<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------------
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 JUNE 30, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 0-19856
----------------------------------
XIRCOM, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4221884
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)
2300 CORPORATE CENTER DRIVE
THOUSAND OAKS, CALIFORNIA 91320
(Address of principal executive offices & zip code)
REGISTRANT'S TELEPHONE NUMBER: (805) 376-9300
----------------------------------
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 19,561,854 shares of the registrant's $.001 par value Common Stock
outstanding as of August 7, 1996.
<PAGE> 2
XIRCOM, INC.
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 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
2
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XIRCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1996 September 30, 1995
------------- ------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 16,341 $ 13,658
Accounts receivable 25,509 13,699
Income tax receivable 436 8,362
Inventories 23,700 17,067
Deferred income taxes 9,017 9,017
Other current assets 2,025 1,459
--------- ---------
Total current assets 77,028 63,262
Equipment and improvements, net 19,784 17,588
Other assets 6,686 7,892
--------- ---------
Total assets $ 103,498 $ 88,742
========= =========
Current liabilities:
Notes payable to bank $ 1,960 $ 600
Accounts payable 16,587 18,561
Accrued liabilities 18,829 14,313
Current portion of long-term obligations 1,430 401
Accrued income taxes 1,690 1,141
--------- ---------
Total current liabilities 40,496 35,016
Long-term obligations 2,217 631
Shareholders' equity:
Common stock 19 19
Paid-in capital 81,208 76,666
Accumulated deficit (20,442) (23,590)
--------- ---------
Total shareholders' equity 60,785 53,095
--------- ---------
Total liabilities and shareholders' equity $ 103,498 $ 88,742
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share information)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30 June 30
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 52,223 $ 16,474 $ 135,246 $ 96,554
Cost of sales 33,413 12,866 86,371 55,303
--------- --------- --------- ---------
Gross profit 18,810 3,608 48,875 41,251
Operating expenses:
Research and development 3,421 3,648 9,645 10,063
Sales and marketing 8,816 9,918 26,481 26,927
General and administrative 2,387 2,110 6,929 5,433
In-process research and development
and other non-recurring charges -- 42,119 -- 42,119
--------- --------- --------- ---------
Total operating expenses 14,624 57,795 43,055 84,542
--------- --------- --------- ---------
Operating income (loss) 4,186 (54,187) 5,820 (43,291)
Other income (expense), net (458) 291 (1,095) 525
--------- --------- --------- ---------
Income (loss) before income taxes 3,728 (53,896) 4,725 (42,766)
Income tax provision (benefit) 1,193 (5,140) 1,577 (1,022)
--------- --------- --------- ---------
Net income (loss) $ 2,535 $ (48,756) $ 3,148 $ (41,744)
========= ========= ========= =========
Weighted average shares outstanding 19,999 17,018 19,648 16,508
Net income (loss) per share $ .13 $ (2.87) $ .16 $ (2.53)
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
XIRCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income (loss) $ 3,148 $(41,744)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Write-off of in-process R&D -- 40,000
Depreciation and amortization 6,229 3,982
Deferred income tax benefit -- (5,790)
Deferred rent -- (23)
Changes in assets and liabilities, net of the effect of the
acquisition:
Accounts receivable (11,810) 10,854
Income tax receivable 7,926 --
Inventories (6,633) (10,302)
Other current assets (566) 116
Accounts payable and accrued liabilities 2,542 (2,158)
Income taxes payable 1,599 219
-------- --------
Net cash provided by (used in) operating activities 2,435 (5,116)
-------- --------
Investing activities:
Purchase of Primary Rate Incorporated -- (24,134)
Purchase of short-term investments -- (14,220)
Sale of short-term investments -- 47,468
Purchases of equipment and improvements (7,257) (10,317)
Other 38 (151)
-------- --------
Net cash used in investing activities (7,219) (1,354)
-------- --------
Financing activities:
Proceeds from issuance of common stock 3,492 2,163
Proceeds from issuance of long-term debt 3,219 --
Net borrowings under line-of-credit agreement 1,360 --
Long-term debt repayments (604) (265)
-------- --------
Net cash provided by financing activities 7,467 1,898
-------- --------
Net increase (decrease) in cash 2,683 (4,572)
Cash and cash equivalents at beginning of period 13,658 14,379
-------- --------
Cash and cash equivalents at end of period $ 16,341 $ 9,807
======== ========
Supplemental cash flow disclosures:
Cash paid for:
Interest $ 390 $ 47
Income taxes 20 4,551
Tax benefit related to employee stock options $ 1,050 $ 1,161
Reconciliation of assets acquired and liabilities assumed:
Fair value of assets acquired $ -- $ 52,644
Liabilities assumed -- (1,956)
Less: Noncash consideration -- (26,554)
-------- --------
Cash paid for acquisition $ -- $ 24,134
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 1996 and the consolidated
results of operations for the three- and nine-month periods ended June 30, 1996
and 1995, and cash flows for the nine-month periods ended June 30, 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 nine-month periods ended June 30,
1996 are not necessarily indicative of the results to be expected for the entire
fiscal year.
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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30 September 30
1996 1995
------- -------
<S> <C> <C>
Finished goods $ 8,987 $ 4,448
Sub-assemblies 4,299 6,629
Work-in-process 2,088 2,495
Component parts 8,326 3,495
------- -------
$23,700 $17,067
======= =======
</TABLE>
6
<PAGE> 7
XIRCOM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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.
RECLASSIFICATIONS
Certain reclassifications of prior year amounts have been made for purposes of
consistent presentation.
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 operations as a percentage of
net sales:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30 June 30
1996 1995 1996 1995
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 64.0 78.1 63.9 57.3
----- ----- ----- -----
Gross profit 36.0 21.9 36.1 42.7
Operating expenses:
Research and development 6.5 22.1 7.1 10.4
Sales and marketing 16.9 60.2 19.6 27.9
General and administrative 4.6 12.8 5.1 5.6
In-process research and development
and other non-recurring charges -- 255.7 -- 43.6
----- ----- ----- -----
28.0 350.8 31.8 87.5
----- ----- ----- -----
Operating income (loss) 8.0 (328.9) 4.3 (44.8)
Other income (expense), net (.9) 1.8 (.8) .5
----- ----- ----- -----
Income (loss) before income taxes 7.1 (327.1) 3.5 (44.3)
Income tax provision (benefit) 2.2 (31.1) 1.2 (1.1)
----- ----- ----- -----
Net income (loss) 4.9% (296.0)% 2.3% (43.2)%
===== ===== ===== =====
</TABLE>
NET SALES
PC CARD AND PARALLEL PORT PRODUCT SALES. Net sales of LAN adapters and modems
("client products") for the three months ended June 30, 1996 increased 175% from
the corresponding period a year ago due 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. Also, net sales in the
June 1995 quarter were negatively impacted by the Company's efforts to reduce
channel inventories that had built up in the first half of fiscal 1995. Unit
shipments of client products increased
8
<PAGE> 9
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
202% for the June 1996 quarter versus the June 1995 quarter but average selling
prices declined due to increased competition in the PC Card LAN adapter market
and to a shifting mix of products from parallel port versions to PC Card
versions. Net sales from client products for the nine-month period ended June
30, 1996 increased at a lesser rate, 32%, compared to the corresponding period
of the prior year than the increase of the three-month period of fiscal 1996
over the same period of fiscal 1995 because of flat sales in the first six
months of fiscal 1996 compared to the same period of fiscal 1995. As explained
in the Form 10Q for the December 1995 quarter, the Company experienced 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 has experienced an increase in
unit sales of its client products by its distributors in each of the last four
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; 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.
REMOTE ACCESS 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 16% and 13% of
net sales for the three- and nine-month periods ended June 30, 1996,
respectively. The Netaccess remote access server and Netwave wireless LAN
product lines accounted for approximately 1% of net sales during each of the
three- and nine-month periods of fiscal 1996. In the corresponding nine-month
period of 1995, the Company derived approximately 8% of its revenue from these
product lines based on initial shipments of the MultiPort Modem product, an
FCC-approved version of its Netwave product and, beginning in June 1995, ISDN
OEM products. The MultiPort Modem product line has not contributed a material
amount of revenue since its introduction. Development of this product has
continued and certain improvements have been made that should allow the Company
to reintroduce it to the market as part of the Netaccess series of remote access
server products later in calendar year 1996.
INTERNATIONAL SALES. Shipments to customers located outside the U.S. were 43%
and 40%, respectively, of total net sales for the three- and nine-month periods
ended June 30, 1996, compared to 63% and 44%, 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, and to stronger channel
sell-through in Europe in the June 1995 quarter which resulted in less impact on
international sales due to channel inventory reductions than in the U.S.
9
<PAGE> 10
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 three- and nine-month periods of fiscal 1996 were
36.0% and 36.1%, respectively, compared to 21.9% and 42.7%, respectively, for
the comparable prior-year periods. The increase in the June 1996 quarter
compared to the June 1995 quarter was due primarily to the unusually low
revenues in the 1995 period and the resulting greater portion of fixed costs in
relation to total cost of sales. The decrease in the nine-month period of 1996
compared to the corresponding period of the prior year is 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
all of its PC Card manufacturing to this in-house facility. While this
transition is expected to have a positive impact on cost reduction efforts, 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 improvements from manufacturing and design efficiencies if
such revenue mix changes continue. In June 1996, the Company commenced shipment
of its Fast Ethernet PC Card adapters for connecting portable PCs to 100 megabit
Ethernet networks. Fast Ethernet products have higher gross profit margins than
the overall corporate average and thus are expected to have a positive impact on
gross profit margins.
OPERATING EXPENSES
Excluding nonrecurring charges related to the acquisition of PRI in June 1995,
operating expenses for the three-month period ended June 30, 1996 decreased by
7% compared to the corresponding prior-year period primarily due to more focused
product development activities, a reduction in certain promotional spending and
reduced headcount through employee attrition. Operating expenses (excluding
nonrecurring charges) for the nine months ended June 30, 1996 increased 1%
compared to the corresponding 1995 period, primarily due to the expansion of
product lines, the
10
<PAGE> 11
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
acquisition of PRI and expanded international operations. The Company has
reduced operating expenses as a percentage of net sales for each of its
functional areas (research and development, sales and marketing, and general and
administrative) in each of the last four quarters. Total operating expenses are
expected to increase in the fourth quarter of fiscal 1996 but may continue to
decrease as a percentage of net sales.
Research and development expenses were 6% lower in the third quarter of fiscal
1996 compared to the same period of fiscal 1995 and were 4% lower in the first
nine months of fiscal 1996 compared to the corresponding period of 1995. The
reduced expenditure levels are a result of more focused product development
efforts. Research and development expenses are expected to increase modestly in
absolute dollars for the fourth quarter of fiscal 1996.
Sales and marketing expenses were 11% lower in the June 1996 quarter compared to
the June 1995 quarter and were 2% lower for the nine months ended June 30, 1996
as compared with the corresponding prior-year period. 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 $8.8
million in the June 1996 quarter, compared to $11.8 million in the September
1995 quarter and $9.9 million in the June 1995 quarter, reflect 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 are expected to increase slightly in the near term to support
planned new product introductions.
General and administrative expenses for the three- and nine-month periods of
1996 increased by 13% and 28%, 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.
Nonrecurring charges in the fiscal 1995 periods of $42.1 million ($41.3 million,
net of tax benefit of $0.8 million) consisted primarily of in-process research
and development purchased from PRI that had not yet reached technological
feasibility and, therefore, were required to be written off under generally
accepted accounting principles. Excluding nonrecurring charges, total operating
expenses were $15.7 million and $42.4 million, respectively, for the three- and
nine-month periods ended June 30, 1995. Net losses and net losses per share for
the same periods, excluding nonrecurring charges, were $7.4 million and $.4
million, respectively, and $0.44 and $0.02, respectively.
OTHER INCOME (EXPENSE), NET
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
11
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XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
expense on notes payable and capital leases. The Company had net other expense
for the first nine months of fiscal 1996 compared to net other income for the
corresponding fiscal 1995 period 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 33.4% for the first nine months of fiscal
1996 as a result of an expected 32% tax rate for profitable operations in the
second and third quarters 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 the fourth quarter of 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. 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 LAN adapter market. As a result, the Company's net sales and
gross profit margins could be adversely impacted by several factors including
increased price competition, the Company's percentage market share in the PC
Card LAN adapter market, the proportion of sales from parallel port products,
and the levels of inventories in the Company's distribution channels. Although
the Company believes its share of the PC Card LAN adapter market stabilized in
1996, primarily because of its more competitive pricing strategy for PC Card
products adopted during fiscal 1995, its success with the latest version of its
combination Ethernet LAN and Modem PC Card and the anticipated introduction of
its Fast Ethernet PC Cards which began shipments in June 1996, competition is
expected to remain intense and therefore the Company's market share could be
adversely affected by continued price competition, new product introductions by
competitors or promotional efforts by competitors.
The Company believes that the market for PC Card LAN adapters and modems will 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.
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 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
12
<PAGE> 13
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reductions or be sufficient 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 and, therefore, future
expenditures are based in part on its estimates of future sales. If net sales do
not meet expectations, the Company may not be able to 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. At the
end of June 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, 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 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 product areas such as remote access and ISDN
are expected to contribute higher gross profit margins, the sales growth to be
achieved in these areas is likely to be proportionate with sales growth in PC
Card products, and therefore any positive impact on overall gross margins, may
be limited.
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. 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 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.
13
<PAGE> 14
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
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 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. See "Legal
Matters" in "Notes to Condensed Consolidated Financial Statements" in the
Company's Form 10-Q for March 31, 1996. To date, the Company has received no
further communication regarding this assertion. 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.
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.
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.
14
<PAGE> 15
XIRCOM, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At June 30, 1996 the Company had $16.3 million in cash and cash equivalents. The
Company's operating activities provided cash of approximately $2.4 million in
the nine-month period ended June 30, 1996, primarily as a result of income from
operations, income tax refunds received and an increase in accounts payable
offset by increases in accounts receivable and inventories. Accounts receivable
increased due to higher quarterly revenue and fewer early payment discounts
offered in the June 1996 quarter compared to the September 1995 quarter.
Inventories increased primarily due to the transition from turn-key to in-house
manufacturing and to an increase in the volume of business. The Company had
capital expenditures of $7.3 million in the first nine 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 in the near term. The Company 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%. 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 June 30, 1996, there were no borrowings outstanding
under this agreement, which expires in November 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 June 30, 1996, there
was $2.0 million in demand notes and $3.5 million in term loans outstanding
under this facility, which expires in April 1999. The Company had approximately
$19.4 million in borrowings available under its credit facilities as of June 30,
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. 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.
15
<PAGE> 16
XIRCOM, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Risk Factors" under "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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
Not applicable.
ITEM 5. OTHER ITEMS
In May 1996, Patrick P. Parker was appointed Vice President,
Engineering. In June 1996, Jerry N. Ulrich resigned as Chief
Operating Officer and Chief Financial Officer of the Company. At
the same time, Steven F. DeGennaro was appointed Chief Financial
Officer of the Company.
In June 1996, Michael F.G. Ashby, Vice President and Chief
Financial Officer of Pacific Telesis Enterprises, was named to
Xircom's Board of Directors. In July 1996, Bruce C. Edwards
resigned as a member of the Board of Directors and was replaced by
Delbert W. Yocam, an independent consultant.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
The company filed one report on Form 8-K during the fiscal
quarter covered by this report, as follows:
(i) Report on Form 8-K filed on June 25, 1996, reporting under
Item 5 the filing of a press release regarding a
management buyout.
16
<PAGE> 17
SIGNATURES
----------
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: August 12, 1996 /s/ Dirk I. Gates
-------------------------------------------------------------------
Dirk I. Gates
Chairman of the Board, President and
Chief Executive Officer
Date: August 12, 1996 /s/ Steven F. DeGennaro
-------------------------------------------------------------------
Steven F. DeGennaro
Vice President, Finance and
Chief Financial Officer
17
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