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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 0-19856
XIRCOM, INC.
2300 CORPORATE CENTER DRIVE
THOUSAND OAKS, CALIFORNIA 91320
TELEPHONE: (805) 376-9300
CALIFORNIA 95-4221884
State of Incorporation) (IRS Employer Identification No.)
Securities registered pursuant to section 12(b) of the Act:
Title of Class Name of Exchange
COMMON STOCK, $.001 PAR VALUE NASDAQ/NMS
Securities registered pursuant to section 12(g) of the Act: NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ______
Based on the closing sale price of the Common Stock on the Nasdaq
Stock Market on November 15, 1996, the aggregate market value of the voting
stock held by non-affiliates of the Registrant was approximately $265,792,514.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $.001
par value, was 19,933,150 at November 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's
Proxy Statement for its Annual Meeting of Shareholders to be held on
January 17, 1997.
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INTRODUCTORY STATEMENT
References made in this Annual Report on Form 10-K to "Xircom," the "Company"
or the "Registrant" refer to Xircom, Inc. and its wholly owned subsidiaries.
Xircom is a registered trademark, and CreditCard LAN Adapter, CreditCard Modem,
CreditCard Ethernet Adapter 10/100, CardBus Ethernet 10/100 Adapter, Pocket LAN
Adapter, Ethernet+Modem, Parallel Port Multiplexor, Tractor Grip, Netaccess,
MultiPort Modem, MultiChannel ISDN Adapter, and Instant ISDN are trademarks of
Xircom, Inc. Other company and product names contained in this report may be
trade names or trademarks of other companies.
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PART 1
ITEM 1. BUSINESS
This Annual Report contains trend analysis and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results could differ materially from those projected in the trend analysis and
other forward-looking statements contained herein, as a result of the risk
factors set forth elsewhere in this report.
Xircom, Inc. ("Xircom" or the "Company") develops, manufactures, sells and
supports a comprehensive set of network access solutions for mobile and remote
personal computer (PC) users. These products represent a market category
recognized as mobile networking. The Company's principal products enable PC
users to access information and resources found on local area networks (LANs)
and on-line services such as the Internet. Xircom's products are recognized
for innovative technology, high reliability and broad compatibility.
Xircom was founded in 1988 and pioneered the use of the universal PC parallel
port to connect portable PCs to LANs. Xircom's Pocket LAN adapter established
the mobile networking market and by 1992 had become the leading solution for
portable PC-to-LAN connectivity. In 1992, Xircom was the first company in the
industry to ship an adapter compliant with the standards set by the Personal
Computer Memory Card International Association ("PCMCIA" or "PC Card"). Through
September 30, 1996, the Company has sold more than 2.5 million PC Card or
parallel port LAN adapters and remains the market leader in PC Cards for
portable PCs.
In 1994 and 1995 Xircom expanded its offerings to include products addressing
wide area networking, which enable access to a LAN from a remote location.
These products include multifunction LAN adapter and modem PC Cards (Combo
cards), modem-only PC Cards and remote access server products. In June 1995
the Company acquired the assets of Primary Rate Incorporated ("PRI") and, in
1996, formed Netaccess, Inc., a wholly-owned subsidiary, to pursue the remote
access server market with both an independent brand and business model.
MARKET BACKGROUND
Growth in Client/Server Computing. Local area networks offer greater
productivity and lower systems costs by enabling workgroups and geographically
dispersed organizations to share information, applications and resources such
as printers, file servers and communication devices. LANs have enabled the
widespread use of personal computers and servers in a client/server network
configuration, and wide area networking has created "enterprise networks" of
broadly interconnected LANs which offer client PCs access to LANs from almost
any location.
Trends Toward Smaller, Mobile Computers. Simultaneous with the growth in LANs,
continuing technological advances have been made in portable PCs, often
referred to as laptop or notebook computers. Growing use of portable computers
is being driven by an increasingly mobile workforce requiring a higher level of
productivity, including field service personnel, salespeople, consultants,
traveling executives, telecommuters and "day extenders," who work at home in
the evening or on weekends. An increasing number of workers are now utilizing
portable computers as their primary PCs and more business applications are
being developed specifically for portable PCs. According to independent market
research, portable PC shipments worldwide will grow from 8.9 million in 1995 to
over 22 million in 2000.(1) It is also
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1 International Data Corporation, 1996
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projected that 78% of portable computers will be connected to a LAN by 2000(2)
compared to 20% in 1995 and that 84% of portable PC users in the U.S. will use
their portable as their primary PC by the year 2000.(3)
Remote Access. Over the last several years, there has been a significant
increase in the number of PC users accessing a corporate LAN or an on-line
service (e.g., America Online, Prodigy, CompuServe or the Internet) from a
"remote" location. To do so requires a modem on the client PC and a modem "on
the LAN" that serves as a communication gateway to the network (often referred
to as a remote access server or communications server). The modem market has
grown substantially over the last several years and today nearly all portable
PCs are equipped with a modem. The market for PC Card modems is expected to
grow from 4.1 million units in 1995 to 13.4 million units by 2000.(4) Integrated
Services Digital Network (ISDN) usage is expected to become a larger proportion
of remote access server connections because ISDN enables higher speeds than
analog modem-based connections and the telephone carriers are making ISDN
service more broadly available. ISDN services are based on multiple 64
kilobits-per-second (Kbps) digital channels (two "B" channels for a basic rate
interface and 23 to 30 "B" Channels for a primary rate interface) compared to
33.6 Kbps speeds for a V.34-1996 analog modem.
PRODUCTS
The Company is organized into the PC Card Division and Netaccess, Inc.
(formerly the Xircom Systems Division) to group similar product lines together
for greater efficiencies and resource utilization.
PC CARD DIVISION
The PC Card Division's products include Ethernet and Token Ring LAN adapters,
combination LAN adapters and modems, and modem-only products.
Wired LAN adapters for portable PCs. Xircom offers the industry's broadest
family of PC Card and parallel port (Pocket) LAN adapters that operate on
Ethernet and Token Ring topologies and are compatible with all widely used
wiring. Xircom LAN adapters incorporate preconfigured software drivers that
support 50 different network operating systems and communication protocols.
Most Xircom adapters include both DOS-, Windows- and Window 95-based
menu-driven software for simple, fast installation.
Xircom shipped the industry's first external parallel port LAN adapter, the
Pocket Ethernet Adapter, in May 1989, and is currently shipping its
third-generation product. Xircom also shipped the first commercially available
parallel port adapter for Token Ring networks, the Pocket Token Ring Adapter,
in December 1989. BYTE magazine's 20th anniversary issue named Xircom's
original Pocket LAN Adapter as one of the Most Important Networking Products of
all time. Today, although Xircom remains the dominant supplier of Pocket LAN
Adapters, with a market share estimated to be over 65%(5), net sales from Pocket
LAN adapters have declined to 9% of Xircom's total net sales in fiscal 1996 and
6% in the fourth quarter of fiscal 1996, compared to 34% in 1995. The
percentage of net sales is expected to continue to decline in 1997 as the PC
Card becomes the exclusive form factor for connecting peripheral devices to
portable PCs.
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(2) International Data Corporation, 1996
(3) International Data Corporation, 1996
(4) International Data Corporation, 1996
(5) Dataquest Incorporated, 1996
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During 1991, the PCMCIA made possible the development of PC Cards by defining
certain dimensional interface standards for use by a variety of PC peripherals,
including memory cards, fax/modems, LAN adapters and disk drives. The PC Card
interface, or slot, is now incorporated into nearly all portable computers,
allowing the PC Card peripheral device, which is the size of a thick credit
card, to be inserted. Xircom was first to ship an Ethernet LAN adapter card
compliant with the PCMCIA standard in late 1992 and began shipping its
CreditCard Ethernet Adapter in February 1993. The Company commenced shipments
of its CreditCard Token Ring Adapter in December 1993. In June 1996, the
Company began shipping its CreditCard Ethernet Adapter 10/100, which supports
both 10Mbps and 100Mbps networks, and in November 1996 commenced shipment of
the industry's first 32-bit CardBus Ethernet 10/100 adapter for connecting
CardBus-enabled portable computers to 10 Mbps and 100 Mbps networks. Net sales
from PC Card LAN adapters, including multifunction adapter/modem cards and
modems, were 76% of the total net sales in fiscal 1996 compared to 59% in
fiscal 1995.
Multifunction Adapter/Modem Cards. In February 1994, the Company began
shipping the first PC Card offering both a LAN adapter and a modem in a single
PCMCIA card (a "Combo card"). The CreditCard Ethernet+Modem quickly achieved
market acceptance and received a number of industry awards for technical
excellence, including PC Magazine's "1994 Technical Excellence Award" in the
Networking Hardware category. The Company commenced shipments of the
second-generation CreditCard Ethernet+Modem II in September 1994 and in July
1995 was the first to ship in volume a combination PC Card product
incorporating a V.34 modem with a LAN adapter. The Ethernet+Modem products
accounted for 38% of revenue for fiscal 1996 compared to 23% in fiscal 1995.
PC Card Modem. Xircom commenced shipment of the Company's first modem-only PC
Card in September 1995. The original CreditCard Modem 28.8 incorporated the
latest V.34 standard and broadened Xircom's remote access solutions by adding a
modem-only option for PC notebook users who require high-speed remote access to
LANs, commercial on-line service, or the Internet. In October 1996, Xircom
shipped its CreditCard Modem 33.6 featuring the new V.34-1996 standard. The PC
Card Modem products accounted for 6% of total revenue for fiscal 1996.
Xircom expects customers for its PC Card client products to continue to demand
higher speeds and bandwidth and is focusing its development efforts on new
versions of its PC Card LAN adapters (both 16-bit PCMCIA and 32-bit CardBus
buses), and multifunction PC Cards that will combine LAN, modem and ISDN
technologies for use with high-bandwidth applications.
NETACCESS PRODUCTS
The Company's Netaccess, Inc. subsidiary sells digital and analog remote access
server products to original equipment manufacturers ("OEMs") and through
two-tier distribution channels.
Remote Access. Xircom's solutions in this market include Multiport Modem Cards
and MultiChannel ISDN Cards which integrate into a standard PC server using
remote access software and ISDN or analog phone lines to extend the network to
remote dial-up users. These solutions are based on an "open systems" approach
to remote access. Industry analysts project that in the future the majority of
dial-in remote access servers will be open systems much like LAN file servers
are today. They will integrate a standard PC with remote access software from
Novell or Microsoft and adapters like Xircom's MultiPort Modem Card. The
MultiPort Modem Card, which was first shipped in March 1995, includes four or
eight V.34 (up to 33.6 Kbps) modems on a card.
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Analog modem users are beginning to migrate to ISDN technology for higher-speed
remote network and Internet connections. In addition, ISDN service is becoming
more broadly available and the costs of installation, service and equipment are
priced more reasonably.
Xircom entered the market for ISDN remote access through its acquisition of PRI
in June 1995. PRI developed the industry's first primary rate interface to a
computer for the computer telephony market. PRI's subsequent efforts were on
developing ISDN solutions for OEM customers. Today, these OEM customers
include Shiva, Motorola, Telebit, Lucent, Attachmate, Xyplex, Netrix and other
vendors who use Xircom ISDN technology as a component of their internetworking,
telecommunications and remote access solutions. Effective in the first quarter
of fiscal 1997, Shiva, which represented 38% of net sales of Netaccess and 4.9%
of total net sales, is expected to have an internally developed solution for
its ISDN remote access products and, therefore, revenue from Shiva is not
expected to be material in fiscal 1997.
Netaccess has developed an ISA (Industry Standard Architecture) version of a
primary rate interface card that runs under Windows NT and a basic rate
interface card. These products complement the analog MultiPort Modem Cards and
offer a seamless dial-in server solution for both ISDN and analog users
employing Windows NT or Netware Connect. Netaccess' experience in ISDN
software development will also be utilized in development of new PC Card ISDN
products. Netaccess products accounted for 14% of total revenue for fiscal
1996 compared to 5% in 1995.
Wireless LAN. Netwave, the wireless LAN product line that enables a user to
establish a peer-to-peer network or maintain an Ethernet network connection
while moving about the workplace unencumbered by wires and cables, was sold to
Netwave Technologies, Inc., a majority-owned subsidiary of Technitrol, Inc.,
effective August 30, 1996. The sale included all Netwave assets including
product inventory, property and equipment, and rights to related intellectual
property. As a result of the sale, Xircom recorded a one-time charge to
operations of $1.5 million ($1.0 million or $.05 per share, net of tax
benefit). Netwave products accounted for 1% and 2% of total net sales in fiscal
1996 and 1995, respectively.
INDUSTRY LEADERSHIP
The Company is a worldwide leader in simplifying the installation and
configuration of PC Card and CardBus connectivity products by incorporating
certain proprietary software coding in its installation routines. The Company
has developed an intelligent Windows-based installation utility which now ships
with most Xircom adapters. Although the Windows 95 operating system improved
the installation process for PC Cards and other peripherals, add-on hardware
often requires driver updates to enhance features or performance. Therefore,
installation utilities remain an important feature of the products. In
addition, the Windows 95 operating system does not currently support CardBus
peripherals. As a result, Xircom has developed software called point enablers
which provide direct enabling of the Xircom hardware, allowing Windows 95 users
to take advantage of Xircom CardBus products.
The Company ships its products worldwide and therefore has developed expertise
in obtaining worldwide homologation including local telephone approvals in 21
countries including: France, Germany, UK, Japan, Australia, Holland, Denmark,
Belgium, and Austria. Xircom has developed a modem design which is a single,
worldwide solution and has a programmable Data Access Arrangement ("DAA").
Xircom has developed a unique software application
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called the CountrySelect, which provides the user with a list of supported
countries, allowing the global traveler to easily reprogram the modem DAA as
he/she travels from country to country.
Device driver software is also a key component of the Company's products.
Device drivers allow the hardware and firmware (the software code which
provides operating instructions to the hardware) to interact with the
communications port on the PC in which the LAN adapter or modem is being
installed (e.g., the parallel port, PCMCIA, or CardBus slot). While the
Company's leading products are designed to operate with the major operating
systems, including Microsoft Windows 95, Windows NT and Windows 3.1, the
Company has also developed Driver Development Kits that include a library of
software interfaces and source code examples to substantially reduce the time
required for other network operating system vendors to develop drivers for
Xircom products. The Company believes that its family of external LAN adapter
products incorporates software drivers for a broader range of computers and
network operating systems than any other family of external LAN adapters
commercially available.
Some of the Company's technical advancements and accomplishments since 1989
include:
o Pioneered the use of the PC parallel port for LAN connectivity;
o Participated with Zenith Data Systems and Intel Corp. in the development of
Enhanced Parallel Port ("EPP") technology;
o Was first to ship an Ethernet PCMCIA/PC Card LAN adapter;
o Was first to ship a parallel port modem, which offers higher throughput
than a serial port modem;
o Was first to ship a PC Card combining a LAN adapter and a modem;
o Was first to incorporate full-duplex Ethernet technology in its PC Card LAN
adapters, which offers up to twice the data throughput on an Ethernet
network;
o Developed the first wireless LAN adapter fully contained in a PC Card (with
no external circuitry);
o Was first to incorporate and ship 100 Mbps Ethernet technology in a PC
Card;
o Was first to ship a 32-bit CardBus adapter for connecting CardBus-equipped
notebook computers to 10 Mbps and 100 Mbps networks.
The June 1995 acquisition of PRI provided the Company with faster entry to an
emerging market for ISDN products. PRI developed ISDN protocol software,
called Instant ISDN, with an open application programming interface, to
simplify the incorporation of their ISDN products into other OEM solutions.
PRI also provided experience in gaining approvals for the sale of ISDN products
and technology ("homologation") in Europe, Japan and Canada. Xircom has
adopted a Distributed Development Environment ("DDE") to facilitate the remote
physical location of some of its engineers. DDE provides structured
development methodologies and high-speed network links into Xircom's corporate
development network. A key component of DDE is the use of Xircom's products by
the engineers that develop and support them. It is believed that DDE results
in increased productivity and retention of key employees. At this time program
participants include engineers located in Austin, Texas; Provo, Utah; and
Kontich, Belgium.
RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapidly changing
technology, short product life cycles and evolving industry standards. The
Company believes that technical innovation in its products is required to make
them more desirable than other portable LAN
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connectivity solutions. The Company's expertise lies in developing small form
factor products which require a high degree of electronic component integration
and careful circuitry design. In addition, use of Application Specific
Integrated Circuits ("ASIC") reduces the number of semiconductor devices
required in the Company's products resulting in lower manufacturing cost and
higher product reliability. Because of the many variations of portable PCs
that the Company's products are installed in, the Company's ASIC devices are
designed so that they can be automatically reconfigured upon initialization by
the Company's proprietary software.
The Company also utilizes flash programmable memory in all of its products to
allow certain changes, enhancements or error corrections to be implemented
through a software download by the user.
The Company's current research and development efforts include ongoing feature
enhancement and cost reduction of current products, continued development of
higher-speed PC Cards, enhancement of remote access server products in both
ISDN and analog formats, and support for the Company's OEM customers.
The Company has participated in leading industry standards committees,
including executive membership in PCMCIA, and steering committee membership of
the Gigabit Ethernet Alliance. Other standards activities include
participation in Institute of Electronic and Electrical Engineers ("IEEE")
committees 802.3u for 100Mb Ethernet and 802.3z for 1Gb Ethernet LANs. In the
Wide Area Networking ("WAN") arena, Xircom participates in the Portable
Computer and Communications Association ("PCCA") and the International
Telecommunications Standards Users Group ("ITSUG") GSM working party. Xircom
is also a voting member of the European Telecommunications Standards Institute
("ETSI").
Approximately 11% of the company's 770 employees were engaged in research and
development activities as of September 30, 1996. During fiscal years 1996,
1995 and 1994, the Company incurred research and development expenditures of
$12,874,000, $13,806,000 and $11,613,000, respectively.
MARKETING
The Company sells its products primarily through domestic and international
distributors. U.S. distributors include major national distributors of
computers and networking equipment such as Ingram Micro Inc., Tech Data
Corporation and Merisel, Inc., and national reseller organizations such as
MicroAge, Inc., Vanstar Corporation and IE Advanced Systems, Inc. The Company
also sells directly to major domestic retail chains, such as CompUSA and CDW
Computer Centers, to portable computer manufacturers and to a number of ISDN
product OEM customers.
Internationally the Company sells products through a worldwide network of
distributors. In fiscal 1996, 1995 and 1994, international sales (sales to
customers outside the U.S.) comprised 40%, 43% and 39%, respectively, of total
net sales. All international sales are denominated in U.S. dollars and may be
subject to government controls and other risks, including, in some cases,
export licenses, federal restrictions on export, currency fluctuations,
political instability, trade restrictions, and changes in tariffs and freight
rates. The Company has experienced no material difficulties to date as a
result of these factors.
Xircom generally seeks to develop the markets for its products through
marketing programs that promote end-user demand. The Company generates brand
recognition through trade advertising, participation in trade shows and public
relations activities. The Company has a field sales organization and has
expanded its inside sales/telemarketing function to create
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demand by calling directly on resellers, VARs and end-users. The Company also
has field sales persons and support engineers to sell its products to OEMs.
BACKLOG
The Company manufactures its products to its forecast of near-term demand and
maintains inventories of finished goods and top-level subassemblies to satisfy
customer orders. Product shipments are generally made within six weeks after
receipt of orders although some OEM customers submit orders for scheduled
deliveries over a longer period. Orders from distribution customers are
cancelable without penalty and OEM customers may reschedule or cancel orders
outside a certain minimum time period. Accordingly, the Company generally does
not seek to maintain any significant backlog, and backlog was not significant
at September 30, 1996 or 1995.
COMPETITION
The Company believes that the principal competitive factors in the market for
external LAN adapters and indirectly competitive products are support of
commonly used topologies, network wiring systems and network operating systems;
performance (including data transfer speeds); compatibility with many brands of
portable computers; quality and reliability; ease of use; size, especially with
respect to the latest subnotebook and handheld portable PCs; customer support
and service; brand name recognition; and price.
Similar to the market for external LAN adapters, the principal competitive
factors for external modems are performance (primarily throughput, but also
error control, connection maintenance and compression); compatibility with many
brands of portable computers and software applications; support of industry
standards; quality and reliability; ease of use; customer support and service;
brand name recognition; and price.
The Company's direct competition for parallel port LAN adapters has primarily
come from a small number of privately held companies, and Xircom has maintained
a dominant market share in this market segment (i.e., over 65%). This market
has, however, declined significantly as PC Cards have become the dominant means
of network connectivity for portable and notebook uses. The PC Card LAN
adapter market has become significantly more competitive, and the Company has a
number of competitors that have substantially greater development,
manufacturing and marketing resources and market presence than Xircom,
including Fujitsu Microelectronics, Inc., International Business Machines Corp.
(IBM), Motorola Inc., 3Com Corporation (3Com) and U.S. Robotics Inc., including
its Megahertz brand (collectively "U.S. Robotics"). Other manufacturers of
desktop LAN adapters offering PC Card adapters include Standard Microsystems
Corporation, Madge Networks Limited and Olicom A/S. In the multifunction PC
Card market (Ethernet+Modem), the Company's most significant current
competitors are 3Com and U.S. Robotics, although other smaller companies,
including Ositech Communications Inc. and New Media, also offer Ethernet+Modem
PC Cards. In addition, the Company is likely to experience additional
competition from other large companies that address other segments of the PC
Card market.
The Company also competes indirectly with companies that provide alternative
means to connect portable computers to LANs such as docking stations or port
replicators with built-in networking capabilities. COMPAQ Computer
Corporation, Toshiba Corporation (Toshiba), IBM, NEC Corporation (NEC) and
others offer docking stations for certain of their portable computers.
Although docking stations historically enjoyed some competitive advantage
because they provide a broader range of functionality than just a LAN
connection, the greater built-in capabilities of many new portable PCs and the
standardization provided by PC Card slots reduce the demand for this additional
functionality. In addition, the use of peripheral
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devices provides the PC user an upgrade path as speed or other enhancements to
the network are developed.
Ethernet interface chipsets on PC system boards which eliminate the need for a
LAN adapter have been offered only in a limited number of portable PCs to-date,
generally because the chipset solution adds cost and complexity to the base PC
and requires the PC manufacturer to provide networking technical support. As a
result, the Company believes that PC Card solutions for networking portable
computers will continue to dominate the market because of the performance,
flexibility and range of choices they offer to both users and PC manufacturers.
Over the last several years, the increased competition in the PC Card LAN
market and the shift from the parallel port to PC Card form factor for portable
LAN adapters has resulted in a decline in overall market share and lower
standard gross profit margins for the Company.
In the modem-only PC Card market, the competition is significant. U.S.
Robotics holds a majority market share for PC Card modems and controls a design
feature called X-Jack which integrates the RJ-11 phone jack into the PC Card
case. Other competitors in this market include Hayes Microcomputer Products,
Boca Research, TDK Systems, and many others, including manufacturers who may
hold leading or significant market shares within specific countries. Xircom
believes that it can continue to leverage its engineering, sales and
manufacturing resources with its V.34 and V.34-1996 PC Card modems because of
its modem technology and market recognition with its Ethernet+Modem PC Card
products. In addition, because nearly all portable PCs utilize a modem, there
may be a greater likelihood that modem functionality could be included by the
PC manufacturers, and some models include modems today. However, the Company
believes that just as for LAN adapters, standard expansion slots like PCMCIA
that allow the users of the PCs more flexibility in choice of modems and
upgradeability as the technology advances will be a standard for some time to
come. In addition, the Company has achieved significant market share in the
combination Ethernet+Modem market segment and expects to offer other
multifunction cards in the future as a way of differentiating its modem
products.
The Company competes directly with a wide variety of vendors offering remote
access solutions. In ISDN, direct competitors include small, ISDN-focused
manufacturers as well as divisions of larger, well-established companies such
as 3Com and U.S. Robotics. For the MultiPort Modem Card, direct competition is
primarily from RS232 interface board manufacturers such as Digi International
Inc., which provides low-cost serial port cards that end users or integrators
use with standard external modems. Indirect competitors such as Shiva Corp.
and Ascend Communications, Inc., currently dominate the remote access market by
providing stand-alone products that do not require integration with other
hardware or software. In addition, major internetworking vendors including
Cisco Systems, Inc., Bay Networks, Inc. and Cabletron Systems, Inc. have added
remote access solutions. All of these indirect competitors have substantially
greater development and marketing resources than the Company.
MANUFACTURING
The Company believes that high-volume, low-cost manufacturing has become an
important capability to compete effectively in the PC Card market. As a
result, the Company commenced in-house manufacturing in September 1995 and now
builds all of its PC Card adapters at its facilities in Penang, Malaysia. The
Company purchases most key components in Penang directly from third-party
suppliers with local representation. The Company inspects
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these components for quality and performs final assembly, test, packaging and
shipping in Penang.
Although the Company generally uses standard parts and components for its
products, certain key components used in the Company's products are currently
available from only one source, and others are available from a limited number
of sources. Components currently available from one source include a
proprietary Ethernet chipset (used in the Pocket Ethernet Adapter) purchased
from Fujitsu Microelectronics, proprietary Ethernet chipsets (used in the
CreditCard Ethernet Adapter) fabricated by Symbios Logic and Atmel Corp., a
Token Ring chipset from Texas Instruments, an AT&T modem chipset (used in the
modem and Combo products) and a standard Motorola microprocessor (used in the
modem and Combo products). In addition, other components, including other
semiconductor devices, transformers and plastic and metal product housings, are
available or acquired from a single source or a limited number of sources.
Although the Company has not experienced any significant parts shortages over
the past year, many of these components require long-lead purchase orders so
that flexibility to change order quantities due to changes in demand is
limited. Inability to obtain sufficient supplies of these components or
develop alternative sources as needed could have a material adverse effect on
the Company's operating results.
PROPRIETARY RIGHTS AND LICENSES
The Company seeks to protect its intellectual property rights in certain of its
products and technologies through patents, copyrights, trade secrets, and
trademarks. The Company holds United States patents on certain technologies
incorporated in several of the Company's parallel port products. Other U.S.
patent applications relating to current research and development efforts of the
Company are in progress. The Company regularly evaluates the applicability of
its parallel port adapter and parallel port modem patents to other products of
third parties. The Company has several license agreements with third parties
granting rights related to the Company's parallel port adapter technology in
return for royalty payments or cross-licensing of technology of the licensee.
The Company also seeks to protect its proprietary rights through a combination
of employee and third-party nondisclosure agreements.
EMPLOYEES
As of September 30, 1996, the Company employed a total of 770 persons,
including 200 in sales, marketing and customer support; 85 in engineering and
product development; 440 in operations; and 45 in finance and other
administrative areas.
The Company's success depends on its continued ability to attract and retain
qualified personnel. Competition for such personnel in the computer networking
industry is intense and the Company must provide competitive salary, stock
incentive and benefit packages to attract such personnel. The Company has
development activities in Thousand Oaks, California; Salem, New Hampshire; and
Kontich, Belgium. None of the Company's employees is represented by a
collective bargaining arrangement. The Company believes that its relations
with its employees are good.
FACTORS AFFECTING STOCK PRICE
The market price of Xircom's common stock may fluctuate substantially over
short periods of time due to a number of factors, including those factors that
could affect Xircom's future financial performance as discussed in Management's
Discussion and Analysis of Financial Condition and Results of Operations on
pages 17 to 24 of this document. The price may
11
<PAGE> 12
also be affected by factors which influence the overall market for stocks or
the market for stocks of high-technology companies in particular.
MANAGEMENT
The following sets forth certain information with respect to the executive
officers of the Company and their ages as of December 1, 1996.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dirk I. Gates 35 Chairman of the Board,
President and Chief Executive Officer
Robert W. (Sam) Bass 50 Vice President, Worldwide Operations
Kenneth W. Bauer 47 Vice President, Human Resources
Thomas V. Brown 54 Vice President, Corporate
Communications
Scott A. Coleman 37 Senior Vice President, Americas
Sales and Marketing
Steven F. DeGennaro 33 Vice President, Finance and
Chief Financial Officer
Marc M. Devis 36 Senior Vice President, Europe and Asia-
Pacific Sales and Marketing
Randall H. Holliday 47 General Counsel and Secretary
William F. Rosenberger 47 Vice President, Xircom; President,
Netaccess, Inc.
Carl E. Russo 40 Executive Vice President and
General Manager
</TABLE>
Mr. Gates has served as Chairman of the Board of the Company since January 1995
and as President and a Director of the Company since its incorporation in
November 1988. He has also served as Chief Executive Officer since October
1991.
Mr. Bass has served as Vice President, Worldwide Operations of the Company
since January 1992. From September 1990 until joining the Company, Mr. Bass
served as Vice President, Operations of Fibermux Corporation, a provider of
intelligent hubs to the LAN market.
Mr. Bauer has served as Vice President, Human Resources of the Company since
December 1995. From 1994 until joining the Company, Mr. Bauer served as Vice
President, Human Resources of L.A. Gear, a footwear manufacturer. From 1984 to
1994, he held a variety of Human Resource management positions with ARCO
Products Company, a company which refines, transports and markets petroleum and
petroleum products.
Mr. Brown has served as Vice President, Corporate Communications of the Company
since February 1991 and also served as Vice President, Marketing of the Company
from November 1994 to August 1996.
12
<PAGE> 13
Mr. Coleman has served as Senior Vice President, Americas Sales and Marketing
since August 1996. From 1985 to August 1996, Mr. Coleman held various senior
sales positions with Apple Computer, Inc., a designer and manufacturer of
microprocessor-based personal computers and related personal computer products,
most recently as Eastern Regional Manager.
Mr. DeGennaro has served as Vice President, Finance and Chief Financial Officer
of the Company since June 1996. He had previously served from May 1995 to June
1996 as Vice President, Finance and Chief Accounting Officer and previously
since January 1994 as Corporate Controller and Chief Accounting Officer. Prior
to joining the Company in 1993, Mr. DeGennaro was a senior manager at KPMG Peat
Marwick, a big-six accounting firm. Mr. DeGennaro is a CPA.
Mr. Devis has served as Senior Vice President, Europe and Asia-Pacific Sales
and Marketing since August 1996 and Vice President, Europe and Asia-Pacific
Sales and Marketing since January 1995. He had previously served, since June
1991, as Managing Director of Xircom Europe N.V.
Mr. Holliday has served as General Counsel of the Company since January 1995.
In December 1993, Mr. Holliday joined the Company as Corporate Counsel. From
March 1990 to December 1993, Mr. Holliday was Division Counsel of Abex
Aerospace Division, Pneumo Abex Corporation, an aircraft hydraulic components
manufacturer.
Mr. Rosenberger has served as President of Netaccess, Inc. (a wholly-owned
subsidiary of the Company) and a Vice President of the Company since the
formation of Netaccess, Inc. in September 1996. Since January 1996, he served
as Vice President and General Manager, Systems Products of the Company. Prior
to joining the Company, Mr. Rosenberger served as Vice President of Sales and
Marketing for Arity Corporation, a spin-off of Lotus Development which launched
a data base management system, from May 1995 to October 1995. From September
1994 to April 1995, Mr. Rosenberger was an independent consultant and from
1993 to September 1994 served as General Manager and Director of Business
Development for ACSYS Incorporated, a wholly-owned subsidiary of AMP
Incorporated, a provider of LAN products and services. From 1990 to 1993, Mr.
Rosenberger served as President and Chief Executive Officer of Netronix, a
research and development firm for LAN technology.
Mr. Russo has served as Executive Vice President and General Manager since
April 1995. From January 1994 to March 1995, Mr. Russo held executive
positions at Network Systems Corporation, a manufacturer of high-speed
networking equipment and software, most recently as Senior Vice President,
Channel Networking Group. From 1991 until 1993, Mr. Russo served as President
of FTR, Inc., a professional motor sports team, which filed for liquidation
under Chapter 7 of the U.S. Bankruptcy Code in December 1993. From 1985 until
1991, Mr. Russo held executive positions at AT&T Paradyne, a manufacturer of
wide area networking products, most recently as Vice President and General
Manager, Data Networking Products.
13
<PAGE> 14
ITEM 2. PROPERTIES
The Company's headquarters are located in 87,000 square feet of a leased
facility in Thousand Oaks, California. This facility accommodates corporate
administration, engineering, marketing, sales and customer support.
Distribution is conducted in a portion of an adjacent 50,000 square-foot leased
facility. The Company also leases a facility that accommodates its Netaccess
subsidiary in Salem, New Hampshire; a manufacturing and distribution facility
in Penang, Malaysia; facilities for its European subsidiaries in Kontich,
Belgium; Paris, France; Basingstoke, England; Grassbrunn, Germany; and
Stockholm, Sweden; and facilities for its Asia-Pacific sales and marketing
operations in Singapore and Sydney, Australia. The Company believes its
existing facilities are adequate for its current needs and additional
facilities proximate to its existing facilities are available for lease to meet
future needs.
Financial information regarding leases and lease commitments are contained in
Note Ten of Notes to Consolidated Financial Statements on page 37 of this
document.
ITEM 3. LEGAL PROCEEDINGS
No material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Xircom Common Stock began trading on The Nasdaq Stock Market on March 31, 1992
under the symbol XIRC. The Company has not paid cash dividends on its Common
Stock and does not plan to pay cash dividends for the foreseeable future.
Under the terms of the Company's credit agreement, it is prohibited from
declaring or paying dividends without the prior consent of the lender. As of
November 25, 1996, there were 295 holders of record of the Company's Common
Stock.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ---- ---
<S> <C> <C>
FIRST QUARTER $ 14-3/8 $ 8-7/8
SECOND QUARTER 14-1/4 9-1/2
THIRD QUARTER 17-1/2 11-1/8
FOURTH QUARTER $ 17 $ 11-1/4
Fiscal 1995 High Low
----------- ---- ---
First quarter $ 23-1/2 $ 16
Second quarter 19 13-1/4
Third quarter 14-1/4 10-1/8
Fourth quarter $ 15-3/8 $ 9
</TABLE>
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected balance sheet and statement of operations
data as of and for the fiscal years ended September 30, 1992 through 1996.
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 193,306 $ 126,565 $ 131,580 $ 82,212 $ 59,083
Cost of sales 122,658 86,080 63,964 38,093 27,440
- - ------------------------------------------------------------------------------------------------------------------------
Gross profit 70,648 40,485 67,616 44,119 31,643
Research and development expenses 12,874 13,806 11,613 6,882 3,908
Sales and marketing expenses 36,762 38,704 25,194 17,105 14,817
General and administrative expenses 9,327 8,092 5,491 5,073 3,391
In-process research and development
and other nonrecurring charges (1) 1,505 46,126 - - -
- - ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 10,180 (66,243) 25,318 15,059 9,527
Other income (expense), net ( 1,332) 439 ( 175) 760 90
- - ------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,848 (65,804) 25,143 15,819 9,617
Income tax provision (benefit) 2,896 ( 7,000) 9,231 6,169 3,560
- - ------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1) $ 5,952 $ (58,804) $ 15,912 $ 9,650 $ 6,057
- - ------------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (1) $ .30 $ ( 3.44) $ .95 $ .59 $ .41
BALANCE SHEET DATA
Working capital $ 43,477 $ 28,246 $ 72,590 $ 57,759 $ 47,300
Total assets $ 108,797 $ 88,742 $ 101,015 $ 75,267 $ 57,043
Long-term obligations,
net of current portion $ 1,860 $ 631 $ 134 $ 793 $ 1,181
Shareholders' equity $ 65,603 $ 53,095 $ 82,115 $ 62,530 $ 49,569
========================================================================================================================
</TABLE>
(1) Fiscal 1996 includes $1,505 ($1,023 net of tax benefit) or $.05 per share
for loss on sale of Netwave product line. Fiscal 1995 includes $46,126
($43,942 net of tax benefit) or $2.57 per share for write-off of in-process
research and development and other nonrecurring charges.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Annual Report contains trend analysis and other forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Actual
results could differ materially from those projected in the trend analysis and
other forward-looking statements contained herein, as a result of the risk
factors set forth below and elsewhere in this report.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $193,306 53% $126,565 (4%) $131,580
</TABLE>
NET SALES - 1996 VERSUS 1995
PC CARD AND PARALLEL PORT PRODUCT SALES. Net sales increased 53% to $193.3
million in fiscal 1996 from $126.6 million in fiscal 1995 primarily due to
increased net sales of LAN adapters, modems and multifunction LAN and modem
cards ("Combo cards") (collectively "client products"), which connect portable
PCs to networks, the Internet and on-line services (such as America Online).
Net sales of client products increased 40% to $165.1 million in 1996 from
$117.8 million in 1995 primarily due to growth in overall market demand for
local and wide area network connectivity products and an increase in unit sales
of its client products by its distributors in each of the last five quarters.
The growth in channel sell-through may be indicative of several factors: an
increased growth rate in shipments of portable PCs, which in turn require
network connections; a more competitive pricing strategy first adopted by the
Company during fiscal 1995; continuing increased market acceptance of the
Company's third-generation Combo card, which was introduced in July 1995; and
increased sales of the Company's modem-only PC Card product, which was
introduced in September 1995. Unit shipments of client products increased 60%
in 1996 over 1995 but average selling prices declined due to increased
competition in the PC Card LAN adapter market and to the continued shift in
product mix to PC Card versions from higher-margin parallel port versions. The
Company's Credit Card Ethernet+Modem and CreditCard Ethernet Adapter accounted
for 38% and 32%, respectively, of 1996 sales and 23% and 29%, respectively, of
1995 sales.
NETACCESS PRODUCT SALES. The Netaccess family of products includes remote
access server products sold to original equipment manufacturers ("OEMs") and
through two-tier distribution channels. Netaccess products increased to 14% of
net sales in 1996 from 5% of net sales in 1995. The Company believes revenues
from Netaccess products will increase in fiscal 1997 due in part to a growing
customer base and the reintroduction of the MultiPort Modem product line in
late fiscal 1996. The Netwave wireless LAN product line, which was sold in
August 1996, accounted for 1% of net sales in 1996 and 2% of net sales in 1995.
INTERNATIONAL SALES. Total international sales (shipments to customers located
outside the U.S.) decreased as a percentage of total sales to 40% in 1996 from
43% in 1995. However, international sales of PC Cards increased as a
percentage of total PC Card sales to 46% in 1996 from 44% in 1995. PC Card
sales in Europe and Asia-Pacific grew at a faster rate than in the U.S. during
1996 primarily because of greater market growth in Asia and shorter delays in
1996 as compared to 1995 between initial shipment of new products in the U.S
and the shipment of internationally approved versions of such products.
17
<PAGE> 18
NET SALES - 1995 VERSUS 1994
Net sales decreased in 1995 compared to 1994 due primarily to the Company's
efforts to reduce channel inventories that had built up in the second half of
fiscal 1994 and the first half of fiscal 1995 and due to a loss of market share
in the PC Card market. Unit sales of LAN adapter products increased only 3% in
1995 compared to 1994. In addition, overall average selling prices in 1995
declined 13% from 1994 due primarily to the increased competition in the PC
Card LAN adapter market and to a shifting mix of products from parallel port
versions to PC Card versions. The decline in average selling price was
partially offset by an increase in 1995 in revenues derived from the
higher-priced combination Ethernet+Modem products, which were originally
introduced in February 1994.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross profit $ 70,648 75% $ 40,485 (40%) $ 67,616
Percentage of net sales 36.5% 32.0% 51.4%
</TABLE>
Gross profit consists of net sales less cost of sales, which includes product
costs (materials, labor, manufacturing overhead and royalty payments to
licensers of software incorporated into the Company's products) and provisions
for excess and obsolete inventory and warranty expense. The increase in gross
profit as a percent of net sales in 1996 compared to 1995 was primarily
attributable to increased revenue and the resulting decrease in fixed costs as
a percentage of total cost of sales, as well as the favorable impact of cost
reduction efforts including the successful transition of all the Company's PC
Card production to its own manufacturing facility in Penang, Malaysia. These
positive margin impacts were partially offset by the increased portion of sales
represented by PC Card products, which have lower gross profit margins than the
Company's parallel port products, and to selling price reductions on PC Card
products. In addition, start-up expenses related to the Malaysian manufacturing
facility had a negative impact on gross margins in the first half of fiscal
1996. While the in-house manufacturing facility is expected to continue to
have a positive impact on cost reduction efforts, the proportion of revenues
derived from the Combo and modem-only PC Cards, which have lower gross profit
margins compared to LAN PC Cards and Netaccess products, have negatively
impacted overall gross margins and may continue to offset improvements from
manufacturing and design efficiencies if such revenue mix changes continue. In
addition, cost reduction could be offset by continued pricing pressure.
The decline in gross profit as a percent of net sales in 1995 compared to 1994
was primarily attributable to product mix changes toward PC Card products as
well as competitive selling price reductions on PC Card products.
Lower-than-expected revenues and the resulting greater portion of fixed costs
in relation to total cost of sales also contributed to the decline in gross
profit margins. The 1995 results also include an $8.7 million inventory
reserve charged to cost of sales, related primarily to excess wireless LAN and
remote access products.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Research and development $ 12,874 (7%) $ 13,806 19% $ 11,613
Percentage of net sales 6.6% 10.9% 8.8%
</TABLE>
Research and development expenses decreased in 1996 in absolute dollars as a
result of more focused product development efforts, including reduced spending
on NetWave products, and decreased significantly as a percentage of sales due
to higher sales levels. Research and development expenses increased in 1995 in
both absolute dollars and as a percentage of net
18
<PAGE> 19
sales as the Company expanded headcount and expenditures for engineering
materials, equipment, software development and outside services, all related to
the development of a significant number of new products. Although the Company
has reduced the planned breadth of certain product line expansion efforts,
total expenditures for research and development expenses are likely to increase
in 1997 as compared to 1996 in both absolute dollars and as a percentage of net
sales, due to planned expenditures on product enhancements and new product
introductions.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and marketing $ 36,762 (5%) $ 38,704 54% $ 25,194
Percentage of net sales 19.0% 30.6% 19.2%
</TABLE>
Sales and marketing expenses decreased in 1996 from 1995 as a result of
consolidation of certain sales operations, reduced overall promotional spending
due to a more focused product line, and reduced headcount through employee
attrition. Sales and marketing expenses increased substantially in 1995 as
compared to 1994 primarily due to additions in sales and marketing personnel,
additional advertising for new products, and higher promotional expenditures
related to increased competition in the PC Card market, efforts to reduce
higher-than-normal levels of channel inventories, and activities to launch new
remote access and wireless LAN products. Sales and marketing expenses for
fiscal 1997 are currently expected to increase in absolute dollars to support
planned new product introductions.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and administrative $ 9,327 15% $ 8,092 47% $ 5,491
Percentage of net sales 4.8% 6.4% 4.2%
</TABLE>
General and administrative expenses increased in each of 1996 and 1995,
primarily due to continued expansion of information systems hardware and
software and amortization of goodwill and other intangible assets related to
the acquisition of PRI. Amortization included in general and administrative
expenses totaled $1,556,000 and $519,000 in 1996 and 1995, respectively. It is
currently expected that general and administrative expenses will increase in
absolute dollars in fiscal 1997 to support growth within the overall
organization.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
In-process research and
development and other
nonrecurring charges $ 1,505 (97%) $ 46,126 N/A $ -
Percentage of net sales 0.8% 36.4% -
</TABLE>
Nonrecurring charges of $1,505,000 ($1,023,000, net of tax benefit of $482,000)
in 1996 related to the sale of the Netwave product line. Nonrecurring charges
of $46,126,000 ($43,942,000, net of tax benefit of $2,184,000) in 1995
consisted primarily of write-offs of $40,000,000 of in-process research and
development purchased from PRI that had not yet reached technological
feasibility and accordingly was charged to the Company's operations. Additional
nonrecurring charges in 1995 related to the sale of certain assets, the
write-off of lease obligations on excess and idle facilities, and severance
payments related to a reduction in workforce.
19
<PAGE> 20
TOTAL OPERATING EXPENSES. Excluding nonrecurring charges, total operating
expenses were $58,963,000 in 1996 compared to $60,602,000 in 1995 (a 3%
decrease). Such decrease was primarily due to more focused product development
activities, a reduction in certain promotional spending and reduced headcount
through employee attrition. Excluding nonrecurring charges, total operating
expenses in 1995 increased by 43% compared to 1994 due to the significant
expansion of the Company's product offerings and the acquisition of PRI in June
1995. Product line expansion efforts required more development expenditures as
well as significant increases in sales and marketing expenditures.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other income (expense),
net $ (1,332) (403%) $439 N/A $ (175)
Percentage of net sales (0.7%) 0.3% (0.1%)
</TABLE>
Net other income or expense includes interest income from the investment of
available cash, early payment discounts earned by the Company offset by early
payment discounts taken by customers, foreign currency transaction gains or
losses, and interest expense on notes payable and capital leases.
Interest income was $473,000, $1,700,000 and $1,562,000 in 1996, 1995 and 1994,
respectively. The net other expense for 1996 as compared to net other income
earned for 1995 was due primarily to lower interest income and higher interest
expense in 1996 as a result of reduced cash balances and borrowings under
credit facilities. Interest expense is expected to increase in 1997 as a
result of borrowings required to fund capital expenditures. Net other expense
in 1994 includes a charge of $575,000 for the early termination of the lease on
the Company's previous corporate headquarters facility.
<TABLE>
<CAPTION>
(in thousands) 1996 CHANGE 1995 Change 1994
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income taxes provision (benefit) $ 2,896 N/A $ (7,000) N/A $ 9,231
Effective tax rate 32.7% 10.6% 36.7%
</TABLE>
The Company's effective tax rate in 1996 was comprised of a 32% rate for
profitable operations in the last three quarters of 1996 and a 25.6% tax
benefit related to a pre-tax loss recorded in the first quarter of 1996. The
Company's effective tax benefit in 1995, notwithstanding the net loss incurred,
was due to the nondeductibility of the in-process research and development
write-off and goodwill amortization from the acquisition of PRI. The Company
estimates that its effective tax rate will decrease in 1997 as compared to 1996
primarily due to benefits from the tax holiday status of the Company's
operations in Malaysia.
Excluding nonrecurring charges, net income and net income per share for 1996
was $6,975,000 and $0.35, respectively, compared to net loss and net loss per
share for 1995 of $14,862,000 and $0.87, respectively.
20
<PAGE> 21
RISK FACTORS
The market for portable PC LAN adapters has grown rapidly since the Personal
Computer Memory Card International Association (PCMCIA) introduced a standard
form factor for PC Card (originally "PCMCIA") LAN adapters in 1993. Companies
with greater name recognition in the PC, desktop LAN adapter and PC Card modem
industries and with greater financial resources now have a significant presence
in the PC Card adapter market. As a result, the Company's net sales and gross
profit margins have been and could continue to be adversely impacted by several
competitive factors, including increased price competition, new product
introductions by competitors, promotional efforts by competitors, any reduction
in the Company's percentage market share of the PC Card adapter markets, and
the levels of inventories in the Company's distribution channels. Although
competition is expected to remain intense, the Company believes its share of
the PC Card LAN adapter market stabilized in 1996, primarily because of a more
competitive pricing strategy for PC Card products adopted during fiscal 1995,
the success of its combination Ethernet LAN and Modem PC Card, and the
introduction of several new PC Card products in late fiscal 1996, including the
Company's Fast Ethernet PC Cards which began shipments in June 1996, its
CardBus Ethernet adapter which began shipping in October 1996, and its
fourth-generation Combo cards which began shipping in September 1996.
The Company believes that the market for PC Card LAN adapters, modems and Combo
cards will continue to be price competitive for the long-term and thus could
continue to result in lower gross profit margins than the Company has earned
from such products in the past. The Company believes its current product costs
are competitive, and continues to redesign its products for cost savings. In
addition, the Company's manufacturing facility, which began volume production
in early fiscal 1996 and is now producing all of the Company's PC Card
products, is operating at a greater efficiency level than in the first half of
fiscal 1996. However, there can be no assurances that cost reductions achieved
through increased manufacturing efficiencies will keep pace with competitors'
cost reductions or will be sufficient in the event of anticipated competitive
price reductions to allow price reductions required to maintain or increase
market share without adversely affecting gross profit margins.
The Company generally ships products within one to six weeks after receipt of
orders and therefore its sales backlog is typically minimal. Accordingly, the
Company's expectations of future net sales are based largely on its own
estimate of future demand and not on firm customer orders. If net sales do not
meet expectations, the Company may not be able to reduce expenses
commensurately in the near-term, and profitability would be adversely affected.
The Company's net sales may be affected by its distributors' decisions as to
the quantity of the Company's products to be maintained in their inventories.
At the end of September 1996, the Company believes its distributors had what
the Company considers to be normal levels of inventory overall. However, there
can be no assurance that distributors will not choose to reduce inventory
levels nonetheless, which would adversely affect net sales.
There can be no assurances that new products that the Company may introduce
will achieve market acceptance or sell through to end users in sufficient
quantities to make them viable for the long-term. In addition, the Company may
have difficulty in establishing its presence in markets in which it does not
have significant brand recognition, such as remote access.
The Company introduced a line of modem-only PC Card products late in fiscal
1995, utilizing existing technologies from its Combo cards and modem-based
remote access products. While the PC Card modems generally have lower gross
profit margins than PC Card LAN adapters,
21
<PAGE> 22
increased sales volume from modems would have a positive impact on coverage of
fixed manufacturing costs, which in time could partially offset the generally
lower margins on modem products. While product areas such as remote access and
ISDN are expected to contribute higher gross profit margins, any sales growth
achieved in these areas may not exceed sales growth, if any, in PC Card
products, and therefore any positive impact on overall gross margins may be
limited.
Because all PC Card products are being manufactured at the Company's own
facilities, interruptions in supply of products could occur if the Company is
unable to accurately forecast or react to changes in product demand, which in
turn could adversely affect future sales. Interruptions could also occur due
to political or economic changes in Malaysia.
In summary, gross profit margins are impacted by a number of factors, including
the rate of sales growth, competitive pricing pressures, the mix of product
sales, component and manufacturing costs, and shipment of new products, which
often have lower margins until market acceptance and increased volumes permit
component cost reductions and manufacturing efficiencies. Frequent product
transitions also increase the risk of inventory obsolescence and interruptions
of sales.
Historically, Netaccess (and previously PRI) has focused its sales and
development efforts on the OEM market and has recorded limited sales to date in
the end-user market. There can be no assurances that the Company will be able
to successfully develop the end-user market for ISDN products or be able to
compete effectively with other companies that have significantly greater
resources than the Company and which have recently entered the ISDN market.
The Company's corporate headquarters, research and development facilities and
other critical business operations are located near major earthquake faults.
Operating results could be materially adversely affected in the event of a
major earthquake.
A number of additional factors could have an impact on the Company's future
operating results. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. While the Company
has historically been successful in developing leading technology for its
products, ongoing investment in research and development will be required to
maintain the Company's technological position, and the Company could be
required to increase the rate of such investments depending on competitive
factors. Many of the Company's competitors have greater financial and
technical resources than the Company. It is also possible that networking
capability could be included in the PC itself or in extension modules to PCs,
which could cause a reduction in the demand for add-on networking devices. The
Company's results are also dependent on continued growth in the underlying
market for portable networking products as well as the Company's ability to
retain its market share.
The Company is aware that competitors have duplicated certain functionality of
the Company's products. There can be no assurance that the Company's patents,
copyrights, trademarks and other efforts to protect its intellectual property
will prevent duplication of the Company's technology or that they will provide
a competitive advantage. The Company is also aware that there can be no
assurance that a patent issued to the Company would be upheld as valid if
litigation over a patent were initiated. The Company believes that, due to the
rapid pace of technological change in the LAN communications industry, the
Company's success is likely to depend more upon continued innovation, technical
expertise, marketing skills and customer support and service than legal
protection of the Company's proprietary rights.
22
<PAGE> 23
With the proliferation of new products and rapidly changing technology in the
PC Card and remote access server markets, there is a significant volume of
patents or similar intellectual property rights held by third parties. Given
the nature of the Company's products and development efforts, there are risks
that claims associated with such patents or intellectual property rights could
be asserted by third parties. These risks may include the following: the cost
of licensing a given technology if the Company believes it may be prudent to
secure such rights; the claimant may not offer such a license on terms
acceptable to the Company; the cost of litigation or settlement of such claims
could be substantial regardless of the merits of the allegations; the Company
may not prevail in the event of litigation; if the Company did not prevail in
litigation, it could be required to pay significant damages, and/or to cease
sales and production of infringing products, and only make future sales of a
noninfringing design. Such a claim was asserted in March 1996 in relation to
the Company's CreditCard Ethernet products. Based on the specific allegations
made, the facts known at this time, and the investigation and evaluation by the
Company and its outside intellectual property counsel regarding the
allegations, management does not currently believe that this matter will have a
material adverse effect on the Company's financial condition or results of
operations in the event that the third party continues to pursue this matter.
The Company currently includes software licensed from third parties in certain
of its Ethernet+Modem, modem-only, Token Ring and remote access products,
which, in the aggregate, accounted for 64% of revenues in fiscal 1996. The
Company's operating results could be adversely affected by a number of factors
relating to this third-party software, including failure by a licensor to
promote or support the software, delays in shipment of the Company's products
as a result of delays in the introduction of licensed software or errors in the
licensed software, excess customer support costs or product returns experienced
by the Company due to errors in licensed software, or termination of the
Company's relationship with such licensors.
Because of frequent technology changes and rapid industry growth, the cost and
availability of components used to manufacture the Company's products may
fluctuate. Some components, including custom chipsets, are available from only
one supplier. Any interruptions in these supply sources or limitations on
availability could impact the Company's ability to deliver its products and in
turn adversely affect future earnings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of approximately $3.1 million
in 1996, primarily as a result of income from operations and income tax refunds
received offset in part by increases in accounts receivable and inventory and a
decrease in accounts payable and accrued liabilities. The Company's capital
expenditures of $9.5 million were for leasehold improvements at new facilities,
equipment related to increased headcount, manufacturing equipment and leasehold
improvements at the Malaysian manufacturing facility, and information systems
hardware and software. The Company has no material fixed commitments for
capital expenditures but is evaluating a lease versus buy decision for its
Malaysian manufacturing facility. If the Company purchases the facility, it
would result in an increase in capital expenditures of approximately $6.0
million and the issuance of long-term debt to finance the purchase.
The Company has a domestic credit facility that permits borrowings up to $15.0
million at the prime rate plus 1-1/4% (9-1/2% at September 30, 1996). Advances
under the agreement are based on eligible accounts receivable and inventories
and are secured by all U.S.-based assets of the Company. As of September 30,
1996, there was $2,500,000 outstanding under this agreement, which expires in
December 1996. The Company also has a credit facility in
23
<PAGE> 24
Malaysia totaling $10.8 million with interest rates ranging from 1% to 1-1/2%
over the bank's reference rate (9.5% to 10.0% at September 30, 1996). As of
September 30, 1996, there was $3,834,000 outstanding under both the revolving
credit and term loan provisions of this facility and $2,000,000 in demand notes
outstanding under this agreement. The Company had approximately $10,578,000 in
borrowings available under its credit facilities as of September 30, 1996. The
Company expects to replace its domestic credit facility with a new facility for
at least the same amount and at terms similar to or more favorable than its
existing facility.
The Company believes that cash on hand, borrowings available under its existing
facilities or from other financing sources and cash provided by operations will
be sufficient to support its working capital and capital expenditure
requirements for at least the next twelve months. However, there can be no
assurances that future cash requirements to fund operations will not require
the Company to seek additional capital sooner than the twelve months, or that
such additional capital will be available when required on terms acceptable to
the Company.
24
<PAGE> 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 193,306 $ 126,565 $ 131,580
Cost of sales 122,658 86,080 63,964
- - -------------------------------------------------------------------------------------------------------------------
Gross profit 70,648 40,485 67,616
Operating expenses:
Research and development 12,874 13,806 11,613
Sales and marketing 36,762 38,704 25,194
General and administrative 9,327 8,092 5,491
In-process research and development
and other nonrecurring charges 1,505 46,126 -
- - -------------------------------------------------------------------------------------------------------------------
Total operating expenses 60,468 106,728 42,298
Operating income (loss) 10,180 (66,243) 25,318
Other income (expense), net (1,332) 439 (175)
- - -------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 8,848 (65,804) 25,143
Income tax provision (benefit) 2,896 (7,000) 9,231
- - -------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 5,952 $ (58,804) $ 15,912
Net income (loss) per share $ .30 $ (3.44) $ 0.95
Weighted average shares outstanding 19,745 17,082 16,833
===================================================================================================================
</TABLE>
See accompanying notes
25
<PAGE> 26
XIRCOM, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
September 30 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 21,504 $ 13,658
Accounts receivable, net of allowances for sales returns
and bad debts of $3,434 ($3,580 in 1995) 32,169 13,033
Income tax receivable 2,652 8,362
Inventories 17,277 17,067
Deferred income taxes 7,048 9,017
Other current assets 3,424 2,125
- - -------------------------------------------------------------------------------------------------------------------
Total current assets 84,074 63,262
Equipment and improvements, net 19,928 17,588
Other assets 4,795 7,892
- - -------------------------------------------------------------------------------------------------------------------
Total assets $ 108,797 $ 88,742
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 5,100 $ 600
Accounts payable 12,613 18,561
Accrued liabilities 20,362 14,313
Current portion of long-term obligations 1,456 401
Accrued income taxes 1,066 1,141
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 40,597 35,016
Long-term obligations 1,860 631
Deferred income taxes 737 -
Commitments and contingencies
Shareholders' equity:
Preferred Stock, 2,000,000 shares authorized, none issued - -
Common Stock, $.001 par value, 50,000,000 shares authorized;
19,731,142 shares outstanding at September 30, 1996
(18,926,030 in 1995) 20 19
Paid-in capital 83,221 76,666
Accumulated deficit ( 17,638) ( 23,590)
- - ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 65,603 53,095
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 108,797 $ 88,742
===================================================================================================================
</TABLE>
See accompanying notes
26
<PAGE> 27
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Retained
Common Stock Unearned Earnings
----------------- Paid-in Stock (Accumulated
(In thousands) Shares Amount Capital Compensation Deficit) Total
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1993 15,669 $ 16 $ 43,359 $ (147) $ 19,302 $ 62,530
Exercise of stock options 447 - 1,590 - - 1,590
Tax benefit related to employee
stock options - - 1,936 - - 1,936
Amortization of unearned
stock compensation - - - 147 - 147
Net income - - - - 15,912 15,912
- - ------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 16,116 16 46,885 - 35,214 82,115
Issuance of Common Stock for
acquisition of PRI 2,049 2 22,281 - - 22,283
Value of options assumed in
connection with acquisition of PRI - - 2,278 - - 2,278
Issuance of Common Stock
under Employee Stock
Purchase Plan 58 - 684 - - 684
Exercise of stock options 703 1 2,843 - - 2,844
Tax benefit related to employee
stock options - - 1,695 - - 1,695
Net loss - - - - ( 58,804) (58,804)
- - -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 18,926 19 76,666 - ( 23,590) 53,095
Issuance of Common Stock
under Employee Stock
Purchase Plan 116 - 888 - - 888
Exercise of stock options 689 1 3,965 - - 3,966
Tax benefit related to employee
stock options - - 1,702 - - 1,702
Net income - - - - 5,952 5,952
- - ------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 19,731 $ 20 $ 83,221 $ - $( 17,638) $ 65,603
========================================================================================================================
</TABLE>
See accompanying notes
27
<PAGE> 28
XIRCOM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Fiscal Years Ended September 30 1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 5,952 $ (58,804) $ 15,912
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Write off of in-process research
and development - 40,000 -
Loss on sale of Netwave product line 1,505 - -
Depreciation and amortization 8,155 6,479 3,776
Deferred income taxes 2,706 (3,760) (1,280)
Other 12 (24) (219)
Changes in assets and liabilities, net of
the effect of acquisition and disposition:
Accounts receivable (19,136) 9,996 (7,381)
Income tax receivable 5,710 (8,362) -
Inventories (1,110) (3,106) (1,373)
Prepaids and other current assets (1,299) 96 (593)
Accounts payable and accrued liabilities (1,039) 11,149 7,469
Income taxes payable 1,627 1,892 1,410
- - -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,083 (4,444) 17,721
INVESTING ACTIVITIES
Proceeds from sale of Netwave product line 1,000 - -
Purchase of PRI, net of cash acquired - (24,387) -
Purchases of short-term investments - (13,975) (39,962)
Proceeds from sale of short-term investments - 51,330 33,385
Purchases of equipment and improvements (9,509) (13,600) (7,418)
(Increase) decrease in other assets 1,634 (175) (433)
- - -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (6,875) (807) (14,428)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 4,854 3,528 1,590
Proceeds from issuance of debt obligations 8,526 1,200 -
Repayment of debt obligations (1,742) (198) (434)
- - -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 11,638 4,530 1,156
Net increase (decrease) in cash
and cash equivalents 7,846 (721) 4,449
Cash and cash equivalents at beginning of period 13,658 14,379 9,930
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 21,504 $ 13,658 $ 14,379
===================================================================================================================
</TABLE>
See accompanying notes
28
<PAGE> 29
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE ONE: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION The accompanying consolidated financial statements
include the accounts of Xircom, Inc. (the "Company") and its wholly-owned
subsidiaries. All intercompany balances and transactions have been eliminated.
BUSINESS The Company designs, manufactures, markets and supports products that
allow PCs to be connected locally or remotely to a network.
CASH AND CASH EQUIVALENTS All highly liquid investments with a maturity of
three months or less at the date of purchase are considered to be cash
equivalents and are carried at cost plus accrued interest. Interest income
totaled $473,000, $1,700,000 and $1,562,000 for fiscal 1996, 1995 and 1994,
respectively, and is included in Other income (expense), net in the
accompanying Consolidated Statements of Operations.
CONCENTRATION OF CREDIT RISK The Company makes periodic evaluations of the
creditworthiness of its customers and generally does not require collateral.
To date, the Company has not experienced any material bad debts or collection
problems. As of September 30, 1996 and 1995, three customers accounted for a
total of 32% and 15%, respectively, of total trade receivables.
INVENTORIES Inventories are carried at the lower of cost (determined on a
first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT Equipment and improvements are stated at cost.
Depreciation and amortization is provided using the straight-line method over
the estimated useful lives of the assets, ranging from one to seven years.
Leasehold improvements are amortized using the straight-line method over the
term of the related lease or the useful life of the asset, whichever is
shorter.
INTANGIBLE ASSETS Included in Other assets in the accompanying Consolidated
Balance Sheets are goodwill and other intangibles associated with the
acquisition of PRI as described in Note Two. Amortization of all intangible
assets is provided on a straight-line basis over their estimated useful lives
ranging from three to seven years. Accumulated amortization of all intangible
assets was $2,090,000 as of September 30, 1996 ($534,000 as of September 30,
1995).
REVENUE RECOGNITION The Company recognizes revenue from product sales when
shipped. The Company generally provides a lifetime limited warranty against
defects in the hardware component and a two-year limited warranty on the
software component of its network adapters and modem products. Netaccess
products have a five-year hardware warranty and a 90-day software warranty, and
ISDN products have a two-year hardware and a one-year software warranty. In
addition, the Company provides telephone support to purchasers of its products
as needed to assist them in installation or use of the products. The Company
makes provisions for these costs in the period of sale. The Company also has
policies and/or contractual agreements which permit distributors and dealers to
return products under certain circumstances. The Company makes a provision for
the estimated amount of product returns that may occur under these programs and
contracts in the period of sale.
29
<PAGE> 30
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NONRECURRING CHARGES In fiscal 1996, the Company recorded a charge to
operations of $1,505,000 ($1,023,000, net of tax benefit) for the sale of all
assets and intellectual property related to its Netwave wireless LAN product
line. In fiscal 1995, the Company recorded charges to operations related to
the sale of certain assets, the write-off of excess and idle facilities and
severance payments related to a reduction in workforce. The aggregate amount
of these nonrecurring charges of $6,126,000 ($3,942,000, net of tax benefit)
was charged to the Company's operations along with the write-off of in-process
research and development in connection with the purchase of PRI as described in
Note Two.
FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign
subsidiaries is the U.S. dollar. To date, substantially all of the Company's
sales have been denominated in U.S. dollars. Gains and losses from
re-measurement are recognized currently in the Consolidated Statements of
Operations.
RESEARCH AND DEVELOPMENT Research and development costs are expensed as
incurred.
NET INCOME (LOSS) PER SHARE Net income (loss) per share is computed using the
weighted average number of shares of common stock and dilutive common stock
equivalents (stock options) outstanding. Fully diluted amounts for each period
do not materially differ from the amounts presented herein.
STOCK-BASED BENEFITS Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), must be adopted by the
Company no later than October 1, 1996. SFAS 123 requires that stock awards
granted subsequent to October 1, 1995 be recognized as compensation cost based
on their estimated fair value at the date of grant. Alternatively, a company
may use the accounting method prescribed by APB 25, "Accounting for Stock
Issued to Employees," and disclose the pro forma amounts for net income and
earnings per share which would have resulted from recognizing such awards at
their fair value. The Company will continue to account for stock-based
compensation expense under APB 25. The required pro forma disclosures for the
SFAS 123 fair value compensation will be made in the fiscal 1997 financial
statements.
LICENSING AGREEMENTS The Company has entered into agreements with third
parties to license software and hardware that is incorporated into or sold with
certain of the Company's products. Royalties associated with such licenses are
accrued and expensed as cost of goods sold when the products are shipped.
ADVERTISING COSTS The Company expenses advertising costs as incurred.
Advertising expense totaled $3,184,000, $4,985,000 and $3,393,000 for fiscal
1996, 1995 and 1994, respectively.
USE OF ESTIMATES The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The industry in which the Company operates
is characterized by rapid technological change and short product life cycles.
As a result, estimates are required to provide for product returns, product
obsolescence and warranty returns. Historically, actual amounts recorded under
these programs have not varied significantly from estimated amounts. Actual
results may differ,
30
<PAGE> 31
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
however, from those estimates, although management does not believe that any
differences would materially affect the Company's financial position or
reported results.
RECLASSIFICATIONS Certain reclassifications of prior year amounts have been
made for purposes of consistent presentation.
NOTE TWO: BUSINESS ACQUISITION
In June 1995, the Company acquired the assets and assumed the liabilities and
outstanding stock options of Primary Rate Incorporated (PRI). PRI develops,
manufactures, markets and supports standards-based Integrated Service Digital
Network (ISDN) products which provide connectivity solutions for corporate
information system departments, original equipment manufacturers and end-users.
The purchase price, net of cash acquired and proceeds from exercise of options
and warrants, totaled approximately $50,279,000, including assumed stock
options which had an associated value of $2,278,000. The purchase price was
paid using funds from the Company's working capital and through the issuance of
2,049,019 shares of common stock which had a value at issuance of $22,283,000.
The acquisition was accounted for as a purchase and, accordingly, the acquired
assets and liabilities were recorded at their estimated fair market values at
the date of acquisition. The purchase price plus costs directly attributable
to the completion of the acquisition have been allocated to the assets and
liabilities acquired. Approximately $40,000,000 of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and accordingly was charged to the Company's
operations. In connection with the acquisition, the Company recorded goodwill
and other intangible assets totaling $6,413,000 and a net deferred tax asset
totaling approximately $2,301,000. The net deferred tax asset related
primarily to the net operating loss carryforward discussed in Note Seven and
deferred taxes related to other intangible assets pursuant to SFAS 109.
NOTE THREE: INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30
--------------------------------------------
<S> <C> <C>
1996 1995
- - -----------------------------------------------------------------------------------------------------------
Finished goods $ 6,154 $ 4,448
Sub-assemblies 3,251 6,629
Work-in-process 650 2,495
Component parts 7,222 3,495
- - -----------------------------------------------------------------------------------------------------------
$ 17,277 $ 17,067
===========================================================================================================
</TABLE>
31
<PAGE> 32
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE FOUR: EQUIPMENT AND IMPROVEMENTS
Equipment and improvements consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Equipment $ 24,003 $ 21,130
Furniture and fixtures 5,324 3,638
Leasehold improvements 7,732 6,006
- - ------------------------------------------------------------------------------------------------------------
37,059 30,774
Less accumulated depreciation and
amortization ( 17,131) ( 13,186)
- - -----------------------------------------------------------------------------------------------------------
$ 19,928 $ 17,588
============================================================================================================
</TABLE>
NOTE FIVE: ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Payroll and related benefits $ 4,535 $ 2,365
Warranty reserve 3,506 1,835
Accrued marketing costs 3,115 2,715
Excess and idle facilities cost 3,593 4,866
Other 5,613 2,532
- - ------------------------------------------------------------------------------------------------------------
$ 20,362 $ 14,313
============================================================================================================
</TABLE>
NOTE SIX: BANK BORROWINGS AND LONG-TERM OBLIGATIONS
Notes payable to bank consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Notes payable to bank, due in 1997 $ 2,600 $ 600
Notes payable to financial institution, due
in 1997 2,500 -
- - ------------------------------------------------------------------------------------------------------------
$ 5,100 $ 600
============================================================================================================
</TABLE>
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Term loans, due through September 1999 $ 3,234 $ 600
Other 82 432
- - ------------------------------------------------------------------------------------------------------------
Total long-term obligations 3,316 1,032
Less current portion 1,456 401
- - ------------------------------------------------------------------------------------------------------------
$ 1,860 $ 631
============================================================================================================
</TABLE>
32
<PAGE> 33
XIRCOM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 8, 1995, the Company entered into a one-year credit agreement with
a financial institution for borrowings up to a maximum of $15,000,000 at the
prime rate plus 1-1/4 percent. Loans under the agreement are advanced based on
the Company's accounts receivable and inventories, subject to borrowing
formulas and are secured by all U.S.-based assets of the Company. As of
September 30, 1996, $2,500,000 was outstanding under the agreement at an
interest rate of 9.5%. The agreement expires in December 1996.
The Company has a credit facility with the Bank of Commerce that permits
borrowings under a bankers acceptance agreement, at a fixed rate of 7.05%, and
on a revolving credit and term loan basis at the bank's reference rate plus 1%
to 1.5% (9.5% to 10.0% as of September 30, 1996). As of September 30, 1996,
$3,834,000 was outstanding under both the revolving credit and term loan
provisions of this agreement ($1,200,000 as of September 30, 1995) and
$2,000,000 was outstanding under the bankers acceptance agreement.
As of September 30, 1996, the weighted average interest rate on all short-term
obligations was approximately 9.6%. The Company had approximately $10,578,000
in borrowings available under its credit facilities as of September 30, 1996.
Aggregate principal maturities on all long-term obligations due subsequent to
September 30, 1996 are as follows: $1,456,000 in 1997, $1,386,000 in 1998 and
$474,000 in 1999. Interest expense totaled $779,000, $68,000 and $157,000 for
fiscal 1996, 1995 and 1994, respectively. The carrying value of the Company's
bank borrowings and long-term obligations approximates their fair values due to
both the variable market interest rates and short-term maturities of its notes
payable.
NOTE SEVEN: INCOME TAXES
The income tax provision (benefit) includes the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------
Current:
Federal $ (709) $ (3,048) $ 8,475
State 250 - 2,010
Foreign 766 - 26
- - ------------------------------------------------------------------------------------------------------------
307 (3,048) 10,511
Deferred:
Federal 2,589 (7,524) (1,263)
State 813 - (17)
Foreign - - -
Valuation allowance (813) 3,572 -
- - ------------------------------------------------------------------------------------------------------------
2,589 (3,952) (1,280)
- - ------------------------------------------------------------------------------------------------------------
$ 2,896 $ (7,000) $ 9,231
============================================================================================================
</TABLE>
33
<PAGE> 34
Significant components of the Company's deferred tax assets and liabilities are
as follows (in thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Book reserves not deductible for tax $ 3,550 $ 10,910
Book in excess of tax depreciation 1,079 640
Foreign operations 1,152 -
Net operating loss carryforward and credit 4,026 3,908
- - ------------------------------------------------------------------------------------------------------------
Total deferred tax asset 9,807 15,458
Valuation allowance (2,759) (3,572)
- - ------------------------------------------------------------------------------------------------------------
Deferred tax asset, net 7,048 11,886
- - ------------------------------------------------------------------------------------------------------------
Basis difference in acquired assets (737) (1,271)
Other - (423)
- - ------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (737) (1,694)
- - ------------------------------------------------------------------------------------------------------------
Net deferred tax asset $ 6,311 $ 10,192
============================================================================================================
</TABLE>
Balance sheet classification of the net deferred tax asset is as follows (in
thousands):
<TABLE>
<CAPTION>
September 30
---------------------------------------------
1996 1995
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current deferred tax asset $ 7,048 $ 9,017
Noncurrent deferred tax asset (liability) (737) 1,175
- - ------------------------------------------------------------------------------------------------------------
$ 6,311 $ 10,192
============================================================================================================
</TABLE>
Noncurrent deferred tax assets are included in Other assets in the accompanying
Consolidated Balance Sheets.
At September 30, 1996 the Company has net operating loss carryforwards for
federal tax and state tax purposes of approximately $10,193,000 and $3,343,000,
respectively, which expire during the period 2001 through 2011. The amount of
the federal net operating loss and a portion of the state net operating loss
that may be used to offset taxable income and income taxes in future years are
subject to certain change in ownership and pre-acquisition loss limitations.
34
<PAGE> 35
A valuation allowance for deferred tax assets was established in 1995 to
reflect the uncertainty of the availability of the loss carryback generated in
1995, applicable to state income taxes. For 1996, the valuation allowance was
reduced due to the realization of state deferred losses that were originally
valued. A reconciliation of the provision (benefit) for income taxes with the
tax (benefit) computed by applying the 35% federal statutory tax rate is as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed expected tax (benefit) $ 3,097 $ ( 23,031) $ 8,800
State income taxes, net of federal benefit 244 ( 1,309) 1,163
Tax exempt FSC and interest income ( 157) ( 303) ( 325)
Research and development credit ( 110) - ( 500)
Foreign operations ( 523) - -
Write-off of purchased in-process
technology - 14,000 -
Valuation allowance on deferred tax asset - 3,572 -
Other 345 71 93
- - -------------------------------------------------------------------------------------------------------------
$ 2,896 $ ( 7,000) $ 9,231
=============================================================================================================
</TABLE>
At September 30, 1996, foreign earnings of $4,092,000 have been retained
indefinitely by subsidiary companies for reinvestment, on which no additional
U.S. tax has been provided. If repatriated, additional taxes of approximately
$1,232,000 on these earnings, net of available foreign tax credit
carryforwards, would be due. Income (loss) before income taxes for all foreign
operations was $5,547,000, $(638,000) and $68,000 for fiscal 1996, 1995 and
1994, respectively.
NOTE EIGHT: COMMON STOCK AND RELATED PLANS
The Company's Stock Option Plan (1992 Plan), as amended, authorizes a total of
up to 6,000,000 shares of Common Stock for issuance as either incentive stock
options with exercise prices which may not be less than fair market value at
the date of grant, or nonqualified stock options. The options generally vest
over three to four years and have terms of five to seven years. The 1992
Director Stock Option Plan (Director Plan) provides for the grant of
nonqualified options for a total of up to 225,000 shares of Common Stock to
non-employee members of the Board of Directors. The options are granted at
fair market value as of the date of grant and vest over a four-year period.
The Company established the 1995 Stock Option Plan (1995 Plan) in connection
with the acquisition of PRI. Unvested options to purchase shares of PRI were
converted into options to purchase shares of the Company's common stock with
vesting rights similar to the 1992 Plan. Options to purchase 232,363 shares of
the Company were granted under the 1995 Plan. The following table is a summary
of activity for the Company's stock option plans:
35
<PAGE> 36
<TABLE>
<CAPTION>
Number of Option price
shares per share
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at October 1, 1993 2,127,642 $ 0.33-$ 18.25
Granted 549,000 $ 14.50-$ 26.50
Exercised ( 447,103) $ 0.33-$ 14.00
Canceled ( 110,277) $ 2.33-$ 19.25
- - ------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1994 2,119,262 $ 0.33-$ 26.50
Granted 2,245,577 $ 9.63-$ 22.50
Exercised ( 703,376) $ 0.33-$ 16.75
Canceled ( 1,124,256) $ 1.29-$ 26.50
- - ------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1995 2,537,207 $ 0.33-$ 19.50
Granted 1,150,550 $ 9.00-$ 17.13
Exercised ( 688,963) $ 0.33-$ 11.50
Canceled ( 679,300) $ 1.29-$ 19.50
- - ------------------------------------------------------------------------------------------------------------
Outstanding at September 30, 1996 2,319,494 $ 1.29-$ 17.13
===============================================================================================================
</TABLE>
On August 3, 1995, upon approval by the Compensation Committee of the Board of
Directors, the Company offered all holders of outstanding options under the
1992 Plan at exercise prices in excess of $10.00 per share the opportunity to
exchange such options for new options at an exercise price of $10.00 per share,
the fair market value of the Company's stock on such date. As a condition of
the exchange, the program required a one-year delay in the vesting of the
options exchanged. In connection with this repricing, an aggregate of 792,464
shares of Common Stock were repriced to an exercise price of $10.00 per share.
The repriced options have been included in the preceding option table as both
canceled and granted in fiscal 1995.
As of September 30, 1996, the Company had 911,300 shares of common stock
available for future grant under its stock option plans, and stock options to
purchase 440,888 shares were exercisable.
The Company's 1994 Employee Stock Purchase Plan (ESPP) allows employees to
purchase Common Stock of the Company, through payroll deductions, at 85% of the
market value of the shares at the beginning or end of the offering period,
whichever is lower. The plan provides for the grant of rights to employees to
purchase a maximum of 250,000 shares of common stock. During fiscal 1996,
116,149 shares were issued under the plan (57,537 shares during fiscal 1995).
Subsequent to the end of fiscal 1996, the Board of Directors approved the
authorization of an additional 600,000 shares for issuance under the 1992 Plan,
200,000 shares for issuance under the Director Plan and 150,000 shares under
the ESPP, subject to shareholder approval at the next Annual Meeting of
Shareholders.
The Company maintains a defined contribution 401(k) plan under which its U.S.
employees are eligible to participate. Participants may make, within certain
limitations, voluntary contributions based upon a percentage of their
compensation. The Company makes matching contributions based on a
participant's contribution up to a specified maximum dollar amount.
Participants are immediately vested in the Company's contributions. Company
contributions were $65,000 and $69,000 for fiscal 1996 and 1995, respectively.
36
<PAGE> 37
NOTE NINE: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash paid
- - ---------------------------------------------------------------------------------------------------------------
Interest $ 776 $ 61 $ 156
Income taxes $ 51 $ 3,383 $ 6,369
Non-cash transactions
- - ---------------------------------------------------------------------------------------------------------------
Acquisition of assets under
capital leases $ - $ - $ 20
Tax benefit related to employee
stock options $ 1,702 $ 1,695 $ 1,936
- - --------------------------------------------------------------------------------------------------------------
Reconciliation of assets acquired and
liabilities assumed related to the
acquisition of PRI
Fair value of assets acquired $ - $ 52,644 $ -
Liabilities assumed - (1,956) -
Less: Non-cash consideration - (26,301) -
- - --------------------------------------------------------------------------------------------------------------
Cash paid for acquisition $ - $ 24,387 $ -
==============================================================================================================
</TABLE>
NOTE TEN: COMMITMENTS AND CONTINGENCIES
The Company leases its facilities and certain equipment under operating leases
expiring on various dates through 2005. Rent expense was $871,000, $1,790,000
and $1,129,000 for fiscal 1996, 1995 and 1994, respectively. As of September
30, 1996, the minimum future rental payments under all noncancelable operating
leases for facilities and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Fiscal year leases
- - --------------------------------------------------------------------------------------------------------------
<S> <C>
1997 $ 2,819
1998 1,757
1999 1,718
2000 1,677
2001 1,555
Thereafter 5,592
- - --------------------------------------------------------------------------------------------------------------
$ 15,118
==============================================================================================================
</TABLE>
Under certain license agreements (see Note One), the Company is required to pay
specified amounts of per unit royalties based on sales of certain of its
products. Some of these agreements also contain minimum quarterly and annual
volume requirements. Certain of these agreements expire on specific dates,
others continue in effect as long as the technology is incorporated into the
Company's products, and some can be terminated by either party after specified
notice periods. Royalties under these agreements amounted to $1,450,000,
$2,129,000, and $2,843,000 for fiscal 1996, 1995 and 1994, respectively.
The Company is involved in certain claims and legal proceedings which arise in
the normal course of business. Management does not believe that the outcome of
any of these matters will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
37
<PAGE> 38
NOTE ELEVEN: SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the design, development,
manufacture, marketing and support of computer network connectivity products.
Information about the Company's operations in the U.S., Europe and Asia is
presented below.
<TABLE>
<CAPTION>
(in thousands) United States Europe Asia Eliminations Total
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1996
Net sales to unaffiliated
customers $ 126,122 $ 45,865 $ 21,319 $ - $ 193,306
Intercompany sales 59,594 17 64,915 (124,526) -
- - ---------------------------------------------------------------------------------------------------------------------
Total sales $ 185,716 $ 45,882 $ 86,234 $ (124,526) $ 193,306
Operating income $ 3,021 $ 572 $ 5,339 $ 1,248 $ 10,180
Identifiable assets $ 82,397 $ 13,980 $ 21,842 $ (9,422) $ 108,797
- - ---------------------------------------------------------------------------------------------------------------------
Fiscal 1995
Net sales to unaffiliated
customers $ 92,771 $ 33,794 $ - $ - $ 126,565
Intercompany sales 31,135 - 3,057 (34,192) -
- - ---------------------------------------------------------------------------------------------------------------------
Total sales $ 123,906 $ 33,794 $ 3,057 $ (34,192) $ 126,565
Operating income (loss) $ (64,160) $ (291) $ 21 $ (1,813) $66,243)
Identifiable assets $ 84,536 $ 9,786 $ 5,489 $ (11,069) $88,742
- - ---------------------------------------------------------------------------------------------------------------------
Fiscal 1994
Net sales to unaffiliated
customers $ 97,081 $ 34,494 $ 5 $ - $ 131,580
Intercompany sales 26,532 - 1,272 (27,804) -
- - ---------------------------------------------------------------------------------------------------------------------
Total sales $ 123,613 $ 34,494 $ 1,277 $ (27,804) $ 131,580
Operating income $ 24,496 $ 251 $ 46 $ 525 $ 25,318
Identifiable assets $ 94,186 $ 8,624 $ 127 $ (1,922) $ 101,015
=====================================================================================================================
</TABLE>
Total export sales (sales to unaffiliated foreign entities) were $10,863,000,
$20,069,000 and $16,991,000 for fiscal 1996, 1995 and 1994, respectively.
Sales to customers in excess of 10% of total sales are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Customer A 18% 21% 28%
Customer B 11% 7% 11%
Customer C 8% 9% 10%
===================================================================================================================
</TABLE>
38
<PAGE> 39
NOTE TWELVE: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share data) Quarter ended
- - --------------------------------------------------------------------------------------------------------------------
Dec. 31 Mar. 31 June 30 Sept. 30 Fiscal Year
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fiscal 1996
Net sales $ 37,698 $ 45,325 $ 52,223 $ 58,060 $ 193,306
Gross profit 13,754 16,311 18,810 21,773 70,648
Net income (loss) (760) 1,373 2,535 2,804(1) 5,952
Net income (loss) per share $ (.04) $ .07 $ .13 $ .14(1) $ .30
- - --------------------------------------------------------------------------------------------------------------------
Fiscal 1995
Net sales $ 40,106 $ 39,974 $ 16,474 $ 30,011 $ 126,565
Gross profit 20,026 17,617 3,608 (766) 40,485
Net income (loss) 4,536 2,476 (48,756)(2) (17,060)(3) (58,804)
Net income (loss) per share $ .27 $ .15 $ (2.87)(2) $ (.91)(3) $ (3.44)
=====================================================================================================================
</TABLE>
(1) In the fourth quarter of fiscal 1996, net income includes
$1,023,000 or $.05 per share for nonrecurring charges.
(2) In the third quarter of fiscal 1995, net loss includes $41,337,000
or $2.43 per share for nonrecurring charges.
(3) In the fourth quarter of fiscal 1995, net loss includes $2,605,000
or $.14 per share for nonrecurring charges. The Company also
recorded a pretax charge of $8,700,000 in the fourth quarter of
fiscal 1995 for additional inventory reserves.
39
<PAGE> 40
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Xircom, Inc.
We have audited the accompanying consolidated balance sheets of Xircom, Inc. as
of September 30, 1996 and 1995, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended September 30, 1996. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Xircom, Inc. at
September 30, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
--------------------------
Woodland Hills, California
October 21, 1996
40
<PAGE> 41
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not applicable.
41
<PAGE> 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of Xircom is incorporated by reference
from the information under the caption "Election of Directors--Nominees" in
the Company's Proxy Statement for its 1997 Annual Meeting of Shareholders.
Information with respect to executive officers of Xircom is incorporated by
reference to Item 1 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions "Executive
Officer Compensation" and "Certain Transactions" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the captions "Principal
Shareholders" and "Election of Directors--Nominees" in the Company's Proxy
Statement for its 1997 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption "Certain
Transactions" in the Company's Proxy Statement for its 1997 Annual Meeting of
Shareholders.
42
<PAGE> 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Xircom, Inc. and
the Report of Independent Auditors, are included in Item 8 of this document:
<TABLE>
<CAPTION>
Page in
Form 10-K
---------
<S> <C>
Consolidated Statements of Operations - Years ended
September 30, 1996, 1995 and 1994 25
Consolidated Balance Sheets at September 30, 1996
and 1995 26
Consolidated Statements of Shareholders' Equity - Years
ended September 30, 1996, 1995 and 1994 27
Consolidated Statements of Cash Flows - Years ended
September 30, 1996, 1995 and 1994 28
Notes to Consolidated Financial Statements 29-39
Report of Ernst & Young LLP, Independent Auditors 40
(2) Consolidated financial statement schedule:
Schedule II - Valuation and Qualifying Accounts 44
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes thereto.
43
<PAGE> 44
SCHEDULE II
XIRCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
-------------------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1996
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR SALES RETURNS
AND BAD DEBTS $3,580 $15,758 $15,904 $3,434
====== ======= ======= ======
LIABILITY RESERVES:
WARRANTY $1,835 $7,312 $5,641 $3,506
====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1995
Deducted from asset accounts:
Allowance for sales returns
and bad debts $2,911 $21,770 $21,101 $3,580
====== ======= ======= ======
Liability reserves:
Warranty $1,295 $4,858 $4,318 $1,835
====== ====== ====== ======
YEAR ENDED SEPTEMBER 30, 1994
Deducted from asset accounts:
Allowance for sales returns
and bad debts $1,592 $7,860 $6,541 $2,911
====== ====== ====== ======
Allowance for sales returns
Warranty $825 $3,034 $2,564 $1,295
==== ====== ====== ======
</TABLE>
44
<PAGE> 45
(3) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K):
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
2.1 Agreement and Plan of Reorganization By and Among Xircom, Inc., a California Corporation, Xircom, Inc., a
Delaware Corporation, and Primary Rate Incorporated, a Delaware Corporation, dated April 12, 1995
(incorporated by reference to Exhibit 2.1 of the Company's report on Form 8-K dated June 22, 1995,
No. 0-19856)
3.1 Amended Articles of Incorporation of Xircom, Inc. (incorporated by reference to Exhibit 3.1 of the
Company's report on Form 10-Q for the quarter ended March 31, 1992)
3.2 Bylaws of Xircom, Inc. (incorporated by reference to Exhibit 3.3 of Amendment No. 3 to the Company's
registration statement on Form S-1, No. 33-45667)
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 3 to the
Company's registration statement on Form S-1, No. 33-45667)
10.1 Form of Indemnification Agreement (incorporated by reference to Exhibit 10.3 of the Company's report on
Form 10-Q for the quarter ended March 31, 1992)
10.9 Stock Option Plan of the Company, as amended and restated on January 19 1996, and forms of agreement
thereunder (incorporated by reference to Exhibit 4.1 of the Company's registration statement on Form S-8
filed on September 18, 1996, No. 333-12225)
10.10 1992 Director Stock Option Plan of the Company and forms of agreement thereunder (incorporated by
reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended March 31, 1992)
10.15 Form of Distributor Agreement (1)
10.20 Agreement of Substitution, dated as of September 1, 1990, between Willemijn Houdstermaatschappij BV and
the Company (1)(2)
10.23 PPIEC Development Program Agreement, dated as of October 26, 1992, between Fujitsu Microelectronics, Inc.
and the Company (incorporated by reference to Exhibit 10.1 of the Company's report on Form 10-Q for the
quarter ended December 31, 1992) (2)
10.24 Software License Agreement, dated as of January 1, 1993, between Madge Networks Limited and the Company
(incorporated by reference to Exhibit 10.2 of the Company's report on Form 10-Q for the quarter ended
December 31, 1992) (2)
10.26 1994 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.26 of the Company's report on
Form 10-K for the year ended September 30, 1993)
</TABLE>
45
<PAGE> 46
<TABLE>
<S> <C>
10.27 Facility lease agreement, dated as of March 29, 1994, between Metropolitan Life Insurance Company and the
Company (incorporated by reference to Exhibit 10.1 of the Company's report on From 10-Q for the quarter
ended March 31, 1994)
10.28 Facility lease agreement, dated as of March 29, 1994, between Metropolitan Life Insurance Company and the
Company (incorporated by reference to Exhibit 10.2 of the Company's report on From 10-Q for the quarter
ended March 31, 1994)
10.29 Loan and Security Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc.,
and Xircom, Inc. and Primary Rate Incorporated (incorporated by reference to Exhibit 10.29 of the
Company's report on Form 10-K for the year ended September 30, 1995)
10.29a. Pledge Agreement, dated as of November 8, 1995, between The CIT Group/Credit Finance, Inc., and Xircom,
Inc. (incorporated by reference to Exhibit 10.29 of the Company's report on Form 10-K for the year ended
September 30, 1995)
10.29b. Secured Continuing Corporate Guaranty dated November 8, 1995, by Xircom, Inc. (incorporated by reference
to Exhibit 10.29 of the Company's report on Form 10-K for the year ended September 30, 1995)
10.29c. Patent Security Agreement dated as of November 8, 1995 by Xircom, Inc. in favor of The CIT Group/Credit
Finance, Inc. (incorporated by reference to Exhibit 10.29 of the Company's report on Form 10-K for the
year ended September 30, 1995)
10.29d. Trademark Security Agreement dated as of November 8, 1995 between Xircom, Inc. and The CIT Group/Credit
Finance, Inc. (incorporated by reference to Exhibit 10.29 of the Company's report on Form 10-K for the
year ended September 30, 1995)
10.29e. Amendment to Loan and Security Agreement, dated as of November 7, 1996, between The CIT Group/Credit
Finance, Inc. and Xircom, Inc. and Primary Rate Incorporated (Filed herewith)
10.29f. Amendment #2 to Loan and Security Agreement, dated as of November 14, 1996, between the CIT Group/Credit
Finance, Inc., and Xircom, Inc. and Primary Rate Incorporated (Filed herewith)
22.1 Subsidiaries of Xircom, Inc. (see page 47)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 48)
24.1 Power of Attorney (see page 49)
27.1 Financial Data Schedule
(1) Incorporated by reference to corresponding exhibit number of the Company's registration statement on Form S-1,
No. 33-45667
(2) Confidential treatment granted as to certain portions of this Exhibit
</TABLE>
(b) Reports on Form 8-K:
None
46
<PAGE> 47
EXHIBIT 22.1
SUBSIDIARIES OF THE COMPANY
Xircom Europe N.V.
Xircom Asia Pacific PTE LTD
Xircom FSC, Inc.
Netaccess, Inc.
Xircom Operations (Malaysia) SDN. BHD.
Xircom U.K., Ltd.
Xircom France, S.A.R.L.
Xircom Deutschland GmbH
Xircom AB
Xircom Asia Limited
47
<PAGE> 48
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
pertaining to the 1992 Director Stock Option Plan, 1992 Stock Option Plan, 1994
Employee Stock Purchase Plan and 1995 Stock Option Plan and in the Registration
Statement (Form S-3 No. 33-93972) and in the related Prospectus of Xircom, Inc.
of our report dated October 21, 1996, with respect to the consolidated
financial statements and schedule of Xircom, Inc., included in this Annual
Report (Form 10-K) for the year ended September 30, 1996.
/s/ ERNST & YOUNG LLP
--------------------------
Woodland Hills, California
December 9, 1996
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
XIRCOM, INC.
Date: December 9, 1996 By: /s/ Dirk I. Gates
---------------------------------------
Dirk I. Gates
Chairman of the Board
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dirk I. Gates and Steven F. DeGennaro, jointly
and severally, his attorneys-in-fact, each with the power of substitution for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- - --------- ----- ----
<S> <C> <C>
/s/ DIRK I. GATES Chairman of the Board, December 9, 1996
- - --------------------------------------
Dirk I. Gates President and Chief Executive Officer
(Principal Executive Officer)
/s/ STEVEN F. DEGENNARO Vice President, Finance and December 9, 1996
- - -------------------------------------- Chief Financial Officer
Steven F. DeGennaro (Principal Financial Officer)
/s/ MICHAEL F.G. ASHBY Director December 9, 1996
- - --------------------------------------
Michael F.G. Ashby
/s/ KENNETH J. BIBA Director December 9, 1996
- - --------------------------------------
Kenneth J. Biba
/s/ GARY J. BOWEN Director December 9, 1996
- - --------------------------------------
Gary J. Bowen
/s/ J. KIRK MATHEWS Director December 9, 1996
- - --------------------------------------
J. Kirk Mathews
/s/ WILLIAM J. SCHROEDER Director December 9, 1996
- - --------------------------------------
William J. Schroeder
/s/DELBERT W. YOCAM Director December 9, 1996
- - --------------------------------------
Delbert W. Yocam
</TABLE>
49
<PAGE> 1
[The CIT Group Letterhead] EXHIBIT 10.29e
[The CIT Group LOGO]
November 7, 1996
Xircom, Inc.
Primary Rate Incorporated
2300 Corporate Center Drive
Thousand Oaks, CA 91320-1420
Attention: Steven F. DeGennaro, VP Finance &
CFO
RE: LOAN AND SECURITY AGREEMENT DATED NOVEMBER 8, 1995 AND ANY AND ALL
AMENDMENTS THERETO ENTERED INTO BETWEEN XIRCOM, INC., PRIMARY RATE
INCORPORATED (COLLECTIVELY "BORROWER") AND THE CIT GROUP/CREDIT FINANCE,
INC. ("LENDER") (THE "AGREEMENT")
Dear Steve:
In confirmation of our understanding, the above-captioned Agreement is hereby
amended, effective immediately, as set forth below. To the extent of any
inconsistencies between this letter-amendment and the Agreement, the terms and
conditions set forth below shall govern. In all other respects the Agreement
shall remain in full force and effect.
1. The Term of the Agreement as set forth in Section 9.1 is hereby extended.
The Agreement shall now terminate on November 18, 1996 rather than on
November 8, 1996.
If the foregoing correctly sets forth our agreement please so acknowledge by
signing the original of this letter-amendment below and returning the same to
the undersigned.
Very truly yours,
The CIT Group/
Credit Finance, Inc.
/s/ JEAN V. GRASSO
Jean V. Grasso
Assistant Vice President
All of the foregoing is hereby approved and agreed to.
Xircom, Inc. Primary Rate Incorporated
By /s/ Steven F. DeGennaro By /s/ Steven F. DeGennaro
-------------------------- --------------------------
Title CFO Title CFO
----------------------- -----------------------
[Letterhead]
<PAGE> 1
EXHIBIT 10.29f
November 14, 1996
[LOGO]
Xircom, Inc.
Primary Rate Incorporated
2300 Corporate Center Drive
Thousand Oaks, CA 91320-1420
Attention: Steven F. DeGennaro, Vice President & CFO
RE: LOAN AND SECURITY AGREEMENT DATED NOVEMBER 8, 1995 AND ANY AND
ALL AMENDMENTS THERETO ENTERED INTO BETWEEN XIRCOM, INC., PRIMARY
RATE INCORPORATED (COLLECTIVELY "BORROWER") AND THE CIT
GROUP/CREDIT FINANCE, INC. ("LENDER") (THE "AGREEMENT")
AMENDMENT #2
Dear Steve:
In confirmation of our understanding, the above-captioned Agreement is hereby
amended, effective immediately, as set forth below. To the extent of any
inconsistencies between this letter-amendment and the Agreement, the terms and
conditions set forth below shall govern. In all other respects the Agreement
shall remain in full force and effect.
1. The Term of the Agreement as set forth in Section 9.1 is hereby
extended. The Agreement shall now terminate on December 18, 1996 rather
than on November 18, 1996.
2. In consideration for this accommodation, you agree to pay a fee of
$12,500.00 which shall be charged to your loan account upon execution of
this letter-amendment.
If the foregoing correctly sets forth our agreement please so acknowledge by
<PAGE> 2
November 14, 1996
Page 2 of 2
signing the original of this letter-amendment below and returning the same to
the undersigned.
Very truly yours,
The CIT Group/
Credit Finance, Inc.
Jean V. Grasso
Assistant Vice President
All of the foregoing is hereby approved and agreed to.
Xircom, Inc. Primary Rate Incorporated
By /s/ STEVEN F. DeGENNARO By /s/ STEVEN F. DeGENNARO
------------------------------ ------------------------------
Title CFO Title CFO
--------------------------- ---------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 21,504
<SECURITIES> 0
<RECEIVABLES> 35,603
<ALLOWANCES> 3,434
<INVENTORY> 17,277
<CURRENT-ASSETS> 84,074
<PP&E> 37,059
<DEPRECIATION> 17,131
<TOTAL-ASSETS> 108,797
<CURRENT-LIABILITIES> 40,597
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 65,583
<TOTAL-LIABILITY-AND-EQUITY> 108,797
<SALES> 193,306
<TOTAL-REVENUES> 193,306
<CGS> 122,658
<TOTAL-COSTS> 122,658
<OTHER-EXPENSES> 60,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,848
<INCOME-TAX> 2,896
<INCOME-CONTINUING> 5,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,952
<EPS-PRIMARY> .30
<EPS-DILUTED> .30
</TABLE>
