<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTER ENDED MARCH 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 0-19856
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XIRCOM, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4221884
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2300 CORPORATE CENTER DRIVE
THOUSAND OAKS, CALIFORNIA 91320
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(Address of principal executive offices & zip code)
REGISTRANT'S TELEPHONE NUMBER:(805) 376-9300
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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
--- ---
There were 19,455,289 shares of the registrant's $.001 par value Common Stock
outstanding as of May 6, 1996.
<PAGE> 2
XIRCOM, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 8-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Items 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
XIRCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
----------- -------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 15,268 $ 13,658
Accounts receivable 21,619 11,592
Income tax receivable 436 8,362
Inventories 27,300 19,174
Deferred income taxes 9,017 9,017
Other current assets 1,720 1,459
-------- --------
Total current assets 75,360 63,262
Equipment and improvements, net 20,214 17,588
Other assets 7,071 7,892
-------- --------
Total assets $102,645 $ 88,742
======== ========
Current liabilities:
Notes payable to bank $ 9,315 $ 600
Accounts payable 16,745 18,561
Accrued liabilities 17,301 14,313
Current portion of long-term obligations 906 401
Accrued income taxes 966 1,141
-------- --------
Total current liabilities 45,233 35,016
Long-term obligations 1,384 631
Shareholders' equity:
Common stock 19 19
Paid-in capital 78,986 76,666
Accumulated deficit (22,977) (23,590)
-------- --------
Total shareholders' equity 56,028 53,095
-------- --------
Total liabilities and shareholders' equity $102,645 $ 88,742
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share information)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
-------------------- -------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $45,325 $39,974 $83,023 $80,080
Cost of sales 29,014 22,357 52,958 42,437
------- ------- ------- -------
Gross profit 16,311 17,617 30,065 37,643
Operating expenses:
Research and development 3,217 3,186 6,224 6,415
Sales and marketing 8,544 8,625 17,665 17,009
General and administrative 2,177 1,734 4,542 3,323
------- ------- ------- -------
Total operating expenses 13,938 13,545 28,431 26,747
------- ------- ------- -------
Operating income 2,373 4,072 1,634 10,896
Other income (expense), net (354) (142) (637) 234
------- ------- ------- -------
Income before income taxes 2,019 3,930 997 11,130
Provision for income taxes 646 1,454 384 4,118
------- ------- ------- -------
Net income $ 1,373 $ 2,476 $ 613 $ 7,012
======= ======= ======= =======
Weighted average shares outstanding 19,448 16,909 19,428 16,926
Net income per share $ .07 $ .15 $ .03 $ .41
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
March 31
----------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 613 $ 7,012
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,053 2,536
Deferred rent - (24)
Changes in assets and liabilities:
Accounts receivable (10,027) (2,239)
Income tax receivable 7,926 -
Inventories (8,126) (4,003)
Other current assets (261) 233
Accounts payable and accrued liabilities 1,172 (428)
Income taxes payable 406 335
-------- --------
Net cash provided by (used in) operating activities (4,244) 3,422
-------- --------
Investing activities:
Purchase of short-term investments - (14,220)
Sale of short-term investments - 21,202
Purchases of equipment and improvements (5,901) (8,811)
Other 43 (176)
-------- --------
Net cash used in investing activities (5,858) (2,005)
-------- --------
Financing activities:
Proceeds from issuance of common stock 1,739 1,561
Proceeds from issuance of long-term debt 1,800 -
Net borrowings under line-of-credit agreement 8,715 -
Long-term debt repayments (542) (200)
-------- --------
Net cash provided by financing activities 11,712 1,361
-------- --------
Net increase in cash 1,610 2,778
Cash and cash equivalents at beginning of period 13,658 14,379
-------- --------
Cash and cash equivalents at end of period $ 15,268 $ 17,157
======== ========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 179 $ 34
Income taxes 20 1,633
Tax benefit related to employee stock options $ 581 $ 949
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared
by the Company without audit (except for the balance sheet information as of
September 30, 1995, which was derived from audited consolidated financial
statements) pursuant to Securities and Exchange Commission regulations. In the
opinion of management, the financial statements reflect all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the consolidated financial position at March 31, 1996 and the consolidated
results of operations for the three- and six-month periods ended March 31, 1996
and 1995, and cash flows for the six-month periods ended March 31, 1996 and
1995, in accordance with generally accepted accounting principles. The
accompanying financial statements are condensed and do not include footnotes
and certain financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's 1995 annual report on
Form 10-K.
The results of operations for the three- and six-month periods ended March 31,
1996 are not necessarily indicative of the results to be expected for the
entire fiscal year.
NET INCOME PER SHARE
Net income 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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31 September 30
1996 1995
-------- ------------
<S> <C> <C>
Finished goods $ 7,137 $ 6,555
Sub-assemblies 6,744 6,629
Work-in-process 4,811 2,495
Component parts 8,608 3,495
------- -------
$27,300 $19,174
======= =======
</TABLE>
6
<PAGE> 7
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
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.
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.
LEGAL MATTERS
The Company received notice in March 1996 from one of its competitors alleging
that the Company's CreditCard Ethernet products infringe two of the
competitor's patents. The Company and its outside counsel have investigated
these allegations and have advised the competitor that it believes the
allegations are without merit. To date, the Company has not received further
communication from the competitor on this matter but intends to vigorously
defend its position. 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 competitor continues to pursue this matter.
The foregoing is a forward-looking statement, and is subject to certain risks.
As with any allegations of patent infringement, these risks may include the
following: 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.
7
<PAGE> 8
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly 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
The following table sets forth the statements of income as a percentage of net
sales:
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
------------------ ----------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.0 55.9 63.8 53.0
----- ----- ----- -----
Gross profit 36.0 44.1 36.2 47.0
Operating expenses:
Research and development 7.1 8.0 7.5 8.0
Sales and marketing 18.9 21.6 21.3 21.3
General and administrative 4.8 4.3 5.4 4.1
----- ----- ----- -----
30.8 33.9 34.2 33.4
----- ----- ----- -----
Operating income 5.2 10.2 2.0 13.6
Other income (expense), net (.8) (.4) (.8) .3
----- ----- ----- -----
Income before income taxes 4.4 9.8 1.2 13.9
Provision for income taxes 1.4 3.6 .5 5.1
----- ----- ----- -----
Net income 3.0% 6.2% .7% 8.8%
===== ===== ===== =====
</TABLE>
NET SALES
LAN ADAPTER AND MODEM PRODUCT SALES. Net sales of LAN adapters and modems
("client products") for the three months ended March 31, 1996 increased 21%
from the corresponding period a year ago due primarily to growth in overall
market demand for such products that connect portable PCs to networks, the
Internet and on-line services (such as America Online), as well as sales of the
Company's modem-only PC Card product, which was introduced in September 1995.
Unit shipments of client products increased 15% for the March 1996 quarter
versus the March 1995 quarter and average selling prices increased as the
result of an increased proportion of revenues coming from the higher priced
combination Ethernet+Modem PC Cards. Net sales from client products for the
six-month period ended March 31, 1996 were approximately the same
8
<PAGE> 9
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
as compared to the corresponding period of the prior year because of lower unit
shipments and average selling prices in the first fiscal quarter of 1996 as
compared to the first quarter of 1995. As explained in the Form 10Q for the
December 1995 quarter, these decreases were attributable to increased
competition during the course of fiscal 1995, a decline in market share
year-over-year and a shifting mix of product sales away from the higher priced
parallel port LAN adapters. However, the Company also indicated last quarter
that unit sales of its client products by its distributors increased
approximately 15% in the December 1995 quarter relative to the September 1995
quarter. Similarly, distributor sales of the Company's client products
increased approximately 19% in the March 1996 quarter compared to the December
1995 quarter. These two sequential growth quarters may be indicative of
several factors: an increased growth rate in shipments of portable PCs, which
in turn require network connections; stabilization of the Company's market
share for LAN adapters for portable PCs based in part on its more competitive
pricing policies adopted during fiscal 1995 (although this has not been
verified by independent market research at this time); the rapid growth in
sales of the latest version of the Company's Ethernet+Modem PC Card, which
first shipped in July 1995; and increased sales of modem-only products first
introduced in September 1995.
SYSTEMS PRODUCT SALES. The Company completed its acquisition of Primary Rate
Incorporated ("PRI"), a provider of Integrated Services Digital Network (ISDN)
products to original equipment manufacturers ("OEMs") in June 1995. Revenues
from this new product line accounted for approximately, 12% and 11% of net
sales for the March 1996 quarter and first six months of fiscal 1996,
respectively. The Netaccess remote access server and Netwave wireless LAN
product lines accounted for approximately 1% of net sales during each of the
second quarter and first six months of fiscal 1996. In the corresponding
six-month period of 1995, the Company derived approximately 9% of its revenue
from these product lines based on initial shipments of the MultiPort Modem
product and an FCC-approved version of its Netwave product. These two product
lines have not contributed a material amount of revenues since their
introduction. Development of the MultiPort Modem products has continued and
certain improvements have been made which will allow the Company to reintroduce
them to the market as part of the Netaccess series of remote access server
products later this fiscal year.
In January 1996, the Company announced that it is having discussions with other
companies that might be interested in partnering arrangements with respect to
development and marketing of Netwave or in the purchase of the product line.
Such discussions are continuing, although to-date no definitive agreement has
been reached. The Company does not expect any such sale or disposition of the
business to have a material impact on its future revenues or results of
operations.
International sales (shipments to customers located outside the U.S.) were 40%
and 38%, respectively, of total net sales for the three- and six-month periods
ended March
9
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XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31, 1996, compared to 42% and 40%, respectively, for the corresponding periods
of fiscal 1995. The lower percentage of international sales in 1996 was
primarily due to the addition of ISDN OEM sales in fiscal 1996, which to-date
have been predominantly U.S.-based.
Many of the Company's products (such as Netaccess, PC Card modems and ISDN
products) are designed to connect to public telecommunications networks and
therefore require approvals for use in certain countries. While the Company
attempts to design its products to meet the requirements of most major
countries worldwide, the testing and approvals process takes additional time.
Historically, the time between first shipments to the U.S. market and shipments
to major international markets requiring approvals has been three to six
months. As a result, the proportion of international sales may be lower than
historical levels during product introduction periods.
GROSS PROFIT
Gross profit margins for the second quarter and first six months of fiscal 1996
were 36.0% and 36.2%, respectively, compared to 44.1% and 47.0%, respectively,
for the comparable prior-year periods due to the increased proportion of sales
of PC Card adapters, which have lower gross profit margins than the Company's
parallel port adapters, and to selling price reductions on PC Card products
during fiscal 1995. In addition, start-up expenses related to the commencement
of operations for the Company's own manufacturing of PC Cards had a negative
impact on gross margins in the December 1995 quarter and, to a lesser extent,
in the March 1996 quarter. The Company has now successfully transitioned 100%
of its PC Card manufacturing to this in-house facility. While this transition
is expected to have a positive impact on gross margins in the future, the
proportion of revenues derived from the Ethernet+Modem and modem-only PC Cards,
which have lower gross profit margins compared to LAN PC Cards and systems
division products, have negatively impacted overall gross margins and may
continue to offset any improvement from manufacturing efficiencies if such
revenue mix changes continue.
OPERATING EXPENSES
Operating expenses for the three- and six-month periods ended March 31, 1996
increased by 3% and 6%, respectively, compared to the corresponding prior-year
periods, primarily due to expansion of product lines, the acquisition of PRI
and expanded international operations. After a significant increase in
operating expenses as a percentage of sales in fiscal 1995 (partially due to
significantly lower sales in the second half of fiscal 1995), the Company has
been reducing expenses over the last two quarters. The absolute dollar amount
of expenses in the March 1996 quarter have decreased by $4.2 million, or 23%,
compared to the September 1995 quarter through more focused product development
activities, a reduction in certain promotional spending and employee attrition.
10
<PAGE> 11
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Research and development expenses were roughly equal in the second quarters of
fiscal 1996 and fiscal 1995 and were slightly lower in the first half of fiscal
1996 compared to the corresponding period of 1995. Research and development
expenses are expected to increase modestly in absolute dollars for the
remainder of fiscal 1996.
Sales and marketing expenses were slightly lower in the March 1996 quarter
compared to the March 1995 quarter but were 4% higher for the six months ended
March 31, 1996 as compared with the corresponding prior-year period as a
result of added sales and marketing personnel related to the acquisition of PRI
in 1995, geographic expansion in certain major international markets and
expansion of domestic field sales personnel. Sales and marketing expenditures
have been reduced substantially from the levels in the second half of fiscal
1995, both in amount and as a percentage of sales. Expenses of $8.5 million in
the March 1996 quarter, compared to $9.1 million in the December 1995 quarter
and $11.8 million in the September 1995 quarter, reflect consolidation of
certain sales operations, reduced overall promotional spending due to a more
focused product line and attrition. Current plans are to keep sales and
marketing expenses at a similar level in absolute dollars for the balance of
fiscal 1996, although certain sales expenses tend to vary with the level of
sales (as such they could be higher or lower depending on sales growth and the
level of competition).
General and administrative expenses for the three- and six-month periods of
1996 increased by 26% and 37%, respectively, compared to the corresponding
periods of 1995 primarily due to expanded information systems hardware and
software and the amortization of goodwill and other intangible assets related
to the acquisition of PRI in June of 1995.
OTHER INCOME (EXPENSE), NET
Net other income or expense includes interest income from the investment of
available cash, prompt payment discounts earned by the company offset by prompt
payment discounts taken by customers, foreign currency transaction gains or
losses and interest expense on notes payable and capital leases. Net other
expense for the first six months of fiscal 1996 compared to net other income
for the corresponding fiscal 1995 period is due primarily to lower interest
income and higher interest expense in the 1996 period as a result of reduced
cash balances and borrowings under credit facilities. Interest expense is
expected to increase for the balance of fiscal 1996 as a result of borrowings
required to fund capital expenditures and operations.
INCOME TAXES
The Company's effective tax rate was 38.5% for the first six months of fiscal
1996 as a result of an expected 32% tax rate for profitable operations in the
second quarter and the 25.6% tax benefit related to a pre-tax loss recorded in
the first quarter. Based on current assumptions of revenue and profitability,
the Company estimates that future
11
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XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
quarters in fiscal 1996 will be taxed at a 32% rate, primarily due to tax
holiday status for the Company's operations in Malaysia.
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. In 1994,
the PC Card market overtook the market for parallel port adapters, and
competition increased substantially beginning in 1995. Companies with greater
name recognition in the PC, desktop LAN adapter and PC Card modem industries
and with greater financial resources gained market share during 1994 and 1995
and now have a significant presence in the PC Card LAN adapter market.
Particularly during fiscal 1995, and to a lesser extent in the first quarter of
fiscal 1996, the Company's net sales and gross margin were adversely impacted
by a combination of factors: increased price competition, loss of market share
in the PC Card LAN adapter market, a lower proportion of sales from parallel
port products, and higher than normal levels of inventories in the Company's
distribution channels and the related effect of reducing those channel
inventory levels. The Company believes its share of the PC Card LAN adapter
market has stabilized because of its more competitive pricing strategy for PC
Card products adopted during fiscal 1995 and because of its success with its
latest version of its combination Ethernet LAN and Modem PC Card. Some of this
success, however, has been attributable to technical difficulties that the
Company believes its principal competitor in this market segment experienced.
To-date, this competitor's product still has not shipped in large volumes, but
it will likely reach greater volumes by the third quarter of fiscal 1996. In
addition, in late calendar 1995, other competitors introduced their combination
LAN and modem PC Cards that compete with the Company's product and they have
been shipping greater volumes over the last several months. Because of these
factors and others, there can be no assurances that market share erosion will
not occur in the future.
The Company believes that the market for PC Card LAN adapters and modems will
be price competitive for the long-term and thus continue to result in lower
gross profit margins than the Company had earned from such products in the
past. While the Company believes its current product costs are competitive, it
continues to redesign its products for cost savings. In addition, the
Company's new manufacturing facility, which began volume production in the
December 1995 quarter, is expected to reach greater efficiency in the second
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 be sufficient to allow price reductions
required to maintain 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
12
<PAGE> 13
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
and not on firm customer orders. While the Company has taken actions to reduce
expenses over the last nine months based on lower revenues, its plans for
future expenditures are still based in part on its estimates of future sales.
If net sales do not meet expectations, the Company may not be able to further
reduce expenses commensurately in the near-term, and profitability could 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.
The Company saw an increase in the level of channel inventories during the last
half of fiscal 1994 and the first half of fiscal 1995 as product sell-through
slowed. The Company reduced the level of such channel inventories during the
second half of fiscal 1995 by significantly reducing its shipments to its
distributors. At the end of March 1996, the Company believes its distributors
had what it considers to be normal levels of inventory overall.
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, if the Company
does not make sufficient expenditures in the sales and marketing areas, the
Company may have difficulty in establishing its presence in markets that are
just emerging, such as wireless LANs, or in which the Company does not have
significant brand recognition, such as remote access.
Although only about 9% of the March 1996 sales were from parallel port LAN
adapters, the Company expects that PC Card adapters will further increase as a
proportion of LAN adapter revenues throughout 1996. As indicated earlier, the
Company's PC Card products generally sell for lower prices than the Company's
comparable parallel port products and have lower gross profit margins. The
Company introduced a line of modem-only PC Card products late in fiscal 1995,
utilizing existing technologies from its combination LAN and modem PC Cards and
modem-based remote access products. While the PC Card modems generally have
lower gross profit margins than PC Card LAN adapters, 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 systems-based product areas such as remote access and ISDN are
expected to contribute higher gross profit margins, the level of sales to be
achieved in these areas, and therefore any positive impact on overall gross
margins, is uncertain.
Because all PC Card products are now 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. In addition, although the Company
has hired experienced management personnel to oversee its manufacturing
operations, the Company has no previous experience in such operations.
Interruptions could also occur due to political or economic changes in
Malaysia.
13
<PAGE> 14
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 the shipments 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.
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. Increased
competition in the PC Card market has resulted in shorter product life cycles
than in the past. 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.
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. Currently, the worldwide demand for the
latest V.34 modem chipsets, which the Company purchases from Lucent
Technologies ("Lucent") (formerly AT&T Microelectronics), has resulted in
allocations to the Company and Lucent has been unable to confirm delivery of
the quantity of such chipsets that the Company has placed on order for the
September 1996 quarter. If interruptions in supply from Lucent occur, revenues
from the Company's modem-based products could be adversely impacted.
The Company is also subject to additional risk factors as identified in its
Annual Report to Shareholders and filing on Form 10-K for the year ended
September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had $15.3 million in cash and cash equivalents.
The Company's operating activities used cash of approximately $4.2 million in
the six-month period ended March 31, 1996, primarily as a result of increases
in accounts receivable and inventories offset by income tax refunds received
and an increase in accounts payable. Accounts receivable increased due to
higher quarterly revenue and less prompt payment discounts offered in the March
1996 quarter compared to the September 1995 quarter. Inventories increased
primarily due to the transition from
14
<PAGE> 15
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
turn-key to in-house manufacturing and, to a lesser extent, because of the
increase in the systems division business. The Company had capital
expenditures of $5.9 million in the first six months of fiscal 1996 primarily
for manufacturing equipment and leasehold improvements at its Malaysian
manufacturing facility. The Company has no material fixed commitments for
capital expenditures and expects that the rate of capital expenditures will
decrease over the remainder of fiscal 1996.
The Company has a domestic credit facility that permits borrowings up to $15.0
million at the prime rate plus 1-1/4%. 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 March 31, 1996, there was $5.0 million
outstanding under this agreement, which expires in November 1996. The $5.0
million was repaid on April 1, 1996. The Company also has a credit facility in
Malaysia totaling $10.8 million with interest rates ranging from 1/2% to 1-1/2%
over the bank's reference rate. As of March 31, 1996, there was $4.3 million
outstanding under this facility, which expires in April 1999. The Company had
approximately $5.0 million in borrowings available under its credit facilities
as of March 31, 1996.
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. While the Company had higher
revenues, returned to profitability and had a positive cash flow from operating
activities in the March 1996 quarter, there can be no assurances that operating
results will continue to improve or 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.
15
<PAGE> 16
XIRCOM, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No material proceedings pending. See "Legal Matters" under
"Notes to Condensed Consolidated Financial Statements."
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The results of voting at the Annual Meeting of Shareholders of
the Company were reported in the Company's Form 10-Q for the
period ended December 31, 1995.
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
Pursuant to the requirements of the Securities and 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.
-----------------------------
(Registrant)
Date: May 10, 1996 /s/ DIRK I. GATES
---------------- -----------------------------
Dirk I. Gates
Chairman of the Board,
President and
Chief Executive Officer
Date: May 10, 1996 /s/ JERRY N. ULRICH
----------------- -----------------------------
Jerry N. Ulrich
Chief Operating Officer and
Chief Financial Officer
Date: May 10, 1996 /s/ STEVEN F. DEGENNARO
----------------- -----------------------------
Steven F. DeGennaro
Vice President, Finance and
Chief Accounting Officer
17
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-31-1996
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<SECURITIES> 0
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<ALLOWANCES> 7,117
<INVENTORY> 27,300
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<PP&E> 36,480
<DEPRECIATION> 16,266
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<CURRENT-LIABILITIES> 45,233
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0
0
<COMMON> 19
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<TOTAL-LIABILITY-AND-EQUITY> 102,645
<SALES> 83,023
<TOTAL-REVENUES> 83,023
<CGS> 52,958
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<INTEREST-EXPENSE> 407
<INCOME-PRETAX> 997
<INCOME-TAX> 384
<INCOME-CONTINUING> 613
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