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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD JANUARY 23, 1998
To The Shareholders:
PLEASE JOIN US AT the Annual Meeting of Shareholders of Xircom, Inc., a
California corporation (the "Company"). The meeting will be held on January 23,
1998 at 10:00 a.m., local time, at the Hyatt Westlake Plaza Hotel, 880 South
Westlake Boulevard, Westlake Village, California 91361. The purpose of this
meeting is to:
1. Elect directors to serve for the coming year and until their
successors are elected and duly qualified.
2. Approve amendments to the Company's Stock Option Plan to increase
the number of shares of Common Stock reserved for issuance from
6,600,000 shares to 7,500,000 shares, and to amend the maximum
individual grant limits under the Plan.
3. Approve an amendment to the Company's Employee Stock Purchase Plan
to increase the number of shares of Common Stock reserved for
issuance from 400,000 shares to 600,000 shares.
4. Ratify the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending September 30,
1998.
5. Transact any other business which may come before the meeting or
any adjournment.
Only shareholders of record at the close of business on November 25,
1997 are entitled to receive notice of and to vote at the Annual Meeting.
All shareholders are cordially invited to attend the Annual Meeting in
person. However, to ensure your representation at the Annual Meeting, you are
urged to mark, sign, date and return the enclosed proxy card as promptly as
possible in the enclosed postage-prepaid envelope. Any shareholder attending the
Annual Meeting may vote in person even if he or she previously returned a proxy.
By Order of the Board of Directors
/s/ RANDALL H. HOLLIDAY
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Randall H. Holliday
Secretary
Thousand Oaks, California
December 12, 1997
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XIRCOM, INC.
2300 CORPORATE CENTER DRIVE
THOUSAND OAKS, CA 91320
PROXY STATEMENT
The Board of Directors of Xircom, Inc., a California corporation
("Xircom" or the "Company"), solicits the enclosed Proxy for use at Xircom's
Annual Meeting of Shareholders (the "Annual Meeting"). The meeting will be held
on Friday, January 23, 1998 at 10:00 a.m., local time, or at any adjournment(s)
thereof. The purposes of the Annual Meeting are set forth in this Proxy
Statement and in the accompanying Notice of Annual Meeting of Shareholders. The
Annual Meeting will be held at the Hyatt Westlake Plaza Hotel, 880 South
Westlake Boulevard, Westlake Village, California 91361.
The Company's principal executive offices are located at 2300 Corporate
Center Drive, Thousand Oaks, California 91320, and its telephone number at that
location is (805) 376-9300.
These proxy solicitation materials were mailed or delivered on or about
December 15, 1997 to all shareholders entitled to vote at the Annual Meeting.
VOTING AND SOLICITATION
Shareholders of record as of the close of business on November 25, 1997
(the "Record Date") are entitled to notice of and to vote at the Annual Meeting.
On November 25, 1997, 22,750,222 shares of Xircom's Common Stock, $ .001 par
value (the "Common Stock"), were issued and outstanding. For information
regarding holders of more than 5% of the outstanding Common Stock, see "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" below. The closing sale
price of Xircom Common Stock as reported on The Nasdaq Stock Market on November
25, 1997 was $10.625 per share.
Except as noted below under Proposal 1 "ELECTION OF DIRECTORS" under
"Required Vote," each share has one vote on all other matters.
Xircom will pay for this solicitation, including reimbursement of
brokerage firms and other persons representing beneficial owners of shares for
their reasonable expenses in forwarding solicitation material to beneficial
owners. Proxies may be solicited by certain of the Company's directors, officers
and other employees, without additional compensation, personally, by telephone
or by telegram. Xircom has retained the services of D.F. King & Co., Inc. to
assist in obtaining proxies from brokers and nominees of shareholders for the
Annual Meeting. The estimated cost of such services is $4,000, plus
out-of-pocket expenses.
REVOCABILITY OF PROXIES
Any proxy may be revoked by the person giving it at any time before it
is voted. You may revoke your proxy by doing one of the following: (i) filing a
written notice of revocation, dated later than the proxy, with the Secretary of
the Company at or before the time the vote is taken at the Annual Meeting; (ii)
executing a later dated proxy relating to the same shares and delivering it to
the Secretary of the Company at or before the vote is taken at the Annual
Meeting; or (iii) attending the Annual Meeting and voting in person (Note: your
attendance at the Annual Meeting will not, in and of itself, constitute a
revocation of your proxy). Any written notice of revocation, or subsequent
proxy, should be delivered to Xircom, Inc., 2300 Corporate Center Drive,
Thousand Oaks, CA 91320-1420, Attention: Secretary, or hand delivered to the
Secretary of the Company at or before the taking of the vote at the Annual
Meeting.
DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS FOR ANNUAL MEETING
FOR FISCAL YEAR 1998
Proposals of shareholders which are intended to be presented at the
Company's fiscal 1998 Annual Meeting must be received by the Company no later
than August 20, 1998 to be included in the proxy statement and form of proxy
relating to that meeting.
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PROPOSAL 1 - ELECTION OF DIRECTORS
NOMINEES
The Company currently has seven directors as authorized under the
Bylaws of the Company. These directors are to be elected at the Annual Meeting
of Shareholders. Unless otherwise instructed, the proxy holders will cast your
vote for the seven nominees listed below, all of whom are presently directors of
the Company. If any of the nominees listed below are unable or do not want to
serve as a director at the time of the Annual Meeting, the proxies will be voted
for any nominee who has been designated by the present Board of Directors to
fill the vacancy. The Company is not aware of any reason why any of the nominees
named below will be unable or will decline to serve as a director. If additional
persons are nominated for election as directors, the proxy holders intend to
vote all proxies received by them according to the cumulative voting rules. This
action will be taken to ensure the greatest number of allowable votes are cast
to assure the election of as many of these nominees as possible. If this does
happen, the proxy holders will determine the specific nominees for whom votes
will be cast. The term of office of each person elected as a director will
continue until the next Annual Meeting of Shareholders or until his successor
has been elected and duly qualified.
The names of the seven nominees, including a brief biographical
description for each, are set forth below. Please see "SECURITIES OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT" below for information on stock
ownership of each director, and all current directors and executive officers as
a group.
<TABLE>
<CAPTION>
Director
Name, Principal Occupation and Directorships Age Since
-------------------------------------------- --- --------
<S> <C> <C>
Michael F.G. Ashby.............................................................................. 48 1996
Executive Vice President and Chief Financial Officer, Ascend Communications,
Inc. (a manufacturer of enterprise networking equipment) since November 1997;
Vice President and Chief Financial Officer, Pacific Telesis
Enterprises/Pacific Bell (a telecommunications company) from September 1995
to October 1997; President and Chief Executive Officer, Network Systems
Corporation (a manufacturer of network communications devices) from March
1995 to August 1995; Chief Operating Officer of Network Systems Corporation
from January 1993 to March 1995; Chief Financial Officer of Network Systems
Corporation from September 1992 to January 1993.
Kenneth J. Biba................................................................................. 47 1991
President, HighGain Technologies, Inc. (a technology consulting firm) since
November, 1995; Executive Vice President and General Manager, Wireless
Products Division of Xircom from September 1993 to October 1995; Executive
Vice President, Business Development of Xircom from January 1993 to September
1993; Chief Operating Officer of Xircom from November 1991 to January 1993.
Gary J. Bowen................................................................................... 50 1995
Industry consultant since October, 1996; Executive Vice President, Worldwide
Field Operations of Bay Networks, Inc. (a manufacturer of enterprise
networking equipment) from October 1994 to October, 1996 (pursuant to merger
of SynOptics Communications, Inc. and Wellfleet Communications, Incorporated
in 1994); Senior Vice President, Marketing and Field Operations of Wellfleet
from January 1990 to October 1994.
Dirk I. Gates................................................................................... 36 1988
Chairman of the Board of Xircom since January 1995, Chief Executive Officer
since October 1991 and President of Xircom since November 1988.
J. Kirk Mathews................................................................................. 55 1988
Independent industry consultant and investor since January 1995; Chairman of
the Board of Xircom from November 1988 to January 1995; Chief Executive
Officer of Xircom from November 1988 until October 1991.
</TABLE>
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<TABLE>
<CAPTION>
Director
Name, Principal Occupation and Directorships Age Since
-------------------------------------------- --- --------
<S> <C> <C>
William J. Schroeder............................................................................. 53 1991
President, Chief Executive Officer and member of Board of Directors of
Diamond Multimedia Systems, Inc. (a manufacturer of computer multimedia
products) since May 1994; Vice Chairman of the Board of Conner Peripherals,
Inc. (a disk drive manufacturer) from 1989 to 1994; also President of Archive
Corporation (a Conner subsidiary) from January 1993 to November 1993 and
Chief Executive Officer of Arcada Software, Inc. (a Conner subsidiary) from
November 1993 to May 1994.
Delbert W. Yocam................................................................................. 53 1996
Chairman and Chief Executive Officer of Borland International, Inc. (a
provider of software development products and services) since December 1996;
independent industry consultant from November 1994 to December 1996;
President, Chief Operating Officer, and member of the Board of Directors of
Tektronix, Inc. (a manufacturer of electronic equipment) from September 1992
to November 1994; independent consultant from November 1989 to September
1992. Member of the Board of Directors of Adobe Systems, Inc., Raster
Graphics, Inc., Hollywood Park/ Boomtown, Inc.
</TABLE>
There are no family relationships among any directors or executive officers of
the Company.
BOARD MEETINGS AND COMMITTEES
There were a total of nine (9) Board meetings during the past fiscal
year, including five (5) telephonic meetings. The Board has an Audit Committee
and a Compensation Committee, but does not have a nominating committee.
The Audit Committee for fiscal 1997 consisted of Messrs. Ashby, Bowen,
Schroeder and Yocam. The Audit Committee's function is to recommend engagement
of the Company's independent accountants. Additionally, it is primarily
responsible for approving the services performed by the Company's independent
auditors, and for reviewing and evaluating the Company's accounting principles
and its system of internal accounting controls. There were five (5) independent
meetings of the Audit Committee during fiscal 1997.
The Compensation Committee of the Board of Directors for fiscal 1997
consisted of Messrs. Ashby, Bowen, Schroeder and Yocam. The Compensation
Committee makes recommendations to the Board of Directors regarding the
Company's executive compensation policies and administers the Company's Stock
Option Plan. There were four (4) meetings of the Compensation Committee during
fiscal 1997.
During fiscal 1997, no incumbent director attended fewer than 75% of
the total number of meetings of the Board of Directors or committees of the
Board on which the director served during the director's period of service on
the Board. Information regarding compensation of non-employee directors can be
found under "Director Compensation" below.
DIRECTOR COMPENSATION
The Company paid fees to each outside director for his services as an
outside director during fiscal 1997, based on the director's respective period
of service and meetings attended, as follows: $26,000 each to Messrs. Bowen,
Biba and Ashby; $25,000 each to Messrs. Schroeder and Mathews; and $24,000 to
Mr. Yocam. Directors are also reimbursed for their reasonable out-of-pocket
expenses incurred in connection with attendance at board and committee meetings.
Under the Company's 1992 Director Stock Option Plan, each outside
director is automatically granted an option to purchase a total of 30,000 shares
of Common Stock upon first joining the Board. Such options vest cumulatively as
to 7,500 shares each year for four years after the date of grant, based on
continued service on the Board. No such grants were made during fiscal 1997.
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In addition, on July 1 of each year, each outside director who has
served on the Board for at least six (6) months as of the date of the grant is
automatically granted another option to purchase 7,500 shares of common stock.
These annual options vest in full four years after the date of the grant and are
granted at an exercise price equal to the fair market value as of the date of
the grant. Messrs. Ashby, Biba, Bowen, Mathews, Schroeder and Yocam each
received such a grant on July 1, 1997 at an exercise price of $11.75 per share.
REQUIRED VOTE
Each shareholder voting in the election of directors may cumulate such
shareholder's votes and give one candidate a number of votes equal to the number
of directors to be elected multiplied by the number of votes to which such
shareholder's shares are entitled, or may distribute such votes on the same
principle among as many candidates as the shareholder chooses, provided that
votes cannot be cast for more than the total number of directors to be elected
at the meeting. However, no shareholder may cumulate votes for any candidate
unless the candidate's name has been placed in nomination prior to the voting
and at least one shareholder at the meeting has given notice of the intention to
cumulate votes prior to the voting.
The seven nominees receiving the highest number of Votes Cast will be
elected as directors for the coming year. For this purpose, the "Votes Cast" are
defined under California law to be the shares of the Company's Common Stock
represented and "voting" at the Annual Meeting. Votes that are withheld from any
director will be counted for purposes of determining the presence or absence of
a quorum, but may not be legally counted as an actual vote cast. While there is
nothing in the law which offers any guidance as to the proper treatment of
abstentions, the Company believes it is appropriate to count abstentions only
for purposes of determining the presence or absence of a quorum required for the
transaction of its business. Broker non-votes will also be counted for purposes
of determining the presence or absence of a quorum for the transaction of
business.
RECOMMENDATION
MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES LISTED ABOVE.
PROPOSAL 2 - APPROVAL OF AMENDMENTS TO 1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (most recently amended and
restated January 17, 1997, and referred to as the "1992 Option Plan") currently
permits the grant of both incentive stock options and nonstatutory stock
options. Options granted under the 1992 Option Plan may be exercised at various
times, depending on continued employment or service to the Company. The 1992
Option Plan allows for option terms of up to a ten (10) years, however all
options granted to date have had terms of between five (5) and seven (7) years.
PROPOSED AMENDMENTS
In October 1997, the Board of Directors adopted, subject to shareholder
approval, an amendment to the 1992 Option Plan to increase the number of shares
reserved for issuance from 6,600,000 shares to 7,500,000 shares. As of November
25, 1997, there were 1,375,475 shares available for future option grants under
the 1992 Option Plan, including the 900,000 shares subject to shareholder
approval at the Annual Meeting.
In addition, in October 1997 the Board adopted, subject to shareholder
approval, an amendment to the 1992 Option Plan to remove the aggregate plan
grant limit. Prior to this amendment, under the 1992 Option Plan no employee
could be granted options, stock appreciation rights ("SARs"), and stock purchase
rights to purchase (i) more than 250,000 shares in any fiscal year (except that
a newly hired employee might receive an additional one-time grant in the year of
hire of an additional 250,000 shares (the "Annual Grant Limit")) and (ii) more
than 500,000 shares from December 9, 1993 to May 16, 2000 (the "Aggregate Grant
Limit"). The amendment would eliminate the Aggregate Grant Limit of 500,000
shares. The 250,000 share Annual Grant Limit (and the one-time new hire
exception) will remain. The Annual Grant Limit will exempt the 1992 Option Plan
from Section 162(m) of the Code ("Section 162(m)"). Section 162(m) limits the
Company's deduction in any one fiscal year for federal income tax purposes to
$1,000,000 per person with respect to the Company's Chief Executive Officer and
its four other highest paid executive officers who are employed on the last day
of the fiscal year, unless the compensation
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was exempt from the deduction limit. Option grants under the 1992 Option Plan
will not be subject to this deduction limitation if the stockholders approve
this amendment and the material provisions of the 1992 Option Plan (as described
below).
At the Annual Meeting, the shareholders are being asked to approve
these amendments to the 1992 Option Plan.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED AMENDMENTS
TO THE 1992 OPTION PLAN AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR SUCH
AMENDMENTS.
DESCRIPTION OF 1992 STOCK OPTION PLAN
The Company's 1992 Option Plan, as amended, provides for the grant to
employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and for the grant to
employees and consultants of non-statutory options.
The 1992 Option Plan may be administered by the Board of Directors of
the Company or by a committee of the Board, and shall be administered in a
manner that complies with Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). Currently the 1992 Option Plan is administered
by the Compensation Committee of the Board. The Compensation Committee
determines the terms of options granted, including exercise price, number of
shares subject to each option, when it can be exercised, and the form of
consideration to be paid once it is exercised. In addition, the Board has
appointed a Stock Option Committee of Management, consisting of Messrs. Dirk I.
Gates and Steven F. DeGennaro, which is authorized to grant options to employees
who are not elected officers, subject to guidelines established by the Board or
the Compensation Committee. The administrator of the 1992 Option Plan determines
when the options granted vest and when they may be exercised. Options granted to
date typically vest over a three or four year period, assuming continued
employment, and expire from five to seven years from the date of the grant.
Options are not transferable by the option holder, unless the option holder has
made a specific gift by will or, in the absence of a will, under the laws of
descent and distribution. Each option may be exercised during the lifetime of
the option holder only by the option holder.
The exercise price of incentive stock options granted under the 1992
Option Plan must be at least equal to 100% of the fair market value of the
shares of Common Stock on the date of grant. Non-statutory options may be
granted at any exercise price. With respect to any participant who owns stock
which constitutes more than 10% of the voting power of all classes of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted must be equal to at least 110% of the fair market value on the
grant date and the maximum term of the option must not exceed five years. The
terms of all other options granted under the 1992 Option Plan may not exceed ten
years. The option exercise price may be paid in cash, promissory note, shares of
the Company's Common Stock, or through a broker-dealer sale and remittance
procedure. A broker-dealer sale and remittance procedure allows the option
holder to exercise the option and sell the purchased shares on the same day. The
sale proceeds are then used to satisfy the option price payable for the
purchased shares.
Section 162(m) of the Code places limits on the deductibility for
federal income tax purposes of compensation paid to certain executive officers
of the Company. In order to preserve the Company's ability to deduct the
compensation income associated with options, SARs and stock purchase rights
granted to such persons, after approval of the proposed amendments the 1992
Option Plan will provide that no employee may be granted, in any fiscal year of
the Company, options, SARs, and stock purchase rights to purchase more than
250,000 shares of Common Stock. Notwithstanding this limit, however, in
connection with such individual's initial employment with the Company, he or she
may be granted options, SARs, or stock purchase rights to purchase up to an
additional 250,000 shares of Common Stock.
If the Company merges with or into another company, or sells
substantially all of its assets, each option will be assumed or an equivalent
option substituted by the successor corporation. In the event that the successor
corporation does not assume the option or substitute an equivalent option, the
plan administrator is required to
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accelerate the exercise date of all outstanding options, which would enable an
immediate exercise by all option holders regardless of their exercise status.
The 1992 Option Plan also allows the Company to grant Stock
Appreciation Rights ("SARs"), stock purchase rights and long-term performance
awards. SARs may be granted in connection with or independent of options and
entitle the holder to receive an amount, in cash or Common Stock, equal to the
difference between the fair market value of the shares at the time of the grant
and the fair market value at the time of its exercise. Stock purchase rights
allow the holder to purchase stock, subject to a right of the Company to
repurchase unvested shares in the event of termination of employment. Shares
purchased pursuant to stock purchase rights vest over time, based on continued
employment. Long-term performance awards are cash or stock bonus awards which
may be earned over a specified period after grant, based upon performance or
employment factors. No SARs, stock purchase rights or long-term performance
awards have been granted under the 1992 Option Plan.
Unless terminated sooner, the 1992 Option Plan will terminate in May
2000. The Board has the authority to amend or terminate the 1992 Option Plan,
provided, however, that no such action may adversely affect any outstanding
option, SAR, long-term performance award or stock purchase right.
As of September 30, 1997, options to purchase an aggregate of 3,508,405
shares of Common Stock had been exercised, options to purchase 2,420,124 shares
at a weighted average exercise price of $12.41 per share were outstanding, and
1,571,471 shares remained available for future option grants under the 1992
Option Plan, including the 900,000 shares subject to shareholder approval at the
Annual Meeting.
TAX INFORMATION
Incentive stock options under the 1992 Option Plan are given favorable
federal income tax treatment under the Code. If an option is treated as an
incentive stock option, the optionee does not recognize income upon grant or
exercise of the option unless the alternative minimum tax rules apply. When an
optionee sells the shares (assuming that the sale occurs no sooner than two
years after grant of the option and one year after exercise of the option), any
gain will be taxed to the optionee as long-term capital gain. If the optionee
disposes of the shares prior to the expiration of the above holding periods, the
optionee will recognize ordinary income in an amount measured as the difference
between the exercise price and the lower of the fair market value of the shares
at the exercise date or the sale price of the shares. Any gain recognized on
such a premature sale or exchange of the shares in excess of the amount treated
as ordinary income will be characterized as capital gain. Any loss on such sale
will be treated as a capital loss. Under the Code, the fair market value of the
total number of shares of Common Stock (determined on the date of grant of such
option) covered by incentive stock options held by an optionee first becoming
exercisable in any one calendar year may not exceed $100,000. To the extent this
limit is exceeded, such options shall not qualify as incentive stock options and
will be taxed as nonstatutory stock options as described below.
All other options granted under the 1992 Option Plan are nonstatutory
options and will not qualify for any special tax benefits to the optionee.
Accordingly, an optionee will not recognize any taxable income at the time he or
she is granted a nonstatutory option. However, upon exercise of the option, the
optionee will recognize ordinary income for federal income tax purposes in an
amount measured as the excess of the then fair market value of the shares over
the exercise price. Upon an optionee's resale of such shares, any difference
between the sale price and the fair market value of such shares on the date of
exercise will be treated as capital gain or loss and will qualify for long-term
capital gain or loss treatment if the shares have been held for more than one
year.
The ordinary income recognized by an optionee who is an employee at the
time of the exercise of a nonstatutory option will be treated as wages for tax
purposes and will be subject to tax withholding by the Company out of the
current compensation paid to such person, if any. If such current compensation
is insufficient to pay the withholding tax, such person will be required to make
direct payment to the Company for the tax liability. Any required withholding in
connection with the exercise of a nonstatutory stock option may, with the
consent of the Board of Directors, be satisfied by an optionee, in whole or in
part, by surrendering to the Company shares of Common Stock held by such person.
For such purpose, the surrendered shares are valued at their fair market value
at the time of surrender.
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The Company will be entitled to a tax deduction in the amount and at
the time that an optionee recognizes ordinary income with respect to the option.
Different rules for measuring an optionee's ordinary income and the
Company's tax deduction may apply if the optionee is subject to Section 16 of
the Exchange Act.
No income will be recognized by a recipient in connection with the
grant of an SAR. When the SAR is exercised, the recipient generally will be
required to include as taxable ordinary income in the year of exercise an amount
equal to the sum of the amount of cash received and the fair market value of any
Common Stock received on the exercise. In the case of a recipient who is also an
employee, any income recognized on exercise of an SAR will constitute wages for
which withholding will be required. The Company will be entitled to a tax
deduction in the same amount. If the optionee receives Common Stock upon the
exercise of an SAR, any gain or loss on the subsequent sale of such stock will
be treated in the same manner as discussed above for nonstatutory stock options.
Generally, no income will be recognized by a recipient in connection
with the grant of a stock purchase right for unvested stock, unless an election
under Section 83(b) of the Code is filed with the Internal Revenue Service
within 30 days of the date of grant. Otherwise, at the time the restricted stock
vests, the recipient generally will recognize compensation income in an amount
equal to the difference between the fair market value of the stock at the time
of vesting and the amount paid for the stock. Generally, the recipient will be
subject to tax consequences similar to those discussed above for nonstatutory
stock options. In the case of a recipient who is also an employee, any amount
treated as compensation will be subject to tax withholding by the Company. The
Company will be entitled to a tax deduction in the amount and at the time the
recipient recognizes ordinary income with respect to a stock purchase right.
THE FOREGOING DOES NOT PURPORT TO BE A COMPLETE SUMMARY OF THE EFFECT
OF FEDERAL INCOME TAXATION UPON HOLDERS OF OPTIONS OR UPON THE COMPANY. IT ALSO
DOES NOT REFLECT PROVISIONS OF THE INCOME TAX LAWS OF ANY MUNICIPALITY, STATE OR
FOREIGN COUNTRY IN WHICH AN OPTIONEE MAY RESIDE.
PLAN BENEFITS
The Company cannot now determine the exact number of options to be
granted in the future to the executive officers named under "EXECUTIVE OFFICER
COMPENSATION--Summary Compensation Table" below, to all current executive
officers as a group, or to all employees (including executive officers). See
"EXECUTIVE OFFICER COMPENSATION--Stock Option Grants and Exercises" below for
the number of stock options granted to the executive officers named in the
Summary Compensation Table in the fiscal year ended September 30, 1997. During
the fiscal year ended September 30, 1997, options to purchase 535,000 shares of
Common Stock of the Company were granted to all current executive officers as a
group and options to purchase 1,338,900 shares of Common Stock of the Company
were granted to all employees (including executive officers).
REQUIRED VOTE
The affirmative vote of a majority of the Votes Cast will be required
under California law to approve the amendments to the Plan. For this purpose,
the "Votes Cast" are defined under California law to be the shares of the
Company's Common Stock represented and "voting" at the Annual Meeting. In
addition, the affirmative votes must constitute at least a majority of the
required quorum, which quorum is a majority of the shares outstanding on the
Record Date. Votes that are cast against the proposal will be counted for
purposes of determining (i) the presence or absence of a quorum and (ii) the
total number of Votes Cast with respect to the proposal. While there is no
definitive statutory or case law authority in California as to the proper
treatment of abstentions in the counting of votes with respect to a proposal
such as the amendments of the Plan, the Company believes that abstentions should
be counted for purposes of determining both (i) the presence or absence of a
quorum for the transaction of business and (ii) the total number of Votes Cast
with respect to the proposal. In the absence of controlling precedent to the
contrary, the Company intends to treat abstentions in this manner. Accordingly,
abstentions will have the same effect as a vote against the proposal. Broker non
votes will be counted for purposes of determining the presence or absence of a
quorum for the transaction of business, but will not be counted for purposes of
determining the number of Votes Cast with respect to the proposal.
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PROPOSAL 3-APPROVAL OF AMENDMENT TO 1994 EMPLOYEE STOCK PURCHASE PLAN
In October 1997, the Board of Directors adopted, subject to shareholder
approval, an amendment to the 1994 Employee Stock Purchase Plan (the "Purchase
Plan") to increase the number of shares reserved for issuance under the Purchase
Plan from 400,000 to 600,000 shares. As of November 25, 1997, there were 234,534
shares of Common Stock available for issuance under the Purchase Plan, including
the 200,000 shares subject to shareholder approval at this Annual Meeting. The
Board of Directors believes that the benefits to employees associated with the
Purchase Plan will assist the Company in attracting and retaining qualified
employees.
At the Annual Meeting, the shareholders are being asked to approve this
amendment to the Purchase Plan.
RECOMMENDATION
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE PROPOSED AMENDMENT
TO THE 1994 EMPLOYEE STOCK PURCHASE PLAN AND RECOMMENDS THAT SHAREHOLDERS VOTE
FOR SUCH AMENDMENT.
DESCRIPTION OF PURCHASE PLAN
The essential features of the Purchase Plan are outlined below. Copies
of the Purchase Plan are available upon written request to the Company.
Purpose
The Purchase Plan is intended to provide Company employees (including
executive officers) an opportunity to purchase Company Common Stock through
payroll deductions. The Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code.
Administration
Either the Board of Directors or a committee appointed by the Board may
administer the Purchase Plan. It is currently administered by the Compensation
Committee of the Board of Directors. The Board of Directors or its appointed
committee decides all questions of interpretation or application of the Purchase
Plan. Such decisions are final, conclusive and binding upon all participants.
Eligibility
The Purchase Plan is open to any person who during the applicable
offering period is regularly employed by the Company for more than twenty (20)
hours per week and five (5) months per calendar year . No person who owns or
holds options or rights to acquire, or as a result of participation in the
Purchase Plan would own or hold options or rights to acquire, 5% or more of the
Company's Common Stock may participate in the Purchase Plan.
Participation in an Offering
Each offering of Common Stock under the Purchase Plan ("Offering") is
generally for a period of six months ("Offering Period"). The Board may change
the timing and duration of the Offering Periods without shareholder approval if
such change is announced at least five (5) days prior to the beginning of the
first Offering Period to be affected. The Board or its Committee may provide for
Offering Periods up to twenty-four (24) months in length, and Offering Periods
may be consecutive or overlapping. To-date Offering Periods under the Purchase
Plan have been for consecutive six (6) month periods commencing on May 1 and
November 1 of each year. To participate in the Purchase Plan, each eligible
employee must authorize payroll deductions pursuant to the Purchase Plan.
Payroll deductions may not exceed 10% of a participant's compensation. Once an
employee becomes a participant in the Purchase Plan, the employee will
automatically participate in each successive Offering Period unless the employee
withdraws from the Purchase Plan or employment terminates.
Grant and Exercise of Option
At the beginning of each Offering Period, each participant is
automatically granted an option to purchase shares of the Company's Common
Stock. The option may be exercised at the end of an Offering Period to the
extent of the payroll deductions accumulated during such Offering Period. The
option expires upon termination of
9
<PAGE> 10
employment or, in the event the option is not exercised, at the end of the
Offering Period, whichever is earlier. Participants may not purchase shares
having a fair market value exceeding $25,000 in any calendar year. The Company
may make a pro rata reduction in the number of shares subject to options if the
total number of shares which would otherwise be subject to options granted at
the beginning of an Offering Period exceeds the number of shares remaining
available for issuance under the Purchase Plan. Unless an employee withdraws his
or her participation in the Purchase Plan by giving written notice to the
Company of his or her election to withdraw all accumulated payroll deductions
prior to the end of an Offering Period, the employee's option for the purchase
of shares will be exercised automatically at the end of the Offering Period, and
the maximum number of full shares subject to option which are purchasable with
the accumulated payroll deductions in his or her account will be purchased at
the applicable purchase price determined as provided below.
Purchase Price
The purchase price per share at which shares are sold to participating
employees is 85% of the lower of the fair market value per share of the Common
Stock on (i) the first day of the Offering Period or (ii) the last day of the
Offering Period. The fair market value of the Common Stock on a given date is
determined by reference to the last reported bid price on The Nasdaq Stock
Market.
Payroll Deductions
The purchase price of the shares acquired is accumulated by payroll
deductions over the six (6) month Offering Period. The deductions may not exceed
10% of a participant's aggregate eligible compensation. Eligible compensation
includes all wages, salaries and fees for professional services and any other
amounts reserved for personal services actually rendered in the course of
employment, including commissions, profit sharing and bonuses, but excluding
amounts realized from participation in the Company's stock and options program.
Payroll deductions for a participant commence on the first payroll following the
offering date and continue until participation is terminated. A participant may
reduce or increase the rate of payroll deductions at any time during the
offering period and may discontinue his or her participation in the Purchase
Plan at any time, subject to such limitations as the Board or its committee may
establish. Upon the withdrawal of a participant from the Purchase Plan, the
Company returns to the participant all funds credited to a participant's payroll
deduction account, without interest.
Termination of Employment
Termination of a participant's employment for any reason, including
retirement or death, or the failure of the participant to remain in the
continuous employ of the Company for an excess of twenty (20) hours per week (or
five (5) months per year) during the applicable Offering Period, cancels his or
her option and his or her participation in the Purchase Plan immediately. In
such event, the payroll deductions credited to the participant's account will be
returned to him or her or, in the case of death, to the person or persons
entitled thereto as provided in the Purchase Plan.
Capital Changes
In the event any change is made in the Company's capitalization during
an Offering Period, such as a stock split or stock dividend, which results in an
increase or decrease in the number of shares of Common Stock outstanding without
receipt of consideration by the Company, appropriate adjustment shall be made in
the purchase price and in the number of shares subject to options under the
Purchase Plan.
Amendment and Termination of the Plan
The Board of Directors may at any time amend, alter or terminate the
Purchase Plan. No amendment may be made to the Purchase Plan without approval of
the shareholders of the Company if such amendment would increase the number of
shares reserved under the Purchase Plan, change the standards of eligibility for
participation in the Purchase Plan or materially increase the benefits accruing
to participants in the Purchase Plan. In the event the Purchase Plan is
terminated, the Board may elect to terminate all outstanding options either
immediately or upon completion of the purchase of shares on the next purchase
date, or may elect to permit options to expire in accordance with their terms
(and participation to continue through such expiration dates).
Federal Income Tax Information
The Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Section 421 and 423
of the Code. Under these provisions, no income will be taxable to a
10
<PAGE> 11
participant at the time of grant of the option or purchase of the shares. Upon
disposition of the shares, the participant will generally be subject to tax. If
the shares have been held by the participant for more than two years after the
date of option grant and more than one year after the purchase date of the
shares, the lesser of (a) the excess of the fair market value of the shares at
the time of such disposition over the purchase price of the shares subject to
the option, or (b) 15% of the fair market value of the shares on the first day
of the Offering Period will be treated as ordinary income, and any further gain
upon such disposition will be treated as long-term capital gain. If the shares
are disposed of before the expiration of the holding periods described above,
the excess of the fair market value of the shares on the exercise date over the
option price will be treated as ordinary income, and further gain or loss on
such disposition will be capital gain or loss. Different rules may apply with
respect to optionees subject to Section 16(b) of the Securities Exchange Act of
1934, as amended. The Company is not entitled to a deduction for amounts taxable
to a participant except to the extent of ordinary income taxable to a
participant upon disposition of shares prior to the expiration of the holding
periods described above.
THE FOREGOING IS ONLY A SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES
OF THE PURCHASE PLAN TO PARTICIPANTS AND THE COMPANY. IN ADDITION, THE SUMMARY
DOES NOT DISCUSS THE TAX CONSEQUENCES OF A PARTICIPANT'S DEATH OR THE INCOME TAX
LAWS OF ANY STATE OR FOREIGN COUNTRY IN WHICH THE PARTICIPANT MAY RESIDE.
PLAN BENEFITS
The Company cannot now determine the exact number of shares to be
issued in the future under the Purchase Plan to the executive officers named
under "EXECUTIVE OFFICER COMPENSATION--Summary Compensation Table," to all
current executive officers as a group, or to all employees (including executive
officers) as a group.
REQUIRED VOTE
The affirmative vote of a majority of the Votes Cast will be required
under California law to approve the amendment to the Plan. For this purpose, the
"Votes Cast" are defined under California law to be the shares of the Company's
Common Stock represented and "voting" at the Annual Meeting. In addition, the
affirmative votes must constitute at least a majority of the required quorum,
which quorum is a majority of the shares outstanding on the Record Date. Votes
that are cast against the proposal will be counted for purposes of determining
(i) the presence or absence of a quorum and (ii) the total number of Votes Cast
with respect to the proposal. While there is no definitive statutory or case law
authority in California as to the proper treatment of abstentions in the
counting of votes with respect to a proposal such as the adoption of the Plan,
the Company believes that abstentions should be counted for purposes of
determining both (i) the presence or absence of a quorum for the transaction of
business and (ii) the total number of Votes Cast with respect to the proposal.
In the absence of controlling precedent to the contrary, the Company intends to
treat abstentions in this manner. Accordingly, abstentions will have the same
effect as a vote against the proposal. Broker non-votes will be counted for
purposes of determining the presence or absence of a quorum for the transaction
of business, but will not be counted for purposes of determining the number of
Votes Cast with respect to the proposal.
PROPOSAL 4 - RATIFICATION OF APPOINTMENT OF AUDITORS
The Board of Directors has appointed Ernst & Young LLP, independent
auditors, to audit Xircom's consolidated financial statements for the fiscal
year ending September 30, 1998. Such appointment is being presented to the
shareholders for ratification at the meeting. The affirmative vote of the
holders of a majority of the shares present in person or represented by proxy
and entitled to vote at the meeting is required to ratify the Board's selection.
In the event of a negative vote on such ratification, the Board of Directors
will reconsider its selection.
Ernst & Young LLP has audited Xircom's consolidated financial
statements since the fiscal period ended September 30, 1989. Representatives of
Ernst & Young LLP are expected to be present at the meeting, will have the
opportunity to make a statement if they so desire, and will be available to
answer appropriate questions from shareholders.
11
<PAGE> 12
RECOMMENDATION
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR
RATIFICATION OF ERNST & YOUNG LLP AS THE COMPANY'S INDEPENDENT AUDITORS.
EXECUTIVE OFFICER COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, as to (i) the Company's Chief Executive
Officer, (ii) each of the four other most highly compensated executive officers
other than the Chief Executive Officer who were serving as executive officers of
the Company as of September 30, 1997 and whose salary plus bonus exceeded
$100,000, and (iii) additional similar information for two individuals who were
no longer executive officers at September 30, 1997 but who otherwise would have
been named in the table (collectively the "Named Executive Officers"),
information concerning compensation paid for services to the Company in all
capacities during the fiscal year ended September 30, 1997, as well as the total
compensation paid to each such individual for the Company's previous two fiscal
years (if such person was the Chief Executive Officer or an executive officer,
as the case may be, during any part of such fiscal year).
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards
--------------------- ---------------- All Other
Name, Age and Principal Position Year Salary($) Bonus($) Option Shares(1) Compensation(2)
- - -------------------------------- ---- --------- -------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Dirk I. Gates, 36 1997 $285,020 $142,144 75,000 $ 1,267
Chairman, President and 1996 $215,000 $214,731 50,000 --
Chief Executive Officer 1995 $215,000 $ 7,242 -- --
Carl E. Russo, 41(3) 1997 $261,591 $131,812 250,000 $ 4,750
Executive Vice President and 1996 $225,000 $175,163 50,000 $84,090
Chief Operating Officer 1995 $ 96,250 $ 41,250 100,000 $35,605
Marc M. Devis, 37(4) 1997 $229,203 $212,593 150,000 $40,135
Sr. Vice President, 1996 $215,000 $152,144 50,000 $30,520
Worldwide Sales 1995 $183,598 $ 40,451 20,000 --
Steven F. DeGennaro, 34 1997 $153,750 $ 63,705 30,000 $ 2,891
Vice President, Finance and 1996 $132,324 $ 77,797 20,000 --
Chief Financial Officer 1995 $111,039 $ 7,855 35,000 --
Randall H. Holliday, 48 1997 $132,000 $ 58,890 30,000 $ 3,318
Secretary and General Counsel 1996 $119,599 $ 70,691 35,000 --
1995 $109,100 $ 7,794 20,000 --
Robert W. Bass, 51(5) 1997 $172,833 $ 66,525 55,000 $ 2,264
Sr. Vice President, 1996 $155,000 $ 92,482 45,000 --
Worldwide Operations 1995 $155,000 $ 13,906 -- --
Scott A. Coleman, 38(6) 1997 $183,475 $ 89,400 50,000 $ 1,595
Former Senior Vice President 1996 $ 25,269 $ 1,895 100,000 $25,000
Americas Sales and Marketing 1995 -- -- -- --
(through July 24, 1997)
</TABLE>
- - --------------------------------------------------------------------------------
(1) The Company has not granted any SARs.
(2) For 1997, amounts include Company contributions to 401(k) Plan. 1996 and
1995 do not include amounts related to the value of group term life
insurance provided nor Company matching payments under the Company's 401(k)
Plan, which together total less than $1,000 for each executive officer.
(3) Mr. Russo joined the Company in April 1995, and was entitled to a guaranteed
performance bonus for the first six months of his employment. Other
compensation in 1995 and 1996 include reimbursements for relocation expenses
and a hire incentive payment.
(4) Mr. Devis, resident in Belgium, is provided the use of a company-paid car.
The value of the personal use of the car is less than $10,000 per year.
Other compensation includes amounts payable as special allowances under
Belgian law.
(5) Formerly reported as executive officer for Sec. 16(a) purposes. Realignment
of responsibilities in 1997 result in exemption from classification as
executive officer.
(6) Formerly reported as executive officer for Sec. 16(a) purposes. Realignment
of responsibilities in 1997 result in exemption from classification as
executive officer. Resigned from Company July 24, 1997. 1996 Other
compensation includes hiring bonus.
12
<PAGE> 13
STOCK OPTION GRANTS AND EXERCISES
The following tables set forth the stock options granted to the Named
Executive Officers under the Company's stock option plans and the options
exercised by such officers during the fiscal year ended September 30, 1997.
Stock Option Grants In Fiscal Year 1997
The Option Grant Table sets forth hypothetical gains for the options at
the end of their respective seven (7) year terms, as calculated in accordance
with the rules of the Securities and Exchange Commission ("SEC"). Each gain is
based on an arbitrarily assumed annualized rate of compound appreciation of the
market price of five percent (5%) and ten percent (10%) from the date the option
was granted to the end of the option term, less the exercise price. Actual
gains, if any, on option exercises are dependent on the future performance of
the Company's Common Stock and overall market conditions.
Individual Grants
-----------------
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Percent of Total Stock Price Appreciation for
Options Granted Exercise or Option Term
Option Shares to Employees in Base Price Expiration ----------------------------
Name Granted (#)(1) Fiscal Year ($/share) Date 5%($) 10%($)
- - ---- -------------- --------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dirk I. Gates 75,000 5.42% $10.0625 04/18/04 $ 307,234 $ 715,985
Carl E. Russo 200,000 14.44% $20.2500 01/13/04 $1,648,757 $3,842,304
50,000 3.61% $10.0625 04/18/04 $ 204,822 $ 477,323
Marc M. Devis 50,000 3.61% $10.0625 04/18/04 $ 204,822 $ 477,323
100,000 7.21% $12.4375 07/28/04 $ 506,331 $1,179,967
Steven F. DeGennaro 10,000 0.72% $20.2500 01/13/04 $ 82,438 $ 192,115
20,000 1.45% $10.0625 04/18/04 $ 81,929 $ 190,929
Randall H. Holliday 10,000 0.72% $20.2500 01/13/04 $ 82,438 $ 192,115
20,000 1.45% $10.0625 04/18/04 $ 81,929 $ 190,929
Robert W. Bass 20,000 1.45% $10.0625 04/18/04 $ 81,929 $ 190,929
35,000 2.53% $12.4375 07/28/04 $ 177,216 $ 412,988
Scott A. Coleman 50,000 3.61% $10.0625 04/18/04 $ 204,822 $ 477,323
</TABLE>
- - --------------------------------------------------------------------------------
(1) The Company did not grant any SARs in fiscal 1997.
Aggregate Option Exercises in Fiscal Year 1997 and Year-end Option Values
The following table discloses all stock options exercised by the Chief
Executive Officer and the other executive officers named in the Executive
Officer Compensation table for the fiscal year ended September 30, 1997. The
values realized in the following table are based on the difference between the
market value of the underlying securities at the exercise date or the end of the
fiscal year (September 30, 1997) minus the exercise price of the options. The
value of unexercised in-the-money options are based on the difference between
the market value at the end of the fiscal year and the exercise price of
in-the-money options.
13
<PAGE> 14
<TABLE>
<CAPTION>
Number of unexercised Value of unexercised
options at in-the-money options at
Shares Value 1997 year-end 1997 year-end (1)
acquired on realized -------------------------- -------------------------
Name of Officer exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- - --------------- ------------ ------------ ----------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dirk I. Gates -- -- 14,236 110,764 $10,677 $200,261
Carl E. Russo 10,000 $160,000 64,652 325,348 $79,999 $196,876
Marc M. Devis 25,831 $428,190 25,904 218,265 $38,389 $219,638
Steven F. DeGennaro 24,587 $215,877 13,735 61,078 $23,680 $ 96,813
Randall H. Holliday 8,000 $111,469 13,833 61,667 $21,625 $ 95,157
Robert W. Bass 2,000 $ 36,500 18,381 89,619 $20,536 $ 70,964
Scott A. Coleman -- -- 27,083 122,917 -- $115,625
</TABLE>
- - --------------------------------------------------------------------------------
(1) Total value of vested and unvested options based on the market value of the
Company's Common Stock on September 30, 1997 ($12.375 per share).
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT, CHANGE-IN-CONTROL ARRANGEMENTS
AND CERTAIN TRANSACTIONS
From time to time, the Company has entered into letter employment
agreements with certain of its executive officers which have set the officer's
base salary and state that options to purchase the Company's Common Stock will
be granted to the officer. The Company has entered into indemnification
agreements with each of its directors and executive officers. Such agreements
require the Company to indemnify such individuals to the fullest extent
permitted by law.
The Company renewed Change in Control Agreements (the "CIC
Agreements"), effective October 1, 1997, with each named executive officer of
the Company other than the Company's Chief Executive Officer. Each CIC Agreement
renews automatically thereafter on an annual basis effective October 1, unless
terminated upon written notice by the Company. The CIC Agreement provides that
in the event of a Change in Control, as defined, each executive shall receive
acceleration of twelve (12) months of vesting under then existing stock options.
In addition, upon any involuntary termination of an executive's employment
within two years following a Change in Control, or voluntary termination by the
executive after a Change in Control and for Good Reason, as defined, the
executive is entitled to certain severance payments and entitlements. Such
severance payments and entitlements include continuation of payment of base
salary, bonuses and benefits, and acceleration of vesting under then existing
stock option grants, for a period of one (1) year if termination of employment
or resignation for Good Reason occurs within twelve (12) months after the Change
in Control, or for a period of six (6) months if termination of employment or
resignation for Good Reason occurs within the thirteenth to twenty fourth
(13th-24th) month after the Change in Control. A Change in Control is generally
defined to be (1) acquisition by a third party of greater than fifty percent
(50%) of the voting power of the Company, or (2) a merger, sale of assets, or
comparable transaction, which results in a Board of Directors in which the
Directors who were members of the Board prior to the event represent less than a
majority of the Board of Directors following the event. Good Reason is generally
defined as a substantial alteration or reduction in duties and responsibilities,
a reduction in salary or bonus eligibility affecting the executive individually
(as opposed to across the board reductions impacting all executives equally),
reassignment to a different geographic location, or refusal of the successor
entity to assume the CIC Agreement.
The Company purchased an aggregate of 150,000 shares of Common Stock of
the Company from J. Kirk Mathews and Sanni Mathews (the "Selling Shareholders")
on June 6, 1997, at a price of $14.31777 per share (an aggregate of
$2,147,665.50), representing the average closing price of the Company's Common
Stock on the Nasdaq National Market over the ten (10) trading days preceding the
date of Board of Directors approval of the transaction. J. Kirk Mathews is a
director of the Company and Sanni Mathews is his wife.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
Exchange Act") requires the Company's executive officers and directors and
persons who own more than ten percent of a registered class of the
14
<PAGE> 15
Company's equity securities to file an initial report of ownership on Form 3 and
changes in ownership on Form 4 or 5 with the Securities and Exchange Commission
(the "SEC") and the National Association of Securities Dealers, Inc. Executive
Officers, directors and greater-than-ten-percent shareholders are also required
by SEC rules to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during the period from October 1, 1996 to September 30, 1997, two delayed
Form 4 filings were made; one each by Kenneth J. Biba and William F.
Rosenberger. Each delayed filing involved a single transaction on the part of
each individual. Other than these delayed filings, again based solely on its
review of copies of such forms received by it or written representations from
certain reporting persons, the Company believes that all other filing
requirements applicable to its officers, directors and ten percent shareholders
were complied with.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors consists of the
independent directors of the Company listed below. The committee is responsible
for determining the Company's executive compensation policies at the beginning
of each year, including the base salary levels and target incentives for
executive officers of the Company. The committee also evaluates the performance
of the Company's Chief Executive Officer against the Company's overall
objectives and administers the Company's Stock Option Plan and Employee Stock
Purchase Plan. The Company's President and Chief Executive Officer, and the
Company's Vice President, Human Resources, have provided executive officer
background and independent salary survey information from third party providers
for the Committee's use.
The Company's policy is that executive compensation should meet two
objectives: (1) to ensure that the compensation and incentives which may be paid
to the executive officers are closely aligned with the Company's financial
performance and ultimately shareholder value; and (2) to enable the Company to
attract and retain, through a competitive compensation structure, those key
executives critical to the long-term success of the Company.
To ensure that the first objective is met, the Committee has provided
that a significant portion of officers' total potential annual compensation
comes from incentive bonus compensation which may be earned based upon
achievement of targeted financial objectives established by the Committee at the
beginning of the fiscal year. In addition, significant potential remuneration is
tied to the Company's stock price performance, through the grant of stock
options to key executive officers. Mr. Gates, the Company's Chief Executive
Officer, is a founder of the Company and as such, owned 1,114,802 shares of
common stock as of September 30, 1997. This substantial equity interest further
ensures that increasing shareholder value is a key element of the total earnings
of Mr. Gates.
The second objective of the overall executive compensation policy is
addressed by establishing compensation levels based on consideration of (i) the
salaries and total compensation of executive officers in similar positions with
comparable companies in its industry, (ii) the Company's financial performance
during the past year and (iii) each officer's performance against objectives
related to their areas of responsibility. In other words, the Compensation
Committee ensures that there is a consistent and reasonable relationship between
executive compensation and the value of work performed toward maximizing
shareholder profits.
For fiscal year 1997, the Company's Chief Executive Officer was
eligible under the bonus plan for incentive bonuses, at specified targets, of up
to 60% of salary based on achievement of specific quarterly financial goals (60%
bonus at target). The other executive officers also were eligible for bonus
incentives at specified targets ranging up to 50% or 60% of base salary based on
quarterly financial goals. For those officers with sales responsibilities,
specific sales volume incentives were also established for bonus calculations.
The plans provided for higher percentages if targeted goals were exceeded. Under
the plans for fiscal year 1997, potential bonus eligibility was measured and
calculated based upon quarter on quarter growth in operating income of the
Company. The bonus plans applicable to Messrs. Gates, Russo, Devis and Coleman
all had specified minimum performance thresholds for bonus eligibility.
Based on attainment of financial objectives for fiscal year 1997, the
Chief Executive Officer received bonuses for fiscal 1997 totaling 50% of base
salary (for a total bonus of $142,144). The other executive officers received
bonuses ranging from 31%-95% of base salary earned during the fiscal year.
15
<PAGE> 16
For fiscal year 1998, the Chief Executive Officer bonus plan provides
for a bonus to be based on achievement of specific financial objectives. The
total bonus available under the Chief Executive Officer plan is up to 70% of
base salary based on achievement of targeted goals. The bonus plan for other
executive officers provides for bonuses up to a range of 50% to 65% based on
achievement of specified financial and (as applicable) sales goals. The plans
provide for higher percentages if targeted goals are exceeded. The bonus plans
for fiscal year 1998 will be based upon a combination of quarterly operating
income percentages and quarter on quarter sales out unit growth.
The Committee also considers granting stock options to an executive
officer based on a number of factors, including such officer's responsibilities
and relative position in the company, any changes in such officer's
responsibility and position, special projects within the officer's area of
responsibility, and such officer's equity interest in the Company in the form of
stock and options held by such individual. Options are granted at the current
market price of the Company's common stock on the date of the grant. During
fiscal 1997, Mr. Gates received an option grant on April 18, 1997 for 75,000
shares. During fiscal 1997, options for 640,000 shares were granted to the Named
Executive Officers as a group.
No member of the Compensation Committee is a former or current officer
or employee of the Company or any of its subsidiaries.
Compensation Committee: Messrs. Michael F.G. Ashby, Gary J. Bowen, William J.
Schroeder and Delbert W. Yocam
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee has a relationship that would
constitute an interlocking relationship with executive officers or directors of
another entity.
16
<PAGE> 17
STOCK PERFORMANCE GRAPH
The following graph compares the change in the Company's cumulative
total shareholder return on its Common Stock with the Standard and Poor's 500
Stock Index and the Hambrecht & Quist High Growth Index for the five-year period
commencing September 30, 1992 and ending September 30, 1997.
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Xircom $100 $162 $184 $122 $144 $110
S&P 500 $100 $113 $117 $152 $183 $257
H&Q Growth $100 $131 $132 $220 $264 $278
</TABLE>
Note: The Company's return is calculated based on the assumption that $100 was
invested on September 30, 1992 at $11.25 per share.
17
<PAGE> 18
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1997, by each person
(or group of affiliated persons) who is known by the Company to own beneficially
more than 5% of the Company's Common Stock, each director, each executive
officer named in the Executive Officer Compensation table, and all current
directors and executive officers as a group. Except as indicated in the
footnotes to this table, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where applicable.
<TABLE>
<CAPTION>
Name and Address Number of shares(2) Percent of Total
---------------- ------------------- ----------------
<S> <C> <C>
Intel Corporation.................................................. 2,516,405 11.1%
2200 Mission College Boulevard
Santa Clara, California 95052
Dirk I. Gates (1).................................................. 1,131,642 5.0%
2300 Corporate Center Drive
Thousand Oaks, California 91320
J. Kirk Mathews.................................................... 522,702 2.3%
Michael F.G. Ashby................................................. 12,500 *
Robert W. Bass..................................................... 23,585 *
Kenneth J. Biba.................................................... 52,700 *
Gary J. Bowen...................................................... 15,000 *
Scott A. Coleman................................................... 33,644 *
Steven F. DeGennaro................................................ 20,704 *
Marc M. Devis...................................................... 34,141 *
Randall H. Holliday................................................ 21,285 *
Carl E. Russo...................................................... 74,765 *
William J. Schroeder(3)............................................ 22,500 *
Delbert W. Yocam................................................... 7,500 *
All current directors and executive officers as a group............ 1,972,668 8.6%
</TABLE>
- - ------------------------------------------------------------------------------
* Less than 1%
(1) Includes 1,114,802 shares held by the Dirk I. Gates Trust dated October 4,
1994 of which Mr. Gates is Trustee and 16,840 shares subject to outstanding
options held by Mr. Gates that were exercisable as of October 31, 1997 or
within 60 days of such date.
(2) Includes options to exercise shares of common stock held by the following
individuals, and all executive officers and directors as a group, that were
exercisable on, or within 60 days after, October 31, 1997, as follows: Mr.
Mathews, 15,000; Mr. Ashby, 7,500; Mr. Bass, 21,453; Mr. Biba, 7,500; Mr.
Bowen, 15,000; Mr. Coleman, 33,333; Mr. DeGennaro, 16,964; Mr. Devis,
32,883; Mr. Holliday, 17,270; Mr. Russo, 73,507; Mr. Yocam, 7,500; and all
executive officers and directors as a group, 272,250.
(3) Mr. Schroeder's shares are held in the name of William J. Schroeder and
Marilee J. Schroeder Revocable Trust. Includes 7,500 shares subject to
outstanding options held by Mr. Schroeder that were exercisable as of
October 31, 1997 or within 60 days of such date.
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<PAGE> 19
OTHER MATTERS
The Board of Directors knows of no other matters to be submitted to the
shareholders at the Annual Meeting. If any other matters properly come before
the shareholders at the Annual Meeting, it is the intention of the persons named
on the enclosed proxy card to vote the shares they represent as the Board of
Directors may recommend.
By Order of the Board of Directors
/s/ RANDALL H. HOLLIDAY
----------------------------------
Randall H. Holliday
Secretary
Thousand Oaks, California
December 12, 1997
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