Computer hardware maker Xylan plans biggest issue so far this year.

In the biggest local offering so far this year, Calabasas-based Xylan Corp., a manufacturer of equipment used by "networked" computers, plans to issue up to $96.6 million in common stock and become traded on the Nasdaq, according to a filing with the Securities and Exchange Commission.

The offering, if successful, would make an instant centi-millionaire out of Steve Y. Kim, 46, Xylan co-founder, chairman and chief executive.

He will retain a 16.5 percent stake of 6.5 million shares in Xylan, worth $20 each (assuming the successful offering) or a total of $130 million. Kim is the founder and former chief executive of Fibermux Corp., a computer networking company.

Xylan, with a mere one year of operating income and founded in 1993, will have a whopping market cap (outstanding shares times share price) of $787.4 million (the public offering is of just 11 percent of Xylan stock outstanding).

Xylan is an emerging maker of hardware - "high bandwidth switching systems," in technical jargon - which enhances the performance of systems which connect computers together in networks for local area networks.

Generally, such networks are within a single company or location, such as computers connected together at an architectural company or publishing outfit.

Many computer networks are becoming overloaded, due to the growing size of networks, the enhanced power of personal computers (which means more information is transmitted between computers), and the growing use of graphics by computer-users (graphics use up a lot of computer power and transmitting capacity). Xylan's product increases the carrying capacity of networks.

Exploding sales

Xylan's sales have been exploding. The company posted a loss of $9.44 million on revenues of $29.7 million in 1995, compared with a loss of $4.1 million on revenues of $443,000 in 1994.

However, in the fourth quarter of 1995, Xylan crossed over into the black, posting net income of $437,000 on revenues of $15.5 million. Revenues have been surging from quarter to quarter. The company has 209 employees, with 88 in sales and 67 in research and development.

The proposed size of the initial public offering is bold - up to $96.6 million for a company that only recently became profitable, and operates in the fiercely competitive world of computer hardware.

New York-based Morgan Stanley & Co., a major brokerage house, is lead underwriter on the Xylan offering.

Major insiders who will keep their stock include Kim (16.5 percent of outstanding common, after the offering), Menlo Park-based Brentwood Associates (17 percent). Menlo Park-based Norwest Equity Partners IV (10.4 percent), Reston, Va.-based Alcatel Data Networks (8.3 percent).

The well-known venture capital firm Brentwood Associates was a major, early investor in Xylan, buying privately placed stock in 1993 and 1994.

Xylan has formed partnerships with major "original equipment manufacturers," or OEMs, in the computer industry. Sales to OEMs accounted for 60 percent of Xylan's revenues in 1995.

End-users of Xylan's products are a virtual roll-call of Fortune 1000-type companies or institutions, including Bell Atlantic Corp., Fujitsu Ltd., Lockheed Martin Corp., R.R. Donnelley, Bank of America, UCLA and the U.S. Air Force.

Possible problem

One possible fly in the Xylan ointment: Another hardware maker claims that Xylan has ripped off its technology, patent and key employees.

A company named Ascom Timeplex, based in New Jersey with a branch in Irvine, has filed suit in U.S. District Court in downtown Los Angeles alleging that Xylan swiped technical and trade secrets and key employees. A skilled technologist will be appointed as a special master to help the court render a judgment in the case.

Ascom Timeplex alleges that patent No. 5,394,402 has been infringed, and that trade secrets have been swiped, primarily via the improper hiring of an Ascom Timeplex employee.

In its prospectus, Xylan said it would vigorously defend against the lawsuit and that its lawyers have told the company that there has been no infringement of the patent.

If Ascom Timeplex prevails in court, it would have material adverse effect upon Xylan, as nearly all of Xylan's products are dependent on the disputed technology and patent. However, the outcome of the lawsuit is not predictable, said Xylan, but it will be expensive to litigate or settle.

In its prospectus, Xylan said it does not hold any patents protecting its proprietary technology, and thus the company might be vulnerable to copying by other companies.