Xedia and Silicon Valley Bank (A)

PA U L A . G O M PE R S

Marty Meyer, CFO of Xedia Corporation, was on a conference call in late October 1997 with Jim Maynard, Senior Vice President of Silicon Valley Bank East (SVB), talking about the deal terms of a bridge loan. Xedia was a networking equipment manufacturer that helped to provide high-speed Internet service and had already taken out a small equipment line of credit with SVB in early 1997. Now, however, Xedia needed additional financing to fund the company until it raised its next round of venture capital financing. Xedia was currently having discussions with a few venture capitalists about investing in the next round, but Meyer was uncertain when the deal would close given the general uncertainty of raising venture capital, including finding investors to commit, negotiating terms, and reviewing all legal documents. Meyer needed to make sure that the company did not run out of cash because, without the bridge loan, his negotiating power with the venture capital firms would weaken.
Meyer wondered whether he and Maynard could come to agreeable terms. After all, Xedia was burning approximately $500,000 per month, and without another venture capital infusion, the company would be unable to pay the loan back. While Meyer believed that Xedia could raise the money, the firm’s fast declining cash balances made life more complicated.

Banks and Entrepreneurial Firms
Young companies had historically suffered from a lack of debt financing because traditional banking rules about creditworthiness often ruled out firms with little operating history. Bankers traditionally secured loans either with a company’s cash flows or only extended credit if the firm had substantial tangible assets. Emerging companies had tremendous difficulty convincing bankers to provide financing under these traditional guidelines because they often had no assets and no track record of positive cash flows. Small loans (also called micro-lending) dropped precipitously in the United States during the banking troubles of the late 1980s and by the late 1990s still had not returned to levels of lending seen in the early 1980s.
Much of the drop in loans to small businesses was a direct result of government regulation, which often required a larger capital base to support such loans. Young, entrepreneurial firms were difficult to evaluate by conventional financial metrics, and government regulators often saw them as very risky.

Research Associate Jon M. Biotti prepared this case under the supervision of Professor Paul A. Gompers. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.

Copyright © 1998 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

Three primary problems affected credit availability for young entrepreneurial firms. First, the entrepreneur typically knew substantially more than the banker about the firm’s business. The banker was likely only casually aware of new developments and new technologies, much less how to evaluate them.
Second, the level of uncertainty surrounding potential outcomes was quite large. The range of possible returns and cash flows was much wider than would have been the case with the bank’s more mature customers. Without some way to ascertain the likelihood of payback, a bank would be unwilling to provide a loan. Because the payment to the bank was fixed interest and principal repayment, any write-off of loans cold destroy a bank’s profitability.
Finally, many entrepreneurial firms were businesses whose value depended solely on intangible assets (e.g., patents, copyrights, etc.) or the skills of its employees. Intellectual property often made poor collateral. In situations where the bank would have to seize the asset, it would be more likely that the intellectual property was worthless. Similarly, individuals cannot pledge themselves as collateral. Without assets to pledge, companies had difficulty convincing banks to lend money.

History of SVB
In early 1981, three senior Silicon Valley businessmen decided over a poker game that the inability of young companies to secure adequate credit represented a business opportunity. From their many years of experience, the three businessmen, Bill Biggerstaff, Bob Medearis, and David Elliot, knew many young companies that had been refused credit because they did not satisfy traditional banking criteria for asset-backed or cash flow-based loans. This group decided to start a bank specializing in lending to young companies in the Silicon Valley area. Ken Wilcox, Executive Vice President of SVB, explained the premise behind the founding of SVB:
The founding of Silicon Valley Bank was based on the ability to overcome one’s prejudice. Because venture capitalists were reluctant to bring an end to a company prematurely, they almost always believed that with some tweaking and additional financing the company could still succeed. Thus, it was very likely that the companies would receive funding for that next round. (See Exhibit 1 for info on the likelihood of second round financing.)
SVB’s strategy was to serve as the banker of choice for emerging growth and middle-market companies in specific target niches focusing on the technology and life sciences industries. The founders of SVB incorporated the bank in 1982 but did not receive all banking licenses to operate until the end of 1983.

SVB Products and Organization
Over the years, SVB established teams of lending and support staff along distinct industry lines: software, communications, semiconductors, computers and peripherals, as well as medical devices, biotechnology and health care services. These groups provided most SVB services to companies in that particular industry group that had raised venture capital money. The product lines sold to these industries included equipment financing, working capital lines of credit, asset acquisition loans, and bridge financing. Equipment financing agreements provided loans secured by the borrower’s equipment. A working capital loan was secured by the current assets of the client’s company: accounts receivable and inventory. Rules of thumb encouraged SVB bankers to lend upwards of 80% of accounts receivable, 20% of inventory, and 80% to 100% of plant and equipment. An asset acquisition loan allowed the borrower to purchase another company and was secured by the assets of

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SVB also organized itself by financial products and services for clients only requiring specific banking services. These clients were served by employees specially trained to provide a particular service. Examples of SVB’s service divisions included business banking, cash management, factoring, asset-based lending, equipment loans, and international banking services. (See Exhibit 2 for SVB’s group organization.) The business banking division focused on non-venture-backed, emerging growth companies with annual sales under $5 million. Client companies in this division required less than $1 million in loans and represented SVB’s strategy of helping young companies grow. Usually, SVB switched these clients into the niche practices as they raised venture capital money. In the cash management group, SVB assisted clients in managing cash collections, disbursements, and investments in an efficient, cost-effective manner by using wholesale lockbox services and PC (computer-linked) banking. SVB’s factoring group helped clients raise capital by quickly selling accounts receivable to SVB at a discount. The discount included an implicit interest rate once the full amount of the account receivable was collected by SVB. Of course, risk resided with SVB if the full amount of the account receivable was not collected. The Asset-Based Lending group made loans against the company’s accounts receivables and inventory to offer greater financing capacity and flexibility through active monitoring of assets. Finally, the International Services group offered a full range of products and services to clients who conducted business overseas. These services included foreign exchange, import and export letters of credit, documentary collections, and export financing.

Growth of SVB
SVB expanded throughout California and Massachusetts during the 1980s followed by expansion to other markets during the 1990s. (See Exhibit 3 for the list of SVB offices and Exhibit 4 for historical growth in loans and assets.) The profitability of SVB and its rapid expansion throughout the United States attracted other commercial lenders to make loans to emerging companies. This competition took many different forms: small lenders like Comerica and Imperial with renewed focus on emerging companies; larger banks like Fleet and Bank of America with increased emphasis on emerging companies; and lastly, equipment leasing and financing companies like Comdisco that were aggressively lending against the special equipment and plant of emerging companies. As a result of this increased competition, SVB’s fees and margins had decreased over the last few years. (See Exhibit 5 for SVB’s most recent financials.) SVB management viewed the increased competition, both in terms of additional competitors as well as additional products offered, as demonstrating the need for differentiation through marketing. (See Exhibit 6 for a sample of SVB’s marketing material.)
Table A Composition of SVB Loans

Type of Loan 1992 1997

Working capital
72%
40%

Equipment
25%
40%

Acquisition financing
1%
1%

Bridge
2%
19%

Source: Company documents.

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The success of SVB and its competitors over the past 15 years greatly improved the amount of credit provided to young companies, although credit availability did not return to the levels of the early 1980s. (See Exhibit 7 for the amounts of loans provided by banks to small companies in the United States.) At the same time, favorable macroeconomic conditions and an improved net interest margin throughout the commercial banking industry improved industry profitability. (See Exhibits 8 and 9 for commercial banking industry profitability, and Exhibit 10 for general macroeconomic conditions).

Credit Selection and Analysis

SVB was founded on the premise that traditional sources of principal repayment (i.e., cash flow or asset sales) were not the primary emphasis. Thus, a legitimate source of loan repayment was the next round of financing raised by the company from venture capitalists. Because most young companies lacked profits and assets, most banks were unwilling to lend to these young companies. Most commercial banks would only lend to a company if it had a long track record of profits to repay the debt or if it had assets that could be sold for a price great enough to recover their principal. SVB needed to analyze whether a company would receive the next round of financing to ensure that their loan would be repaid. Dave Fischer, Senior Vice President of SVB, explained the credit analysis process:
The first screen is whether the company is financeable by equity investors which boils down to whether the company is positioned well to do great things. From our experience, we have found it unusual for a company to grow rapidly without outside money. For example, some companies are what we call “lifestyle” companies with very little desire to either grow rapidly or do an IPO. We look at these companies differently from those that have the potential to skyrocket. Second, we spend time with the venture capitalists to assess their willingness to fund the next round. One of the time-honored principals of this business is that one needs to know who the key decision makers are. The fate of a young company is often in the hands of the investors, not the company’s management. In essence, we rely on the investors to perform part of the due diligence for us. For example, if a top venture capitalist brings us a deal, then we almost always do the deal because we trust his instincts and that if it isn’t working, he’ll do something about it. On the flip side, we will not lend money to portfolio companies of certain other venture firms because of previous bad experiences. Next, we perform internal due diligence on the company’s industry and trends within that industry. Basically, we want to understand whether the company is positioned well and how much competition exists for that space. Finally, we analyze how the company intends to spend the money and why the company wants bank debt. We want to do business with people who are confident that their company will do well and think of a loan from SVB as a means to decrease dilution of their equity.

History of Xedia
Xedia was founded in 1993 by Jens Montanana and Ashley Stephenson. During this period, Xedia successfully designed, manufactured, marketed, and sold an Ethernet switch. By 1995, senior management realized, however, that Xedia was late in that product’s life-cycle trail, behind well- capitalized competitors like Cisco Systems, Ascend, and 3Com. Furthermore, the Internet’s open standards influenced convergence with traditional data networking, broadcast video, and telephony, which also attracted new competitors like Lucent Technologies and Northern Telecom to enter this market. Xedia management believed that this intense competition would depress Ethernet switch

4

prices, creating an industry where scale was the most important success variable. Throughout the mid-1990s, Cisco was buying as many competitors as possible in order to grow. Xedia was forced to sell its product through Bay Networks under an original equipment manufacturer (OEM) agreement. Under this agreement, Bay placed its name on Xedia’s product and sold it. Meanwhile, Xedia had no brand name with all its revenues coming from royalties. Xedia senior management did not feel comfortable about the long-term sustainability of their company if they did not reinvent the firm.
Ashley Stephenson, President and CEO, had recruited Marty Meyer as the CFO during 1995. Along with Montanana, this group began to analyze the repositioning of the company. (See Exhibit 11 for resumes of Xedia’s senior management.) Senior management analyzed the company’s core competencies and how they could fund their new strategy. Marty Meyer described this time:
In February 1996, a plan was put in place to use the $5 million in forecasted royalty revenues which we would receive from Bay Networks over the next nine months to restart the company. The decision was made to swim upstream into communication equipment with an increased level of software content. Ultimately, we decided to focus on developing an access router which would help corporate clients and Internet Service Providers (ISPs) to manage bandwidth for the provision of high speed Internet service, i.e., Xedia’s proposed product would be able to guarantee a customer access to the Internet at a certain speed.

The “New” Xedia

The “new” Xedia was repositioned to take advantage of the growth in Internet traffic. The opportunity stemmed from the belief that the Internet would become more integral to the business applications of an enterprise. As a result, companies required increased speed, more consistent performance, and better management control over their Internet access resources. At the same time, Internet Service Providers (ISPs), the firms that provided connections to the Internet, needed a way to manage who had access at what speed.
To attack this market opportunity, Xedia created a single-box solution that integrated high- performance, industry-standard hardware, and highly optimized software technology providing network operators with a scalable Internet access solution that effectively managed Internet traffic. In essence, the Xedia product managed the bandwidth of a network to maximize access. Using fully open, nonproprietary traffic management technology called Class-Based Queuing (CBQ), a customer was able to classify, specifically allocate, and efficiently share, or borrow, bandwidth across the departments of a company, managed server environments, or multi-tenant facilities. This product allowed consistent quality of access to the Internet at well-specified speeds.
Xedia envisioned that the market demand for their product would skyrocket as usage of the Internet increased. In this situation, a firm’s network manager would need to establish policies to control (1) who had access, (2) how much bandwidth, and (3) at what service level. With Xedia’s product, the network manager could establish and enforce Internet access policies that ensured that service needs were met across the firm’s employees users and applications. The company believed there were two major applications to its technology.
First, a company could use Xedia’s product to allocate bandwidth space between the different corporate departments. The network manager could allocate bandwidth by department (e.g., sales, marketing, engineering, etc.), by traffic type (e.g., Web, electronic mail, voice over IP, etc.) or by any combination of these criteria. Each class of traffic would then be allocated an explicit bandwidth rate. A second application involved the network service providers who, as a means of differentiating their service, wanted to guarantee the quality and quantity of service to achieve sales. Using the Xedia

5

product, Internet Service Providers could manage their bandwidth capacity more effectively to provide better service to more customers. (See Exhibit 12 for an example.)

Historical Financing
Through the end of 1996, Xedia was financed by Montanana, a group of individual investors and two corporate investors, Bay Networks and Japan Tobacco Software Services, a Japanese conglomerate. This group had invested under the old strategy of Ethernet switch product. With its new strategy, Xedia needed more money to finance the research and development of the new product. After depleting a substantial cash position generated from their previous Ethernet switch business and which Xedia senior management used to bring their new product to Alpha stage, Xedia management wanted to raise venture capital money. Marty Meyer explained:
Xedia was an odd duck because it was a restart. We had good people looking at a large market but with a checkered past. Our story required more explaining than most. We decided that Xedia needed the outside validation that venture capital money brings; this type of validation was worth the dilution of a VC investment. Ultimately, we raised $6.3 million in February 1997 led by Roger Evans of Greylock at a post-money valuation of $20 million. We were definitely right about the validation because as soon as we received the investment from Greylock, we received phone calls from investment banks, commercial banks, many real estate and insurance people, and equipment financing companies. Before, we had to work hard to meet bankers and get bank financing, even for warrants, whereas now they seek us out to offer bank financing. (See Exhibit 13 for a list of similar Greylock investments).

Table B Historical Financing of Xedia ($000s)

Round Lead Investor
Date
Amount Raised
Post-Money Valuation

1 Xedia Management

1/93

$360

$6,000
2 Japan Tobacco Software Services
12/93
$1,650
N.A
3 Bay Networks
11/95
$2,400
$17,000
4 Greylock
2/97
$6,300
$20,000
Source: VentureOne.

Soon after Xedia decided to open a credit line in order to buy equipment and furniture for the company. Taking on debt would allow the company to retain as much of its equity as possible. Xedia maintained a banking relationship with US Trust for checking and deposits but worried about US Trust’s inexperience in lending to young companies. Another possible source of lending was venture leasing firms like Comdisco, Lighthouse, and Phoenix. Xedia management believed that most venture leasing firm lenders did not have the time or resources to learn about many different industries like Xedia’s access routing business, so any agreement would require a significant number of warrants to make a loan. Xedia was also interested in SVB because of its reputation as the commercial lender of choice for young companies and also because of its reputation for competitive pricing. Ultimately, Xedia arranged a small loan of $700,000 with SVB primarily for the purchase of office furniture and equipment. Meyer discussed their decision:
We liked the fact that SVB has specific groups that focus on specific industries. Because of this, they knew more about the different technologies than most bankers, allowing them to take more risk. Another place where SVB added value involved their covenant agreements.

6

We felt that SVB understood our business more than the other bankers we talked to. We felt that they would not panic if we ever breached a banking covenant.

Corporate Strategy
Xedia planned to raise a large amount of money for its next round in order to finance the production rollout of its product. Early indications from beta site users were that the product would be well received by the market. The company was burning $500,000 per month and expected this rate to increase steadily in the future. Without either the bridge loan or the next round of financing, Xedia would reach its fume date by the end of March 1998. Senior management believed that their company was poised for a major breakthrough, resulting in strong growth and profitability. (See Exhibit 14 for historical financials, Exhibit 15 for Xedia income statement projections created by SVB, Exhibit 16 for information on comparable companies to Xedia, and Exhibit 17 for volatility calculations.)

Conclusion
Notwithstanding senior management’s confidence about their company’s future, general uncertainty behind fundraising caused Xedia management not to know exactly when they would close on their next round of financing. For this reason, Xedia decided to ask SVB for a bridge loan of
$1.5 million in order to give the company more breathing room in its negotiation with its VC investors. Meyer informed SVB in August 1997 about the possibility of needing the bridge loan, given that the company would officially run out of cash in March 1998.

Meyer was confident that the company was now headed in the proper direction since the restart of the company and believed that the creditworthiness of Xedia would influence most lenders to make the bridge loan. He fully realized, however, that time was beginning to become a factor. The company was traveling at a fast speed, and this financing represented a brick wall that Xedia had to get over or else it would be in trouble.

7

Exhibit 1 Data on Subsequent Rounds of Financing, 1987–1995

Round
Number of Companies
Median Amount Raised
Mean Amount Raised
Median Post- Money Valuation
Mean Post- Money Valuation
Percentage of Previous Round

1

1150

$2.83

$3.85

$7.00

$10.00

100.0%
2
986
$3.50
$4.66
$13.50
$17.10
85.0%
3
614
$3.90
$5.10
$19.00
$25.90
62.3%
Source:
VentureOne.

Exhibit 2 SVB Group Organization

Technology and Life Sciences Special Industries Strategic Financial Products and
Services

Communications and Information ∙ Diversified Industries ∙ Cash Management Services
Computers and Peripherals ∙ Entertainment ∙ Asset-Based Lending
Semiconductors ∙ Premium Wine Industry ∙ Emerging Technologies
Software ∙ Real Estate ∙ International
Venture Capital Banking Division ∙ Religious Financial Resources ∙ Factoring
Life Sciences and Health Care

Source: Company documents.

Exhibit 3 Silicon Valley Bank Locations

LOCATIONS

Santa Clara, CA ∙ Palo Alto, CA
Menlo Park, CA ∙ San Diego, CA
Beverly Hills, CA ∙ Irvine, CA
St. Helena, CA ∙ Boulder, CO
Wellesley, MA ∙ Rockville, MD
Beaverton, OR ∙ Austin, TX
Chicago, IL ∙ Atlanta, GA
Bellevue, WA ∙ Phoenix, AZ

Source: Company documents.

8

Exhibit 4 SVB Historical Growth ($Millions)

Year Loans
Assets
Net Income
Deposits

1983 $7.6

$17.9

$0.24

$13.5
1984 30.1
50.3
0.25
45.3
1985 45.5
73.4
0.46
67.6
1986 102.7
169.4
0.98
158.3
1987 142.3
202.7
1.50
188.1
1988 188.7
275.4
3.50
255.5
1989 286.0
439.4
7.02
412.0
1990 484.6
670.6
10.00
630.7
1991 601.1
860.1
11.99
799.8
1992 606.1
956.2
-2.33
888.9
1993 553.6
992.3
1.61
915.0
1994 702.4
1,161.6
9.07
1,075.4
1995 793.8
1,407.6
18.15
1,298.0
1996 1,001.6
1,924.5
21.47
1,774.3
1997 1,312.8
2,625.1
27.68
2,432.4
14-Year CAGR 44.5%
42.8%
40.3%
44.9%
5-Year CAGR 16.7%
22.4%
NM
22.3%
Source: Company documents.

9

Exhibit 5 SVB Financial Highlights (dollars and numbers in thousands, except per-share amounts)

Years Ended December 31 1997 1996 1995 1994 1993
(Unaudited)

Income Statement Summary:

Net interest income
$110,824
$87,275
$73,952
$60,260
$50,410
Provision for loan losses
10,067
10,426
8,737
3,087
9,702
Noninterest income
13,265
11,609
12,565
4,922
9,316
Noninterest expense
52,682
52,682
47,925
45,599
47,357
Income before taxes
47,721
35,776
29,855
16,496
2,667
Income tax expense
20,043
14,310
11,702
7,430
1,066
Net income
27,678
21,466
18,153
9,066
1,601
Common Share Summary:

Net income per share
$ 2.72
$ 2.21
$ 1.98
$ 1.06
$ 0.20
Book value per share
17.50
14.51
11.71
9.08
8.48
Weighted average common shares
9,970
9,702
9,164
8,575
8,201
outstanding

Year-End Balance Sheet Summary:

Loans, net of unearned income
$
$
$
$
$564,555

1,174,645
863,492
738,405
703,809

Assets
2,625,123
1,924,544
1,407,587
1,161,539
992,289
Deposits
2,432,407
1,774,304
1,290,060
1,075,373
914,959
Shareholders’ equity
174,481
135,400
104,974
77,257
70,336
Average Balance Sheet Summary:

Loans, net of unearned income
NA
$
$
$
$

779,655
681,255
592,759
574,372
Assets
NA
1,573,903
1,165,004
956,336
917,569
Deposits
NA
1,441,360
1,060,333
877,787
846,298
Shareholders’ equity
NA
119,788
91,710
73,461
68,198
Capital Ratios:

Average shareholders’ equity to
6.9%
7.6%
7.9%
7.7%
7.4%
average assets

Total risk-based capital ratio
11.5%
11.5%
11.9%
10.1%
11.3%
Tier 1 risk-based capital ratio
10.2%
10.2%
10.6%
8.9%
10.1%
Tier 1 leverage ratio
7.1%
7.7%
8.0%
8.3%
6.9%
Select Financial Ratios:

Net interest margin
NA
6.1%
7.1%
7.2%
6.4%
Efficiency ratio
55.9%
55.9%
60.6%
68.3%
68.9%
Return on average assets
1.3%
1.4%
1.6%
0.9%
0.2%
Return on average shareholders’ equity
18.2%
17.9%
19.8%
12.3%
2.3%

Source: Company Annual Report.

10

Exhibit 6 Silicon Valley Bank Advertisement from Company Press Kit

Source: Company documents.

11

1981    1982    1983    1984    1985    1986    1987    1988    1989    1990    1991    1992    1993    1994 

Industry Totals
Total Dollar Volume

523.8

570.9

583.7

588.8

595.5

630.3

603.7

605.4

596.7

565.3

491.7

458.2

449.3

480.6
Dollar Volume by Credit Size:
Less than $100,000:

54.6

50.2

44.4

46.8

40.5

39.5

37.6

41.0

43.4

33.7

23.7

22.9

23.6

22.5
$100,000 to $250,000:
45.3
38.1
36.6
38.8
36.5
37.3
38.0
40.8
38.9
30.1
25.7
22.2
23.0
25.3
$250,000 to $1 million:
91.9
76.2
66.4
73.5
72.3
77.3
74.2
64.9
61.4
54.0
40.7
43.3
41.1
45.9
$1 million to $10 million:
169.9
194.3
172.2
172.3
176.5
182.0
178.5
154.8
173.0
163.9
142.5
142.9
135.5
152.7
$10 million to $25 million:
53.7
83.5
104.4
114.1
97.1
114.4
101.9
127.3
110.3
134.5
107.4
100.9
116.2
124.4
$25 million to $100 million:
93.5
101.2
118.3
113.5
135.6
134.5
141.6
123.0
137.5
110.3
100.5
95.7
90.9
86.5
Greater than $100 million:
14.8
27.2
41.5
29.8
36.9
45.2
31.8
53.7
32.2
38.8
51.2
30.3
19.0
23.2
Organizations with Greater than
$100 Billion in Total Assets

Total Dollar Volume
55.7
59.9
62.7
49.3
42.3
45.2
54.8
37.1
40.1
37.5
81.4
74.0
82.4
92.2
Dollar Volume by Credit Size:
Less than $100,000:

3.0

2.6

0.8

0.9

0.6

0.3

0.3

0.1

0.0

0.1

0.2

0.3

0.2

0.3
$100,000 to $250,000:
2.0
1.9
0.9
1.0
0.6
0.4
0.3
0.1
0.1
0.2
0.3
0.6
0.5
0.4
$250,000 to $1 million:
3.1
2.7
3.1
3.3
2.8
2.4
1.8
0.4
0.5
0.8
1.3
1.7
2.0
1.6
$1 million to $10 million:
16.3
16.9
13.6
14.8
14.8
14.4
18.8
5.8
8.6
7.2
14.0
14.9
15.3
21.0
$10 million to $25 million:
11.1
12.2
11.9
11.0
8.1
6.4
9.8
7.4
11.5
11.3
17.4
18.0
25.1
28.1
$25 million to $100 million:
16.9
18.9
17.7
15.5
11.9
17.8
17.8
11.8
16.5
10.7
33.5
28.7
32.0
32.3
Greater than $100 million:
3.3
4.9
14.8
2.7
3.4
3.4
6.1
11.6
2.7
7.2
14.7
9.9
7.2
8.5

Source: Brookings Papers on Economic Activity, “The Transformation of the U.S. Banking Industry: What a Long Strange Trip It’s Been;” Berger, Allen; Kashyap, Anil; and Scalise, Joseph; volume 2, 1995, pp. 55–218.

Item
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

Gross Interest Income

9.58%

8.50%

8.39%

9.00%

9.95%

9.59%

8.58%

7.47%

6.87%

6.66%

7.30%

7.21%
Gross Interest Expense
6.08
5.11
4.97
5.46
6.44
6.14
4.97
3.57
2.96
2.87
3.57
3.45
Net Interest Margin
3.50
3.39
3.42
3.54
3.51
3.46
3.61
3.90
3.90
3.79
3.73
3.76
Noninterest Income
1.20
1.28
1.43
1.50
1.62
1.67
1.79
1.95
2.13
2.00
2.02
2.19
Loss Provisions
.68
.78
1.30
.65
.98
.97
1.03
.78
.47
.28
.30
.38
Other Noninterest Expense
3.17
3.22
3.35
3.38
3.42
3.49
3.73
3.87
3.94
3.76
3.65
3.73
Securities Gain
.06
.14
.05
.01
.03
.01
.09
.11
.09
-.01
.01
.03
Income Before Tax
.90
.80
.26
1.02
.76
.68
.73
1.32
1.70
1.74
1.81
1.86
Taxesa
.21
.19
.19
.33
.30
.23
.25
.42
.56
.58
.63
.65
Extraordinary Items
.01
.01
.01
.03
.01
.02
.03
.01
.06
NM
NM
NM
Net Income
.70
.62
.08
.71
.47
.47
.51
.91
1.20
1.15
1.18
1.21
Cash Dividends
.33
.33
.36
.44
.44
.42
.45
.41
.62
.73
.75
.91
Declared
Net Retained Earnings

.37

.29

-.29

.28

.02

.05

.07

.50

.59

.42

.43

.29
MEMO:

Net Interest Margin, Taxable Equivalentb
3.88%
3.79%
3.63%
3.72%
3.65%
3.57%
3.71%
3.99%
3.99%
3.86%
3.79%
3.81%
Return on Equity
11.18%
9.97%
1.29%
11.61%
7.33%
7.29%
7.71%
12.66%
15.34%
14.64%
14.71%
14.60%

Source: Federal Reserve Bulletin, June 1996.

aIncludes all taxes estimated to be due on income, extraordinary gains, and security gains.
bFor each bank with profits before tax greater than zero, income from tax-exempt state and local obligations was increased by [t/(l-t)] times the lesser of profits before tax or interest earned on tax-exempt obligations (t is the marginal federal income-tax rate). This adjustment approximates the equivalent pretax return on tax-exempt obligations.

Profitability Metric
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996

Return on Equity

All Banks
9.83%
1.29%
11.61%
7.33%
7.29%
7.71%
12.66%
15.34%
14.64%
14.71%
14.60%
Ten Largest Banks
9.58
-18.11
23.30
-3.92
10.13
4.23
10.91
16.75
13.86
13.78
13.34
Banks Ranked 11
12.75
-1.70
9.72
8.41
4.07
7.71
15.21
16.91
16.27
16.45
16.93
through 100

Banks Ranked
10.93
9.25
10.01
10.54
7.41
8.45
12.16
14.94
15.45
14.86
14.42
101 through 1000

Banks Not Ranked
6.74
6.99
8.09
9.66
8.60
8.95
11.64
12.66
12.03
12.12
12.38

in Top 1000

Return on Assets

Top 1000

Source: Federal Reserve Bulletin, June 1997.

Year
Real GDP
(1992 $
Billions)
Inflation
Unemployment Rate
12-Month Treasury Bill
Rate
5-Year Government
Bond
10-Year Government
Bond
Prime Rate
S&P 500
Index

1990

$6,079.0

5.3%

6.3%

6.4%

7.7%

8.1%

10.0%

330.2
1991
$6,105.3
2.6%
7.3%
3.9%
5.9%
6.7%
7.2%
417.1
1992
$6,327.1
2.9%
7.4%
3.5%
6.0%
6.7%
6.0%
435.7
1993
$6,476.9
2.5%
6.5%
3.5%
5.2%
5.8%
6.0%
466.5
1994
$6,688.6
2.7%
5.4%
6.8%
7.8%
7.8%
8.5%
459.3
1995
$6,796.5
2.3%
5.6%
4.9%
5.4%
5.6%
8.7%
615.9
1996
$7,017.4
2.9%
5.3%
5.3%
6.2%
6.4%
8.3%
740.7
Q1 1997
$7,101.6
2.4%
5.2%
5.7%
6.8%
6.9%
8.3%
757.1
Q2 1997
$7,159.6
2.0%
5.0%
5.4%
6.4%
6.5%
8.5%
885.1
Q3 1997
$7,217.6
1.9%
4.9%
4.9%
6.0%
6.1%
8.5%
947.3
Q4 1997
$7,283.3
1.6%
4.7%
5.2%
5.7%
5.8%
8.5%
970.4

Source: Federal Reserve Bulletin, June 1997.

Exhibit 11 Management Biographies

Jens Montanana, Chairman
One of the founders of Xedia Corporation, Jens Montanana brought extensive experience in launching and repositioning companies for success.
In 1986, he founded DataTec Ltd., a networking and communications distributor with a market cap of over $200M. In 1989 he led the acquisition of UK-based data communications front-runner Miracom Ltd. as part of a joint venture with U.S. Robotics, Inc., the leading U.S. modem maker. Subsequently, he served as Vice President and Managing Director of U.S. Robotics for five years.
During his tenure with U.S. Robotics, Mr. Montanana increased revenues fivefold for the Miracom division while overseeing a tenfold increase in profits and a rise from an eleventh-place market position to number two in the industry. Previously, he held a range of executive, marketing, and sales positions within the computer industry, including experience with Sperry Corporation, Commodore Computers, Westinghouse, and Computer Science Corporation.

Ashley Stephenson, President & CEO
As a member of the executive team that established Xedia, Ashley Stephenson became President & CEO of the company in August 1995. He was most recently responsible for leading Xedia’s expansion beyond its initial successes in workgroup Ethernet switching into the emerging market of Managed Broadband Access to the Internet.
In his previous position as Vice President of Marketing with Xedia, he led the introduction of its first products through indirect channels and established the company’s initial OEM relationship with existing firms in the networking field.
His prior experience included senior strategic responsibilities with Groupe Bull, including the founding of the Power PC/PowerOpen consortium with IBM, Motorola, and Apple Computer. He began his career in engineering, holding positions such as Director of CPU Development with Stellar Computer, Architect of SNA and LU6.2 gateway products for Wang Laboratories, and various research and development roles with IBM UK.
Mr. Stephenson conducted postgraduate research in high-energy physics at C.E.R.N., Switzerland (Conseil European pour la Recherché Nucleaire/European Particle Physics Laboratory) after graduating with First Class Honors from the Royal College of Science in London. He served on the Board of Directors for the PowerOpen Association and the Object Management Group.

Karen Barton, Vice President of Marketing
Karen Barton joined Xedia in 1997 as the Vice President of Marketing. Barton had more than 20 years of experience in strategic marketing, product planning, business development, product management, and marketing programs. She joined Xedia from Bay Networks where, as Vice President of Strategic Business Development, she played an executive role in developing corporate strategy, building technology partnerships, mergers and acquisitions, and in corporate and product planning. Previously, she held senior-level management positions in product marketing, market development, and strategic planning at Wellfleet Communications, BBN Comm.,

16

Exhibit 11 (continued)

and Motorola Codex. Barton received a B.S. from the University of New Hampshire and an MBA from Boston College.

Jeremy Greene, Chief Technical Officer
Jeremy Greene joined Xedia in 1996 as the principal architect of the company’s new product line designed to address the needs of the Broadband Internet Access marketplace. Greene led the engineering effort to develop the new generation of Xedia products encompassing technologies such as IP Routing, Frame Relay, and ATM.
Before coming to Xedia, Mr. Greene held senior technical and consulting positions with Proteon, Chipcom, Coral Systems and InterLan. Over the course of his career, Mr. Greene has managed and developed a wide variety of networking-related projects ranging from routers, network management systems, and remote access devices.
Born and educated in the United States, Mr. Greene held BSEE and MSEE degrees from the University of Massachusetts.

Rick Lemieux, National Sales Manager
Rick Lemieux was responsible for developing key components of the sales and marketing plan for Xedia’s flagship Access Point family of products. Lemieux joined Xedia from UB Networks where he was responsible for launching UB’s channel program in the Northeast. Between 1987 and 1995, Mr. Lemieux held senior sales positions at ascom Timeplex, Primary Access Corporation, and Network Equipment Technologies. At ascom Timeplex, he was an Executive Account Manager responsible for developing TimeplexÕs major accounts in the Northeast. At Primary Access, Mr. Lemieux was an Executive Account Manager responsible for launching Primary Access’s dial access systems in the Northeast, including key accounts as IBM/Advantis, Digital Equipment Corporation, Prodigy Services and Travelers Insurance. At Network Equipment Technologies, he was responsible for sales of T1 networking systems in the New England area to key accounts such as Bank of Boston. Commercial Union and John Hancock Mutual Life Insurance. Prior to entering sales, Mr. Lemieux held a series of technical management positions at Motorola Codex.
Mr. Lemieux had won numerous awards throughout his career, including Rookie of the Year, # 1 New Account closer, and President’s Club. He has also served as executive sales advisor.

Martin Meyer, Chief Financial Officer
As Chief Financial Officer, Mr. Meyer was responsible for the financial strategy and management of the company. He was also responsible for operational departments, including Human Resources. Mr. Meyer has over a dozen years of high-tech experience in engineering and finance, and joined the company in 1995. He had extensive experience in tax management, mergers and acquisitions, financial management, and the structuring of corporate benefit programs. Previously, he held several controllerships for Stratus Computer, including controller of Stratus’ Isis software subsidiary. Mr. Meyer began his career as a hardware engineer for Raytheon Corporation. He received a technical degree from Boston University and an MBA from Babson College.
Source: Company Web site.

17

Exhibit 12 Diagram of Product

All Banks
.62%
.08%
.71%
.47%
.47%
.51%
.91%
1.20%
1.15%
1.18%
1.21%
Ten Largest Banks
.47
-.80
1.07
-.19
.48
.21
.61
1.13
.91
.88
.93
Banks Ranked 11
.72
-.09
.51
.47
.23
.47
1.05
1.26
1.22
1.31
1.35
through 100

Banks Ranked 101
.73
.62
.67
.71
.51
.60
.92
1.22
1.29
1.28
1.29
through 1000

Banks Not Ranked in
.55
.58
.68
.83
.74
.77
1.04
1.19
1.15
1.21
1.26

Source: Company Web site.

18

Exhibit 13 List of Similar Greylock Investments

Year Company Product/Market Focus Status

Networking Equipment (Hardware)
1979 Intertel/Infinet Data modems Acquired by Memotech Data in 1986
1979 Tellabs Telecommunications equipment IPO 1980

1979 Micom Data multiplexor and data PABX products
IPO 1981; acquired by Odyssey Partners in 1988

1985 Bytex Matrix switches/equipment IPO 1989 1989 Ascend Communications Remote LAN access IPO 1994 1989 CrossComm Corporation Internetworking equipment IPO 1993 1990 Xircom, Inc. Network adapters and modems IPO 1992 1991 Shiva Corporation Remote LAN access IPO 1994
1992 Sonix Communications Limited Modems, ISDN products Acquired by 3Com in 1995

1993 Whitetree Network Technologies, Inc.
ATM networking equipment Acquired by Ascend in 1997

1995 Endgate Corporation High frequency radio transmission and
receiving
Private company

1995 Sahara Networks Telephone network products Acquired by Cascade in 1997 1995 ZeitNet, Inc. ATM network interface cards Acquired by Cabletron in 1996

1996 Copper Mountain Communications
xDSL internet access devices Private company

1996 Ipsilon Networks, Inc. IP switch Acquired by Nokia in 1997 1997 Xedia High-speed internet access devices Private company
1997 Argon Networks Terabit switch router Private company

Networking Software
1990 Xcellenet, Inc. Remote distribution of PC applications IPO 1994
1993 Wildfire Communications Telephone-based applications Private company 1994 Cambio Networks, Inc. Network management application Private company 1994 Optimal Networks Corporation Network management application Private company
1994 Airsoft, Inc. Wireless communications software Acquired by Shiva in 1996 1994 Puma Technology, Inc. Wireless communications software Private company
1994 Raptor Systems Internet firewall IPO 1996; acquired by Axent in 1998
1995 IntelliLink Corporation Wireless communications software Acquired by Puma in 1996

1995 Unwired Planet, Inc. Platform for wireless internet
appliances
Private company

1995 Starburst Communications Corporation
1996 Frontier Software Development, Inc.
IP multicast software solutions Private company Network monitoring and diagnostics Private company

Source: Greylock Management.

19

Income Statement3

Income Statement (000s)
1994
1995
1996
1997
(Estimated)

Revenue

$491

$3,564

$4,424

$1,000
Cost of Goods Sold
365
2,645
3,565
750
Gross Profit
$126
$919
$859
$250
Operating Expenses:
Research & Development

906

926

1,052

2,500
Sales & Marketing
448
877
555
2,100
General & Administrative
458
596
771
950
Income from Operations
($1,686)
($1,480)
($1,519)
($5,300)
% of Sales
(345%)
(42%)
(35%)
(530%)
Interest (Expense)/ Income
10
14
15
25
Taxes
0
0
0
0
Net Income
($1,696)
($1,494)
($1,534)
($5,275)
% of Sales
(345%)
(42%)
(35%)
(528%)

Estimates of 1997 income statement and balance sheet were made by SVB after discussions with Xedia management.

20

Balance Sheet

Balance Sheet (000s)
1994
1995
1996
1997
(Estimated)

Cash

$110

$831

$445

$250
Accounts Receivable
46
305
1
850
Inventory
245
1,569
58
500
Other Current Assets
33
51
62
250
Current Assets
$434
$2,756
$566
$1,850
Net Fixed Assets
192
230
384
700
Other Long-Term Assets
0
0
21
50
Intangibles
0
0
0
0
Total Assets
$626
$2,986
$971
$2,600
Short-Term Notes
0
0
94
100
Accounts Payable
298
1,580
118
400
Accruals
142
289
366
600
Deferred Revenues
0
0
0
25
Other
84
0
70
100
Current Liabilities
$524
$1,869
$648
$1,225
Long-Term Debt
0
0
68
0
Other LT Liabilities
428
436
300
500
Total Liabilities
$952
$2,305
$1,016
$1,725
Equity
(326)
681
(45)
875
Total Liabilities & Equity
$626
$2,986
$971
$2,600

Source: Company documents.

21

Exhibit 15 SVB’s Projections of Xedia’s Income Statement4

Income Statement (000s) 1998P 1999P

Revenue
$13,500
$38,500
Cost of Goods Sold
6,000
15,500
Gross Profit
$7,500
$23,000
Operating Expenses:
Research & Development

3,750

5,500
Sales & Marketing
7,000
9,750
General & Administrative
1,500
3,000
Income from Operations
($4,750)
$4,750
% of Sales
(35%)
12%
Interest (Expense)/Income
150
225
Taxes
0
1,600
Net Income
($4,600)
$3,375
% of Sales
(34%)
9%

Source: SVB projections.

SVB projections are based on conversations with Xedia.

22

Company
1996 Sales
(millions)
1996 Debt to Total Capital
1996 Beta
1996 Shares Outstanding
1996 Stock Price
1996 Market Value

(Market Value)

(millions)

(millions)

SBE, Inc.

$13.4

9.6%

1.50

2.2

$4.125

$9.2
Proteon, Inc.
$45.3
0.0%
3.56
15.4
$2.50
$38.6
Lanoptics
$20.6
NA
2.41
NA
$7.375
NA
ODS Networks
$117.9
0.0%
0.71
16.3
$12.00
$195.9
Network Equipment Technology
$324.5
8.3%
2.52
21.0
$13.50
$284.2
Netframe System
$74.4
0.0%
0.32
13.8
$2.562
$35.5
Madge Networks
$482.1
1.2%
0.73
44.5
$9.875
$439.1
Fore Systems
$395.4
0.1%
1.47
97.7
$15.00
$1,465.1
Cisco Systems
$4,096.0
0.0%
1.62
973.9
$34.50
$33,600.5
Bay Networks
$2,056.6
2.2%
1.97
188.5
$25.75
$4,854.8
Access Beyond
$39.4
3.5%
1.49
10.9
$12.625
$137.0
Shiva Corporation
$201.8
0.1%
2.59
28.9
$34.875
$1,007.6
Retix
$31.1
0.0%
1.94
22.6
$6.75
$152.5
Olicom
$168.2
0.0%
1.46
14.7
$18.875
$277.1
Emulex Corporation
$51.3
0.5%
1.75
6.0
$14.625
$87.6
Digital Link Corporation
$52.1
0.0%
1.96
9.2
$24.25
$223.5
Cabletron Systems
$1,406.6
0.0%
1.70
156.3
$30.125
$4,708.7
3Com Corporation
$3,147.1
1.3%
1.68
178.4
$48.50
$8,651.1
Asante Technologies
$67.0
0.0%
0.83
8.9
$6.625
$58.7
Ascend Communications
$549.3
0.0%
3.95
119.4
$62.125
$7,418.8
Amati Communications
$12.1
0.2%
4.60
17.7
$11.25
$199.0
Gandalf Technologies
$66.2
15.2%
3.34
43.4
$1.687
$73.2

Source: Center of Research for Securities Prices.

These companies were used to calculate the volatility of the different stock returns. The data set used monthly returns from 1993 to 1996; hence, the comparable data table above shows the 1996 information of the comparable companies.

Source: Center of Research for Securities Prices.

The graph plots the average annualized volatility of 22 Computer Communication Equipment companies over the period 1993 to 1996.