Offer at any time in its sole discretion (but subject in
all cases to the provisions of the Merger Agreement), Purchaser will not be
required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating
to Purchaser's obligation to pay for or return tendered Shares promptly after
termination or withdrawal of the Offer), pay for, and may delay the acceptance
for payment of or, subject to the restriction referred to above, the payment
for, any tendered Shares, and may terminate the Offer or amend the Offer as to
any Shares not then paid for, if (i) any applicable waiting period under the HSR
Act, the EC Merger Regulations (as defined below) or any applicable non-United
States laws regulating competition,
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<PAGE> 15
antitrust, investment or exchange controls has not expired or terminated prior
to the expiration of the Offer (the "HSR/Foreign Antitrust Condition"), (ii) the
Minimum Condition has not been satisfied or waived (pursuant to the Merger
Agreement) or (iii) at any time on or after the date of the Merger Agreement and
before the time of acceptance of Shares for payment pursuant to the Offer, any
of the following events occurs (each, a "Certain Condition") or is determined by
Purchaser to have occurred (other than as the result of any action or inaction
of Parent or its subsidiaries that would constitute a material breach of the
Merger Agreement (other than the representations and warranties of Parent and
Purchaser)):
(a) there has been instituted or is pending any suit, action or
proceeding by any governmental entity seeking, or by any other person which
would reasonably be expected to, (i) prohibit or impose any material
limitations on Parent's or Purchaser's ownership or operation (or that of
any of their respective subsidiaries or affiliates) of all or a material
portion of their or the Company's businesses or assets, or to compel Parent
or Purchaser or their respective subsidiaries and affiliates to dispose of
or hold separate any material portion of the business or assets of the
Company or Parent and their respective subsidiaries, (ii) prohibit the
acquisition by Parent or Purchaser of any Shares under the Offer or
pursuant to the Stock Option Agreement or the Shareholder Agreements, to
restrain or prohibit the making or consummation of the Offer or the Merger
or the performance of any of the other transactions contemplated by the
Merger Agreement, the Stock Option Agreement or the Shareholder Agreements,
or to require the Company, Parent or Purchaser to pay any damages that are
material in relation to the Company taken as a whole, (iii) impose material
limitations on the ability of Purchaser, or to render Purchaser unable, to
accept for payment, pay for or purchase some or all of the Shares pursuant
to the Offer and the Merger, (iv) impose material limitations on the
ability of Purchaser or Parent effectively to exercise full rights of
ownership of the Shares, including, without limitation, the right to vote
the Shares purchased by it on all matters properly presented to the
Company's shareholders or (v) have a Company Material Adverse Effect or
materially adversely affect the ability of the Company or Parent to
consummate the Offer or the Merger or to perform any of their obligations
under the Merger Agreement or the Stock Option Agreement; or
(b) there is any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated or deemed applicable to
the Offer or the Merger, or any other action is taken by any governmental
entity, other than the application to the Offer or the Merger of applicable
waiting periods under the HSR Act, EC Merger Regulations and applicable
non-United States laws regulating competition, antitrust, investment or
exchange controls that would reasonably be expected to result, directly or
indirectly, in any of the consequences referred to in clauses (i) through
(v) of paragraph (a) above; or
(c) there has occurred (i) any general suspension of trading in, or
limitation on prices for, securities on the New York Stock Exchange or in
the Nasdaq National Market (excluding suspensions or limitations resulting
solely from physical damage or interference with such exchanges not related
to market conditions), (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States (whether or
not mandatory), (iii) a commencement of a war, armed hostilities or other
international or national calamity directly or indirectly involving the
United States other than the current hostilities in Iraq, Kosovo, Bosnia or
Serbia, (iv) any limitation (whether or not mandatory) by any United States
governmental authority on the extension of credit by banks or other
financial institutions, (v) a change in general financial bank or capital
market conditions which materially and adversely affects the ability of
financial institutions in the United States to extend credit or syndicate
loans or (vi) in the case of any of the foregoing existing at the time of
the commencement of the Offer, a material acceleration or worsening
thereof; or
(d) there has occurred and is continuing any change, condition, event
or development that would reasonably be expected to result in a Company
Material Adverse Effect; or
(e) the Company Board or any committee thereof has (i) withdrawn,
modified or changed in a manner adverse to Parent or Purchaser (including
by amendment of the Schedule 14D-9) its approval or recommendation of the
Offer, the Merger Agreement or the Merger or has resolved to do so or
14
<PAGE> 16
(ii) recommended or taken a "neutral" position with respect to the approval
or acceptance of an Acquisition Proposal from, or similar business
combination with, a person or entity other than Parent, Purchaser or their
affiliates or has resolved to do so; or
(f) any of the representations and warranties of the Company set forth
in the Merger Agreement (disregarding for this purpose any qualifications
with respect to materiality or Company Material Adverse Effect) are not
true and correct as of the date of the Merger Agreement and as of the
scheduled expiration of the Offer and where the failure to be true and
correct would not, together with all other such failures, have a Company
Material Adverse Effect; or
(g) the Company has and continues to have failed to perform in any
material respect any obligation or to comply in any material respect with
any agreement or covenant of the Company to be performed or complied with
by it under the Merger Agreement; or
(h) the Merger Agreement has been terminated in accordance with its
terms;
which in the reasonable judgment of Parent or Purchaser, in any such case, and
regardless of the circumstances (including any action or inaction by Parent or
Purchaser) giving rise to such condition, makes it inadvisable to proceed with
the Offer and/or with such acceptance for payment of or payment for Shares. "EC
Merger Regulations" means Council Regulation (EEC) No. 4064/89 of December 21,
1989 on the Control of Concentrations Between Undertakings, OJ (1989) L 395/1
(as amended) and the regulations and decisions of the Commission of the European
Community or other organs of the European Union or European Community
implementing such regulations.
The above conditions are for the sole benefit of Parent and Purchaser and
may (subject to the terms of the Merger Agreement) be waived by Parent or
Purchaser, in whole or in part, at any time and from time to time in the sole
discretion of Parent or Purchaser. The failure by Parent or Purchaser at any
time to exercise any of the above rights will not be deemed a waiver of any such
right and each such right will be deemed an ongoing right which may be asserted
at any time and from time to time.
SHAREHOLDER AGREEMENTS
For purposes of this section:
"Covered Shares" means the Owned Shares and the Shares Under Option.
"Owned Shares" means all the shares of Company Common Stock beneficially
owned by the Shareholder on the date of the Shareholder Agreements (other than
Shares Under Option), including any securities of the Company entitled, or which
may be entitled, to vote generally in the election of directors that are
beneficially owned by the Shareholder.
"Shares Under Option" means all the shares of Company Common Stock that are
subject to options, securities convertible into, exchangeable or exercisable for
any such shares, or any voting debt of the Company beneficially owned by the
Shareholder.
"Shareholder" means each of Steve Y. Kim, Yuri Pikover, and John Walecka, a
Director of the Company.
Tender of Shares. Pursuant to the Shareholder Agreements entered into by
Messrs. Kim, Pikover and Walecka, and in order to induce Parent and Purchaser to
enter into the Merger Agreement, the Shareholders, who beneficially own in the
aggregate approximately 11.6% of the outstanding shares of Company Common Stock,
have agreed to tender and sell all their Owned Shares pursuant to the Offer and
not to withdraw any Owned Shares that have been tendered unless the Offer is
terminated or has expired.
Voting of Owned Shares; Proxy. Each Shareholder Agreement provides that,
during the period commencing on the date of such Shareholder Agreement and
continuing until the earlier of (x) the consummation of the Offer and (y) the
termination of such Shareholder Agreement (such period being referred to as the
"Voting Period"), at any meeting (whether annual or special, and whether or not
an adjourned or postponed) of the Company's shareholders, however called, or in
connection with any written
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consent of the Company's shareholders, subject to the absence of a preliminary
or permanent injunction or other requirement under applicable law by any United
States federal, state or foreign court barring such action, each Shareholder
will vote (or cause to be voted) all Owned Shares: (i) in favor of the Merger,
the execution and delivery by the Company of the Merger Agreement and the
approval and adoption of the Merger and the terms thereof and each of the other
actions contemplated by the Merger Agreement and such Shareholder Agreement; and
(ii) against any action or agreement that would impede, interfere with or
prevent the Merger, including any Acquisition Proposal.
Under the Shareholder Agreements, each Shareholder has granted to Parent
and certain officers of Parent, during the Voting Period, an irrevocable proxy
to vote such Shareholder's Owned Shares or grant a consent or approval in
respect of such Shareholder's Owned Shares (i) in favor of the Merger, the
execution and delivery by the Company of the Merger Agreement and the approval
and adoption of the Merger and the terms thereof and each of the other actions
contemplated by the Merger Agreement and (ii) against any action or agreement
that would impede, interfere with or prevent the Offer or the Merger, including
any Acquisition Proposal. The Shareholders may not enter into any agreement,
arrangement or understanding with any person the effect of which would be
inconsistent or violative of the above provisions and agreements.
Irrevocable Option. In addition, each Shareholder, except for John
Walecka, has granted Purchaser an irrevocable option (the "Irrevocable Option")
to purchase any or all of such Shareholder's Owned Shares and Shares Under
Option (to the extent exercisable on the date that Parent notifies such
Shareholder that it intends to exercise the Irrevocable Option) at a price per
share equal to the Offer Price. The Irrevocable Option will become exercisable
immediately prior to, but contingent upon, the consummation of a transaction
contemplated by the Acquisition Proposal referred to in clause (ii) below, if:
(i) the Merger Agreement is terminated and Parent would be entitled, or
following such time may be entitled, to receive the Fee in connection with such
termination and (ii) the Company enters into a letter of intent or definitive
agreement with respect to a transaction contemplated by an Acquisition Proposal
within six months after such termination. The Irrevocable Option will cease to
be exercisable immediately following the consummation of such a transaction.
The Irrevocable Option will become and remain exercisable so that Purchaser
will have the right and ability to exercise the Irrevocable Option and deliver
the Shares issuable upon such exercise and to receive the consideration payable
for such Shares in connection with the consummation of the transaction
contemplated by the Acquisition Proposal. However, if at the scheduled closing
date for the transaction contemplated by the Acquisition Proposal, Parent or
Purchaser is legally prohibited from exercising the Irrevocable Option as to all
or any portion of the Owned Shares or Shares Under Option (including by reason
of a failure on the party of Parent and Purchaser to comply fully with the
requirements of the HSR Act or the EC Merger Regulations), such legal
prohibition will not delay or otherwise prevent consummation of such transaction
at its scheduled closing date. Moreover, Purchaser will not be entitled to
purchase any Covered Shares pursuant to the Irrevocable Option if Purchaser has
failed to purchase the Shares pursuant to the Offer in breach of its obligations
under the Merger Agreement.
Nevertheless, whenever the Irrevocable Option is exercisable, Purchaser may
elect, instead of exercising the Irrevocable Option, to require a Shareholder
upon consummation of the transaction contemplated by the Acquisition Proposal to
pay to Purchaser a portion of the consideration per Covered Share (the
"Consideration") received by such Shareholder at the consummation of such
transaction equal to the amount of the excess, if any, of the Consideration over
the Offer Price, multiplied by the number of Covered Shares acquired in such
transaction. Such payment will be made as and when paid in connection with such
transaction.
Restrictions on Transfer, Other Proxies; No Solicitation. Each Shareholder
Agreement, other than that of John Walecka, provides that a Shareholder will
not, until the termination of such Shareholder Agreement, directly or
indirectly: (i) except as provided in the above paragraphs, transfer to any
person any or all Covered Shares; or (ii) grant any proxies or powers of
attorney, deposit any Covered Shares into a voting trust or enter into a voting
agreement, understanding or arrangement with respect to such Covered Shares.
Nothing contained in such Shareholder Agreement will prevent such Shareholder
from transferring any or all of the Covered Shares to an affiliate of such
Shareholder which agrees to be bound by such Shareholder Agreement,
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provided that such Shareholder will continue to remain liable for all its
obligations under such Shareholder Agreement.
Each Shareholder, except for John Walecka, has agreed, in its capacity as a
Shareholder of the Company, that it and its affiliates will not, and it will
cause its representatives not to, directly or indirectly, (i) initiate, solicit,
encourage (including by way of furnishing non-public information), participate
in or otherwise facilitate any inquiries or the making of any proposal or offer
that constitutes or is reasonably likely to lead to an Acquisition Proposal or
(ii) engage in any negotiations concerning, or provide any non-public
information or data to, or have any discussions with, any third party relating
to an Acquisition Proposal. Such Shareholder will notify Parent promptly (but in
any event within 24 hours) if any such inquiries, proposals or offers are
received by, any such information requested from, or any such discussions or
negotiations are sought to be initiated or continued with such Shareholder or
its representatives (if any) in each case in connection with any Acquisition
Proposal indicating, in connection with such notice, the name of such person and
the material terms and conditions of any proposals or offers and thereafter will
keep Parent informed, on a current basis, of the status and terms of any such
proposals or offers and the status of any such negotiations or discussions. Such
Shareholder has agreed that it will immediately cease and cause to be terminated
any existing activities or discussion with any parties previously conducted with
respect to an Acquisition Proposal and will request from each person that has
previously executed a confidentiality agreement in connection with its
consideration of an Acquisition Proposal to return all confidential information
that has been furnished to such person by or on behalf of it or any of its
subsidiaries. The foregoing will be subject to such Shareholder's fiduciary
duties as a director and/or officer of the Company. Any action taken by the
Company or any member of the Company Board in his capacity as such in accordance
with the terms of the Merger Agreement will be deemed not to violate this
paragraph.
Waiver of Dissenters' Rights. Each Shareholder has waived any rights of
appraisal or rights to dissent from the Merger that it may have.
Non-Competition. In consideration of the transactions contemplated under
each Shareholder Agreement and the Merger Agreement, each of Messrs. Kim and
Pikover has agreed that, commencing on the Effective Time and for a period
ending four years after the Effective Time for Mr. Kim and two years after the
Effective Time for Mr. Pikover, he will not, directly or indirectly:
(i) own, manage, control or participate in the ownership, management
or control of, or be employed or engaged by or otherwise affiliated or
associated as a consultant, independent contractor or otherwise with any
other corporation, partnership, proprietorship, firm, association or other
business entity engaged in the business of designing, manufacturing and/or
selling enterprise data LAN switching, ATM switching and/or Gigabit
Ethernet switching products to customers in the enterprise and/or carrier
markets. However, the following will not be deemed a violation of this
covenant: (A) the ownership of not more than three percent of any class of
publicly traded securities of any entity; and (B) passive investments in
venture capital funds or similar entities established by persons who are
not affiliated with or related to such Shareholder and over which such
Shareholder has no power to direct the management or investment decisions;
(ii) offer to employ or otherwise engage any person who is then (or
was at any time within one year prior to the time of such employment,
engagement or offer thereof) an employee, sales representative or agent of
the Company; or
(iii) solicit any business from any person or entity that is at the
time of such solicitation a customer of the Company in a manner likely to
result in a discontinuance or reduction of the extent of such person's or
entity's business relationship with the Company, or induce or influence any
customer, supplier or other person that has a business relationship with
the Company to discontinue or reduce the extent of such relationship with
the Company.
Cancellation of Change of Control Agreements; Agreement to Rollover Shares
Under Option; Option Vesting. In consideration of the transactions contemplated
under each Shareholder Agreement and under the Merger Agreement, each of Messrs.
Kim and Pikover has agreed to waive, effective at, and contingent
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upon the occurrence of, the Effective Time, any and all claims, rights and
entitlements that he has, has had or may ever have with respect to or arising
under the Change of Control Agreement between such Shareholder and the Company
(the "CIC Agreement") and release, effective at, and contingent upon the
occurrence of, the Effective Time, the Company and its officers, directors,
shareholders, employees and representatives and any of their successors and
assigns from any and all such claims, rights and entitlements relating to or
arising under the CIC Agreement. Each of Messrs. Kim and Pikover has
acknowledged that the CIC Agreement will become null and void at the Effective
Time.
The Shareholder Agreements further provide that Messrs. Kim and Pikover may
not exercise, sell or otherwise transfer (or attempt to exercise, sell or
otherwise transfer) any of their outstanding options to purchase shares of the
Company (whether vested or unvested) (the "Shareholder Options"), and will take
any and all actions necessary to ensure that all of their Shareholder Options
are converted in accordance with clause (ii) of the third paragraph under "The
Merger Agreement -- Stock Options; Stock Purchase Plan" above.
The Company and Mr. Pikover have also agreed that, as of the Effective
Time, Mr. Pikover's Shareholder Options will be amended to provide that: (i) the
Shareholder Options will not terminate following the termination of Mr.
Pikover's employment for any reason other than for "cause"; (ii) Mr. Pikover
will continue to vest in the Shareholder Options in accordance with the
applicable option plan or agreements for the Shareholder Options on the same
basis as if he continued to be employed, provided that he continues to fulfill
all obligations with respect to the restrictive non-competition covenant
described above; and (iii) if Mr. Pikover fulfills such restrictive covenant
obligations, he will be entitled to exercise his Shareholder Options at any time
within the 30 day period following the satisfaction of the restrictive covenant.
Unless terminated earlier as contemplated above, under the applicable option
plan or under the agreements for the Shareholder Options, Mr. Pikover's
Shareholder Options will automatically expire on their originally-specified
expiration dates. For purposes of Mr. Pikover's Shareholder Agreement, "cause"
means his fraud, embezzlement or similar activities; or his conviction of, or
plea of guilty or no contest to, any felony or any crime involving fraud,
embezzlement or other defalcation or any crime involving moral turpitude; or his
commission of any act of dishonesty or series of repeated acts of dishonesty
which are not in the best interests of the Company, or which are injurious to
the business reputation of the Company; or his willful and repeated failure to
perform his material duties of employment, which failure has not been cured
within 30 business days after the Company gives him written notice.
Termination. Each Shareholder Agreement, other than that of John Walecka,
and all rights and obligations of the parties thereunder, will terminate upon
the earlier of (a) the date upon which Parent has purchased and paid for all of
the Owned Shares of such Shareholder in accordance with the terms of the Offer,
(b) if the Merger Agreement is terminated in circumstances that do not give rise
to the payment of the Fee, the date on which the Merger Agreement is terminated,
(c) if the Merger Agreement is terminated in circumstances that give rise to the
payment of the Fee and the Company has not entered into a letter of intent or
definitive agreement with respect to a transaction contemplated by an
Acquisition Proposal within six months following such date of termination, six
months following the date on which the Merger Agreement is terminated, and (d)
if the Merger Agreement is terminated in circumstances that give rise to the
payment of the Fee and the Company has entered into a letter of intent or
definitive agreement with respect to a transaction contemplated by an
Acquisition Proposal within six months following such date of termination, the
date on which such transaction is consummated. Mr. Walecka's Shareholder
Agreement will terminate upon the earlier of (a) the date upon which Parent has
purchased and paid for all of Mr. Walecka's Owned Shares in accordance with the
terms of the Offer and (b) the date on which the Merger Agreement is terminated.
The Shareholder Agreements are filed as Exhibits 7-9.
EMPLOYMENT AGREEMENT
Term and Position. Under an employment agreement, dated March 1, 1999 (the
"Employment Agreement"), between Purchaser and Steve Y. Kim, Purchaser agreed to
employ Mr. Kim as President and Chief Executive Officer of Purchaser. The term
of the Employment Agreement is for two years commencing at the Effective Time.
After the second anniversary, the term will be extended automatically for
successive
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one-year periods unless earlier terminated by either party. All obligations
under the Employment Agreement are conditioned upon consummation of the Merger,
and the Employment Agreement will terminate if such condition is not satisfied.
Compensation. Under the Employment Agreement, Mr. Kim will receive a base
salary of $400,000 per year, subject to increase, and will be eligible for an
annual bonus equal to 50% of his salary based on his achievement of certain
performance standards. Mr. Kim will be eligible to participate in any benefit
plans offered to employees or executives of Purchaser.
Termination. Mr. Kim's employment may be terminated (i) due to his death
or permanent disability, (ii) by Purchaser for "cause" at any time, (iii) by Mr.
Kim for "good reason" or (iv) by Purchaser at any time "without cause." In the
event of Mr. Kim's death or permanent disability or his termination for "cause,"
he will not be entitled to receive any further compensation or benefits, except
for death or disability benefits. If Mr. Kim's employment is terminated by
Purchaser "without cause" or by Mr. Kim for "good cause," then for two years
from the date of termination, he will be entitled to the continuation of his
then-effective annual rate of salary and existing health and welfare benefits.
Covenants; Options. The Employment Agreement contains a non-competition
and non-solicitation provision which extends for a period of four years from the
Effective Time. The Employment Agreement also provides that, subject to Mr.
Kim's fulfillment of such covenant, his options to purchase shares of the
Company will not terminate following the termination of his employment for any
reason other than for "cause" and he will continue to vest in, and be entitled
to exercise, such options. In addition, Mr. Kim has agreed that, during the term
of his employment and for two years thereafter, he will maintain the
confidentiality of Purchaser's proprietary information.
STOCK OPTION AGREEMENT
Under the Stock Option Agreement, the Company granted to Purchaser an
irrevocable Top-Up Stock Option to purchase that number of Top-Up Option Shares
equal to the number of shares of Company Common Stock that, when added to the
number of shares of Company Common Stock owned by Purchaser, Parent and their
subsidiaries immediately following consummation of the Offer, will constitute
90% of the shares of Company Common Stock then outstanding (assuming the
issuance of the Top-Up Option Shares) at a purchase price per Top-Up Option
Share equal to the Offer Price. However, the Top-Up Stock Option will not be
exercisable if the number of shares of Company Common Stock subject thereto
exceeds the number of authorized shares of Company Common Stock available for
issuance.
Subject to the terms and conditions of the Stock Option Agreement, the
Top-Up Stock Option may be exercised by Purchaser, in whole, but not in part, at
any one time after the occurrence of a Top-Up Exercise Event (as defined below)
and prior to the Top-Up Termination Date (as defined below). A "Top-Up Exercise
Event" will occur for purposes of the Stock Option Agreement at such time as
such number of shares of Company Common Stock that have been validly tendered
and not withdrawn when added to such number of Shares issuable pursuant to the
Stock Option Agreement would constitute at least 90% of the shares of Company
Common Stock then outstanding. Except as provided in the last sentence of this
paragraph, the "Top-Up Termination Date" will occur for purposes of the Stock
Option Agreement upon the earliest to occur of: (i) the Effective Time; (ii) the
date which is ten business days after the occurrence of a Top-Up Exercise Event;
(iii) the termination of the Merger Agreement; and (iv) the date on which
Purchaser waives the Minimum Condition and accepts for payment the Revised
Minimum Number of Shares. Nevertheless, even if the Top-Up Termination Date has
occurred, Purchaser will be entitled to purchase the Top-Up Option Shares if it
has exercised the Top-Up Stock Option in accordance with the terms of the Stock
Option Agreement prior to such occurrence.
The obligation of the Company to deliver Top-Up Option Shares upon the
exercise of the Top-Up Stock Option is subject to the following conditions: (a)
all waiting periods, if any, under the HSR Act, the EC Merger Regulations or
other applicable non-United States laws regulating competition, antitrust,
investment or exchange controls applicable to the issuance of the Top-Up Option
Shares have expired or have been terminated or waived; and (b) there is no
temporary restraining order, preliminary or permanent injunction or
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other order issued by any court of competent jurisdiction or governmental entity
or similar binding legal restraint preventing or prohibiting the exercise of the
Top-Up Stock Option or the delivery of the Top-Up Option Shares in respect of
any such exercise.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
(a) Recommendations with respect to the Offer.
Recommendation of the Company Board.
At a meeting held on March 1, 1999 the Company Board, by unanimous vote of
all directors (a) determined that each of the Offer, the Merger, the Stock
Option Agreement and the Merger Agreement is fair to and in the best interests
of the Shareholders of the Company, (b) approved the Offer and the Merger, (c)
approved and adopted the Merger Agreement, the Stock Option Agreement and the
Employment Agreement (as to which approval Mr. Kim abstained), the execution of
such agreements and the transactions contemplated by such agreements and (d)
recommended that such shareholders accept the Offer and tender their Shares
pursuant thereto.
THEREFORE, THE XYLAN BOARD RECOMMENDS THAT THE PUBLIC SHAREHOLDERS TENDER
ALL THEIR SHARES PURSUANT TO THE OFFER.
A copy of a letter to all shareholders of the Company communicating the
recommendations of the members of the Company Board is filed as Exhibit 6 hereto
and is incorporated by reference in its entirety.
(b) Background; Reasons for the Recommendation of the Board; Opinion of
Morgan Stanley & Co. Incorporated ("Morgan Stanley").
(1) BACKGROUND.
On March 13, 1995, ADN purchased 1,982,122 shares of Series C Preferred
Stock of Xylan, representing approximately 18% of the outstanding shares of
capital stock of Xylan at that time. In connection therewith, subsidiaries of
Alcatel entered into the Resale Agreement, the Product and Technology Agreement
and the 1995 Shareholder Agreement.
From October 1997 to July 1998, various discussions occurred regarding the
formation of a joint venture to be owned equally by Alcatel and Xylan for the
development of future multimedia technologies. The discussions also involved the
acquisition by Alcatel of additional shares of Xylan.
On July 9, 1998, Jean-Pierre Halbron, Senior Executive Vice President of
Alcatel, Olivier Baujard, President of EDD, Jacques Dunogue, President of the
Telecom Sector of Alcatel and Steve Kim met in Richardson, Texas regarding a
potential transaction. At this meeting, the parties continued their previous
discussions regarding the formation of a joint venture for the development of
future multimedia technologies.
On August 26, 1998, executive officers of the Company, Jean-Luc Abaziou,
President of Alcatel Data Networks, Inc. and certain additional officers of
Alcatel met in Ashburn, Virginia to discuss the development of a core switch
based on the Company hardware and Alcatel software. However, no agreement was
reached on the development of the switch.
In September 1998, Mr. Kim and Mr. Abaziou held further discussions
regarding potential technical partnering arrangements between the parties.
However, subsequent discussions did not produce any definitive agreements
between the parties.
On January 7, 1999, Joelle Gauthier, Vice President Corporate Data Business
Unit of EDD, requested a meeting with Olivier Houssin, Executive Vice
President -- Telecom Sector of Alcatel, Mr. Kim and Ms. Gauthier in Calabasas to
review strategic issues. A meeting for later in the month was confirmed.
On January 13, 1999, at a regularly scheduled Company Board meeting, the
Company Board discussed various strategic alternatives, including its
relationship with Alcatel and other corporate partnering and acquisition
opportunities. The Company Board directed management to explore such
opportunities.
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From January 26-28, 1999, Joelle Gauthier and Olivier Houssin met with
Steve Kim and Yuri Pikover to discuss a potential acquisition of the Company by
Alcatel. The parties continued their discussions over the next day regarding
technology and marketing synergies. Both parties agreed that they would direct
their respective management teams and financial and legal representatives to
prepare a proposal and agreed to schedule a meeting in New York on February
21-22 to discuss further details of a potential acquisition.
On February 8, 1999, the Company engaged Morgan Stanley as its financial
advisor to identify and approach candidates for an acquisition with Xylan and to
assist in structuring and negotiating such acquisition.
On February 8, 1999, senior management of the Company and John Walecka, a
member of the Board of Directors of the Company, had a conference call with
representatives at Morgan Stanley and Venture Law Group to discuss structuring a
potential transaction with Alcatel. In addition, the parties discussed other
candidates for a business combination with the Company. The Company directed
Morgan Stanley to consider the alternatives for an acquisition by Alcatel and to
approach other parties to determine whether any of such parties would be
interested in acquiring the Company.
Between February 8 and February 28, 1999, Morgan Stanley approached a
number of other potential acquirors and their representatives regarding an
acquisition of the Company.
On February 8, 1999, Mr. Pikover flew to the East Coast to meet with
another potential acquisition partner to discuss a potential transaction between
the companies.
On February 10, 1999, senior management of the Company met with
representatives of Morgan Stanley to discuss the Company's strategic value to
potential partners.
On February 12, 1999, Mr. Pikover flew to Europe to meet with other
potential acquisition candidates.
On February 15, 1999, Olivier Houssin called Steve Kim to inform him that
Alcatel had been studying various transaction structures and would prepare a
proposal by the end of the week, which was confirmed two days later during a
telephone call between Lehman Brothers and Morgan Stanley.
On February 17 and 18, 1999, Mr. Pikover met with additional acquisition
candidates in Europe.
On February 18, 1999, Lehman Brothers sent the Company a term sheet, via
Morgan Stanley, outlining a potential transaction structure.
On February 19, 1999, representatives of Morgan Stanley, Venture Law Group,
Lehman Brothers and Simpson Thacher & Bartlett ("Simpson Thacher"), legal
counsel to Morgan Stanley, held a conference call to discuss the term sheet.
Later that day, representatives of Morgan Stanley, Venture Law Group and Simpson
Thacher held a conference call with Messrs. Kim, Pikover and Walecka to discuss
the term sheet. The terms included a tender offer which would have given senior
management of the Company an equity interest of the bidder, and an earn-out
arrangement for those executives of the Company that would have had an equity
interest in the bidder. The Company determined that the earn-out arrangement
would be unfavorable and proposed an alternative structure, which Morgan Stanley
conveyed to Lehman Brothers.
On February 21-22, 1999, Jean-Pierre Halbron, Olivier Houssin,
Jean-Christophe Giroux, Vice President of Financial Operations of Alcatel, and
representatives from Lehman Brothers and Proskauer met with Messrs. Kim and
Pikover and representatives from Morgan Stanley, Venture Law Group and Simpson
Thacher at Proskauer's offices in New York. The talks involved a proposal for a
cash tender offer followed by a merger which would be subject to completion of
customary due diligence and the negotiation of definitive agreements.
On the evening of February 21, 1999, Mr. Kim together with representatives
from Morgan Stanley and Venture Law Group telephoned John Walecka and Trude
Taylor, a member of the Company Board, to discuss the proposed terms of the
acquisition.
On February 23, 1999, the Company Board held a special meeting to approve
certain option grants and to discuss the Alcatel proposal. Representatives of
Morgan Stanley updated the Company Board on its discussions with other potential
acquirors and their representatives. Morgan Stanley reported that none of
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these other candidates indicated that they were prepared to make an offer to
acquire Xylan. The Company Board then reviewed the current terms of the
transaction with Alcatel and how they differed from the original proposal made
by Alcatel. The Company Board directed management to negotiate definitive
agreements reflecting these terms and directed Morgan Stanley to continue to
pursue discussions with other parties.
From February 24 through February 26, representatives from Alcatel,
Proskauer, Lehman Brothers and Arthur Andersen, Alcatel's accountants, conducted
due diligence at the Company's headquarters in Calabasas, California. During
such period, Alcatel, the Company and their respective legal and financial
advisors conducted further negotiations of the terms of the transaction,
including the terms of the Shareholder Agreements and the Stock Option
Agreement.
On February 28, 1999, the Company Board held a special meeting by telephone
conference. Representatives of Venture Law Group discussed the material terms of
the proposed tender offer and merger, including the agreements relating to
certain of the Company's senior executives and major shareholders. They also
discussed the nature of the Company Board's fiduciary duties under California
law under these circumstances. Morgan Stanley reported on the status of its
discussions with other potential acquirors and, based on such report, the
Company Board determined that such talks had not identified any potential
alternative acquirors who expressed serious or sufficient interest in making a
competing proposal.
On March 1, 1999, the Board of Directors of Alcatel met to discuss the
proposed transaction. In addition, Alcatel's Board received a fairness opinion
from Lehman Brothers regarding the terms of the transaction. Following
discussion among the directors, Alcatel's Board unanimously approved the
transaction.
On March 1, 1999, the Company Board held a special meeting via video and
teleconference, in which all of the members were present. Morgan Stanley made a
presentation regarding certain financial analyses it had performed in connection
with its review of the Offer and Merger, and rendered its oral opinion,
subsequently confirmed in writing, that subject to certain assumptions and
qualifications, the consideration to be received by the holders of the Company's
Common Stock (other than Parent and its affiliates) in the Offer and Merger
pursuant to the Merger Agreement was fair to such holders from a financial point
of view. Morgan Stanley also reviewed its discussions with other potential
acquirors and, based on such review, the Board determined no change in status
since February 28, 1999. Representatives of Venture Law Group also gave a
presentation regarding the various legal aspects of the transaction as well as a
summary of the principal terms of the Merger Agreement. At the conclusion of
this meeting, the Company Board unanimously approved the Offer, the Merger, the
Stock Option Agreement, the Merger Agreement and the Employment Agreement (as to
which approval Mr. Kim abstained), determined that the Offer, the Merger, the
Stock Option Agreement and the Merger Agreement are fair to and in the best
interests of the shareholders of the Company, and recommended that the
shareholders accept the Offer and tender their Shares pursuant thereto.
In the evening on March 1, 1999, the Merger Agreement, the Shareholder
Agreements, the Stock Option Agreement and the Employment Agreement were
executed and a joint press release was issued by Alcatel and Xylan before the
opening of the U.S. stock markets on March 2, 1999 announcing such transaction.
On March 8, 1999, the Purchaser commenced the Offer.
(2) REASONS FOR THE RECOMMENDATION OF THE COMPANY BOARD.
In reaching its determination described above, the Company Board considered
a number of factors, including, without limitation, the following:
(i) the amount of consideration to be received by the Company's
shareholders in the Offer and the Merger pursuant to the Merger
Agreement, as well as the fact that shareholders would receive a
cash payment with no financing condition;
(ii) the Company's prospects if it were to remain independent, including
the risks inherent in remaining independent, and the prospects of
the Company going forward as an independent company;
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(iii) the possible alternatives to the Offer and the Merger (including the
possibility of continuing to operate the Company as an independent
entity), the range of possible benefits to the Company's
shareholders of such alternatives and the timing and the likelihood
of accomplishing the goal of any of such alternatives;
(iv) the current status of the data networking market and the competitive
advantage in the industry of large telecommunications companies,
including Parent, with significant distribution capacity, installed
infrastructure, compatible product and service offerings, and
substantial financial resources;
(v) the current industry trend toward sector consolidation, and
management's belief that the Company's core data networking market
will be controlled by large network equipment vendors in the near
future, which are likely either to acquire the Company's competitors
or to develop their own competitive technologies, and the assumption
that this development would be extremely detrimental to the Company,
due to its reliance on these companies as important distribution
channel partners. In particular, the Company Board considered that,
given the importance of this market to Parent, it was likely that,
if the acquisition did not occur, Parent would acquire a major
competitor of the Company in the future;
(vi) the financial condition, historical results of operations and
business and strategic objectives of the Company, as well as the
risks involved in achieving those objectives;
(vii) other historical information concerning the Company's business,
prospects, financial performance and condition, operations,
technology, management and competitive position;
(viii) the fact that the $37 per Share to be paid in the Offer and as the
consideration in the Merger represents: a premium of approximately
79% over the 30-day trailing average of $20.69 per Share and a
premium of approximately 90% over the $19.50 closing sale price for
the Shares on the Nasdaq National Market 30 trading days prior, on
January 14, 1999; a premium of approximately 86% over the $19.88
closing sale price for the Shares on the Nasdaq National Market on
February 19, 1999; and a premium of approximately 37% over the
$26.94 closing sale price for the Shares on the Nasdaq National
Market on March 1, 1999, the last trading day prior to the public
announcement of the execution of the Merger Agreement;
(ix) current financial market conditions, and historical market prices,
volatility and trading information with respect to the Common Stock
of the Company;
(x) the opinion of Morgan Stanley, dated March 1, 1999, that as of such
date, the proposed consideration to be received by holders of Shares
in the Offer and Merger pursuant to the Merger Agreement was fair to
such shareholders (other than Parent and its affiliates) from a
financial point of view. A copy of the Morgan Stanley opinion is
attached to this Schedule 14D-9 as Annex B. Such opinion should be
read in its entirety for a description of the procedures followed,
assumptions and qualifications made, matters considered and
limitations of the review undertaken by Morgan Stanley. In
connection with delivering its opinion, Morgan Stanley made a
presentation to the Company Board at its meeting on March 1, 1999,
as to various financial and other matters underlying such opinion.
(xi) the high likelihood that the proposed acquisition would be
consummated, in light of the experience, reputation and financial
capabilities of Parent, and that the proposed acquisition would be
consummated more quickly than a stock-for-stock merger and, on the
other hand, the risks to the Company if the acquisition were not
consummated or were not consummated for a significant period of
time, including a potential negative effect on (a) the Company's
sales and operating results, (b) progress of certain development
projects and (c) the Company's stock price;
(xii) the terms of the Merger Agreement, including the parties'
representations, warranties and covenants, and the conditions to
their respective obligations; and
23
<PAGE> 25
(xiii) the fact that pursuant to the Merger Agreement, the Company is not
prohibited from responding to any unsolicited Superior Proposal (as
defined in the Merger Agreement) to acquire the Company in the
manner provided in the Merger Agreement, and the Company may
terminate the Merger Agreement and accept such Superior Proposal
subject to the Company's compliance with the terms of the Merger
Agreement and the Company's obligation to pay the termination fee in
the amount and in the manner described in the Merger Agreement.
The Company Board did not assign relative weights to the above factors or
determine that any factor was of particular importance. Rather, the Company
Board viewed its position and recommendations as being based on the totality of
the information presented to and considered by it. In addition, it is possible
that different members of the Board assigned different weights to the various
factors described above.
The Company Board recognized that, while the consummation of the Offer
gives the Company's shareholders the opportunity to realize a premium over the
price at which the Shares were traded during the period prior to the public
announcement of the Offer, tendering in the Offer would eliminate the
opportunity for such shareholders to participate in the future growth and
profits of the Company. The Company Board believes that the loss of this
opportunity was fully reflected in the Offer price of $37 per Share. The Company
Board recognized that there can be no assurance as to the level of growth or
profits to be attained by Company, if it remained independent, or by the
Surviving Corporation in the future.
It is expected that, if the Shares are not purchased by Parent in
accordance with the terms of the Offer or if the Merger is not consummated, the
Company's current management, under the general direction of the Company Board,
will continue to manage the Company as an ongoing business.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY IS ATTACHED HERETO AS
ANNEX B. SHAREHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION CAREFULLY AND
IN ITS ENTIRETY. SUCH OPINION IS DIRECTED TO THE COMPANY BOARD IN CONNECTION
WITH THEIR CONSIDERATION OF THE MERGER AGREEMENT AND ADDRESSES ONLY THE FAIRNESS
(FROM A FINANCIAL POINT OF VIEW) OF THE CONSIDERATION TO BE RECEIVED BY HOLDERS
OF SHARES (OTHER THAN PARENT AND ITS AFFILIATES) IN THE OFFER AND THE MERGER
PURSUANT TO THE MERGER AGREEMENT. SUCH OPINION DOES NOT ADDRESS ANY OTHER ASPECT
OF THE OFFER OR THE MERGER AND DOES NOT CONSTITUTE AN OPINION OR A
RECOMMENDATION TO ANY SHAREHOLDER AS TO WHETHER TO TENDER SHARES IN THE OFFER OR
HOW TO VOTE WITH RESPECT TO THE MERGER. IN LIGHT OF THE FACTORS SET FORTH ABOVE,
THE BOARD RESOLVED UNANIMOUSLY TO APPROVE THE OFFER, THE MERGER, THE MERGER
AGREEMENT, THE STOCK OPTION AGREEMENT, AND THE EMPLOYMENT AGREEMENT (AS TO WHICH
MR. KIM ABSTAINED), AND DETERMINED THAT THE TERMS OF THE OFFER, THE MERGER, THE
MERGER AGREEMENT, AND THE STOCK OPTION AGREEMENT, ARE FAIR TO, AND IN THE BEST
INTERESTS OF, THE SHAREHOLDERS OF THE COMPANY AND UNANIMOUSLY RECOMMENDED THAT
SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES TO THE
PURCHASER.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
In connection with the Offer and other matters arising in connection
therewith, Morgan Stanley has been retained as the exclusive financial advisor
to the Company Board. The Company Board and the Company have a long standing
relationship with Morgan Stanley, which served as the Company's lead banker in
both of its public offerings, and also as its advisor in connection with
potential corporate partners and acquirors.
Pursuant to an engagement letter, dated February 8, 1999 (the "Engagement
Letter"), Morgan Stanley agreed to render financial advice and assistance to the
Company in connection with a possible merger, sale or other strategic
combination involving the Company (a "Transaction"), including advice and
assistance with respect to defining objectives, performing valuation analysis,
and structuring, planning and negotiating a Transaction. In addition, upon the
Company's request, Morgan Stanley would render a financial opinion letter
24
<PAGE> 26
to the Company in accordance with Morgan Stanley's customary practice with
respect to the consideration to be received in a Transaction.
Pursuant to the Engagement Letter, the Company has agreed to pay Morgan
Stanley the following fees: (i) a fee of approximately $100,000 in the event a
Transaction is not consummated, as reimbursement for time and efforts spent;
(ii) upon execution of a definitive agreement relating to a Transaction, a fee
of $2,500,000 for Morgan Stanley's assistance in valuation, structuring and
strategic advice associated with a Transaction, and for providing a financial
opinion letter; and (iii) upon consummation of a Transaction, a fee equal to
between 0.55% and 0.65% of the total consideration involved in the completed
Transaction, depending on the amount of the consideration received in a
Transaction.
Morgan Stanley is a nationally recognized investment banking firm and, as
part of its investment banking activities, is regularly engaged in the valuation
of businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
The Company selected Morgan Stanley as its financial advisor on the basis of its
experience and expertise in transactions similar to the Offer and the Merger,
its reputation in the information technology and investment communities, and its
knowledge of and familiarity with the Company resulting from the investment
banking services it has previously provided to the Company.
Neither the Company nor any person acting on its behalf has employed,
retained or agreed to compensate any other person to make solicitations or
recommendations to the Public Shareholders on behalf of the Company concerning
the Offer and the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES
(a) To the best knowledge of the Company, no transactions in Shares have
been effected during the past 60 days by the Company or any of its executive
officers, directors or affiliates, except as described below:
<TABLE>
<CAPTION>
TRANSACTION NUMBER OF
SHAREHOLDER DATE ACTION SHARES
----------- ----------- ----------- ---------
<S> <C> <C> <C>
Yuri Pikover Trusts:
Wilmington Trust, Ttee FBO Pikover Blind Trust dated
10/26/96 1/21/99 Sale 10,000
Wilmington Trust, Ttee FBO Pikover Blind Trust dated
10/26/96 1/22/99 Sale 10,000
Pikover Irrevocable Children's Trust dated 9/15/95 2/11/99 Sale 5,000
Pikover Irrevocable Children's Trust dated 9/15/95 2/22/99 Sale 5,000
Pikover 1995 Irrevocable Trust dated 9/15/95 2/11/99 Sale 5,000
Pikover 1995 Irrevocable Trust dated 9/15/95 2/22/99 Sale 5,000
Wilmington Trust, Ttee FBO Pikover Blind Trust dated
10/26/96 2/12/99 Sale 20,000
Steve Y. Kim Trusts:
Wilmington Trust, Ttee FBO Kim Blind Trust dated
10/26/96 1/21/99 Sale 15,000
Wilmington Trust, Ttee FBO Kim Blind Trust dated
10/26/96 1/22/99 Sale 15,000
Kim Irrevocable Children's Trust dated 9/15/95 2/11/99 Sale 15,000
Kim Irrevocable Children's Trust dated 9/15/95 2/22/99 Sale 10,000
Wilmington Trust, Ttee FBO Kim Blind Trust dated
10/26/96 2/12/99 Sale 30,000
</TABLE>
In addition, executive officers of the Company have acquired beneficial
ownership of Shares under the Company's Employee Stock Purchase Plan, which
acquisitions are not material.
(b) The Company has not been advised by its executive officers, directors
and affiliates who own Publicly Held Shares, either directly or beneficially,
whether they intend to tender such Shares to Purchaser pursuant to the Offer,
other than the binding obligations to tender as set forth in the Shareholder
Agreements for Messrs. Kim, Pikover and Walecka described above.
25
<PAGE> 27
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY
(a) Except as described in Items 3 and 4 above, including as set forth in
the Offer, to the knowledge of the Company no negotiation is being undertaken or
is underway by the Company in response to the Offer which relates to or would
result in (1) any extraordinary transaction, such as a merger or reorganization,
involving the Company or any affiliate or subsidiary of the Company, (2) a
purchase, sale or transfer of a material amount of assets by the Company or any
subsidiary of the Company, (3) a tender offer for or other acquisition of
securities by or of the Company, or (4) any material change in the present
capitalization or dividend policy of the Company.
(b) Except as described in Items 3 and 4 above, there are no transactions,
board resolutions, agreements in principle, or signed contracts in response to
the Offer which relate to or would result in one or more of the matters referred
to in clauses (1) through (4) of paragraph (a) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Litigation. On March 2, 1999, an action entitled Daniel W. Krasner v.
Xylan Corporation et. al. was filed in the Superior Court of the State of
California for the County of Los Angeles, in which the plaintiff named as
defendants the Company, the directors of the Company and Parent. The complaint
purports to assert claims on behalf of all public shareholders of the Company.
The complaint alleges that Parent and the members of the Company Board have
breached their fiduciary duties to the Company and that Alcatel used its
relationship with Xylan and the Company Board to force the Company Board to
accept an inadequate proposal.
The complaint seeks class certification and other equitable and monetary
relief, including enjoining the Offer and the Merger or awarding damages. Parent
and the Company believe that the allegations are without merit and intend to
vigorously contest this action. There can be no assurance, however, that the
defendants will be successful. The above summary does not purport to be complete
and is qualified in its entirety by reference to the full text of the complaint,
which is filed as Exhibit 17.
Other. In addition, reference is hereby made to the Offer to Purchase
(including without limitation Item 15 thereof) and the related Letter of
Transmittal, which are attached as Exhibits 1 and 2 hereto, respectively, and
are incorporated by reference herein in their entirety.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
<TABLE>
<S> <C>
Exhibit 1 Form of Offer to Purchase, dated March 8, 1999 (incorporated
by reference to Exhibit (a)(1) to Parent and Purchaser's
Tender Offer Statement on Schedule 14D-1 dated March 8,
1999, as amended (the "Schedule 14D-1")).
Exhibit 2 Form of Letter of Transmittal (incorporated by reference to
Exhibit (a)(2) to the Schedule 14D-1).
Exhibit 3 Agreement and Plan of Merger, dated as of March 1, 1999,
among Xylan Corporation, Zeus Acquisition Corp., and Alcatel
(incorporated by reference to Exhibit (c)(1) to the Schedule
14D-1).
Exhibit 4 Stock Option Agreement, dated as of March 1, 1999, among
Xylan Corporation, Zeus Acquisition Corp., and Alcatel
(incorporated by reference to Exhibit (c)(5) to the Schedule
14D-1).
Exhibit 5 1995 Shareholders Agreement, dated March 13, 1995, between
Alcatel Data Networks S.A., Brentwood Associates VI, L.P.,
Crosspoint Venture Partners 93, Crosspoint 1993
Entrepreneurs Fund, Norwest Equity Partners IV, U.S. Venture
Partners IV, L.P., Second Ventures II, L.P., USVP
Entrepreneur Partners II, L.P., Steve Y. Kim, and Yuri
Pikover (incorporated by reference to Exhibit(c)(6) to the
Schedule 14D-1).
Exhibit 6 Letter to Shareholders of Xylan Corporation dated March 8,
1999.*
</TABLE>
26
<PAGE> 28
<TABLE>
<S> <C>
Exhibit 7 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., Yuri Pikover and Pikover 1995 Irrevocable Trust,
Pikover Trust, and Pikover Irrevocable Children's Trust
dated as of March 1, 1999 (incorporated by reference to
Exhibit (c)(3) to the Schedule 14D-1).
Exhibit 8 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., Steve Y. Kim and Steve Y. Kim Living Trust and Kim
Irrevocable Children's Trust dated as of March 1, 1999
(incorporated by reference to Exhibit (c)(2) to the Schedule
14D-1).
Exhibit 9 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., and John Walecka dated as of March 1, 1999
(incorporated by reference to Exhibit (c)(4) to the Schedule
14D-1).
Exhibit 10 Employment Agreement between Zeus Acquisition Corp. and
Steve Y. Kim dated as of March 1, 1999.
Exhibit 11 Press Release issued March 2, 1999 (incorporated by
reference to Exhibit (a)(8) to the Schedule 14D-1).
Exhibit 12 International Distributor Agreement between the Company and
Alcatel Data Networks S.A., dated as of March 13, 1995.(A)
Exhibit 13 Product and Technology Agreement between the Company and
Alcatel Data Networks S.A., dated as of March 13, 1995.(A)
Exhibit 14 Form of Change of Control Agreement.(B)
Exhibit 15 Preferred Shares Rights Agreement, dated as of April 17,
1997, between Xylan Corporation and BankBoston N.A. (f/k/a/
The First National Bank of Boston), including the
Certificate of Determination of Rights, Preferences and
Privileges of Series A Participating Preferred Stock, the
form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B and C, respectively.(C)
Exhibit 16 Amendment No. 1 to Preferred Shares Rights Agreement, dated
as of March 1, 1999.(D)
Exhibit 17 Complaint filed March 2, 1999, in Daniel W. Krasner v. Xylan
Corporation, et. al.
ANNEX A INFORMATION STATEMENT
ANNEX B OPINION OF MORGAN STANLEY & CO. INCORPORATED
</TABLE>
- ---------------
* Included with Schedule 14D-9 mailed to shareholders.
(A) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-00574) declared effective on March 11, 1996.
(B) Incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K filed on March 31, 1998.
(C) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form 8-A filed on April 18, 1997.
(D) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form 8-A/A filed on March 8, 1999.
27
<PAGE> 29
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this Statement is true, complete and
correct.
By: /s/ STEVE Y. KIM
------------------------------------
Steve Y. Kim
President and Chief Executive
Officer
Dated: March 8, 1999
28
<PAGE> 30
ANNEX A
XYLAN CORPORATION
26707 W. AGOURA ROAD, CALABASAS, CA 91302
INFORMATION STATEMENT PURSUANT TO SECTION 14(f)
OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14f-1 THEREUNDER
GENERAL
This Information Statement (the "Statement") is being mailed on or about
March 8, 1999 as part of the Solicitation/Recommendation Statement on Schedule
14D-9 (the "Schedule 14D-9") of Xylan Corporation, a California corporation (the
"Company"), with respect to the tender offer by Zeus Acquisition Corp.
("Purchaser"), a California corporation, and a wholly-owned indirect subsidiary
of Alcatel, a corporation organized and existing under the laws of France
("Parent"), for shares of the Company's Common Stock, par value $0.001 including
the associated Preferred Share Purchase Rights ("Shares") per share. Capitalized
terms used and not otherwise defined herein shall have the meaning set forth in
the Schedule 14D-9. This Statement is furnished in connection with the possible
election of persons designated by Parent to a majority of the seats on the
Company's Board of Directors (the "Company Board"). The Agreement and Plan of
Merger by and among the Company, Parent and Purchaser, dated as of March 1, 1999
(as the same may be amended from time to time, the "Merger Agreement"), provides
that promptly upon the acceptance for payment by Parent or any of its
subsidiaries of Shares purchased pursuant to the Offer, and from time to time
thereafter as Shares are acquired by Parent or any of its subsidiaries, Parent
will be entitled to designate such number of directors ("Parent Designees"),
rounded up to the next greatest whole number, on the Company Board as will give
Parent representation on the Company Board equal to that number of directors
which equals the product of the total number of directors on the Company Board
(giving effect to the directors appointed or elected pursuant to this sentence
and including current directors serving as officers of the Company) multiplied
by the percentage that the aggregate number of Shares beneficially owned by
Purchaser, Parent or any of their affiliates (including Shares accepted for
payment pursuant to the Offer, but excluding Shares held by the Company or any
of its affiliates, which would not include Parent, Purchaser or its affiliates)
bears to the number of Shares outstanding. However, if Purchaser has acquired
the Revised Minimum Number of Shares in the Offer, such number of directors will
be rounded up to the greatest whole number plus one to give Purchaser at least a
majority of the members of the Company Board. Furthermore, in the event that
Purchaser's designees are appointed or elected to the Company Board, until the
Effective Time the Company Board will have at least one director who is a
director on the date of the Merger Agreement and who is not an executive officer
of the Company (the "Independent Director"). At such times, the Company will
also cause (i) each committee of the Company Board, (ii) if requested by Parent,
the board of directors of each of the Company's subsidiaries and (iii) if
requested by Parent, each committee of such subsidiaries' boards of directors to
include persons designated by Parent constituting the same percentage of each
such committee or board of directors as Parent's Designees are of the Company
Board. The Company will, upon request by Parent, promptly increase the size of
the Company Board or exercise its best efforts to secure the resignations of
such number of directors, or both, as is necessary to enable Parent's designees
to be elected or appointed to the Company Board and will cause Parent's
designees to be so elected or appointed.
Following the election or appointment of Parent's designees and prior to
the Effective Time, the approval of a majority of the Independent Directors will
be required to authorize (i) any amendment that would be adverse to the holders
of Shares, (ii) any termination of the Merger Agreement by the Company, (iii)
any consent by the Company to any extension of the time for performance of any
of the obligations or other acts of Parent or Purchaser, (iv) any waiver by the
Company of compliance with any of the covenants or conditions contained in the
Merger Agreement for the benefit of the Company or any other rights of the
Company under the Merger Agreement, or (v) the exercise of any of the Company's
rights, remedies or benefits under the Merger Agreement.
A-1
<PAGE> 31
This Statement is required by Section 14(f) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and Rule 14f-1 promulgated thereunder.
You are urged to read this Statement carefully. You are not, however, required
to take any action. The Offer commenced on March 8, 1999 and is scheduled to
expire at 12:00 Midnight, New York City time, on April, 2, 1999, unless
extended. The information contained in this Information Statement concerning
Parent and Purchaser has been furnished to the Company by Parent, and the
Company assumes no responsibility for the accuracy, completeness or fairness of
any such information. At the close of business on March 4, 1999, there were
42,631,777 Shares issued and outstanding, which is the only class of securities
outstanding having the right to vote for the election of the Company's
directors, each of which entitles its record holder to one vote.
DESIGNEES TO THE COMPANY'S BOARD OF DIRECTORS
Parent has informed the Company that it currently intends to choose the
Parent Designees it has the right to designate to the Company Board pursuant to
the Merger Agreement from the officers and employees of Parent and Purchaser
listed below.
The Company's By-Laws currently provide for not less than four nor more
than seven directors and currently authorize six directors. The Company's
Articles of Incorporation provide for the classification of the Board of
Directors into two classes serving staggered terms. After the election or
appointment of the initial Class I and Class II directors, Class I directors
then will re elected and qualified in odd-numbers years (e.g., 2001) and Class
II directors then will be elected and qualified in even-numbered years (e.g.,
2000). Each Class I and Class II director is elected for a two year term.
However, the initial Class II directors elected or appointed to the Company
Board pursuant to the Merger Agreement will serve only through the Annual
Meeting in 2000, the next even-numbered year.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR
NAME CLASS AGE EMPLOYMENT HISTORY AND CITIZENSHIP
---- ----- --- --------------------------------------------------------
<S> <C> <C> <C>
Olivier Houssin..................... I 45 Mr. Houssin graduated from the Ecole Polytechnique and
(Alcatel, 54, rue La Boetie, Telecommunications Engineer and started his career in
75008 Paris, France) Thomson-CGR, where he had responsibilities in Italy and
in the U.S. In 1988, he became Vice President,
Operations in Thomson Consumer Electronic, then
Executive Vice President in 1991. In 1993, he joined
Alcatel to be President of Cables activities in the
North America. In 1996 he became President, Telecom
Products Division, Cable and Components sector of
Alcatel. In November 1998, he joined the Executive
Committee as Executive Vice President of Alcatel Telecom
in charge of the Enterprise and Consumer Business Group.
Krish Prabhu........................ I 43 Krish Prabhu, Senior Executive Vice President of the
(Alcatel USA, 1000 Coit Road, Telecom Sector of Alcatel since November 1998 and
Plano, Texas, 75075, USA) Executive Vice President and Member of the Executive
Committee of Alcatel since July 1998. Since September
1998, President and Chief Executive Officer of Alcatel
USA, located at 1000 Coit Road, Plano, Texas 75075.
Joined Alcatel in the United States in 1991, becoming
President of its Broadband Division in 1996. A U.S.
citizen.
</TABLE>
A-2
<PAGE> 32
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR
NAME CLASS AGE EMPLOYMENT HISTORY AND CITIZENSHIP
---- ----- --- --------------------------------------------------------
<S> <C> <C> <C>
Martin de Prycker.... II 43 Mr. Prycker joined Alcatel in 1982 after obtaining
(Alcatel Bell NV, Francis degrees in electrical engineering, computer science and
Wellesplein 1, B-2018 business management. He held various positions within
Antwerpen, Belgium) Alcatel's Research Division. In 1984, he was appointed
Research Director of Alcatel in Antwerp. In 1996, he
became vice president of the Access Division,
responsible for Internet and ADSL. At the end of 1998,
he was appointed Network Strategy Director for Alcatel
Telecom. In March 1999 he became president of the
Internet Division.
Hubert de Pesquidoux... II 33 Mr. Pesquidoux has a Master in Law, a Master in
(Alcatel USA, 1000 Coit Business, and PhD in Finance from the Paris University.
Road, Plano, Texas, 75075, USA) He began his career in banking with Paribas NY. He then
joined Alcatel CIT in 1991, and became Corporate
Treasurer in 1995. In September 1998, he was appointed
Senior Vice President and CFO of Alcatel USA.
</TABLE>
Parent has advised the Company that each of the individuals listed above
has consented to act as a director, if so designated. Parent has also advised
the Company that, to the best knowledge of Parent or Purchaser, none of such
individuals (i) currently is a director of, or holds, any position with, the
Company, (ii) beneficially owns any equity securities, or rights to acquire any
equity securities, of the Company or (iii) has been involved in any transactions
with the Company or any of its directors, executive officers, affiliates or
associates which are required to be disclosed pursuant to the rules and
regulations of the Commission.
It is expected that the Parent Designees may assume office at any time
following the purchase by Parent or Purchaser, as applicable, of the specified
minimum number of shares of Common Stock pursuant to the Offer, which purchases
cannot be earlier than March 8, 1999.
CURRENT DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
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 Company Board 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.
Prior to founding
A-3
<PAGE> 33
Fibermux, Mr. Kim held management and design positions with a number of
companies, including Phalo Optical Systems Division, Litton Data Systems, and
Burroughs Corporation.
Mr. Pikover, a co-founder of the Company, has served in various sales and
management positions and as a member of the Company Board since the Company's
inception in July 1993, and currently serves as Executive Vice President,
Business Development. Mr. Pikover served as the Company's Vice President of
Worldwide Sales from July 1993 to September 1997. From August 1988 to June 1993,
Mr. Pikover served as Regional Sales Manager at Fibermux. Mr. Pikover served in
various sales, marketing and technical positions at MICOM Systems Inc., a
networking company, from September 1982 to August 1988.
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. From May 1984 to
January 1990, Mr. Walecka was an associate with Brentwood Venture Capital. 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. Prior
to joining U.S. West, Mr. Hawk was employed at Mountain Bell. Mr. Hawk also
serves as a director of Premisys Communications, Pairgain Technologies, Concord
Communications and Radcom.
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 of Product
Development. Prior to joining the Company, Mr. Bailey was an Assistant Vice
President for LAN Internetworking Technology at Ascom Timeplex a networking
company, from September 1992 to January 1994. From January 1990 to September
1992, Mr. Bailey served in various engineering management and design positions
at Unisys Corporation, a computer manufacturer.
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 has also held senior
financial positions at Data Products Corporation and Harris Corporation. 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
Communications. 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. Hill has also served as Vice President, Marketing and Sales at ACT
Networks, Inc., a networking company, and as Assistant Vice President at MICOM
Systems, Inc., a networking company.
Mr. Arvin joined the Company in February 1996 and has served in various
sales and management positions and since November 1997, 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.
CORPORATE GOVERNANCE
The Company Board held a total of six meetings during the fiscal year ended
December 31, 1998. All of the Company's directors participated in more than 75%
of the aggregate number of meetings and actions by unanimous written consent of
the Company Board and any committee of the Company Board on which the director
is a member. The Company Board has an Audit Committee and a Compensation
Committee, and the
A-4
<PAGE> 34
Compensation Committee has a secondary Stock Option Committee. It does not have
a nominating committee or a committee performing the functions of a nominating
committee.
The Audit Committee of the Company Board consists of Trude C. Taylor and
John L. Walecka and held two meetings during 1998. The Audit Committee
recommends engagement of the Company's independent auditors, and is primarily
responsible for approving the services performed by the Company's independent
auditors and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls.
The Compensation Committee of the Company Board consists of Robert C. Hawk,
Trude C. Taylor and John L. Walecka and held two meetings during 1998 and acted
twice by unanimous consent. The Compensation Committee establishes the
compensation for the Company's executive officers, including the Company's
President and Chief Executive Officer. In addition, the Company's Compensation
Committee has a secondary Stock Option Committee which consists of director
Steve Y. Kim and held seventeen meetings during 1998. The Stock Option Committee
establishes stock option grant levels and grants stock options to all employees
except for executive officers.
DIRECTORS' COMPENSATION
Directors currently receive no cash fees for services provided in that
capacity but are reimbursed for out-of-pocket expenses incurred in connection
with attendance at meetings of the Company Board and committees thereof. In
January 1996, the shareholders of the Company approved the Directors' Plan
pursuant to which each non-employee director elected after the effective date of
the Plan will be granted a non-statutory stock option to purchase 15,000 shares
of Common Stock (the "First Option") on the date on which the optionee first
becomes a non-employee director of the Company. Thereafter, on the date of each
annual meeting of the shareholders at which each non-employee director is
re-elected to the Company Board, each non-employee director (including directors
who were not eligible for a First Option) will be granted an additional option
to purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such
date, he or she shall have served on the Company Board for at least six months
prior to the date of such annual meeting. Between December 1993 and December
1998, non-employee directors received options to purchase a total of 190,000
shares of Common Stock at specified exercise prices. This number does not
include restricted stock grants.
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>
COMMON STOCK BENEFICIALLY OWNED
-------------------------------
NAME(1) 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
Steve Y. Kim................................................ 3,007,000(7) 7.1%
Chairman of the Board, CEO & President
Yuri Pikover................................................ 2,086,251(8) 4.9%
Executive VP, Business Development
</TABLE>
A-5
<PAGE> 35
<TABLE>
<CAPTION>
COMMON STOCK BENEFICIALLY OWNED
-------------------------------
NAME(1) NUMBER PERCENT(2)
------- --------- ----------
<S> <C> <C>
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............. 6,499,714(15) 15%
(10 persons)
</TABLE>
- ---------------
* Less than 1%.
(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
in the other footnotes to this table. Beneficial ownership is determined in
accordance with the rules of 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
Effective Time of the Merger.
A-6
<PAGE> 36
(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 Effective Time 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
Director's Plan which exercise date will be accelerated to the date
immediately prior to the Effective Time 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
Director's Plan which exercise date will be accelerated to the date
immediately prior to the Effective Time 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 28,000
shares of Common Stock issuable upon exercise of unvested options under the
Director's Plan which exercise date will be accelerated to the date
immediately prior to the Effective Time of the Merger.
(12) Includes 150,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days of February 23, 1999.
(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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee of the Company Board are
Messrs. Hawk, Taylor and Walecka. No member of the Compensation Committee was at
any time during the fiscal year ended December 31, 1998, or at any other time
since the Company's initial public offering, an officer or employee of the
Company. No executive officer of the Company serves as a member of the Company
Board or Compensation Committee of any entity which has one or more executive
officers serving as a member of the Company Board or Compensation Committee.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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.
A-7
<PAGE> 37
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------- ---------------------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3) OPTIONS ($)
- --------------------------- ---- ------- ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steve Y. Kim................... 1998 236,321 39,325 -- 300,000(4) 30,827(5)
Chief Executive Officer, 1997 203,944 1,000 16,002 -- 45,753(6)
President and Chairman 1996 160,416 -- 134,123 -- 49,902(7)
of the Board
Yuri Pikover................... 1998 197,000 28,875 -- 150,000(8) --
Executive Vice President, 1997 146,251 11,760 -- -- 11,760(9)
Business Development 1996 132,083 9,750 -- -- 7,200(9)
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.
(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.
A-8
<PAGE> 38
(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, $10,872
paid as reimbursement for loss of certain benefits.
STOCK OPTION GRANTS IN FISCAL YEAR 1998
The following table sets forth information concerning the grant of options
to purchase shares of Common Stock under the Company's 1993 Stock Incentive Plan
and 1996 Stock Plan to the Named Executive Officers in fiscal year 1998. No
stock appreciation rights were granted to any of the Named Executive Officers
during fiscal year 1998.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------- POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS/SARS STOCK PRICE APPRECIATION FOR
SECURITIES GRANTED TO OPTION TERM(3)
UNDERLYING EMPLOYEES IN EXERCISE OR -----------------------------
OPTIONS/SARS FISCAL YEAR BASE PRICE EXPIRATION 5% 10%
NAME GRANTED(1) (2) ($/SH) DATE ($) ($)
- ---- ------------ ------------ ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steve Y. Kim......... 300,000 2.21% $15.25 1/13/2008 $2,877,193 $7,291,372
300,000(4) 2.21% $10.50 1/13/2008 $1,811,719 $4,501,962
Yuri Pikover......... 150,000 1.10% $15.25 1/13/2008 $1,438,596 $3,645,686
150,000(4) 1.10% $10.50 1/13/2008 $ 905,860 $2,250,981
John Bailey.......... 150,000 1.10% $15.25 1/13/2008 $1,438,596 $3,645,686
50,000 0.37% $10.69 10/13/2008 $ 336,065 $ 851,656
150,000(4) 1.10% $10.50 1/13/2008 $ 905,860 $2,250,981
Rene Arvin........... 115,500(4) 0.84% $10.50 2/21/2006 $ 528,959 $1,246,856
15,000(4) 0.11% $10.50 4/2/2007 $ 81,281 $ 197,566
169,500(4) 1.25% $10.50 10/27/2007 $ 994,545 $2,456,443
20,000 0.15% $10.69 10/13/2008 $ 134,426 $ 340,662
Dale J. Bartos....... 30,000 0.22% $26.63 4/14/2008 $ 502,424 $1,273,241
20,000 0.15% $10.69 10/13/2008 $ 134,426 $ 340,662
30,000(4) 0.22% $10.50 4/14/2008 $ 187,311 $ 468,801
80,000(4) 0.65% $10.50 1/27/2007 $ 473,993 $1,151,325
20,000(4) 0.15% $10.50 4/2/2007 $ 108,374 $ 263,421
</TABLE>
- ---------------
(1) The options granted to the Named Executive Officers have a maximum term of
10 years, subject to earlier termination in the event of the optionee's
cessation of service with the Company. The options vest over a two, four or
five year period following the date of grant with 1/24th, 1/48th or 1/60th
of the shares vesting per month in equal monthly installments except for the
performance options, which are vested when certain milestones are reached.
See "Certain Relationships and Related Transactions" for further
information.
A-9
<PAGE> 39
(2) Total number of options granted by the Company to employees for the fiscal
year 1998 is 13,595,541. This amount includes 8,352,184 options that were
cancelled and reissued in connection with its repricing program.
(3) There is no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the option term will be at the 5% or 10% levels or at any defined level.
Unless the market price of the Common Stock does in fact appreciate over the
option term, no value will be realized from the option grants.
(4) Represents the options repriced as of September 21, 1998; the repriced
options are treated as newly granted.
REPRICING OF OPTIONS
In order to reincentivize its employees, the Company Board, upon
recommendation of the Compensation Committee, in September 1998 approved an
option repricing program pursuant to which employees could surrender options
granted by the Company having exercise prices greater than $10.50 per share and
receive in the place of such surrendered options new options having an exercise
price of $10.50 per share, the fair market value of the Common Stock on the date
the Company Board approved such repricing and the date of grant. The new options
issued pursuant to this repricing program were subject to the same vesting
provisions as the surrendered options. The following table sets forth certain
information as of December 31, 1998 with respect to the repricing of certain
stock options held by the Company's executive officers since the Company's
initial public offering.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET EXERCISE ORIGINAL
UNDERLYING PRICE OF PRICE AT OPTION TERM
OPTIONS/SAR's STOCK AT TIME OF NEW REMAINING AT
REPRICED OR TIME OF REPRICING OR EXERCISE DATE OF
AMENDED REPRICING OR AMENDMENT PRICE REPRICING OR
NAME AND PRINCIPAL POSITION DATE (#) AMENDMENT($) ($) ($) AMENDMENT
- --------------------------- ------- ------------- ------------ ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Steve Y. Kim............. 9/21/98 300,000 $ 10.50 $15.25 $ 10.50 9 yrs 114 days
CEO, President and Chairman
of the Board
Yuri Pikover............. 9/21/98 150,000 $ 10.50 $15.25 $ 10.50 9 yrs 114 days
Executive VP, Business
Development
Rene Arvin............... 7/23/97 110,000 $ 15.81 $20.00 $ 15.81 8 yrs 213 days
VP of Worldwide Sales 7/23/97 20,500 $ 16.13 $15.81 $ 15.81 9 yrs 253 days
9/21/98 110,000 $ 10.50 $15.81 $ 10.50 7 yrs 151 days
9/21/98 169,500 $ 10.50 $14.50 $ 10.50 9 yrs 36 days
9/21/98 20,500 $ 10.50 $15.81 $ 10.50 8 yrs 191 days
John Bailey.............. 9/21/98 150,000 $ 10.50 $15.25 $ 10.50 9 yrs 114 days
VP/CTO and General Manager,
Enterprise Div.
Dale Bartos.............. 7/23/97 100,000 $ 15.81 $28.12 $ 15.81 9 yrs 188 days
VP and Chief 7/23/97 20,000 $ 15.81 $16.13 $ 15.81 9 yrs 253 days
Financial Officer 9/21/98 30,000 $ 10.50 $26.63 $ 10.50 9 yrs 203 days
9/21/98 88,000 $ 10.50 $15.81 $ 10.50 8 yrs 126 days
9/21/98 20,000 $ 10.50 $15.81 $ 10.50 8 yrs 191 days
Thomas S. Burns.......... 9/21/98 50,000 $ 10.50 $15.25 $ 10.50 9 yrs 50 days
VP of Finance
Phil Lichtenberger(1).... 7/23/97 7,282 $15.8125 $39.00 $ 15.81 8 yrs 361 days
7/23/97 32,718 $15.8125 $44.87 $ 15.81 9 yrs 91 days
</TABLE>
- ---------------
(1) Mr. Lichtenberger resigned from his position as Vice President of
Manufacturing of the Company in September 1997.
A-10
<PAGE> 40
Aggregated Option Exercises in Fiscal Year 1998 and Fiscal Year-End Option
Values
The following table sets forth information for the Named Executive Officers
with respect to exercises in fiscal year 1998 of options to purchase Common
Stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES AT 12/31/98 OPTIONS AT 12/31/98
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE REALIZED UNEXERCISABLE)(1) UNEXERCISABLE)(2)
- ---- ----------- ------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Steve Y. Kim............. 0 $ 0.00 210,500/349,500 $3,169,399/$3,570,601
Yuri Pikover............. 0 $ 0.00 22,917/127,083 $174,742/$969,008
Rene Arvin............... 0 $ 0.00 129,525/190,475 $987,316/$1,448,934
John Bailey(3)........... 134,000 $ 3,698,525 125,333/171,667 $1,942,804/$1,752,446
Dale Bartos(4)........... 12,000 $ 157,375 41,333/116,667 $314,852/$886,148
</TABLE>
- ---------------
(1) No stock appreciation rights (SAR) were outstanding during fiscal year 1998.
(2) Based on the closing price of the Company's Common Stock as reported on the
Nasdaq National Market on December 31, 1998 of $18.125 per share minus the
exercise price of the options.
(3) Value realized is calculated based on the closing price of the Company's
Common Stock as reported on the Nasdaq National Market on the date of
exercise ($20.07 on February 13, 1998 and $30.25 on May 4, 1998) minus the
exercise price(s) of the option ($0.06 and $0.10) and does not necessarily
indicate that the optionee sold such stock.
(4) Value realized is calculated based on the closing price of the Company's
Common Stock as reported on the Nasdaq National Market on the date of
exercise ($28.93 on April 22, 1998) minus the exercise price of the option
($15.8125) and does not necessarily indicate that the optionee sold such
stock.
A-11
<PAGE> 41
PERFORMANCE GRAPH
The following graph summarizes cumulative total shareholder return data
(assuming reinvestment of dividends) for the period since the Common Stock was
first registered under Section 12 of the Exchange Act (March 11, 1996). The
graph assumes that $100 was invested (i) on March 12, 1996 in the Common Stock
of Xylan Corporation at a price per share of $26.00, the date on which and the
price at which such stock was first offered to the public, (ii) on February 29,
1996 in Standard & Poor's 500 Index and (iii) on February 29, 1996 in Standard &
Poor's Technology Sector Index. The stock price performance on the following
graph is not necessarily indicative of future stock price performance.
COMPARISON OF 34 MONTH CUMULATIVE TOTAL RETURN(1)
AMONG XYLAN CORPORATION, THE S&P 500 INDEX
AND THE S&P TECHNOLOGY SECTOR INDEX
[COMPARISON CHART]
<TABLE>
<CAPTION>
XYLAN CORPORATION S&P 500 INDEX S&P TECHNOLOGY SECTOR
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<S> <C> <C> <C>
3/12/96(1) 100.00 100.00 100.00
12/31/96 109.00 118.00 130.00
12/31/97 58.00 157.00 164.00
12/31/98 70.00 202.00 284.00
</TABLE>
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(1) $100 invested on 3/12/96 in stock or on 2/29/96 in Indices, including
reinvestment of dividends. Fiscal year ending December 31.
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.
A-12
<PAGE> 42
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 Company Board,
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.
In January 1997, Brentwood VI Management Partners, L.P., whose general
partners are also general partners of Brentwood VI Ventures, L.P., the general
partner of Brentwood Associates VI, L.P., provided a car to Steve Y. Kim valued
at $139,827. John Walecka, a general partner of Brentwood VI Ventures, L.P., the
general partner of Brentwood Associates VI, L.P., is a director of the Company.
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 executed on March 1, 1999, 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, as
described in the Schedule 14D-9 to which this Annex A is attached. 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 1996 Directors' Stock Option 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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities
to file with the Securities and Exchange Commission (the "SEC") initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and holders of more than
ten percent of the Company's Common Stock are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.
To the Company's knowledge and based solely upon review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended December 31, 1998, the
Company's officers, directors and holders of more than ten percent of the
Company's Common Stock complied with all Section 16(a) filing requirements.
A-13
<PAGE> 43
MORGAN STANLEY DEAN WITTER
2725 SAND HILL ROAD
BUILDING C -- SUITE 200
MENLO PARK, CALIFORNIA 94025
(650) 234-5500
March 1, 1999
Board of Directors
Xylan Corporation
26707 West Agoura Road
Calabasas, CA 91302
Members of the Board:
We understand that Xylan Corporation ("Xylan"), Alcatel and Zeus Acquisition
Corp. ("Merger Sub"), a wholly-owned subsidiary of Alcatel, propose to enter
into an Agreement and Plan of Merger, substantially in the form of the draft
dated as of March 1, 1999 (the "Merger Agreement") which provides, among other
things, for (i) the commencement by Merger Sub of a tender offer (the "Tender
Offer") for any and all outstanding shares of common stock, par value U.S.
$0.001 per share, of Xylan (the "Xylan Common Stock") for U.S. $37.00 per share
net to the seller in cash, and (ii) the subsequent merger (the "Merger") of
Merger Sub with and into Xylan. Pursuant to the Merger, Xylan will become a
wholly-owned subsidiary of Alcatel and each outstanding share of Xylan Common
Stock, other than shares held in treasury or held by Alcatel or any affiliate of
Alcatel or Xylan or as to which dissenters' rights have been perfected, will be
converted into the right to receive $37.00 per share in cash. The terms and
conditions of the Tender Offer and the Merger are more fully set forth in the
Merger Agreement. We further understand that (i) approximately 6.6% of the
outstanding shares of Xylan Common Stock is owned by Alcatel; and (ii) that the
shares owned by certain senior executives of Xylan are subject to certain
restrictions on transfers to purchasers other than affiliates of Alcatel and
rights of first refusal with affiliates of Alcatel under the terms of the 1995
Shareholder Agreement (the "Shareholder Agreement") entered into between such
executives and an affiliate of Alcatel.
You have asked for our opinion as to whether the consideration to be received by
the holders of shares of Xylan Common Stock pursuant to the Merger Agreement is
fair from a financial point of view to such holders (other than Alcatel and its
affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of Xylan;
(ii) reviewed certain internal financial statements and other financial
and operating data concerning Xylan prepared by the management of
Xylan;
(iii) discussed the past and current operations and financial condition
and the prospects of Xylan with senior executives of Xylan;
(iv) reviewed the reported prices and trading activity for the Xylan
Common Stock;
(v) compared the financial performance of Xylan and the prices and
trading activity of the Xylan Common Stock with that of certain other
publicly-traded companies and their securities;
(vi) reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
(vii) reviewed and discussed with the senior management of Xylan the
strategic rationale for the Merger and certain alternatives to the
Merger;
(viii) participated in discussions and negotiations among representatives
of Xylan and Alcatel and their financial and legal advisors;
(ix) reviewed the draft Merger Agreement and certain related documents;
<PAGE> 44
Board of Directors
March 1, 1999 MORGAN STANLEY DEAN WITTER
Page 2
(x) reviewed the Shareholder Agreement; and
(xi) performed such other analyses and considered such other factors as
we have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the internal financial statements and other financial
and operating data, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
prospects of Xylan. We have not made any independent valuation or appraisal of
the assets or liabilities or technology of the Company, nor have we been
furnished with such appraisals. Our opinion is necessarily based on financial,
economic, market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of Xylan in
connection with this transaction and will receive a fee for our services. In the
past, Morgan Stanley & Co. Incorporated ("Morgan Stanley") and its affiliates
have provided financing services for Xylan and have received fees for the
rendering of these services. In addition, Morgan Stanley and its affiliates have
provided financial advisory and financing services for Alcatel and have received
fees for the rendering of these services. In the ordinary course of our business
we may actively trade the securities of Xylan and Alcatel for our own account
and for the accounts of our customers and, accordingly, may at any time hold a
long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Xylan and may not be used for any other purpose without our prior
written consent, except that this opinion may be included in its entirety in any
filing made by Xylan with the Securities and Exchange Commission in respect of
the transaction. In addition, we express no recommendation or opinion as to
whether the holders of Xylan Common Stock should accept the Tender Offer or how
such holders should vote at any shareholders' meeting held in connection with
the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of Xylan Common
Stock pursuant to the Merger Agreement is fair from a financial point of view to
such holders (other than Alcatel and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ NICHOLAS D. OSBORNE
--------------------------------------
Nicholas D. Osborne
Principal
<PAGE> 45
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT NAME
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<S> <C>
Exhibit 1 Form of Offer to Purchase, dated March 8, 1999 (incorporated
by reference to Exhibit (a)(1) to Parent and Purchaser's
Tender Offer Statement on Schedule 14D-1 dated March 8,
1999, as amended (the "Schedule 14D-1")).
Exhibit 2 Form of Letter of Transmittal (incorporated by reference to
Exhibit (a)(2) to the Schedule 14D-1).
Exhibit 3 Agreement and Plan of Merger, dated as of March 1, 1999,
among Xylan Corporation, Zeus Acquisition Corp., and Alcatel
(incorporated by reference to Exhibit (c)(1) to the Schedule
14D-1).
Exhibit 4 Stock Option Agreement, dated as of March 1, 1999, among
Xylan Corporation, Zeus Acquisition Corp., and Alcatel
(incorporated by reference to Exhibit (c)(5) to the Schedule
14D-1).
Exhibit 5 1995 Shareholder Agreement, dated March 13, 1995, between
Alcatel Data Networks S.A., Brentwood Associates VI, L.P.,
Crosspoint Venture Partners 93, Crosspoint 1993
Entrepreneurs Fund, Norwest Equity Partners IV, U.S. Venture
Partners IV, L.P., Second Ventures II, L.P., USVP
Entrepreneur Partners II, L.P., Steve Y. Kim, and Yuri
Pikover (incorporated by reference to Exhibit (c)(6) to the
Schedule 14D-1.
Exhibit 6 Letter to Shareholders of Xylan Corporation dated March 8,
1999.*
Exhibit 7 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., Yuri Pikover and Pikover 1995 Irrevocable Trust,
Pikover Trust, and Pikover Irrevocable Children's Trust
dated as of March 1, 1999 (incorporated by reference to
Exhibit (c)(3) to the Schedule 14D-1).
Exhibit 8 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., Steve Y. Kim and Steve Y. Kim Living Trust and Kim
Irrevocable Children's Trust dated as of March 1, 1999
(incorporated by reference to Exhibit (c)(2) to the Schedule
14D-1).
Exhibit 9 Shareholder Agreement between Alcatel, Zeus Acquisition
Corp., and John Walecka dated as of March 1, 1999
(incorporated by reference to Exhibit (c)(4) to the Schedule
14D-1).
Exhibit 10 Employment Agreement between Zeus Acquisition Corp. and
Steve Y. Kim dated as of March 1, 1999.
Exhibit 11 Press Release issued March 2, 1999 (incorporated by
reference to Exhibit (a)(8) to the Schedule 14D-1).
Exhibit 12 International Distributor Agreement between the Company and
Alcatel Data Networks S.A., dated as of March 13, 1995.(A)
Exhibit 13 Product and Technology Agreement between the Company and
Alcatel Data Networks S.A., dated as of March 13, 1995.(A)
Exhibit 14 Form of Change of Control Agreement.(B)
Exhibit 15 Preferred Shares Rights Agreement, dated as of April 17,
1997, between Xylan Corporation and BankBoston N.A. (f/k/a
The First National Bank of Boston), including the
Certificate of Determination of Rights, Preferences and
Privileges of Series A Participating Preferred Stock, the
form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B and C, respectively.(C)
Exhibit 16 Amendment No. 1 to Preferred Shares Rights Agreement, dated
as of March 1, 1999.(D)
</TABLE>
29
<PAGE> 46
<TABLE>
<S> <C>
Exhibit 17 Complaint filed March 2, 1999, in Daniel W. Krasner v. Xylan Corporation, et. al.
ANNEX A INFORMATION STATEMENT*
ANNEX B OPINION OF MORGAN STANLEY & CO. INCORPORATED*
</TABLE>
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* Included with Schedule 14D-9 mailed to shareholders.
(A) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-00574) declared effective on March 11, 1996.
(B) Incorporated by reference to an exhibit to the Company's Annual Report on
Form 10-K filed on March 31, 1998.
(C) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form 8-A filed on April 18, 1997.
(D) Incorporated by reference to an exhibit to the Company's Registration
Statement on Form 8-A/A filed on March 8, 1999.
30
<PAGE> 1
[Xylan Logo]
March 8, 1999
To Our Shareholders:
I am pleased to inform you that on March 1, 1999, Xylan Corporation entered
into an Agreement and Plan of Merger with Alcatel and Zeus Acquisition Corp., a
wholly owned indirect subsidiary of Alcatel. Under the Agreement, Alcatel has
commenced a cash tender offer to purchase all of the outstanding shares of
Xylan's Common Stock for $37 per share (including the associated Preferred Share
Purchase Rights), without interest. The Offer will be followed by a Merger in
which any remaining shares of Xylan's Common Stock will be converted into the
right to receive $37 per share in cash, without interest.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE OFFER, THE MERGER, THE
STOCK OPTION AGREEMENT AND THE MERGER AGREEMENT AS DESCRIBED IN THE SCHEDULE
14D-9 ATTACHED HERETO AND DETERMINED THAT THE OFFER, THE MERGER, THE STOCK
OPTION AGREEMENT, THE MERGER AGREEMENT AND THE EMPLOYMENT AGREEMENT (AS TO WHICH
APPROVAL I ABSTAINED) ARE FAIR TO AND IN THE BEST INTERESTS OF THE SHAREHOLDERS
OF THE COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE
OFFER AND TENDER THEIR SHARES TO PURCHASER PURSUANT TO THE OFFER.
In arriving at its recommendation, the Board of Directors gave careful
consideration to a number of factors, which are described in the attached
Schedule 14D-9 that has been filed today with the Securities and Exchange
Commission. These factors include, among other things, the opinion of Morgan
Stanley & Co. Incorporated, the Company's financial advisor, that the
consideration to be received by the shareholders of the Company in the Offer and
Merger pursuant to the Agreement is fair from a financial point of view to the
shareholders of the Company (other than Alcatel and its affiliates).
In addition to the attached Schedule 14D-9 relating to the Offer, also
enclosed is the Offer to Purchase, dated March 8, 1999, of Alcatel, together
with related materials to be used for tendering your shares. These documents set
forth the terms and conditions of the Offer and the Merger and provide
instructions as to how to tender your shares. I urge you to read the enclosed
materials carefully.
Sincerely,
/s/ Steve Y. Kim
Steve Y. Kim
President and Chief Executive Officer
<PAGE> 1
Exhibit 10
EMPLOYMENT AGREEMENT
This employment agreement (this "Agreement") is entered into as of
March 1, 1999, between Zeus Acquisition Corp. (the "Company"), and Steven Y. Kim
(the "Executive") for employment commencing on the Effective Date in the
position and title of PRESIDENT AND CHIEF EXECUTIVE OFFICER (the "Position").
The Company desires to employ the Executive, and the Executive desires
to be employed by the Company, on the terms and subject to the conditions set
forth herein;
THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive in the Position
and the Executive hereby accepts such employment, on the terms
and subject to the conditions hereinafter set forth.
(b) During the term of his employment under this Agreement and
any renewal hereof, the Executive shall be and have the
Position stated, shall report to the Chairman of the Company
(who is currently the Executive Vice President, TelCom Sector,
of the Company's parent company), and shall devote his entire
professional business time and all reasonable efforts to his
employment and perform diligently such duties as are
customarily performed in the position of companies similar in
size to the Company, together with such other duties as may be
reasonably requested from time to time by Chairman of the
Company, which duties shall be consistent with his Position;
provided, however, that activities by the Executive with
respect to passive investments, so long as such activities do
not, alone or in the aggregate, interfere with the Executive's
performance of his duties as described in this Paragraph 1(b),
will not be deemed inconsistent with the requirements of this
Agreement. Nothing in this Agreement will prevent Executive
from serving on boards of corporations or civic or charitable
organizations, owning no more than three percent (3%) of the
outstanding equity securities of a publicly traded
corporation, or making passive investments in venture capital
funds and similar entities established by persons who are not
affiliated with or related to the Executive and over which the
Executive has no power to direct the management or investment
decisions, provided that such activities do not conflict with
the interests of the Company.
<PAGE> 2
(c) The "Effective Date" shall be the date of the consummation
of the merger contemplated by the Agreement and Plan of Merger
among Alcatel, Zeus Acquisition Corp. and Xylan Corporation
(the "Merger").
2. Term and Position.
(a) Subject to the provisions for renewal and termination
hereinafter stated, the term of this Agreement shall begin on
the Effective Date and shall continue through the second
anniversary of the Effective Date. As of the second and each
successive anniversary of the Effective Date, such term
automatically shall be extended for one (1) additional year,
unless:
(i) the Executive's employment is terminated by
the Executive or the Company for any reason
or
(ii) either the Company or the Executive shall
give written notice to the other, at least
ninety (90) days before the second
anniversary of the Effective Date, or any
subsequent annual anniversary, that this
Agreement shall not be so extended but shall
terminate upon the expiration of the
then-current term.
All references herein to the term of this Agreement shall
include by reference any periods of renewal thereof, if any.
(b) Notwithstanding any provision in this Agreement to the
contrary, all obligations under this Agreement are subject to
the condition that the Merger occur, and this Agreement shall
terminate if such condition is not satisfied.
(c) If:
(i) the Company materially changes the Executive's
duties and responsibilities, demotes or reduces
Executive's authority;
(ii) the Executive's place of employment or the
principal executive offices of the Company are
located more than 50 miles from the geographical
center of Calabasas, California;
(iii) there occurs a material breach by the Company
of any of its obligations under this Agreement, which
breach has not been cured in all material respects
within thirty (30) business days after the Executive
gives notice thereof to the Company;
2
<PAGE> 3
then in any such event the Executive shall have the right to
terminate his employment with the Company, but such
termination shall, for purposes of this Agreement be
considered a resignation by the Executive for "good reason."
The Executive may exercise such rights of termination at any
time within three (3) months following the occurrence of the
applicable event.
3. Compensation
During the term of his employment under this Agreement the
Company shall pay or provide, as the case may be, to the Executive the
compensation and other benefits and rights set forth in this Paragraph
3.
(a) During the term of this Agreement, the Company shall pay
to the Executive a base salary of $400,000 per year (the
"Salary"), payable in accordance with the Company's usual pay
practices (and in any event no less frequently than monthly).
Executive's Salary shall be reviewed annually during the term
of this Agreement and any increase shall be effective on the
anniversary of the Effective Date.
(b) The Executive shall be eligible for an annual bonus in a
target amount of 50 percent of his Salary, based on
achievement of 100 percent of performance standards to be
established by the Board of Directors of the Company (the
"Board"). Any such bonus shall be measured and paid quarterly.
(c) The Company shall provide for Executive to participate in
any and all executive incentive bonus programs that may be
established by the Company hereafter.
(d) During the term of this Agreement, the Company shall
provide to the Executive such health and welfare benefits as
may be available to other executive employees of the Company.
(e) The Executive shall participate in all retirement and
other benefit plans of the Company generally available from
time to time to employees or executives of the Company and for
which the Executive qualifies under the terms thereof (and
nothing in this Agreement shall or shall be deemed to affect
in any way the Executive's rights and benefits thereunder
except as expressly provided herein).
(f) The Executive shall be entitled to such periods of
vacation and sick leave allowance each year as are determined
by the Company for all executives of the Company.
3
<PAGE> 4
(g) The Company shall reimburse the Executive or provide him
with an expense allowance during the term of this Agreement
for travel, entertainment and other expenses reasonably and
necessarily incurred by the Executive in connection with the
Company's business, in agreement with the Company's practice.
The Executive shall furnish such documentation with respect to
reimbursement to be paid hereunder as the Company shall
reasonably request.
4. Payment in the Event of Death or Permanent Disability.
In the event of the Executive's death or permanent disability,
the Executive's employment hereunder shall terminate and the Executive
shall be entitled to no further compensation or other benefits under
this Agreement, with the exception of any earned and unpaid Salary,
incentive bonus or other benefit accrued and earned by him hereunder up
to and including the date of such death or permanent disability;
provided, however, that nothing in this Agreement shall affect
Executive's right to receive death or disability benefits under the
Company's life and disability insurance programs. Permanent disability
shall be determined in a manner consistent with such determination
under the Company's disability insurance program.
5. Termination.
(a) The employment of the Executive under this Agreement may
be terminated,
(i) due to the Executive's death or by the Company
due to permanent disability (as defined in Paragraph
4) of the Executive;
(ii) by the Company for "cause" at any time by action
of the board of directors or Chairman of the Company;
(iii) by the Executive for "good reason" as provided
in Paragraph 2(c); or
(iv) by the Company at any time "without cause."
4
<PAGE> 5
For purposes hereof, "cause" shall mean:
(A) the Executive's fraud, embezzlement or
similar activities; or
(B) the Executive's conviction of, or plea
of guilty or no contest to, any felony or
any crime involving fraud, embezzlement or
other defalcation or any crime involving
moral turpitude; or
(C) the Executive's commission of any act of
dishonesty or series of repeated acts of
dishonesty which are not in the best
interests of the Company, or which are
injurious to the business reputation of the
Company; or
(D) the Executive's willful and repeated
failure to perform his material duties under
this Agreement, including without
limitation, the failure to follow the
directions of Chairman, which failure has
not been cured within thirty (30) business
days after the Company gives written notice
thereof to the Executive; or
(E) The Executive's material breach of any
provision of this Agreement, which breach
has not been cured in all substantial
respects within thirty (30) business days
after the Company gives written notice
thereof to the Executive.
For purposes hereof, a termination by the Company "without
cause" shall mean a termination by the Company for any reason
other than pursuant to Paragraph 5(a)(i) or 5(a)(ii).
Upon any termination of Executive's employment under this
Agreement for any reason, all offices and directorships held
by the Executive in the Company or any of its affiliates shall
be terminated.
(b) In the event of termination pursuant to Subparagraph
(a)(i) or (a)(ii) of this Paragraph 5, the Executive shall be
entitled to no further compensation or other benefits under
this Agreement except as to that portion of any unpaid salary,
incentive bonus and other benefits referred to in Paragraph 4,
if applicable, accrued and earned by him hereunder up to and
including the effective date of such termination.
(c) In the event of termination pursuant to Paragraph
5(a)(iii) or 5(a)(iv), then for a period of two (2) years from
the date of termination, the Executive shall be entitled to:
5
<PAGE> 6
(i) the continuation of the Executive's Salary (in
accordance with the Company's payroll practices), at
the then-effective annual rate of Salary, as
determined under Paragraph 3(a), and
(ii) subject to the Executive's continued payment of
applicable premiums, the continuation of health and
welfare benefits in effect as of the date of such
termination; provided, however, that any rights the
Executive (including his spouse and dependents) may
have for continued health coverage under the
Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA"), shall run concurrently
(and not consecutively) with the continuation of
health benefits under this Paragraph 5(c)(ii).
6. Options.
As of the Effective Date, the Company and the Executive hereby
agree that his options to purchase shares of Xylan Corporation (whether
vested or unvested) (the "Options") be amended to provide that: (I) the
Options will not terminate following the termination of the Executive's
employment for any reason other than for the reason described under
Subparagraph 5(a)(ii) of this Agreement; (II) the Executive shall
continue to vest in the Options in accordance with the applicable
option plan or agreements for the Options on the same basis as if the
Executive continued to be employed, provided that the Executive
continues to fulfill all obligations with respect to the restrictive
covenant set forth in Paragraph 7(a) hereof; and (III) if the Executive
fulfills such restrictive covenant obligations, the Executive shall be
entitled to exercise such Options at any time within the thirty (30)
day period following the satisfaction of the restrictive covenant.
Notwithstanding anything herein to the contrary, unless terminated
earlier as contemplated hereunder, under the applicable option plan or
under the agreements for the Options, the Options shall automatically
expire on their originally-specified expiration dates.
7. Covenants and Confidential Information.
The Executive acknowledges the Company's reliance on and
expectation of the Executive's continued commitment to performance of
his duties and responsibilities during the time when he is employed
under this Agreement. In light of such reliance and expectation on the
part of the Company, and in consideration of the transactions
contemplated by the Merger, Executive agrees as follows:
(a) During the term of the Executive's employment under this
Agreement and for a period ending two (2) years after the
second anniversary of the Effective Date, Executive shall not,
directly or indirectly:
6
<PAGE> 7
(i) own, manage, control or participate in the
ownership, management, or control of, or be employed
or engaged by or otherwise affiliated or associated
as a consultant, independent contractor or otherwise
with any other corporation, partnership,
proprietorship, firm, association or other business
entity engaged in the business of designing,
manufacturing and/or selling enterprise data LAN
switching, ATM switching and/or Gigabit Ethernet
switching products to customers in the enterprise
and/or carrier markets; provided, however, that the
following shall not be deemed a violation of this
covenant: (A) the ownership of not more than three
percent (3%) of any class of publicly traded
securities of any entity; and (B) passive investments
in venture capital funds and similar entities
established by persons who are not affiliated with or
related to the Executive and over which the Executive
has no power to direct the management or investment
decisions.
(ii) offer to employ or otherwise engage, any person
who is then (or was at any time within one year prior
to the time of such employment, engagement or offer
thereof) an employee, sales representative or agent
of the Company; or
(iii) solicit any business from any person or entity
that is at the time of such solicitation a customer
of the Company in a manner likely to result in a
discontinuance or reduction of the extent of such
person's or entity's business relationship with the
Company, or induce or influence any customer,
supplier or other person that has a business
relationship with the Company to discontinue or
reduce the extent of such relationship with the
Company.
(b) During the term of Executive's employment under this
Agreement and for two (2) years thereafter, Executive shall
not disclose, divulge, discuss, copy or otherwise use or
suffer to be used in any manner, in competition with, or
contrary to the interests of, the Company, any confidential
information relating to the Company's operations, properties
or otherwise to its particular business or other trade secrets
of the Company, it being acknowledged by the Executive that
all such information regarding the business of the Company
compiled or obtained by, or furnished to, the Executive while
the Executive shall have been employed by or associated with
the Company is confidential information and the Company's
exclusive property; provided, however, that the foregoing
restrictions shall not apply to the extent that such
information (A) is obtainable in the public domain or known in
the industry generally, (B) becomes obtainable in the public
domain or known in the industry generally, except by reason of
the breach by the Executive of the terms hereof; or (C) is
required to be disclosed by rule of law or by order of a court
or governmental body or agency.
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(c) The Executive agrees and understands that the remedy at
law for any breach by him of this Paragraph 7 may be
inadequate and that the damages flowing from such breach are
not readily susceptible to being measured in monetary terms.
Accordingly, it is acknowledged that, upon the Executive's
violation of any provision of this Paragraph 7, the Company
shall be entitled to immediate injunctive relief and may
obtain a temporary order restraining any further breach.
Nothing in this Paragraph 7 shall be deemed to limit the
Company's remedies at law or in equity for any breach by the
Executive of any of the provisions of this Paragraph 7 which
may be pursued or availed of by the Company.
8. Withholding of Taxes.
The Company shall withhold from any amounts payable under this
Agreement all federal, state, local or other taxes as legally shall be
required to be withheld.
9. Miscellaneous.
(a) The Executive represents and warrants that he is not a
party to any agreement, contract or understanding, whether
employment or otherwise, which would restrict or prohibit him
from undertaking or performing employment in accordance with
the terms and conditions of this Agreement. The Executive
further covenants that he will not impair his ability to carry
out his obligations under this Agreement by entering into any
agreement or in any way assisting others, directly or
indirectly, to enter into any agreement which will violate the
confidentiality, non-solicitation and non-competition
provisions of this Agreement.
(b) If any clause or provision of this Agreement shall be held
to be invalid or unenforceable, such clause or provision shall
be construed and enforced as if it had been more narrowly
drawn so as not to be invalid or unenforceable, and such
invalidity or unenforceability shall not affect or render
invalid or unenforceable any other provision of this
Agreement.
(c) The rights and obligations of the Company under this
Agreement shall inure to the benefit of, and shall be binding
on, the Company and its successors and assigns, and the rights
and obligations of the Executive under this Agreement shall
inure to the benefit of, and shall be binding upon, the
Executive and (other than obligations to perform services and
to refrain from competition and disclosure of confidential
information) his heirs, personal representatives and assigns.
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<PAGE> 9
(d) Any notice to be given under this Agreement shall be
personally delivered in writing or shall have been deemed duly
given when received after it is posted in the United States
Mail, postage prepaid, registered or certified, return receipt
requested, and if mailed to the Company, shall be addressed to
its principal place of business, attention: Human Resources,
and if mailed to the Executive, shall be addressed to him at
his last known address on the records of the Company, or at
such other address or addresses as either the Company or the
Executive may hereafter designate in writing to the other. Any
notice sent on behalf of a party may be signed and sent by an
attorney for that party. Notices sent by Federal Express or
similar overnight delivery service or by facsimile
transmission shall also constitute due notice under this
Paragraph 9(d), effective upon receipt thereof.
(e) The failure of either party to enforce any provision or
provisions of this Agreement shall not in any way be construed
as a waiver of any such provision or provisions as to any
future violations thereof, nor prevent that party thereafter
from enforcing each and every other provision of this
Agreement. The rights granted the parties herein are
cumulative and the waiver of any single remedy shall not
constitute a waiver of such party's right to assert all other
legal remedies available to it under the circumstances.
(f) This Agreement supersedes all prior agreements and
understandings between the parties made prior to the date
hereof and may not be modified or terminated orally. No
modification, termination or attempted waiver shall be valid
unless in writing and signed by the party against whom the
same is sought to be enforced.
(g) This Agreement shall be governed by and construed
according to the laws of the State of California.
(h) Captions and Paragraph headings used herein are for
convenience and are not a part of this Agreement and shall not
be used in construing it.
(i) Where necessary or appropriate to the meaning hereof, the
singular and plural shall be deemed to include each other, and
the masculine, feminine and neuter shall be deemed to include
each other.
(j) This Agreement may be executed in multiple counterparts,
each of which will be deemed an original, but all of which
together will constitute one and the same instrument. This
Agreement may be executed by facsimile signature.
9
<PAGE> 1
EXHIBIT 16
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ, LLP
FRANCIS M. GREGOREK (144785)
BETSY C. MANIFOLD (182450)
FRANCIS A. BOTTINI, JR. (175783)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4599
Attorneys for Plaintiff
SUPERIOR COURT OF THE STATE OF CALIFORNIA
LOS ANGELES COUNTY
DANIEL W. KRASNER, On Behalf of ) Case No.
Himself and All Others Similarly )
Situated, ) CLASS ACTION
------------
)
Plaintiff, ) COMPLAINT FOR BREACH OF
) FIDUCIARY DUTIES
vs. )
)
XYLAN CORPORATION, STEVE Y. KIM, )
YURI PIKOVER, ROBERT S. CECIL, )
ROBERT C. HAWK, TRUDE C. TAYLOR, )
JOHN L. WALECKA and ALCATEL SA, )
)
Defendants. ) Plaintiff Demands A
) Trial By Jury
- ------------------------------------------ -------------------
<PAGE> 2
CLASS ACTION COMPLAINT
Plaintiff, by and through his attorneys, alleges the following upon
information and belief:
SUMMARY OF ACTION
1. This action arises out of the proposal by Alcatel SA ("Alcatel"), a
6.5% shareholder of Xylan Corp. ("Xylan" or the "Company"), and one of its most
significant customers, if not its most significant customer, to acquire the
shares of Xylan it does not already own, for grossly inadequate consideration
and in breach of defendants' fiduciary duties. Plaintiff brings this action as a
class action on behalf of himself and all other public stockholders of the
Company who are similarly situated, to void and enjoin defendants' efforts to
deprive the Company's public shareholders of their equity interest in Xylan at a
grossly unfair and inadequate price and to usurp the benefits of the Company's
growth and future prospects for defendants' own benefit.
JURISDICTION AND VENUE
1. This Court has jurisdiction over the cause of action asserted herein
pursuant to the California Constitution, Article VI, Section 10, because this
case is a cause not given by statute to other trial courts.
2. This Court has jurisdiction over Xylan because this defendant is a
citizen of California with its principal place of business located at 26707 West
Agoura Road, Calabasas, California.
3. Venue is proper in this Court because the conduct at issue took place
and had an effect in this County.
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THE PARTIES
4. Plaintiff Daniel W. Krasner is the owner of shares of the common
stock of Xylan.
5. Defendant Xylan is a California corporation with its principal
executive offices located at 26707 West Agoura Road, Calabasas, California.
Xylan is a provider of high-band width switching systems that enhance the
performance of existing local area networks and facilitates migration to
networking technologies, such as Automatic Teller Machines.
6. Defendant Steve Y. Kim is Chairman, CEO and President of Xylan.
7. Defendant Yuri Pikover is Executive Vice President and a director of
Xylan.
8. Defendant Robert S. Cecil is a director of Xylan.
9. Defendant Robert C. Hawk is a director of Xylan.
10. Defendant Trude C. Taylor is a director of Xylan.
11. Defendant John L. Walecka is a director of Xylan.
12. The foregoing individuals (collectively the "Individual Defendants")
as officers and/or directors of Xylan are in a fiduciary relationship with
plaintiff and other public shareholders and owe plaintiff and the other public
shareholders the highest obligations of good faith, candor, loyalty and fair
dealing.
13. The Individual Defendants suffer from disabling conflicts of
interests and thus cannot adequately protect the interests of the public Xylan
shareholders.
14. Defendant Alcatel is a French-based telecommunications company.
Alcatel owns or controls 6.5 percent of the outstanding
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shares of Xylan and dominates and controls Xylan through Xylan's reliance on
Alcatel's significant joint technology and distribution arrangements with the
Company and the fact that Alcatel accounts for 11% of Xylan's revenue.
CLASS ACTION ALLEGATIONS
15. Plaintiff brings this action pursuant to Section 382 of the
California Code of Civil Procedure on his own behalf and as a class action on
behalf of all public stockholders of Xylan (excluding defendants and their
affiliates), or their successors in interest, who are or will be threatened with
injury arising from defendants' actions as more fully described herein (the
"Class").
16. This action is properly maintainable as a class action:
(a) The Class is so numerous that joinder of all members is
impracticable. As of February 27, 1999, there were approximately 42 million
shares of Xylan common stock outstanding, 20 million of which were publicly held
by what plaintiff believes to be thousands of stockholders of record. Members of
the Class are scattered throughout the United States.
(b) There are questions of law and fact which are common to the
Class and which predominate over questions affecting any individual Class
member.
(c) Defendants have acted and will continue to act on grounds
generally applicable to the Class, thereby making appropriate final injunctive
or corresponding declaratory relief with respect to the Class as a whole.
(d) A class action is superior to other methods for
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the fair and efficient adjudication of the claims herein asserted and no unusual
difficulties are likely to be encountered in the management of this class
action. The likelihood of individual class members prosecuting separate claims
is remote.
17. Plaintiff is committed to the prosecution of this action and has
retained competent counsel experienced in litigation of this nature. Plaintiff's
claims are typical of the claims of other members of the Class and plaintiff has
the same interests as the other members of the Class. Accordingly, plaintiff is
an adequate representative of the Class and will fairly and adequately protect
the interests of the Class.
18. Plaintiff does not anticipate any difficulty in the management of
this litigation as a class action.
SUBSTANTIVE ALLEGATIONS
19. On March 2, 1999 Alcatel announced a proposal to acquire the shares
of Xylan it does not already own for $37 per share, or $2 billion (the
"Transaction"). The Transaction provides that the acquisition will be made by
cash tender offer commencing on March 8, 1999 and scheduled to expire 20
business days thereafter. Both companies' board of directors approved the
acquisition and the Xylan board has recommended that its shareholders accept the
tender.
20. Xylan has extremely significant joint technology products and
distribution arrangements with Alcatel. Moreover, Alcatel accounted for more
than 11% of Xylan's revenue in 1997 i.e., the latest figures available. Xylan is
extremely dependent on Alcatel's business.
21. As such Alcatel is in a controlling and dominate
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position over Xylan and its board of directors and can and has used that
dominant position to force the Xylan Board of Directors to accept its inadequate
proposal.
22. Although Alcatel's offer amounts to a 37% premium over its March 1,
1999 closing price Xylan's business has been growing at an extraordinary pace
over the last two years, growing at a rate of 65%. Moreover Xylan's recent
fourth quarter profit rose 67% on strong sales. Alcatel, through its extensive
joint ventures with Xylan, is intimately aware of the Company's growth
prospects. Because Alcatel is in possession of proprietary information
concerning Xylan's future financial prospects it is aware of the fact that the
Company is worth more than the $37.00 per share offered under the Transaction.
Additionally, the Company's stock price has traded as high as $31.00 as recently
as July 20, 1998. Alcatel is therefore taking advantage of the fact Xylan stock
does not fully reflect the Company's financial prospects.
23. The Individual Defendants' are obligated among other things, to: (a)
undertake an appropriate evaluation of any bona fide offers, and take
appropriate steps to solicit all potential bids for the Company or its assets,
consider strategic alternatives and otherwise obtain the best transaction
reasonably available to maximize shareholder value; (b) take appropriate steps
to have any offer for the company reviewed independently, including appointing a
truly disinterested representative of the public shareholders or requiring a
vote of a majority of the public stockholders so that the interests of Xylan's
public stockholders are protected; and (c) adequately ensure that no
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<PAGE> 7
conflicts of interest exist between defendants' own interests and their
fiduciary obligations to the public stockholders of Xylan and that the terms of
any proposal by Alcatel are entirely fair.
24. By virtue of the conduct alleged herein, Alcatel and the Individual
Defendants are not complying with their fiduciary duties or adequately
protecting the interests of the Class, and are enriching Alcatel at the expense
of the Class.
25. As a result of the foregoing, the Individual Defendants and Alcatel
have breached fiduciary duties owed to Xylan and its public stockholders.
26. Unless enjoined by this Court, defendants will continue to breach
fiduciary duties owned to plaintiff and the other members of the Class and will
benefit themselves, all to the irreparable harm of the Class, as aforesaid.
27. Plaintiff and the other members of the Class have no adequate remedy
at law.
PRAYER FOR RELIEF
WHEREFORE, plaintiff demands judgment as follows:
1. declaring this to be a proper class action;
2. enjoining the consummation of the Transaction pending institution of
adequate safeguards to protect the interests of the Class, or, alternatively,
awarding rescissory damages;
3. ordering the Individual Defendants to carry out their fiduciary
duties to plaintiff and the other members of the Class;
4. ordering defendants, jointly and severally, to account to plaintiff
and the other members of the Class for all damages suffered and to be suffered
by them as a result of the acts and transactions alleged herein;
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5. declaring that the Individual Defendants and each of them have
violated their fiduciary duties to the Class and/or aided and abetted such
breach;
6. awarding plaintiff the costs and disbursements of the action,
including a reasonable allowance for plaintiff's attorney's fees and experts'
fees; and
7. granting such other and further relief as this Court may deem to be
just and proper.
JURY DEMAND
Plaintiff demands a trial by jury.
DATED: March 2, 1999 WOLF HALDENSTEIN ALDLER FREEMAN & HERZ, LLP
FRANCIS M. GREGOREK
BETSY C. MANIFOLD
FRANCIS A. BOTTINI, JR.
/s/ FRANCIS M. GREGOREK
---------------------------------------------
FRANCIS M. GREGOREK
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/338-4599
Attorneys for Plaintiff
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